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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-23694
HEARTLAND WIRELESS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-1435149
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification no.)
200 Chisholm Place, Suite 200, 75075
Plano, Texas (Zip code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 423-9494
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
Common Stock, par value $.001 per share
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of
the registrant is $12,759,686, based on the closing price of the registrant's
common stock, $.001 par value per share (the "Common Stock"), on March 20,
1998, as reported on the NASDAQ Stock Market's National Market.
The number of outstanding shares of Common Stock as of March 20, 1998,
was 19,715,267.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
expected to be held on or before June 12, 1998, and to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, are incorporated
by reference into Part III of this Form 10-K.
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HEARTLAND WIRELESS COMMUNICATIONS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 30
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 30
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PART I
ITEM 1. BUSINESS
OVERVIEW
Heartland Wireless Communications, Inc. (the "Company") develops, owns
and operates wireless cable television systems, primarily in small to mid-size
markets located in the central United States. At December 31, 1997, including
one operating system and two non-operating systems managed by the Company, the
Company had wireless cable channel rights in 93 markets, comprised of 58
markets in which the Company has systems in operation (the "Existing Systems")
and 35 future launch markets in which the Company owns the BTA authorization
from the Federal Communications Commission (see "Business-Regulatory
Environment"), has aggregated sufficient wireless cable channel rights to
commence construction of a system or has leases with or options from applicants
for channel licenses that the Company expects to be granted by the Federal
Communications Commission (the "FCC"). At December 31, 1997, the Existing
Systems were providing wireless cable service to approximately 187,000
subscribers.
The Company generally targets small to mid-size markets which include
areas with households that are unpassed by traditional hard-wire cable. Many of
these households, particularly in rural areas, have limited access to local
off- air VHF/UHF channels (such as ABC, NBC, CBS and Fox), and typically do not
have access to pay television service except via satellite receivers. As a
result, the Company believes that its wireless cable television service is an
attractive alternative to existing choices for such households. Additionally,
the Company competes for customers in its service areas in homes passed by
traditional hard-wire cable. See "Business -- Business Strategy."
Wireless cable programming is transmitted through the air via
microwave frequencies from a transmission facility to a small receiving antenna
at each subscriber's location, which generally requires a direct, unobstructed
line-of-sight from the transmission facility to the subscriber's receiving
antenna, by utilizing up to 198 megahertz ("MHz") of radio spectrum allocated
by the FCC for ITFS and MDS service (each as defined herein), both of which
comprise the spectrum used for providing commercial wireless cable service.
See "Business -- Regulatory Environment." Traditional hard-wire cable systems
also transmit signals from a transmission facility, but deliver the signal to a
subscriber's location through an extensive network of coaxial cable and
amplifiers. Because wireless cable systems do not require such an extensive
cable network, wireless cable operators such as the Company can provide
subscribers with a high quality picture and a reliable signal resulting in
fewer transmission disruptions at a lower system capital cost per installed
subscriber than traditional hard-wire cable systems.
Like traditional hard-wire cable system operators, the Company
generally can offer its subscribers local off-air VHF/UHF channels from ABC,
NBC, CBS, Fox affiliates and other local independent broadcast stations, as
well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN, USA, WGN, WTBS,
Discovery, the Nashville Network, A&E and other programming services. The
channels that the Company offers in each market will vary depending upon the
channel rights secured in such market at the time of system launch and as the
Company continues to acquire channel rights.
The executive offices of the Company are located at 200 Chisholm
Place, Suite 200, Plano, Texas 75075, and the telephone number of the executive
offices is (972) 423-9494. The Company's operations headquarters are based in
Durant, Oklahoma. Unless the context otherwise requires, all references in this
Form 10-K to the Company refer collectively to Heartland Wireless
Communications, Inc., its predecessors and its majority-owned subsidiaries.
CABLE INDUSTRY OVERVIEW
Cable Television Industry. The cable television industry began in the
late 1940s and 1950s to serve the needs of residents in predominantly rural
areas with limited access to local off-air VHF/UHF broadcasts. The cable
television industry expanded to metropolitan areas due to, among other things,
better reception and more programming. Today, cable television systems offer
various types of programming, which generally include basic service, premium
service and, in some instances, pay-per-view service.
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A traditional cable television customer generally pays an initial
connection charge and a fixed monthly fee for basic service. The amount of the
monthly basic service fee varies from one area to another and is a function, in
part, of the number of channels and services included in the basic service
package and the cost of such services to the television system operator. In
most instances, a separate monthly fee for each premium service and certain
other specific programming is charged to customers, with discounts generally
available to customers receiving multiple premium services. Monthly service
fees for basic, enhanced basic and premium services constitute the major source
of revenue for cable television systems. Converter box rentals, remote control
rentals, installation charges and reconnect charges for customers who were
previously disconnected are also included in a cable television system's
revenues, but generally are not a major component of such revenues.
Wireless Cable Industry Background. Initially, most cable systems were
hard-wire systems, using coaxial cable and amplifiers to transmit television
signals. In 1983, the FCC allocated a portion of the radio spectrum from 2500
to 2700 MHz, which previously had been allocated entirely for educational use,
to commercial wireless cable operation. Simultaneously, the FCC also modified
its rules on the usage of the remaining portion of such spectrum allocated for
educational use to permit ITFS licensees to lease excess capacity to commercial
operators.
Like a traditional hard-wire cable system, wireless cable operates
from a transmission facility ("head-end"), consisting of satellite reception
and other equipment necessary to receive the desired programming. Programming
is then transmitted by microwave transmitters from an antenna located on a
tower to a small receiving antenna located on a subscriber's rooftop. At the
subscriber's location, the microwave signals are converted to frequencies that
can pass through conventional coaxial cable into an addressable descrambling
converter and then to a television set. Wireless cable requires a clear
line-of-sight, because the microwave frequencies used will not pass through
large trees, hills, tall buildings or other obstructions. However, many signal
blockages can be overcome with the use of signal boosters which retransmit an
otherwise blocked signal over a limited area.
Currently, wireless cable companies can offer up to 33 channels of
analog video programming. The ability to offer substantially more programming
utilizing existing wireless channel capacity is dependent on effectively
applying digital compression technology, which would allow six or more channels
to be transmitted over the same six MHz of spectrum that presently can
accommodate only one analog channel. FCC approval is required before the
Company's wireless cable systems can be converted to digital technology. The
FCC issued a Declaratory Ruling in July 1996 which effectively established
interim rules to govern the transition from analog to digital technology and
authorized wireless cable operators to file minor modifications to existing
systems to specify digital operation. The FCC has yet to commence a rulemaking
proceeding to adopt permanent rules. There can be no assurance as to what
permanent rules and policies the FCC will adopt to govern the use of digital
technology, and when such rules and policies will be adopted, or the Company's
ability to comply with those rules and policies. Digital technology became
commercially available in 1997 in several markets. The cost of digital
equipment materially exceeds the cost of analog equipment; and there can be no
assurance that digital converter boxes and other equipment necessary to
implement digital technology, including satellite delivery of digital signals,
will be available on a specific timetable or that digital technology can be
successfully deployed.
The Company believes that conversion to a fully digital system would
require a significant investment in capital and time. In addition, because of
its focus on small to mid-size markets, the Company currently does not believe
that the perceived value of expanded channel capacity resulting from digital
conversion would justify the additional capital expenditures required. As a
result, the Company currently has no plans to convert from analog technology to
a digital technology for a multichannel video service. Whether the Company
ultimately elects to implement digital technology will depend upon a number of
factors including equipment costs, availability of vendor and/or corporate
financing on satisfactory terms, possibility of subscriber growth and numerous
competitive factors.
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REGULATORY ENVIRONMENT
General. The wireless cable industry is subject to regulation by the
FCC pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment and/or transfer of control of such licenses;
to approve the location of wireless cable systems; to regulate the kind,
configuration and operation of equipment used by wireless cable systems; and to
impose certain equal employment opportunity and other reporting requirements on
wireless cable operators.
The FCC has determined that wireless cable systems are not "cable
systems" for purposes of the Communications Act. Accordingly, a wireless cable
system does not require a local franchise and is subject to fewer local
regulations than a hard-wire cable system. Moreover, all transmission and
reception equipment for a wireless cable system can be located on private
property; accordingly, there is no need to make use of utility poles or
dedicated easements or other public rights-of-way. Although wireless cable
operators typically have to lease the right to use wireless cable channels from
the holders of channel licenses, unlike hard-wire cable operators, they do not
have to pay local franchise fees. Legislation has been introduced in some
states to authorize state and local authorities to impose on all video program
distributors (including wireless cable operators) a tax on the distributors'
gross receipts comparable to the franchise fees cable operators pay. Similar
legislation might be introduced in additional states. While the proposals vary
among states, the bills all would require, if passed, as much as 5.0% of gross
receipts to be paid by wireless distributors to local authorities. Efforts are
ongoing by the industry trade association to preempt such state taxes through
federal legislation. In addition, the industry is opposing the state bills as
they are introduced. Currently, the Company is not subject to the type of
local gross receipts tax described above. However, it is not possible to
predict whether new state laws will be enacted which impose new taxes on
wireless cable operators, including the Company. The imposition of a gross
receipts tax on the Company could have a material adverse effect on the
Company's business.
In the nation's 50 largest metropolitan markets, 33 analog channels
are available for wireless cable (in addition to local off-air VHF/UHF
broadcast channels that are not retransmitted over the microwave channels). In
the Company's markets, 32 channels are available for wireless cable (in
addition to local off-air VHF/UHF broadcast channels that are not retransmitted
over the microwave channels), 12 of which can be licensed to for-profit
entities such as the Company for full-time usage without programming
restrictions ("MDS" channels). Except in limited circumstances, the other 20
wireless cable channels can generally only be licensed to qualified non-profit
educational organizations, and, in general, each must be used a minimum of 20
hours per week per channel for educational programming ("ITFS" channels). The
remaining excess air time on an ITFS channel may be leased to wireless cable
operators for commercial use, without further programming restrictions (other
than the right of the ITFS license holder, at its option, to recapture up to an
additional 20 hours of air time per week for educational programming). Certain
programs (e.g., The Discovery Channel and A&E) qualify as educational and
thereby facilitate full-time usage of an ITFS channel by commercial wireless
cable operators. Additionally, a technique known as "channel mapping" permits
ITFS licensees to meet their minimum educational programming requirements by
transmitting educational programming over several ITFS channels at different
times, but the viewer sees the transmission as one channel. In addition,
lessees of ITFS excess air time, including the Company, generally have the
right to transmit to their subscribers the educational programming provided by
the lessor at no incremental cost. In 1994, the FCC amended its rules to permit
"channel loading." Channel loading permits ITFS license holders to consolidate
their educational programming on one or more of their ITFS channels thereby
providing wireless cable operators leasing such channels, including the
Company, with greater flexibility in their use of ITFS channels. The remaining
12 wireless cable channels (commonly referred to as MMDS or commercial
channels) available in most of the Company's markets are made available by the
FCC for full-time commercial usage without programming restrictions. The FCC's
allocation of frequencies to wireless cable is subject to change and in the
future the FCC might propose to alter the present wireless cable allocation to
provide a portion of the spectrum for other emerging technologies. The Company
believes that if any such action were taken to reallocate any of the current
wireless cable spectrum, the FCC would allocate substitute frequency rights to
the wireless cable industry or provide other concessions.
In 1985, the FCC established a lottery procedure for awarding MDS
licenses. In 1990, the FCC established a filing "window" system for new
multichannel MDS ("MMDS") applications. The FCC's selection among more than one
acceptable MMDS application filed during the same filing window was determined
by a lottery. Generally, once an MMDS application was selected by the FCC and
the applicant resolved any deficiencies identified by the FCC, a conditional
license was issued, allowing construction of the station to commence.
Construction generally must be
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completed within one year of the date of grant of the conditional license, in
the case of MMDS channels, or 18 months, in the case of ITFS channels. ITFS and
MMDS licenses generally have terms of 10 years. Licenses must be renewed and
may be revoked for cause in a manner similar to other FCC licenses. FCC rules
prohibit the sale for profit of an MMDS conditional license or of a controlling
interest in the conditional license holder prior to construction of the station
or, in certain instances, prior to the completion of one year of operation. The
FCC, however, does permit the leasing of 100% of an MMDS license holder's
spectrum capacity to a third party and the granting of options to purchase a
controlling interest in a license once the required license holding period has
lapsed and certain other conditions are met. During the lifetime of any such
lease or option agreement, the licensee must remain in control of its FCC
license to avoid violating FCC transfer of control rules. Where two or more
ITFS applicants file applications for the same channels and the proposed
facilities could not be operated without impermissible interference, the FCC
employs a set of comparative criteria to select from among the competing
applicants.
In March, 1995, the FCC concluded its auction ("BTA Auction") of
available commercial wireless cable spectrum in 487 "Basic Trading Areas"
("BTAs") and six additional BTA-like geographic areas around the country. The
winner of a BTA has the right to develop the available MDS frequencies
throughout the BTA, consistent with certain specified interference criteria
that protect existing ITFS and MDS channels. Existing ITFS and MDS channel
rights holders also must protect the BTA winner's spectrum from interference
caused by power increases or tower relocations. The Company was the winning
bidder in 93 BTAs at a total cost of approximately $19.8 million. Under the
terms of the BTA Auction, the Company has remitted approximately $4.0 million
as down payments and deposits. The remaining $15.8 million bears interest at
9.5% and will be paid over a 10-year period that began in the fourth quarter of
1996. The Company is required to make quarterly interest-only payments for the
first two years. Quarterly payments of principal and interest will begin in
the fourth quarter of 1998. The Company has been awarded authorizations for all
BTAs in which the Company was the high bidder.
The Company has entered into a lease and purchase option agreement
with CS Wireless Systems, Inc. ("CS Wireless") for 10 BTAs and portions of four
additional BTAs (the "Leased BTAs"). Under this agreement, CS has reimbursed
the Company, and will continue to reimburse the Company, for all amounts paid
by the Company to the FCC for the Leased BTAs. In addition, the agreement
provides CS with the option to purchase the Leased BTAs. The Company owns
approximately 36% of the outstanding common stock of CS Wireless.
Application for renewal of MDS and ITFS licenses must be filed within
a certain period prior to expiration of the license term, and petitions to deny
applications for renewal may be filed during certain periods following the
filing of such applications. Licenses are subject to revocation or cancellation
for violations of the Communications Act or the FCC's rules and policies.
Conviction of certain criminal offenses may also render a licensee or applicant
unqualified to hold a license. The Company's lease agreements with license
holders typically require the license holders, at the Company's expense, to use
their best efforts, in cooperation with the Company, to make various required
filings with the FCC in connection with the maintenance and renewal of
licenses. The Company believes this reduces the likelihood that a license will
be revoked, canceled or not renewed by the FCC.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of channels operating with common technical
characteristics. In order to commence operations in many of the Company's
future launch markets, the Company has filed or will be required to file
applications with the FCC to modify licenses for unbuilt stations. In applying
for these modifications, the Company must demonstrate that its proposed signal
does not violate interference standards in the FCC-protected area of another
wireless cable channel license holder. A wireless cable license holder
generally is protected from interference from another wireless cable operator
within a 35-mile radius of the transmission site. An ITFS license holder is
entitled to protection to all of its receive sites, but is only entitled to be
awarded a 35-mile protected service area during excess capacity use by a
wireless cable operator. In addition, modifications submitted after the BTA
Auction are required to protect auction winners from interference. If such
changes would cause the Company's signal to cause interference in the
FCC-protected service area of another wireless cable channel license holder,
the Company would be required to obtain the consent of such other license
holder; however, there can be no assurance that such consent would be received
and the failure to receive such consent could adversely affect the Company's
ability to serve the affected market.
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Wireless cable operators, including the Company, have experienced
interference from operators of personal communications systems, or PCS, because
of proximity to PCS cell sites and the orientation of individual wireless cable
receive sites in certain markets. To date, the Company has experienced moderate
PCS interference in 11 of its 57 Existing Systems at March 31, 1998. The
Company has addressed such interference on an individual subscriber basis,
replacing the subscriber's integrated down converter or adding a filter to the
subscriber's stand-alone down converter when necessary. The Company expects
that interference from PCS will continue in these markets and may increase in
these and other markets. For all new subscribers in Existing Systems and any
new systems, the Company intends to purchase integrated down converters or
external filters to eliminate the problem of PCS interference.
The Cable Act. On October 5, 1992, Congress passed the Cable
Television Consumer Protection and Competition Act of 1992 (the "Cable Act"),
which imposes greater regulation on traditional hard-wire cable operators and
permits regulation of prices in areas in which there is no "effective
competition." Pursuant to the Cable Act, the FCC, among other things, adopted
comprehensive new federal standards for local regulation of certain rates
charged by traditional hard-wire cable operators. The Cable Act also provides
for deregulation of traditional hard-wire cable in a given market when other
multi-channel video providers serve, in the aggregate, at least 15% of the
cable franchise area. Rates charged by wireless cable operators, typically
already lower than traditional hard-wire cable rates, are not subject to
regulation under the Cable Act.
Under the retransmission consent provisions of the Cable Act and the
FCC's implementing regulations, all multi- channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
Cable Act and the FCC's "must carry" rules to retransmit a specified number of
local commercial and non-commercial television or qualified low power
television signals. In 1997, the Supreme Court upheld the "must carry"
provisions of the Cable Act.
The 1996 Telecommunications Act. In February 1996, the
Telecommunications Act of 1996 (the "1996 Telecommunications Act") was enacted.
Pursuant to the 1996 Telecommunications Act, all cable programming service tier
rate regulation will be eliminated after three years. In addition, for "small
systems" (as defined in the 1996 Telecommunications Act) and under certain
other circumstances, including cases where a cable system faces "effective
competition," such rate regulation will be eliminated immediately. The 1996
Telecommunications Act removes certain barriers to investment by telephone
companies in hard-wire cable companies. The legislation lifted the current
statutory cross-ownership ban contained in the Communications Act, which
prevented a telephone company from using hard-wire facilities to provide cable
television service to the same community where it provides telephone service.
The statutory ban was never applied to a telephone company's investment in
wireless cable. Telephone companies operating in the markets serviced by the
Company were legally permitted to build, lease or purchase hard-wire cable
systems and become competitors of the Company. Although the 1996
Telecommunications Act offered specific benefits and relief to the wireless
cable industry including: (1) clarifying that wireless cable operators are not
"common carriers" and therefore not subject to a number of regulations
governing such licensees, and (2) directing the FCC to implement rules
preempting municipalities' or local governments' regulations restricting
wireless cable reception antennae, including restrictions of homeowners
associations, the Company is currently unable to predict what effect these
regulations may have on the Company. Direct broadcast satellite operators were
afforded relief under the legislation in the form of an exemption from local
taxes on their service. Wireless cable operators did not receive such an
exemption; however, the wireless cable industry has continued to lobby Congress
for a similar exemption.
While current FCC regulations are intended to promote the development
of a competitive multichannel video programming distribution industry, the
rules and regulations affecting the wireless cable industry may change, and any
future changes in FCC rules, regulations, policies and procedures could have a
material adverse effect on the industry as a whole and on the Company in
particular. In addition, a number of legal challenges to the Cable Act and the
regulations promulgated thereunder have been filed, both in the courts and
before the FCC. These challenges, if successful, could substantially increase
the Company's operating costs, make some programming unavailable to the Company
and otherwise have a material adverse effect on the wireless cable industry as
a whole or the Company in particular.
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Fixed Two-Way Transmissions. In October 1997, the FCC issued a Notice
of Proposed Rulemaking (the "Two-Way NPRM"), which proposed amendments to the
FCC's existing rules to allow for the use of MDS and ITFS frequencies for fixed
two-way voice, video and data communications from "response stations,"
"response station hubs" and booster stations in a configuration similar to that
used in cellular communications. Under the proposed regulatory scheme, the FCC
would permit licensees to use all or part of each of their 6 MHz channels for
two-way transmissions originating at either the primary transmitter or
subscribers' premises in a "cellularized" system, where transmissions would
flow through intermediary booster stations located between subscribers'
response stations and the primary transmitter site. The public comment and
reply comment periods to the Two-Way NPRM expired in February 1998. Based on
the comments filed, the Company believes that the FCC should approve the
proposals set forth in the Two-Way NPRM substantially in the form proposed.
There can be no guarantee, however, when or if the FCC will enact the Two-Way
NPRM and whether the final rules, if any, will differ materially from the
Two-Way NPRM. Several developmental licenses and one permanent authorization
for two-way services have been granted to other wireless cable operators. The
two-way systems constructed by these operators have achieved upstream wireless
data speeds of 512 Kbps and downstream wireless speeds of 6 Mbps, or 17 to 208
times faster than traditional telephony speeds of 28.8 Kbps, and four to 46
times faster than Integrated Services Digital Network ("ISDN") rates of 128
Kbps. Although such developmental trials have operated at such speeds, there
is no guarantee when, if and at what prices equipment for the infrastructure of
fixed two-way communications systems will be available for the launch of such
systems on a commercial basis.
Other Regulations. Because the vast complex of coaxial cable utilized
by traditional hard-wire cable operators requires a "right of way" to cross
municipal streets, such operators must acquire a municipal franchise and pay
municipal franchise fees. Because wireless cable uses FCC approved frequencies,
it does not require a municipal right of way. Accordingly, wireless cable
operators are not subject to those franchise fees. Traditional hard-wire cable
operators are also required to set aside public access channels for municipal
and local resident use. Wireless cable operators are not subject to these or
other franchise requirements.
Wireless cable license holders are subject to regulation by the FAA
with respect to the construction, maintenance and lighting of transmission
towers and to certain local zoning regulations affecting construction of towers
and other facilities. There may also be restrictions imposed by local
authorities. There can be no assurance that the Company will not be required to
incur additional costs in complying with such regulations and restrictions.
AVAILABILITY OF PROGRAMMING
General. Once a wireless cable operator has obtained the right to
transmit programming over specified frequencies, the operator must then obtain
the right to use the programming to be transmitted. Currently, with the
exception of the retransmission of off-air VHF/UHF broadcast signals,
programming is made available in accordance with contracts with program
suppliers under which the system operator pays a royalty based on the number of
subscribers receiving service each month. Individual program pricing varies
from supplier to supplier; however, more favorable pricing for programming is
generally afforded to operators with larger subscriber bases. The Company,
Wireless One, Inc. ("Wireless One"), CAI Wireless Systems, Inc. ("CAI
Wireless") and CS Wireless participate in a cooperative organization to obtain
volume-based programming contracts at a discount from rates currently paid by
each of the parties. There can be no assurances that the cooperative will
achieve such discounts. The likelihood that program material will be
unavailable to the Company has been mitigated by the Cable Act and various FCC
regulations issued thereunder which, among other things, impose limits on
exclusive programming contracts and prohibit cable programmers in which a cable
operator has an attributable interest from discriminating against cable
competitors with respect to the price, terms and conditions of programming. The
FCC currently is considering whether it is necessary to adopt additional rules
regarding these "program access" provisions of the Cable Act to ensure that
cable competitors obtain the benefits of the provisions. The majority of the
major cable television programming services carried by the Company are
currently owned by vertically integrated multiple cable system operators and
the Company historically has not had material difficulty in arranging contracts
for services of independent programmers. The basic programming package offered
in each of the Existing Systems is comparable to that offered by the local
traditional hard-wire cable operators with respect
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to the most widely watched channels. However, almost all of such local
traditional hard-wire cable operators currently offer more enhanced basic,
premium, pay-per-view and public access channels than the Company.
Copyright. Under the Federal copyright laws, permission from the
copyright holder generally must be secured before a video program may be
retransmitted. Under Section 111 of the Copyright Act of 1976 (the "Copyright
Act"), certain "cable systems" are entitled to engage in the secondary
transmission of programming without the prior permission of the holders of
copyrights in the programming. In order to do so, a cable system must secure a
compulsory copyright license. Such a license may be obtained upon the filing of
certain reports and the payment of certain fees set by copyright arbitration
royalty panels.
Wireless cable operators may rely on Section 111. In 1994, Congress
enacted legislation that clarified the ability of wireless cable operators to
obtain the benefit of the Section 111 compulsory copyright license.
Periodically, Congress has considered proposals to phase out the Section 111
compulsory license. In response to a request from Congress, the U.S. Copyright
Office held a public hearing on the issue of compulsory licenses in May 1997
and endorsed eventual replacement of the statutory license by a free market
negotiated one while recommending retention of the existing license for the
near future. Congress currently is holding hearings to review this and other
recommendations. Because the Existing Systems retransmit only a limited number
of broadcast channels, the Company does not believe that the termination of the
compulsory copyright license would have a material adverse effect on the
Company.
Effective October 6, 1993, commercial broadcasters (other than
superstations) could require that cable operators obtain their consent before
retransmitting off-air VHF/UHF broadcasts. The FCC has exempted wireless cable
operators from the retransmission consent rules if the receive-site antenna is
either owned by the subscriber or within the subscriber's control and available
for purchase by the subscriber upon the termination of service. In all other
cases, wireless cable operators must obtain consent to retransmit broadcast
signals. The Company has obtained such consents in each of its Existing Systems
where the Company is retransmitting broadcast signals on a wireless cable
channel. Such consents will be required in the Company's other markets. There
can be no assurance that the Company will be able to obtain such consents on
terms satisfactory to the Company, if at all.
PAY TELEVISION INDUSTRY TRENDS
The Company's business will be affected by pay television industry
trends and, in order to maintain and increase its subscriber base in the years
ahead, the Company may need to adapt to industry trends and modify its
practices to remain competitive.
Digital Compression. Several decoder manufacturing companies have
developed digital compression technology, which allows several programs to be
carried in the amount of bandwidth where only one program is carried over an
analog signal. Compression technology, allowing six to 10 channels within one
6-MHz bandwidth, is now commercially available. Wireless cable companies will
be able to use digital compression technology through upgraded set-top
converters. However, the Company currently has no plans to deploy such digital
technology. The Company believes traditional hard- wire cable companies will
be required to expend significant funds on upgrading current systems in order
to utilize digitally-compressed signals.
Internet and the World Wide Web. Certain hard-wire cable operators
have begun to introduce cable modems that connect to the Internet and the
World Wide Web at significantly higher bandwidths than currently offered over
conventional telephone lines. In addition, several multimedia and Internet
software and access providers are developing rich multimedia content to be
distributed over the Internet, such as digital audio and video, interactive
home shopping and video games, as high-bandwidth Internet connections become
widely available. Certain wireless cable operators have successfully tested
wireless cable modems that connect to the Internet at faster speeds than
hard-wire cable modems, traditional telephone lines and ISDN lines. The Company
currently plans to introduce wireless Internet access service in several
markets on a test basis in 1998. See "Business -- Regulatory Environment" and
"Business -- Business Strategy."
9
<PAGE> 10
Advertising. Until recently, most advertising on cable has been sold
by program suppliers, who sell national advertising time as part of the signal
they deliver to cable operators. Recently, however, advertisers have begun
placing advertisements on channels dedicated exclusively to advertising, as
well as in local available time (typically, two minutes each hour) set aside by
program suppliers for local insertions in their programming of advertisements
sold by cable operators. Use of local available time requires automatic spot
insertion equipment, which is readily available today at a minimal capital
cost.
COMPETITION
MULTI-CHANNEL VIDEO PROGRAMMING
In addition to competition from established traditional hard-wire
cable systems, wireless cable television operators face competition from a
number of other sources, including potential competition from emerging trends
and technologies in the pay television industry, some of which are described
below.
Hard-Wire Cable. The Company's principal subscription television
competitors in each market are traditional hard-wire cable operators.
Hard-wire cable companies are generally well-established and known to potential
customers and have significantly greater financial and other resources than the
Company. According to a report issued by the FCC in January 1998, of the
approximately 74 million total households that subscribe to multichannel video
programming services nationwide, approximately 64 million are hard-wire cable
subscribers.
Direct Broadcast Satellite ("DBS"). DBS involves the transmission of
an encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than other
satellite-transmitted signals, its reception can be accomplished with a
relatively small (18-inch) dish mounted on a rooftop or in the yard. For
technical and legal reasons, DBS service providers historically have not
provided local VHF/UHF broadcast channels as part of their service, although
many DBS subscribers receive such channels via standard over-air receive
antennae. Moreover, DBS may provide subscribers with access to broadcast
network distant signals only when such subscribers reside in areas unserved by
any broadcast station. However, certain DBS operators have announced plans to
offer local broadcast signals in major markets and are seeking changes to the
copyright laws to enable them to take such action. The cost to a DBS
subscriber for equipment and service is generally substantially higher than the
cost to wireless cable subscribers. In addition, DBS subscribers generally have
not been able to obtain economically the ability to view different programming
on multiple televisions in a single household. Several DBS services currently
are available throughout the Company's markets, and more are expected to be
launched in 1998. As of June 30, 1997 DBS had approximately 5.1 million
subscribers nationwide.
Direct-to-Home ("DTH"). DTH satellite television services originally
were available via satellite receivers which generally were 7-to-12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has reduced their popularity, although the
Company will to some degree compete with these systems in marketing its
services.
Local Multi-Point Distribution Service ("LMDS"). In 1993, the FCC
proposed to redesignate the 28 gigahertz ("GHz") band to create a new video
programming delivery service referred to as local multipoint distribution
service. In July 1996, the FCC proposed to award LMDS licenses in each of 493
BTAs pursuant to auctions. Sufficient spectrum for up to 49 analog channels has
been designated for the LMDS service. On March 12, 1997, the FCC adopted rules
to govern these licenses. The FCC will award two licenses in each BTA (one for
1150 MHz of spectrum in the 28 GHz and 31 GHz bands, and one for 150 MHz of
spectrum in the 31 GHz band). The FCC determined that telephone companies and
traditional hard-wire cable operators will not be permitted to bid on LMDS
licenses in their territory or own such authorizations for a period of three
years following auction. Applicants filed to participate in the auction on
January 20, 1998. The auction began on February 18, 1998. Because of the high
frequency and resulting limited coverage area of LMDS service, the Company
elected not to participate in this auction.
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<PAGE> 11
Satellite Master Antenna Television ("SMATV"). SMATV is a
multi-channel television service offered through a wired plant very similar to
a traditional hard-wire cable system, except that because it does not utilize
public rights- of-ways, it operates without a franchise from a local authority.
SMATV operates under an agreement with a private landowner to service one or
more specific multiple-dwelling units ("MDUs"), so long as no public right of
way is crossed between such units. The FCC amended its rules to provide
point-to-point delivery of video programming by SMATV operators and operators
of other video delivery systems in the 18 GHz band, which allowed such
operators to serve more MDUs with a single head-end facility, thus reducing
capital expenditure requirements per MDU subscriber.
Telephone Companies. Before 1996, local exchange carriers ("LECs")
were prohibited from providing video programming directly to subscribers in
their respective telephone service areas. The FCC had ruled, however, that LECs
may acquire wireless cable channel operations. Moreover, certain U.S. District
Courts and Courts of Appeal have held that the "telco-cable cross-ownership
ban" abridged the First Amendment rights of LECs to free expression under the
U.S. Constitution. The 1996 Telecommunications Act lifted barriers to the
provision of cable television services by telephone companies including
allowing telephone companies to provide video service as "open video systems
operators," which are similar to traditional cable systems but are subject to
different regulatory requirements and confirmed the ability of LECs to own and
operate wireless cable systems. While the competitive effect of the entry of
telephone companies into the programming business is still uncertain, the
Company believes that wireless cable systems will continue to be competitive
with fiber optic distribution technologies for providing multi-channel video
service.
Off-Air VHF/UHF Broadcasts. Off-air VHF/UHF broadcasts (such as those
providing programming from ABC, NBC, CBS and Fox) provide a free programming
alternative to the public. Previously, wireless cable systems could retransmit
these broadcast signals without permission. However, effective October 6, 1993,
pursuant to the Cable Act, wireless cable operators must obtain consent before
retransmitting off-air VHF/UHF broadcasts. The Company has obtained such
consents in the Existing Systems where the Company is retransmitting on a
wireless cable channel. However, such consents periodically must be renewed,
and there can be no assurance that the Company will be able to renew all such
consents in each of its markets. The FCC also has recently permitted
broadcasters to acquire, subject to certain restrictions, ownership interests
in traditional hard-wire cable systems.
Low Power Television ("LPTV"). LPTV utilizes a limited portion of the
spectrum allocated by the FCC for local off-air VHF/UHF broadcasts, but LPTV
utilizes lower power transmission equipment than local off-air VHF/UHF
broadcasts and its signal may be encrypted. LPTV typically has only a 15 to 20
mile signal range. LPTV requires a separate transmitter for each channel and a
standard antenna at the receiving site. Moreover, current proposals for
Advanced Television or High Definition Television may have an adverse effect on
certain LPTV stations.
INTERNET
To the extent the Company enters the Internet access market to provide
a retail Internet access service to business customers, the Company will
experience competition from multiple service providers, including traditional
Internet Service Providers ("ISPs"), inter-exchange carriers, local telephone
companies and hard-wire cable television companies.
Internet Access. The competition for Internet access service to small
to mid-size businesses generally falls into three categories: national,
regional and local competitors. National competitors include inter-exchange
carriers such as AT&T, MCI and Sprint, and national ISPs such as Digex, PSINet
and UUNet. The services offered by national competitors generally range from
dial-up 14.4 Kbps to a dedicated DS-3 (45 Mbps) connection. Some competitors
have added Asynchronous Digital Subscriber Lines ("ADSL") to their service
offering. ADSL can achieve higher data speeds over existing copper wire
infrastructure (1.5 Mbps to 8.4 Mbps) than previously possible. Regional
competitors include Regional Bell Operating Companies and regional ISPs that
generally offer services that range from dial-up 14.4 Kbps to dedicated T-1
(1.5 Mbps) connections. Local competitors include local exchange carriers,
multi-system hard-wire cable operators and local ISPs. The services offered by
local competitors generally range from dial-up 14.4 Kbps to a dedicated T-1
connection. Local providers generally aggregate or over-subscribe local
traffic onto access lines which
11
<PAGE> 12
are connected to a regional or national provider. Accordingly, these local
providers typically target consumers, as opposed to businesses.
The Company believes that it can compete in small to mid-size markets
with national, regional and local Internet access providers by offering
high-quality, high-speed Internet access, a local direct sales and service
presence, faster installation intervals and competitive pricing. There is no
assurance, however, that the Company will be able to effectively compete
against such competitors. See "Business -- Business Strategy."
BUSINESS STRATEGY
Overview. The Company's primary business objective is to develop, own
and operate single family unit ("SFU") and MDU wireless cable television
businesses, and retail Internet access businesses (on a developmental basis in
1998) in markets in which the Company owns or leases sufficient channel rights
that allow the Company to best utilize its ITFS and MMDS spectrum and maximize
its return on investment.
Beginning in the second quarter of 1997, in an effort to conserve
capital resources, the Company suspended new system launches and decreased
marketing efforts directed at acquiring net new subscribers. During 1998, the
Company intends to increase its marketing efforts in selected markets and
implement a new business plan, subject to obtaining timely financing on
acceptable terms and conditions, that the Company believes will provide the
greatest opportunity for improving the profitability of the Company and
capitalizing on its existing assets. This projected plan consists of (1)
maintaining moderate SFU subscriber growth through traditional analog video
service in selected markets, (2) pursuing MDU subscriber growth through a
cooperative marketing alliance with DIRECTV, Inc. ("DIRECTV"), (3) developing
and testing 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 carry out this projected business plan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources;" and "Future Cash Requirements."
Traditional SFU Wireless Cable Television. Since inception, the
Company has developed, acquired and operated wireless cable television systems
in primarily small to mid-size markets. The Company principally has targeted
SFU subscribers in these markets. The Company intends to continue to grow its
core SFU analog wireless cable business at a modest rate, directing resources
toward markets that the Company believes have the most potential to positively
contribute to consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The Company believes that markets with 25 to 30 basic
and premium channels, a greater number of homes not passed by hard-wire cable
and limited access to off-air VHF/UHF broadcast channels afford the greatest
opportunities in this regard. In addition, the Company intends to compete
directly against traditional hard-wire cable service for SFUs desiring basic
and first- tier premium service. The Company's current programming packages
for new subscribers range from $24.99 for basic service and one premium channel
to $39.99 for basic service and up to four premium channels. The Company
currently has no plans to upgrade any of its facilities for digital
transmission.
MDU Wireless Cable Television. In November 1997, the Company entered
into a Cooperative Marketing Agreement with DIRECTV, a DBS service provider
with over 3 million subscribers. The seven-year agreement allows Heartland to
expand its programming offerings by more than 75 channels to residential MDUs
by offering DIRECTV programming packages on a commission basis. In addition,
the Company has the ability to enhance its traditional channel line-ups by
adding individual DIRECTV channels to its MDU programming offerings under a
Channel Transport Agreement. The Company intends to market the DIRECTV
programming offerings in up to 40 of the Company's markets in 1998 and beyond.
Internet Access. The Company believes that its wireless cable
spectrum and technology present a viable option to traditional telephony for
Internet access as a "pipeline" through which Internet and commercial on-line
services can be carried, especially for small to medium-sized businesses who
seek a cost-effective means of accessing such on-line services. The Company
also believes that the potential of this spectrum and technology for speed of
on-line access is
12
<PAGE> 13
substantially superior to traditional telephone lines. A one-way MDS/MMDS
system using a traditional telephone line for an upstream path can transmit
downstream wireless data at speeds of up to 2.8 Mbps, nearly 97 times faster
than traditional telephony speeds of 28.8 Kbps and 21 times faster than ISDN
rates of 128 Kbps. With an ISDN 128 Kbps upstream path, a one-way MMDS system
can transmit downstream wireless data at speeds of up to 6 Mbps, nearly 208
times faster than traditional speeds of 28.8 Kbps and 46 times faster than ISDN
speeds of 128 Kbps.
The Company currently intends to enter the Internet access market as a
business retail Internet service provider ("ISP") in 1998 on a developmental
basis. The Company has selected its principal equipment vendors and plans to
target small to mid-sized businesses in up to four markets in 1998, offering
high-speed Internet access. The Company expects to engineer its test markets
to provide one-way downstream speeds of 768 Kbps, burstable up to 2.8 Mbps.
The Company's current plans provide that its Internet customers will receive
their Internet data via a roof-mounted antenna or a six-inch by six-inch square
indoor window mount antenna connected to a piece of coaxial cable and a cable
modem/router. The cable modem/router will interface to the customer's personal
computer or network via an Ethernet card connection. Upstream communication
will be available via a standard telephone line or ISDN connection. Downstream
transmission will be provided over one of the Company's existing 6 MHz MDS or
MMDS channels. The Company intends to apply for an MDS/MMDS two-way
developmental license in several of the markets in which it launches a one-way
system to perform two-way trials.
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 implement its plans to launch such systems on a
commercial basis in 1998 or thereafter.
New Markets. The Company intends to launch two to six new systems in
1998 in markets (1) in which the Company has or believes it will be able to
timely secure sufficient channel rights, and (2) that the Company believes
offer superior MDU, Internet and SFU subscriber growth opportunities. Markets
with sufficient channel rights will be evaluated individually for potential
return on investment from all business segments. The exact construction
schedule for the Company's future launch markets, including markets currently
expected to be launched in 1998, will depend upon multiple factors, including,
but not limited to, the availability of capital resources and financing
alternatives, the number of wireless cable channels for which FCC licenses have
been obtained, the expiration dates of leases and FCC construction permits, the
number of potential subscribers in each market and the proximity of a market to
the Existing Systems or other markets ready for construction. The launch of a
new market generally will involve the construction of a transmission building
near a transmission tower and the installation of transmission equipment and,
in certain cases, the construction of the transmission tower. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" and "Future Cash
Requirements." The Company intends to continue to pursue channel additions in
future launch markets that will complement existing channel rights.
Additional Financing Needs. Despite the Company's efforts to conserve
capital and the improvement in its EBITDA during the second half of 1997, the
Company does not expect to generate sufficient cash flow to implement its
business strategy and service the Company's existing indebtedness in 1998.
Accordingly, the continued growth of the Company's subscriber base and the
implementation of the above-described business strategy is subject to and
dependent upon obtaining additional capital and/or restructuring the Company's
current debt on terms and conditions acceptable to the Company and in a timely
manner. The Company has retained the investment banking firm of Wasserstein
Perella & Co., Inc. as a financial advisor to analyze all options available to
finance the Company's projected business plan and service its existing debt.
Such options may include the sale or exchange of debt or equity securities,
borrowings under secured or unsecured loan arrangements, sales of assets
including wireless cable systems and channel rights, and/or a recapitalization
or restructuring of the Company's current debt and/or equity, including
converting part or all of the Company's existing indebtedness and/or interest
payments due thereon into equity of the Company or delaying certain interest
payments on the Senior Notes (defined below). If the Company is unable to
obtain financing in a timely manner and on acceptable terms, management has
developed and intends to implement a plan that would allow the Company to
continue operating in the normal course of business at least through 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" and "Future Cash Requirements."
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The Company's ability to effect certain financings, asset sales and
recapitalizations is limited by the indentures governing its $115.0 million in
aggregate principal amount of 13% Series B and C Notes due 2003 (the "13%
Notes") and $125.0 million in aggregate principal amount of 14% Senior Notes
due 2004 (collectively, the "Senior Notes"), and the agreements governing its
issuance of $40.2 million of 9% Convertible Subordinated Discount Notes due
2004 (the "Convertible Notes"). There can be no assurance that the Company
will be able to enter into financing arrangements, asset sales or a
recapitalization or restructuring in a timely manner and on terms satisfactory
to the Company that will be necessary to implement the above-described business
strategy and service its debt. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources;" and "Future Cash Requirements."
EXISTING SYSTEMS AND FUTURE LAUNCH MARKETS
The following tables provide information regarding the 93 markets in
which the Company owns the BTA authorization and/or has acquired, or expects to
acquire, wireless cable channel rights that it intends to retain and develop as
of December 31, 1997. In these markets, the Company has acquired or expects to
acquire sufficient channel rights to launch a wireless cable system in the
market providing multichannel video service to SFUs and/or MDUs and/or Internet
access to business customers. The Existing Systems are listed in order of date
of launch or, for acquired markets, date of acquisition.
The Company has revised its methodology of reporting total households
and line-of-sight households ("LOSHH"). Certain prior estimates of total
households and LOSHH included households located within the Company's service
areas or BTAs that could be served by additional transmission facilities such
as signal boosters or repeaters. Although the rural nature and relatively flat
terrain in many of the Company's markets would allow these households to be
served, the Company's current business strategy does not contemplate the
capital expenditures necessary to construct additional transmission facilities
that may be necessary to provide service to such households. Actual total
households and LOSHH may be more or less than reported below.
"Estimated Total Households" represents the Company's current
estimates of the approximate number of households within a 35-mile radius of
the Company's tower sites (or projected tower sites for certain unlaunched
markets), plus LOSHH outside the 35-mile radius that may be served from
existing or currently projected transmission facilities in each market and
calculated as set forth below. The 35-mile radius is an arbitrary radius
chosen because of industry practice and capital expenditure considerations.
Total household information within the 35-mile radius is based on 1990 Census
data obtained using a commercially available population software program called
POP90(TM), created by EDX Engineering, Inc. ("EDX"). Due to the relatively
flat terrain in certain of the Company's markets, the estimated LOSHH capable
of being served may exceed the estimated households within the 35-mile radius.
Because LOSHH outside of the 35-mile radius are added to estimated total
households, the number of estimated total households may equal the number of
estimated LOSHH. A total average annual growth rate of approximately 1% since
1990, based on population growth rate estimates of the U.S. Bureau of the
Census (the "Census Bureau") released in March 1997, is included in the
estimates.
"Estimated Line-of-Sight Households" represents the Company's
estimates of the approximate number of LOSHH that can receive an adequate
signal from the Company in its service areas. This information was calculated
by using a commercially available engineering software program called
Signal(TM), created by EDX. The EDX program determines LOSHH from 1990 Census
Bureau data, using actual antenna heights, antenna locations and the
surrounding three arc second terrain data. LOSHH in overlapping service areas
in Existing Systems are divided proportionately among such areas. LOSHH in
future launch markets are not divided among such markets. The program
considers topographical features, but does not take into account potential
signal blockage due to foliage or buildings. Due to the relatively flat
terrain in certain of the Company's markets, the estimated LOSHH capable of
being served may exceed the estimated total households within the 35-mile
radius. Because LOSHH outside of the 35-mile radius are added to estimated
total households, the number of estimated LOSHH in a market may equal the
number of estimated total households in such market. The calculation of LOSHH
assumes (1) the grant of pending applications for new licenses
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<PAGE> 15
or for modification of existing licenses, and (2) the grant of applications for
new licenses and license modification applications that have not yet been filed
with the FCC. The LOSHH estimates include a total average annual growth rate
of approximately 1% since 1990, based on Census Bureau population growth rate
estimates released in March 1997.
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED NUMBER OF
TOTAL LINE-OF-SIGHT SUBSCRIBERS
EXISTING SYSTEMS HOUSEHOLDS HOUSEHOLDS 12/31/97
----------------------- ---------- ---------- --------
<S> <C> <C> <C>
Ada, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,638 21,916 3,712
Wichita Falls, TX . . . . . . . . . . . . . . . . . . . . . . . . . 64,823 56,795 4,773
Midland, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,713 115,713 5,882
Abilene, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,185 57,158 3,365
Lawton, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,955 58,440 7,329
Laredo, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,351 48,950 3,840
Enid, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,560 40,560 4,412
Lindsay, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,151 32,444 2,846
Ardmore, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,282 53,282 3,385
Mt. Pleasant, TX . . . . . . . . . . . . . . . . . . . . . . . . . 57,179 50,119 2,653
Chanute, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,986 55,986 4,568
Stillwater, OK . . . . . . . . . . . . . . . . . . . . . . . . . . 81,508 81,508 6,354
Texarkana, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,055 77,682 1,619
Lubbock, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,885 63,557 4,730
McLeansboro, IL . . . . . . . . . . . . . . . . . . . . . . . . . . 88,485 76,277 1,508
Vandalia, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,907 92,907 1,943
Olney, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,655 70,655 1,901
Taylorville, IL . . . . . . . . . . . . . . . . . . . . . . . . . . 163,090 144,622 2,042
Peoria, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,501 200,564 2,122
Bucyrus, OH . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,819 237,819 1,024
Paragould, AR . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,557 140,557 2,702
Sikeston, MO . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,368 100,368 2,821
Manhattan, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,008 54,008 2,009
Olton, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,583 20,541 873
O'Donnell, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,006 59,747 836
Monroe City/Lakenan, MO . . . . . . . . . . . . . . . . . . . . . . 69,771 69,771 1,917
Sherman/Denison, TX . . . . . . . . . . . . . . . . . . . . . . . . 109,525 82,132 8,617
Freeport, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,042 148,042 1,487
Paris, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,857 44,857 3,340
Strawn/Ranger, TX . . . . . . . . . . . . . . . . . . . . . . . . 42,772 41,008 1,358
Corsicana/Athens, TX . . . . . . . . . . . . . . . . . . . . . . . 95,568 95,568 2,465
Champaign, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,781 103,081 3,723
Austin, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431,541 385,070 12,972
Waco, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,613 95,581 6,318
Temple/Killeen, TX . . . . . . . . . . . . . . . . . . . . . . . . 139,907 104,141 11,388
Corpus Christi, TX . . . . . . . . . . . . . . . . . . . . . . . . 166,940 126,275 12,880
Hamilton, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,358 18,884 2,835
Marion, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,014 52,587 1,363
Sterling, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,688 36,755 1,099
Macomb/Walnut Grove, IL . . . . . . . . . . . . . . . . . . . . . . 84,383 84,383 2,495
Tulsa, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,114 309,464 13,414
George West, TX . . . . . . . . . . . . . . . . . . . . . . . . . . 23,325 16,270 2,201
Kingsville/Falfurrias, TX . . . . . . . . . . . . . . . . . . . . . 32,614 32,614 1,564
Uvalde/Sabinal, TX . . . . . . . . . . . . . . . . . . . . . . . . 18,325 12,578 1,412
Medicine Lodge/Anthony, KS . . . . . . . . . . . . . . . . . . . . 30,154 30,154 1,404
Gainesville, TX . . . . . . . . . . . . . . . . . . . . . . . . . 39,539 12,121 1,126
Jourdanton/Charlotte, TX . . . . . . . . . . . . . . . . . . . . . 100,519 100,519 1,472
Kerrville, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,004 19,527 478
Greenville, PA . . . . . . . . . . . . . . . . . . . . . . . . . . 336,335 165,578 777
Jacksonville, IL . . . . . . . . . . . . . . . . . . . . . . . . . 48,302 29,010 677
Radcliffe, IA(1). . . . . . . . . . . . . . . . . . . . . . . . . . 75,039 75,039 2,056
Weatherford, OK . . . . . . . . . . . . . . . . . . . . . . . . . . 29,146 14,259 501
Montgomery City, MO . . . . . . . . . . . . . . . . . . . . . . . . 90,905 90,905 767
Beloit, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,755 20,755 717
McAlester, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,913 24,837 936
Muskogee, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,894 50,484 908
Woodward, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,180 13,704 2,316
Watonga, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,310 24,310 706
--------- --------- -------
Total Existing Markets . . . . . . . . . . . . . . . . . 5,252,383 4,542,438 186,937
========= ========= =======
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
FUTURE LAUNCH TOTAL LINE-OF-SIGHT
MARKETS HOUSEHOLDS HOUSEHOLDS
---------------- ----------- ------------
<S> <C> <C>
Altus, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,365 28,485
Amarillo/Borger, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,879 111,012
Burnet, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,200 29,492
Casper, WY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,362 28,736
Cheyenne, WY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,225 32,345
Columbia, MO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,715 111,490
Crow, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,111 90,643
Des Moines, IA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,319 200,062
El Dorado, AR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,924 79,924
El Paso, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,491 195,860
Elk City, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,010 12,738
Fischer, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,945 347,773
Flagstaff, AZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,124 39,604
Forrest City, AR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,144 172,144
Great Bend, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,148 54,148
Hays, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,868 28,868
Henryetta, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,443 27,227
Holdenville, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,478 28,322
Kalispell, MT (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,910 28,073
Kossuth, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,174 72,174
Lenapah, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,807 44,740
Lufkin, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,308 70,308
Paducah/Mayfield, KY . . . . . . . . . . . . . . . . . . . . . . . . . . 76,393 70,262
Ottawa/LaSalle, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,149 236,149
Peaksville, MO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,981 86,981
Ponca City, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,455 129,455
Purdin, MO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,534 44,534
Scottsbluff, NE (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,523 16,588
Searcy, AR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,274 26,747
Seminole, OK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,870 44,924
Shreveport, LA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,038 160,163
Springfield, MO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,696 142,696
Stromsberg, NE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,717 59,717
Topeka, KS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,540 112,540
Tyler, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,130 121,554
--------- ---------
Total-Future Markets . . . . . . . . . . . . . . . . . . . . . 3,574,250 3,086,478
--------- ---------
Total-All Company Markets . . . . . . . . . . . . . . . . . . . 8,826,633 7,628,916
========= =========
</TABLE>
__________
(1) The Company operated this market under a Management Agreement on behalf of
CS Wireless. Effective December 31, 1997, CS Wireless resumed operational
control and ownership of this market. Heartland retained no interest in
this market.
16
<PAGE> 17
(2) The Company managed this market under a Management Agreement on behalf of
CS Wireless. Effective December 31, 1997, CS Wireless resumed management
and ownership of this market. Heartland retained no interest in this
market.
Existing Systems. As of December 31, 1997, including one operating
system managed by the Company, the Company had 58 Existing Systems. The Company
generally offers 16 to 31 basic, premium and pay-per-view wireless cable
channels (including three to four local off-air VHF/UHF broadcast channels that
are retransmitted). Generally, the Company's Existing Systems lease the
majority of their wireless cable channels. The terms of such leases typically
expire five to 10 years from the license grant date, ranging from years 1998 to
2007. The majority of such leases provide for (i) a right of first refusal to
purchase the channels after the expiration of the lease if FCC rules and
regulations so permit, (ii) an automatic renewal of the lease of five to 10
years if such automatic renewals are then permitted by the FCC, and/or (iii) an
agreement to negotiate a lease renewal in good faith. Although the Company
does not believe that the termination of or failure to renew a single channel
lease would adversely affect the Company, several of such terminations or
failures in one or more Existing Systems could have a material adverse effect
on the Company. The Existing Systems transmit at 10 to 100 watts of power from
a transmission tower that generally has a signal pattern covering a radius of
35 to 50 miles.
Future Launch Markets. In these markets, the Company owns the BTA
authorization and/or has aggregated or is aggregating additional wireless cable
channel rights as of December 31, 1997. Certain of the Company's channel rights
in the future launch markets are in the form of lease agreements with
educational entities that have pending applications for ITFS channels or that
have had applications returned without prejudice by the FCC that will be
refiled. These ITFS applications undergo review by the FCC's engineering and
legal staff. Because the FCC's application review process does not lend itself
to complete certainty, and given the considerable number of applications
involved, no assurance can be given as to the precise number of applications
that will be granted.
EMPLOYEES
As of March 20, 1998, the Company had approximately 790 employees.
None of the Company's employees are subject to a collective bargaining
agreement. The Company has experienced no work stoppages and believes that it
generally has good relations with its employees. The Company also presently
utilizes the services of independent contractors to install certain components
of its wireless cable systems.
RECENT TRANSACTIONS
Acquisition. In January 1997, the Company acquired two operating
wireless cable television systems in Woodward and Watonga, Oklahoma for $1.6
million in cash and $150,000 in escrowed cash.
Exchange Offer. In April 1997, the Company consummated the exchange
of $125.0 million aggregate principal amount of 14% Series B Senior Notes due
2004 for $125.0 million aggregate principal amount of 14% Senior Notes
containing identical terms, except that the 14% Senior Notes are registered
under the Securities Act of 1933, as amended.
Asset Exchange. In April 1997 the Company consummated an exchange
with American Telecasting, Inc. of wireless cable channel rights and related
assets in South Dakota and Florida for wireless cable channel rights and
related assets in Michigan and Illinois.
Sale of Telinor Interest. In September 1997, the Company sold a 39%
equity interest in Television Interactiva del Norte, S.A. de C.V. ("Telinor")
for approximately U.S. $915,000 to CS Wireless. In addition, the Company sold
to CS Wireless two promissory notes payable by Telinor for approximately U.S.
$2.6 million, representing principal and accrued interest payable under such
notes. Following this transaction, the Company retained a 10% equity interest
in Telinor.
17
<PAGE> 18
CS Wireless True-Up. In September 1997, the Company completed certain
post-closing adjustments with respect to relative accounts payable, accounts
receivable, working capital assets and subscribers relating to the
Participation Agreement dated as of February 23, 1996, among the Company, CS
Wireless and CAI Wireless. The Company received approximately 257,000 shares
of newly issued common stock of CS Wireless in connection with these
adjustments.
Business Operations and Processes Evaluation. During 1997 the Company
completed an evaluation of its business operations and processes and, as a
result of this evaluation, has upgraded certain of its information and
accounting systems. Arthur Andersen & Co. LLP assisted the Company in the
selection and implementation of accounting and distribution software that will
provide the Company with improved technological tools for managing financial
and capital resources.
ITEM 2. PROPERTIES
The Company leases approximately 24,000 square feet of office space,
of which approximately 10,000 square feet is subleased to CS Wireless, for its
executive offices in Plano, Texas under a lease that expires April 10, 2003.
The Company pays approximately $385,000 per annum rent for such space, of which
$192,500 (50%) is reimbursed to the Company by CS Wireless. The Company leases
from affiliates of L. Allen Wheeler, a director of the Company, and David E.
Webb, a former executive officer and director of the Company, approximately
16,350 square feet in several locations for its operations, executive and
telemarketing offices in Durant, Oklahoma under leases that expire between
March 1, 2000 and May 31, 2000. The Company pays a total of $108,000 per annum
rent for such space. The Company leases approximately an additional 30,000
square feet of tower and warehouse space in Durant, Oklahoma from an affiliate
of Messrs. Webb and Wheeler under two leases that expire on March 1, 2000 and
August 1, 2000. The Company pays $35,000 per annum rent for such space. The
Company leases from an affiliate of Messrs. Webb, Wheeler and Robert R. Story,
a former executive officer of the Company, an additional 12,430 square feet of
office space in Durant, Oklahoma under a lease that expires March 1, 2000. The
Company pays $62,000 per annum rent for such space. The Company believes that
these facilities are leased at fair market value and are adequate for the
foreseeable future.
The principal physical assets of a wireless cable system consist of
satellite signal reception equipment, radio transmitters and transmission
antennae, as well as office space and transmission tower and head-end space.
The Company leases office space for the Existing Systems and will, in the
future, purchase or lease additional office space in other locations where it
launches other wireless cable systems. The Company also owns transmission
towers or leases space on transmission towers located in its markets. The
current capacity range of the Company's transmission facilities is from 10 to
100 watts, capable of generating a signal over a 35 to 50 mile range. The
Company believes that office space and space on transmission towers currently
is available on acceptable terms in the markets where the Company intends to
operate wireless cable systems.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party, from time to time, to routine litigation
incident to its business. It is the opinion of management that no pending
litigation matter will have a material adverse effect on the Company's
consolidated financial position or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on The NASDAQ Stock Market's
National Market on April 22, 1994. The following table sets forth, on a per
share basis for the periods shown, the high and low closing sale prices of the
Common Stock as reported on the NASDAQ Stock Market's National Market. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
CLOSING SALE PRICE
------------------
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year Ended December 31, 1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29.75 $ 23.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.63 $ 22.88
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.25 $ 19.56
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.25 $ 11.75
Fiscal Year Ending December 31, 1997:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.38 $ 2.13
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.06 $ 1.88
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.25 $ 1.56
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.56 $ 1.31
</TABLE>
On March 20, 1998, the last reported sale price for the Common Stock
as reported on the NASDAQ Stock Market's National Market was $0.94 per share.
As of March 20, 1998, there were approximately 717 holders of record of the
Common Stock.
The Company has never declared or paid any cash dividends on the
Common Stock and does not presently intend to pay cash dividends on the Common
Stock in the foreseeable future. The Company intends to retain any future
earnings for reinvestment in its business. The terms governing the preferred
stock issued by one of the Company's majority-owned subsidiaries include a
preference as to dividend payments over the Company, as a holder of common
stock of such subsidiary. Certain covenants in a Note Purchase Agreement among
the Company, Jupiter Partners L.P. and Thomas R. Haack prohibit the Company
from declaring or paying cash dividends. The indentures governing the Senior
Notes also prohibit the Company from declaring or paying cash dividends.
Future loan facilities, if any, obtained by the Company or any of its
subsidiaries also may prohibit or restrict the payment of dividends or other
distributions. Subject to the waiver of such prohibitions and compliance with
such limitations, the payment of cash dividends on shares of Common Stock will
be within the discretion of the Company's Board of Directors and will depend
upon the earnings of the Company, the Company's capital requirements,
applicable requirements of the Delaware General Corporation Law and other
factors that are considered relevant by the Company's Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of December
31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 were
derived from the consolidated financial statements of the Company, which were
audited by KPMG Peat Marwick LLP, independent certified public accountants, and
which are included elsewhere in this Form 10-K. The selected historical
financial data presented below as of December 31, 1995, 1994 and 1993 and for
the years ended December 31, 1994 and 1993 were derived from consolidated
financial statements of the Company, which were audited by KPMG Peat Marwick
LLP, but which are not included in this Form 10-K. This selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements (including the notes thereto) included
elsewhere in this Form 10-K.
19
<PAGE> 20
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (1)
------------------------------------------------------------
1997 (2) 1996 (2) 1995 (3) 1994 1993
------- ------- ------ ----- -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Revenues . . . . . . . . . . . . . . . . . $ 78,792 $ 56,017 $ 15,300 $ 2,229 $ 869
Operating expenses:
Systems operations . . . . . . . . . . . 39,596 21,255 4,893 762 321
Selling, general and
administrative . . . . . . . . . . . . 42,255 42,435 11,887 4,183 647
Depreciation and amortization . . . . . 65,112 39,323 6,234 1,098 138
---------- -------- -------- ------- ------
Total operating expenses . . . . . 146,963 103,013 23,014 6,043 1,106
---------- -------- -------- ------- ------
Operating loss . . . . . . . . . . . . . . (68,171) (46,996) (7,714) (3,814) (237)
Interest expense, net . . . . . . . . . . . (34,321) (18,166) (10,857) (210) (73)
Equity in losses of affiliates . . . . . . (32,037) (18,612) (1,369) (387) --
Other income (expense) . . . . . . . . . . (54) 4,981 (247) (227) (96)
Income tax benefit . . . . . . . . . . . . -- 28,156 4,285 1,595 --
---------- -------- -------- ------- ------
Loss before extraordinary item . . . . . . $ (134,583) $(50,637) $(15,902) $ (3,043) $ (406)
Extraordinary item, net of tax
benefit . . . . . . . . . . . . . . . . -- (10,424) -- -- --
---------- -------- -------- ------- ------
Net loss . . . . . . . . . . . . . . . . . $ (134,583) $(61,061) $(15,902) $ (3,043) $ (406)
========== ======== ======== ======== ======
Loss per basic and dilutive share (4):
Loss before extraordinary item . . . . . . $ (6.85) $ (2.74) $ (1.34) $ (0.30) $(0.05)
Extraordinary item . . . . . . . . . . . . -- (0.57) -- -- --
---------- -------- -------- ------- ------
Net loss . . . . . . . . . . . . . . . . . $ (6.85) $ (3.31) $ (1.34) $ (0.30) $(0.05)
========== ======== ======== ======== ======
Weighted average number of basic and
dilutive common shares outstanding . . . 19,649 18,473 11,866 10,011 8,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------- --------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents . . . . . . . . . $42,821 $79,596 $23,143 $11,986 $815
Total assets . . . . . . . . . . . . . . . 372,134 515,364 205,405 77,921 8,665
Long-term debt, including current
portion . . . . . . . . . . . . . . . . 308,196 303,538 141,652 40,506 1,593
Total stockholders' equity . . . . . . . . 46,408 180,847 51,688 30,081 4,493
</TABLE>
__________
(1) Amounts between years are not comparable because of acquisitions
accounted for as purchases and dispositions, primarily in years
subsequent to 1994 (see Note 8 to the consolidated financial
statements).
(2) The Company changed its useful lives for depreciating the
nonrecoverable portion of subscriber installation costs in 1997 and
1996 (see Note 1(e) to the consolidated financial statements), and
license and leased license costs and excess of cost over fair value of
net assets acquired in 1996 (see Note 1(g) to the consolidated
financial statements).
(3) The Company changed its method of accounting for the direct costs and
installation fees related to subscriber installations in 1995 (see
Note 1(e) to the consolidated financial statements).
(4) Loss per basic and dilutive common share for each period presented has
been calculated using the provisions of SFAS No. 128 "Earnings per
Share," which is effective for periods ending after December 15, 1997
and
20
<PAGE> 21
requires restatement of all prior period loss per share data (see Note
1(m) to the consolidated financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 targets small to mid-size markets which include households
that are unpassed by traditional hard-wire cable. The Company offers its
subscribers local off-air VHF/UHF channels, as well as HBO, HBO2, Cinemax,
Showtime, Disney, ESPN, CNN, USA, WGN, WTBS, Discovery, the Nashville Network,
A&E and other popular cable television networks. At December 31, 1997,
including one operating system and two non-operating systems managed by the
Company, the Company had wireless cable channel rights in 93 markets. At
December 31, 1997, including one operating system managed by the Company, the
Company had 58 markets with systems in operation, providing wireless cable
service to approximately 187,000 subscribers. The remaining 35 markets
represent potential future launch systems. In addition, the Company owns an
approximate 20% equity interest in Wireless One and an approximate 36% equity
interest in CS Wireless.
"System EBITDA" means net income (loss) plus interest expense, income
tax expense, depreciation and amortization expense and all other non-cash
charges, less any non-cash items which have the effect of increasing net income
or decreasing net loss, for a system. System EBITDA includes all selling,
general and administrative expenses attributable to employees employed in that
system and, to more accurately reflect operations at the system level, the
Company also allocates expenses related to billing, collections, telemarketing,
the Company's call center and information systems. EBITDA and System EBITDA
are presented because they are widely accepted financial indicators of a
company's ability to service and/or incur indebtedness. However, EBITDA and
System EBITDA are not financial measures determined under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of operating results or to cash flows as a measure of funds
available for discretionary or other liquidity purposes.
Although the Company has recorded net losses of $215.0 million since
inception, 47 systems achieved positive System EBITDA and two systems achieved
break-even System EBITDA for the year ended December 31, 1997. The Company's
nine remaining systems did not achieve positive System EBITDA for the year
ended December 31, 1997, primarily as a result of the lower number of channels
offered by such systems, insufficient LOSHH and/or their early stages of
development.
Effective December 31, 1996, the Company (i) revised its methodology
for reporting MDU subscribers and (ii) wrote off approximately 33,000
subscribers with delinquent balances. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Changes in Method for
Reporting Subscribers." For the year ended December 31, 1996 and in subsequent
periods, the Company has reported and will report its subscriber base, average
revenue per subscriber and churn rate based upon the new methodology (the "new
method"). However, the Company is unable to retroactively apply the new method
to periods prior to December 31, 1996. Therefore, certain information set
forth below will only include amounts for periods which can be calculated under
the new method.
FORWARD LOOKING STATEMENTS
In addition to the matters noted above, 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 business strategy and financing needs, 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) business and economic conditions in the Company's
existing markets, (ii) the Company's ability to implement a successful
marketing plan and competitive price structure to produce subscriber growth,
(iii) the Company's existing indebtedness and the need for additional
21
<PAGE> 22
financing to fund subscriber growth, system development and debt service, (iv)
the successful implementation of the Company's MDU alliance with DIRECTV, (v)
regulatory and interference issues, including the grant of pending applications
for new licenses or for modification of existing licenses and the grant of
applications for new licenses and license modification applications that have
not yet been filed with the FCC, (vi) competitive products and services, and
(vii) the successful integration of new systems processes (including subscriber
qualification and retention efforts) and management personnel, as well as those
matters discussed specifically elsewhere herein. As a result, the actual
results realized by the Company could differ materially from the statements
made herein. Investors are cautioned not to place undue reliance on the forward
looking statements made in this report.
BALANCE SHEET AS OF DECEMBER 31, 1997 COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 1996
Allowance for Doubtful Accounts. The allowance for doubtful accounts
was $340,000 as of December 31, 1997, compared to $5.5 million as of December
31, 1996. The decrease in this account over the periods presented is due to
the write-off of certain delinquent subscriber balances, principally consisting
of 33,000 subscribers that were identified as delinquent as of December 31,
1996. Improved credit screening policies and collection procedures also
contributed to the decrease.
Management of the Company writes off delinquent subscriber balances
when the Company no longer provides programming services and future collection
efforts are not warranted. Generally, the Company defines an "active
subscriber" as a subscriber receiving programming service with an outstanding
receivable balance of less than 60 days past due or a subscriber that has a
pay-out plan with the Company. After 60 days, programming service is
terminated and the Company continues to pursue internal collection efforts for
approximately 15 to 20 days, after which time the entire account receivable
balance generally is written off and forwarded to a third party collection
agency. Generally, subscribers with outstanding balances greater than 90 days
past due are not included in the Company's subscriber base.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1997
Revenues. The Company's revenues consist of monthly fees paid by
subscribers for basic programming, premium programming, program guides,
equipment rental and other miscellaneous fees. The Company's revenues were
$78.8 million in 1997, $56.0 million in 1996 and $15.3 million in 1995,
representing increases of 41% from 1996 to 1997 and 266% from 1995 to 1996.
Effective December 31, 1996, the Company revised its methodology for reporting
subscribers in MDUs as discussed above. For the year ended December 31, 1996
and in future periods, the Company has reported and will report its subscriber
base and average monthly revenue per subscriber based upon the new method.
However, the Company is unable to retroactively apply the new method to periods
prior to December 31, 1996. Therefore, the information set forth below will
only include amounts for periods which can be calculated under the new method.
The increase in revenues over the three year period is primarily due
to an increase in the number of average subscribers resulting from the
acquisition or launch of 21 net new systems in 1995, 20 net new systems in 1996
and three net new systems in the first quarter of 1997. Also contributing to
the increase in revenues was the addition and retention by the Company in 1997
of subscribers at overall higher subscription rates, and the receipt of
increased revenues for premium services from customers retained after the
expiration of certain free-service promotions. Average monthly revenue per
subscriber under the new method was $30.22 during 1996 and $33.52 during 1997.
The increase in average monthly revenue per subscriber from 1996 to 1997 under
the new method was due to a greater percentage of subscribers purchasing
premium packages and pay per view services. At December 31, 1997, including
one system managed by the Company, the Company had 187,000 subscribers under
the new method versus 181,000 subscribers at December 31, 1996. Including one
operating system managed by the Company, the Company had 58 systems in
operation at December 31, 1997 compared to 54 at December 31, 1996 and 34 at
December 31, 1995.
System Operations. System operations expenses include programming,
channel lease payments, labor and overhead costs of service calls and churn,
transmitter site and tower rentals, cost of program guides and certain repairs
and maintenance expenditures. Programming costs (with the exception of minimum
payments), cost of program guides
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and channel lease payments (with the exception of certain fixed payments) are
variable expenses which increase as the number of subscribers increases.
Systems operations expenses were $39.6 million, $21.3 million and $4.9 million
for the years ended December 31, 1997, 1996 and 1995, respectively. As a
percentage of revenues, systems operations expenses were 50% in 1997, 38% in
1996 and 32% in 1995. As a percentage of revenue, system operations expenses
increased from 1995 to 1997 primarily due to increased programming costs
resulting from expanded channel offerings in certain markets, the promotion of
a special programming package which carried lower margins than the Company's
basic programming package, higher overall programming rates, increased service
call expense related to installation corrections and a significant increase in
labor and overhead expense related to the Company's attempts to recover
equipment from disconnected subscribers. The Company expects programming
expense as a percentage of revenue to increase slightly over the short- term as
a result of rate increases from most of the Company's programming suppliers.
However, the Company also expects decreasing expenses from churn and customer
service in 1998, which should help offset increased programming expenses.
Selling, General and Administrative ("SG&A"). SG&A was $42.3 million
in 1997, $42.4 million in 1996 and $11.9 million in 1995. As a percent of
revenues SG&A expense was 54% for 1997, 76% for 1996 and 78% for 1995. The
increase in SG&A dollars from 1995 to 1996 was a direct result of an increase
in the number of systems in operation during 1996. This system growth required
expenditures related to opening and maintaining additional offices, additional
accounting and support costs and additional compensation expense. The slight
decrease from 1996 to 1997 resulted from decreases in the Company's bad debt
expense resulting from improved credit and collections procedures and a
temporary reduction in advertising while the Company focused on improving its
fundamental operations. As a percent of revenue, SG&A declined from 1996 to
1997 due to decreases in bad debt expense, consolidations of management and
staff in certain markets, reductions in executive and other corporate staff,
and economies of scale resulting from SG&A costs covering a modestly larger
subscriber base and a larger revenue base. The Company plans to increase
marketing expenditures in 1998 upon implementation of its business strategy.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Cash Requirements."
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and amortization of license and
leased license investment and the excess of cost over fair value of net assets
acquired. Depreciation and amortization expense was $65.1 million in 1997,
$39.3 million in 1996 and $6.2 million in 1995. The increase in depreciation
and amortization expense from 1995 to 1996 was due to additional systems and
equipment in connection with the launch of 16 markets during 1996, as well as
increased amortization expense on license and leased license investment of
systems in operation and on excess of cost over fair value of net assets
acquired related to the acquisition of wireless cable channel rights, operating
wireless cable systems and the acquisition of minority interests in certain
subsidiaries of the Company. In addition, during 1996, the Company incurred
increased depreciation expense related to (i) the write-off of the unamortized
balance of capitalized labor and overhead, sales commissions and
non-recoverable equipment associated with disconnected subscribers (including
the write-off of approximately 33,000 subscribers), (ii) the write-off of
license and leased license investment in certain markets where the Company was
unsuccessful in obtaining wireless cable channel rights, and (iii) changes in
estimates of useful lives of assets. In the fourth quarter of 1996, as
discussed below in further detail, the Company reduced its estimates of the
useful lives of the non-recoverable portion of subscriber installation costs
and license and leased license investment and excess of cost over fair value of
assets acquired. Its amortization period related to the non- recoverable
portion of subscriber installation costs was reduced from six years
(approximately 1.4% churn per month) to four years (approximately 2.1% churn
per month). The estimated useful life of license and leased license investment
and cost over fair market value of net assets acquired was reduced from 20
years to 15 years.
Depreciation and amortization expense increased from 1996 to 1997 due
to a nonrecurring charge to depreciation expense of $9.0 million during the
third quarter of 1997. This charge was comprised of three components: $6.1
million related to the third quarter 1997 write-off of equipment not recovered
from subscriber homes; $1.7 million related to the write-off of obsolete
subscriber equipment that was not available for future use; and $1.2 million
related to the effects of a reduction in the estimated useful life by the
Company of the nonrecoverable portion of subscriber installation costs. In
addition, in the third quarter of 1997 the Company revised its estimated useful
life from four years (approximately 2.1% churn per month) to three years
(approximately 2.8% churn per month) for the nonrecoverable
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portion of installation costs for new subscribers to correspond to the Company's
current estimate of its average subscription term. The amortization periods
related to the non-recoverable portion of installation costs for new subscribers
over the periods presented reflect the Company's best estimates of the expected
useful lives of such costs at the time of implementation. The Company's
original estimate of six years was based in part on the assumption that a
primarily rural operating strategy could contribute to subscription terms that
were significantly higher than the hard-wire industry, because of a perceived
higher degree of stability, lower amount transiency and less competition for
multichannel video programming alternatives in a rural subscriber base. In the
fourth quarter of 1996, the Company reassessed its policy and determined, in
light of increased disconnect rates in 1996, to reduce its estimate of useful
lives to four years. In the third quarter of 1997, the Company again reassessed
its estimate of useful lives and reduced its estimate to three years. The
Company based this reduction primarily on cumulative results of operation
through September 30, 1997 that indicated a lower than anticipated retention
rate of subscribers in markets where the Company offered 20 channels or less and
in markets where prior promotional campaigns had begun to expire. As noted
above, a three-year useful life is the equivalent of a 2.8% churn rate. The
Company currently believes that a consolidated monthly churn rate of 2.8% to
3.0% can be achieved and maintained in the Company's existing markets, as other
wireless cable operators with similar operating markets have been successful in
maintaining a monthly churn rate of 3% or lower. The Company will continue to
evaluate market conditions in assessing its estimate of the average subscription
term of its subscribers, and could reduce such estimate again in the future,
although the Company has no current plans to do so.
In 1997 the Company began amortizing BTAs that were acquired in
December 1996, which also contributed to the increase in depreciation and
amortization expense from 1996 to 1997. The Company's policy is to capitalize
the excess of direct costs of subscriber installations over installation fees.
These direct costs include reception materials and equipment on subscriber
premises, installation labor and certain overhead charges, and direct
commissions. These direct costs are capitalized as systems and equipment in the
accompanying consolidated balance sheet.
Operating Loss. The Company generated operating losses of $68.2
million during 1997, $47.0 million during 1996 and $7.7 million during 1995.
EBITDA was negative $3.1 million for 1997, negative $7.7 million in 1996 and
negative $1.5 million in 1995. The increase in the Company's operating loss
and negative EBITDA from 1995 to 1996 was primarily due to increased systems
operations, SG&A and depreciation and amortization expense, partially offset by
increases in revenue. The improvement in EBITDA from 1996 to 1997 resulted
from the 41% growth in revenues combined with lower corporate overhead. EBITDA
consistently increased during 1997, improving from negative $2.6 million in the
second quarter, to negative $798,000 in the third quarter to a positive
$279,000 in the fourth quarter. The Company attributed this increase in EBITDA
to operational improvements implemented during the year in the Company's 58
operating systems (including one operating system managed by the Company for CS
Wireless), as well as cost savings and efficiencies through consolidation of
management and staff in certain markets and reductions in executive and
corporate staff. In addition, bad debt expense decreased from $7.3 million in
1996 to $3.5 million in 1997, primarily as a result of improved credit
screening procedures and collection policies. The Company believes that these
improvements resulted in a higher quality subscriber base at year-end. The
Company's monthly churn rate decreased from 9.6% for the year ended December
31, 1996 (including the year-end subscriber write-off and change in methodology
for reporting MDU subscribers) to 4.6% for the year ended December 31, 1997.
Excluding the 1996 year-end subscriber write-off and methodology change, the
Company's average monthly churn for 1996 was 4.1%. The increase in overall
churn in 1997 is primarily attributable to the enforcement of more aggressive
collections and disconnect procedures during 1997. The Company's monthly churn
for the fourth quarter ended December 31, 1997 was 4.3%.
Interest Income. Interest income was $5.5 million in 1997, $3.8 million
in 1996 and $2.9 million in 1995. The increase in interest income over the
periods was due to higher interest earned on notes receivable and average cash
and cash equivalents subsequent to the receipt of approximately $53.3 million in
cash related to the formation of CS Wireless in February, 1996 and the issuance
of $125.0 million of 14% Senior Notes due 2004 in December, 1996.
Interest Expense. The Company incurred interest expense of $39.9
million in 1997, $22.0 million in 1996 and $13.7 million in 1995. The increase
in interest expense over the periods presented is due to increases in borrowed
funds. Average borrowings increased from $91.0 million during 1995 to $176.0
million during 1996 and $307.0 million during 1997. Interest expense during
1997 and 1996 consisted primarily of (i) non-cash interest related to the
Convertible Notes, (ii) interest on the Company's 13% Notes, (iii) interest on
the Company's $125.0 million in 14% Notes due 2004 ("14% Notes") since December
20, 1996, (iv) interest related to a short-term senior secured credit facility
repaid in December 1996 and (v) interest on debt incurred in conjunction with
the BTA auction. Interest expense during 1995 included (i) non-cash interest
related to the Convertible Notes and (ii) interest on the Company's 13% Notes
since April 26, 1995.
Equity In Losses Of Affiliates. The Company had equity in losses of
affiliates of $32.0 million in 1997, $18.6 million in 1996 and $1.4 million in
1995. Equity in losses of affiliates during 1996 and 1997 represents losses
from CS Wireless in which the Company has an approximate 36% interest, and
losses from Wireless One in which the Company owns an approximate 20% interest.
The Company acquired its interest in CS Wireless on February 23, 1996. Equity
in losses of affiliates during 1995 represents losses from Wireless One. The
Company acquired its interest in Wireless One in October 1995.
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Other Income (Expense). Other income (expense) is comprised of gain
on the sale of assets and other non-operating income, offset by minority
interests in the net earnings of subsidiaries, dividends on preferred stock of
certain subsidiaries and other non-operating expenses. The Company had net
other expense of $54,000 in 1997. In 1996, the Company had other income of $5.3
million related to a gain on the sale of the Flippin, Tennessee market and the
sale of channel rights in three Georgia markets. Offsetting this income, the
Company incurred $400,000 of other expenses during 1996, of which $200,000
related to non-operational settlement charges. In 1995 the Company incurred
$247,000 of other expenses, of which $200,000 related to non-operational
settlement charges between the Company and an unaffiliated third party.
Income Tax Benefit. At December 31, 1997, the Company had an
estimated $172.0 million net tax loss carryforward. No income tax benefit was
recorded for the year ended December 31, 1997. As discussed more fully in Note
6 of the notes to the consolidated financial statements, the Company recognized
income tax benefits related to the Company's losses before income taxes and
extraordinary items of $28.2 million for 1996 and $4.3 million for 1995.
Extraordinary Item. In December 1996, the Company recognized an
extraordinary loss of $11.5 million, net of tax of $1.1 million. This
extraordinary loss resulted from a substantive modification of the terms of the
13% Notes and due to the amount of consent fees paid ($6.9 million). For
financial reporting purposes, the 13% Notes have been treated as having been
extinguished and reissued upon the consummation of the 14% Notes, and recorded
at their estimated fair value as of such date. The extraordinary loss consists
of the associated write-off of debt issuance costs related to the 13% Notes of
$5.3 million, the consent payments of $6.9 million, the decrease in the 13%
Notes of $1.1 million to reflect their estimated fair value and other costs of
$400,000.
Net Loss. The Company has recorded net losses since its inception.
The Company incurred net losses of $134.6 million or $6.85 per basic and
diluted common share during 1997, $61.1 million or $3.31 per basic and diluted
common share during 1996 and $15.9 million or $1.34 per basic and diluted
common share during 1995. As previously discussed, although the Company's
total revenue increased from 1995 to 1996 and from 1996 to 1997, increased
systems operations, equity in losses of affiliates, depreciation and
amortization and interest expense caused the Company's net losses to increase
over these periods. Although the Company experienced growth in EBITDA during
the second half of 1997, it expects to continue to incur net losses throughout
1998 and beyond.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital intensive
business. Since inception, the Company has expended funds to lease or otherwise
acquire channel rights in various markets and systems in operation, to
construct operating systems and to finance initial system operating losses. To
date, the Company's primary sources of capital have been from the sale of the
Company's common stock, debt financing and the sale of wireless cable channel
rights that are not part of the Company's strategic plan.
The Company estimates that a launch of a wireless cable system in a
typical market will involve the initial expenditure of approximately $820,000
to $1.3 million for wireless cable system transmission equipment and tower
construction, depending upon the type and sophistication of the equipment and
whether the Company is required to construct a transmission tower. In
addition, incremental installation costs of approximately $465 per single
family household subscriber for equipment, labor, overhead charges and direct
commission are required. The Company has recently utilized a more sophisticated
type of boxless equipment that will cost approximately $65 less per
installation and therefore it believes that the average cost of materials will
continue to decrease as subscribers are added in systems that utilize such
equipment. The Company plans to convert some of its current operating systems
from a boxed to boxless technology in order to realize these future cost
savings. It will use boxed inventory removed from these converted markets to
supply growth in other boxed technology markets. Other launch costs include
the cost of securing adequate space for marketing and warehouse facilities, as
well as costs related to employees. As a result of these costs, operating
losses are likely to be incurred by a system during the start-up period.
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Cash used in operations by the Company was $41.6 million in 1997,
$22.8 million in 1996, and $6.5 million in 1995. The increase in cash consumed
by operations during 1997 was primarily due to increased systems operations and
interest expense, partially offset by a 41% increase in revenues from 1996 to
1997. The increase in cash used in operations during 1996 as compared to 1995
was primarily due to increases in systems operations, SG&A and interest
expense, partially offset by a 266% increase in revenues.
Cash provided by investing activities was $6.8 million in 1997. Cash
used in investing activities was $34.2 million in 1996 and $96.7 million in
1995. Cash provided by/used in investing activities principally relates to the
construction of additional operating systems, the acquisition and installation
of subscriber receive-site equipment, the upgrade of transmission equipment in
certain markets and the acquisition of wireless cable channel rights and
operating systems, partially offset by the sale of wireless cable channel rights
that are not a part of the Company's strategic plan. During 1997 cash provided
by investing activities included receipt of approximately $15.0 million in cash
for payment on a note receivable, $3.5 million in cash from the sale of a
partial interest in the Company's investment in Telinor and sales of debt
securities totaling $19.9 million. This was partially offset by the Company's
acquisition of two operating systems in Oklahoma for $1.6 million in cash. The
Company's purchases of systems and equipment decreased from 1996 to 1997 due to
the launch of 16 systems during 1996 compared to two systems in 1997 and six
systems during 1995. In conjunction with the planned launch of two to six
markets during 1998, the Company projects capital expenditures of $2.0 million
to $7.0 million for head-end equipment and other set up costs as well as $50,000
to $750,000 in additional subscriber equipment depending upon the number of
systems launched. These projected expenditures will be evaluated throughout the
year in relation to the Company's financial condition and its ability to obtain
timely financing on satisfactory terms and conditions (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Future Cash Requirements".)
As discussed more fully in Notes 3 and 8 of the notes to the
consolidated financial statements, cash used in investing activities during
1996 also included the Company's acquisition of the Champaign, Illinois and
Gainesville, Texas operating systems, payments related to the BTA Auction and
out-of-pocket expenses related to the acquisition of the businesses of
CableMaxx, Inc. and American Wireless Systems, Inc., assets of Fort Worth
Wireless Cable T.V. Associates, Wireless Cable T.V. Associates #38 and certain
of the wireless cable television assets of Three Sixty Corp., formerly
Technivision, Inc. (collectively the "CableMaxx, AWS and Technivision
Acquisitions"). These uses of cash were partially offset by the receipt of
approximately $58.3 million in cash from CS Wireless in connection with the
Company's contribution of wireless cable assets to CS Wireless, and sale of
wireless cable channel rights in Tennessee, California, Texas, Illinois and
Georgia for total proceeds of approximately $23.8 million. As discussed more
fully in Note 8 of the notes to the consolidated financial statements, cash
used in investing activities during 1995 included the Company's investment in
RuralVision Joint Venture, the acquisition of certain wireless cable assets
from RuralVision Joint Venture and Cross Country Wireless, Inc., the
acquisition of the Lubbock, Texas and Tulsa, Oklahoma markets and payments made
in connection with the CableMaxx, AWS and Technivision Acquisitions. These uses
of cash were partially offset by the sale of wireless cable channel rights in
five markets and the repayment of a $10.0 million note from Wireless One.
Net cash used in financing activities was $2.0 million in 1997. Net
cash provided by financing activities was $113.4 million in 1996 and $114.3
million in 1995. Cash used during 1997 was primarily for miscellaneous
payments on notes payable. As discussed more fully in Notes 3 and 8 of the
notes to the consolidated financial statements, cash provided by financing
activities during 1996 includes the net proceeds from the sale of $125.0
million of 14% Notes and $15.0 million of 13% Notes, partially offset by
payments on long-term debt assumed in the CableMaxx, AWS and Technivision
Acquisitions and the repayment of certain short-term borrowings. As discussed
more fully in Note 3 of the notes to the consolidated financial statements,
cash provided by financing activities during 1995 primarily represents the sale
of $100.0 million of 13% Notes.
At March 20, 1998, the Company had approximately $44.0 million of
unrestricted cash and $8.0 million of investments in debt securities from the
proceeds of the sale of the Company's 14% Notes placed in escrow for the semi-
annual payment of interest. In addition, the Company had $2.2 million
representing collateral securing various outstanding letters of credit to
certain vendors of the Company.
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FUTURE CASH REQUIREMENTS
As a result of the Company's current level of indebtedness, and the
possible incurrence of additional indebtedness or alternative financing, the
Company will be required to satisfy certain debt service requirements. In
April 1997, the Company disbursed all of the remaining funds in the escrow
account established in connection with the indentures governing the 13% Notes.
As a result, in October 1997, the Company began to make semi-annual cash
interest payments on the 13% Notes from its operating cash, with each such
payment totaling approximately $7.5 million. Beginning in October 1998,
following the disbursement in April 1998 of all of the funds in the escrow
account established in connection with the indenture governing the 14% Notes,
the Company will be required to make semi-annual cash interest payments on the
13% Notes and the 14% Notes from operating cash, with each such payment
totaling approximately $16.2 million. Also, beginning in November 1998 the
Company will be required to begin making quarterly principal payments (in
addition to interest) on its debt incurred in connection with the 1996 BTA
auction, with each such payment totaling approximately $655,000 (net of BTA
lease payments from CS Wireless). Finally, beginning in November, 1999, if the
holders of the Convertible Notes have not exercised their conversion rights,
the Company will be required to make semi-annual cash interest payments on the
Convertible Notes, with each such payment totaling approximately $2.8 million.
Beginning in the second quarter of 1997, in an effort to conserve
capital resources, the Company suspended new system launches and decreased
marketing efforts directed at acquiring net new subscribers. During 1998, the
Company intends to increase marketing efforts in selected markets and implement
a new business plan, subject to obtaining timely financing on acceptable terms
and conditions, that it believes will provide the greatest opportunity to
improve the profitability of the Company and capitalize on its existing assets.
This projected plan consists of (1) maintaining moderate single family unit
subscriber growth through traditional analog video service in selected markets,
(2) pursuing multi-dwelling unit subscriber growth through a cooperative
marketing alliance with DIRECTV, (3) developing and testing 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
carry out this projected business plan.
Despite the Company's efforts to conserve capital and the improvement
in its EBITDA during the second half of 1997, the Company does not expect to
generate sufficient cash flow to implement its business strategy and service
the Company's existing indebtedness in 1998. Accordingly, the continued growth
of the Company's subscriber base and the implementation of the above-described
business strategy is subject to and dependent upon obtaining additional capital
and/or restructuring the Company's current debt on terms and conditions
acceptable to the Company and in a timely manner. The Company has retained the
investment banking firm of Wasserstein Perella & Co., Inc. as a financial
advisor to analyze all options available to finance the Company's projected
business plan and service its existing debt. Such options may include the sale
or exchange of debt or equity securities, borrowings under secured or unsecured
loan arrangements, sales of assets including wireless cable systems and
channel rights, and/or a recapitalization or restructuring of the Company's
current debt and/or equity, including converting part or all of existing
indebtedness and/or interest payments due thereon into equity of the Company or
delaying certain interest payments on the Senior Notes.
The Company's ability to effect certain financings, asset sales and
recapitalizations is limited by the indentures governing its Senior Notes and
the agreements governing its Convertible Notes. There can be no assurance that
the Company will be able to enter into financing arrangements, asset sales or a
recapitalization or restructuring in a timely manner and on terms satisfactory
to the Company that will be necessary to implement the above-described business
strategy and grow the Company's subscriber base.
In the event that the Company is unable to obtain financing in a
timely manner and on acceptable terms, management has developed and intends to
implement a plan that would allow the Company to continue operating in the
normal course of business at least through 1998. More specifically, this plan
would include delaying, reducing or
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eliminating the launch of new systems (including Internet developmental
systems), reducing or eliminating new subscriber installations and related
marketing expenditures and reducing or eliminating other discretionary
expenditures.
CHANGES IN METHOD FOR REPORTING SUBSCRIBERS
Effective December 31, 1996, the Company changed its methodology for
reporting subscribers in MDUs. MDU subscribers who receive bills directly from
the Company, who prior to December 31, 1996 had been reported using an
equivalent basic unit ("EBU") rate of $9.05, were reclassified as
individually-billed units, similar to SFU subscribers. In addition, under the
new methodology, MDU subscribers who are billed in bulk to the MDU owner have
been converted to SFU subscribers using an EBU rate of $17.95, as opposed to
$9.05 under the old methodology. As adjusted, during the fourth quarter of
1996, the Company's direct-billed MDU subscriber base generated average monthly
revenue per subscriber of $27.31 and the Company's bulk-billed MDU subscribers
generated average monthly revenue per subscriber of $17.95, versus $9.05 during
the third quarter of 1996 for both direct and bulk-billed MDU subscribers. MDU
and EBU subscriber reporting conventions are subjective, and any changes in
methodology that decrease subscriber count result in a corresponding increase
in average revenue per subscriber. The Company believes that using the revised
EBU rate of $17.95 and reclassifying individually billed units more accurately
reflects the revenue derived from these subscribers, and will minimize the
impact on monthly revenue per subscriber resulting from future changes in the
number of MDU subscribers relative to SFU subscribers.
INCOME TAX MATTERS
The Company and certain of its subsidiaries file a consolidated
Federal income tax return. Subsidiaries in which the Company owns less than 80%
of the voting stock will file separate Federal income tax returns. The Company
has had no material state or Federal income tax expense since inception. As of
December 31, 1997, the Company had approximately $172.0 million in net
operating losses for U.S. Federal income tax purposes, expiring in years 2013
through 2017. The Company estimates that approximately $38.0 million of the
above losses relate to various acquisitions and as such are subject to certain
limitations.
THE YEAR 2000
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (Year 2000) approaches. The
Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as 1900 rather than the Year 2000. This could result in a system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, transmit
programming or engage in similar normal business activities.
The Company is utilizing both internal and external resources to
identify, correct or reprogram, and test its systems for the Year 2000
compliance. The Company anticipates that all reprogramming efforts will be
complete by June 30, 1999, which the Company believes will allow adequate time
for testing and implementation before the Year 2000. To date, confirmations
have been received from the Company's primary information processing vendors
that plans are being developed to address processing of transactions in the
Year 2000. However, the Company is uncertain of the expense associated with
the Year 2000 compliance and related potential effect on the Company's results
of operations.
INFLATION
Management does not believe that inflation has had or is likely to
have any significant impact on the Company's operations. Management believes
that the Company will be able to increase subscriber rates, if necessary, to
keep pace with inflationary increases in costs.
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FUTURE OPERATING RESULTS
The Company's future revenues and profitability are difficult to
predict due to a variety of risks and uncertainties, including (i) business and
economic conditions and growth in the Company's existing markets, (ii) the
Company's ability to implement a successful marketing plan and a competitive
price structure to produce subscriber growth, (iii) the Company's existing
indebtedness and the need for additional financing to fund subscriber growth,
system development and debt service, (iv) the successful implementation of the
Company's MDU alliance with DIRECTV, (v) regulatory and interference issues,
including the grant of pending applications for new licenses or for
modification of existing licenses and the grant of applications for new
licenses and license modification applications that have not yet been filed
with the FCC, (vi) competitive products and services, and (vii) the successful
integration of new systems processes (including subscriber qualification and
retention efforts) .
The rate of growth of the Company's subscriber base during 1998 and
beyond cannot be estimated with precision or certainty. Successful
implementation of the Company's projected business strategy and the Company's
ability to obtain timely financing on acceptable terms will have a significant
impact on the Company's 1998 operating and financial performance. In addition,
the Company cannot quantify the potential impact on its 1998 financial
performance resulting from the implementation of its projected business
strategy.
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.
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 131"). SFAS 131 is effective for fiscal years beginning after December
31, 1997. This statement establishes standards for the way that public
companies report information about segments in annual and interim financial
statements. The effective adoption of SFAS 131 is not expected to have a
material impact on the Company's consolidated financial statements and related
disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
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Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1997 and
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the Three Years
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for the
Three Years Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
29
<PAGE> 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated herein by
reference to the sections of the definitive Proxy Statement to be filed with
the Securities and Exchange Commission (the "Commission") not later than 120
days after fiscal year ended December 31, 1997, and delivered to stockholders
in connection with the Annual Meeting of Stockholders expected to be held on or
before June 12, 1998, captioned "Election of Directors," "Executive Officers"
and "Disclosure Pursuant to Section 16 of the Exchange Act."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by
reference to the sections of the definitive Proxy Statement to be filed with
the Commission not later than 120 days after fiscal year ended December 31,
1997, and delivered to stockholders in connection with the Annual Meeting of
Stockholders expected to be held on or before June 12, 1998, captioned
"Meetings of the Board of Directors and Committees of the Board of Directors;
Compensation of Directors" and "Executive Compensation Related Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by
reference to the sections of the definitive Proxy Statement to be filed with
the Commission not later than 120 days after fiscal year ended December 31,
1997, and delivered to stockholders in connection with the Annual Meeting of
Stockholders expected to be held on or before June 12, 1998, captioned
"Security Ownership of Certain Beneficial Owners, Directors and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference to the sections of the definitive Proxy Statement to be filed with
the Commission not later than 120 days after fiscal year ended December 31,
1997, and delivered to stockholders in connection with the Annual Meeting of
Stockholders expected to be held on or before June 12, 1998, captioned "Certain
Transactions and Relationships."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of the Report
1. Financial Statements
The following financial statements are filed as part of this
Form 10-K:
30
<PAGE> 31
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the three years
ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this Form 10-K:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Schedule II -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
Schedules other than the above have been omitted because they are
either not applicable or the required information has been disclosed
in the financial statements or notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2.1 -- Letter Agreement regarding formation of the Registrant
(filed as Exhibit 2.1 as the Registrant's Registration
Statement on Form S-1, File No. 33-74244 (the "Form
S-1"), and incorporated herein by reference)
2.2 -- Supplement to Letter Agreement regarding formation of
the Registrant (filed as Exhibit 2.2 to the Form S-1 and
incorporated herein by reference)
3.1 -- Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Form S-1 and incorporated
herein by reference)
3.2 -- Restated By-laws of the Registrant (filed as Exhibit 3.2 to
the Form S-1 and incorporated herein by reference)
4.1 -- 1994 Employee Stock Option Plan of the Registrant
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-04263) and
incorporated herein by reference
4.2 -- Revised Form of Nontransferable Incentive Stock Option
Agreement under the 1994 Employee Stock Option Plan of
the Registrant (filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4, File No. 33-91930
(the "February 1996 Form S-4")and incorporated herein by
reference)
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
4.3 -- Revised Form of Nontransferable Non-Qualified Stock Option
Agreement under the 1994 Employee Stock Option Plan of
the Registrant (filed as Exhibit 4.3 to the February 1996
Form S-4 and incorporated herein by reference)
4.4 -- 1994 Stock Option Plan for Non-Employee Directors of
the Registrant (filed as Exhibit 4.4 to the Form S-1 and
incorporated herein by reference)
4.5 -- Form of Stock Option Agreement under the 1994 Stock
Option Plan for Non-Employee Directors of the Registrant
(filed as Exhibit 4.5 to the Form S-1 and incorporated
herein by reference)
4.6 -- Indenture between the Registrant and First Trust of New
York, National Association , as Trustee (the "Trustee")
(filed as Exhibit 4.20 to the Registrant's Registration
Statement on Form S-4, File No. 333-12577 (the "December
1996 Form S-4") and incorporated herein by reference)
4.7 -- Supplemental Indenture dated as of December 9, 1996,
between the Registrant and the Trustee (filed as Exhibit
4.21 to the December 1996 Form S-4 and incorporated
herein by reference)
4.8 -- Heartland Wireless Communications, Inc. 401(k) Plan (filed
as Exhibit 4.3 to the Registrant's Registration Statement
on Form S-8 (File No. 333-05943) and incorporated
herein by reference)
10.1 -- Standard Form of MMDS License Agreement (filed as
Exhibit 10.1 to the Registrant's Form 10-K Annual Report
for the fiscal year ended December 31, 1996 (the "1996 Form 10-
K") and incorporated herein by reference)
10.2 -- Standard Form of ITFS License Agreement (filed as Exhibit
10.2 to the 1996 Form 10-K and incorporated herein by
reference)
10.3 -- Form of Indemnity Agreement between the Registrant and
each of its directors (filed as Exhibit 10.3 to the Form S-1
and incorporated herein by reference)
10.4 -- Noncompetition Agreement between the Registrant and
J.R. Holland, Jr. (filed as Exhibit 10.4 to the Form S-1
and incorporated herein by reference)
10.5 -- Noncompetition Agreement between the Registrant and
David E. Webb (filed as Exhibit 10.5 to the Form S-1 and
incorporated herein by reference)
10.6 -- Noncompetition Agreement between the Registrant and
John R. Bailey (filed as Exhibit 10.6 to the Form S-1 and
incorporated herein by reference)
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C> <C>
10.7 -- Noncompetition Agreement between the Registrant and
Randy R. Hendrix (filed as Exhibit 10.7 to the Form S-1
and incorporated herein by reference)
10.8 -- Noncompetition Agreement between the Registrant and
L. Allen Wheeler (filed as Exhibit 10.9 to the Form S-1
and incorporated herein by reference)
10.9 -- Building Lease Agreement dated June 1, 1990, between
Wireless Communications, Inc. and The Federal Building,
Inc. (filed as Exhibit 10.13 to the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1994
(The "1994 Form 10-K") and incorporated herein by
reference)
10.10 -- Building Lease Agreement dated January 2, 1995, between
the Registrant and W&W Commercial Group, L.L.C. (filed as
Exhibit 10.14 to the 1994 Form 10-K and incorporated
herein by reference)
10.11 -- Building Lease Agreement dated May 1, 1994, between
Wireless Communications, Inc. and The Federal Building,
Inc. (filed as Exhibit 10.15 to the 1994 Form 10-K and
incorporated herein by reference)
10.12 -- Building Lease Agreement dated November 20, 1995,
between the registrant and the Federal Building, Inc.
(filed as Exhibit 10.18 to the February 1996 Form S-4 and
incorporated herein by reference)
10.13 -- Office Lease dated April 10, 1996 between Merit Office
Portfolio Limited Partnership and the Registrant for the
Registrant's Plano, Texas office (filed as Exhibit 10.1
to the Form 10-Q Quarterly Report for the quarter ended
June 30, 1996 ("June 1996 Form 10-Q") and incorporated
herein by reference)
10.14 -- Sublease Agreement dated June 14, 1996 between the
Registrant and CS Wireless (filed as Exhibit 10.2 to the
June 1996 Form 10-Q and incorporated herein by reference)
10.15 -- Building Lease Agreement dated February 1, 1996, as
amended June 1, 1996, between Registrant and National
Horizon Development, L.C. (filed as Exhibit 10.16 to the
1996 Form 10-K and incorporated herein by reference)
*10.16 -- Cooperative Marketing Agreement between the Registrant
and DIRECTV, Inc. dated November 12, 1997, and the
following related agreements between the Registrant and
DIRECTV, Inc.: Transport Agreement, DSS Receiver
Support Agreement and Subscriber Payment Agreement
(collectively, the "DIRECTV Agreements")
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
**10.17 -- Heartland Wireless Communications, Inc. Performance
Incentive Compensation Plan.
**10.18 -- Employment Agreement between the Registrant and Carroll
D. McHenry dated as of March 6, 1998.
**21 -- List of Subsidiaries
**23 -- Consent of KPMG Peat Marwick LLP
**27 -- Financial Data Schedule
</TABLE>
__________
*Filed herewith. Confidential portions of the DIRECTV Agreements and exhibits
thereto have been omitted and filed separately with the Commission under a
confidential treatment request ("CTR") pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended. The Company will provide without charge,
upon written request, a copy of exhibits to the DIRECTV Agreements, with
confidential portions omitted pursuant to the CTR.
** Filed herewith
(b) Reports on Form 8-K
None.
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Heartland Wireless Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Heartland
Wireless Communications, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. In connection with our audits of the consolidated financial statements, we
also have audited the accompanying financial statement schedule. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Heartland Wireless
Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in note 1(e) to the consolidated financial statements, the Company
changed its method of accounting for the direct costs and installation fees
related to subscriber installations in 1995.
KPMG Peat Marwick LLP
Dallas, Texas
March 24, 1998
F-1
<PAGE> 36
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 42,821 79,596
Restricted assets - investment in debt and other securities (note 3) ..... 9,818 21,215
Subscriber receivables, net of allowance for doubtful accounts of
$340 in 1997 and $5,468 in 1996 ........................................ 2,198 5,382
Prepaid expenses and other ............................................... 1,390 1,586
--------- ---------
Total current assets ........................................ 56,227 107,779
--------- ---------
Investments in affiliates, at equity (notes 8 and 9) ........................ 34,167 68,095
Systems and equipment, net (notes 2, 3 and 8) ............................... 122,653 145,797
License and leased license investment, net of accumulated
amortization of $12,929 in 1997 and $7,127 in 1996 (note 7) .............. 123,369 129,725
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $3,685 in 1997 and $1,691 in 1996 (notes 4 and 8) ........ 26,226 28,220
Restricted assets - other investment securities ............................. 515 8,792
Note receivable from affiliate (note 8) ..................................... 2,069 16,275
Other assets, net ........................................................... 6,908 10,681
--------- ---------
$ 372,134 515,364
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ......................................................... $ 261 15,683
Accrued expenses and other liabilities (note 10) ......................... 17,120 15,057
Current portion of long-term debt (note 3) ............................... 1,358 1,188
--------- ---------
Total current liabilities ................................... 18,739 31,928
--------- ---------
Long-term debt, less current portion (note 3) ............................... 306,838 302,350
Minority interests in subsidiaries (note 4) ................................. 149 239
Stockholders' equity (note 5):
Common stock, $.001 par value; authorized 50,000,000 shares,
issued 19,688,527 shares in 1997 and 19,594,481 shares in 1996 ......... 20 20
Additional paid-in capital ............................................... 261,880 261,652
Accumulated deficit ...................................................... (215,134) (80,551)
Treasury stock at cost, 13,396 shares in 1997 and 10,252 shares in 1996 .. (358) (274)
--------- ---------
Total stockholders' equity .................................. 46,408 180,847
Commitments and contingencies (notes 7 and 12) $ 372,134 515,364
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 37
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three years ended December 31, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $ 78,792 56,017 15,300
--------- --------- ---------
Operating expenses:
System operations 39,596 21,255 4,893
Selling, general and administrative 42,255 42,435 11,887
Depreciation and amortization 65,112 39,323 6,234
--------- --------- ---------
Total operating expenses 146,963 103,013 23,014
--------- --------- ---------
Operating loss (68,171) (46,996) (7,714)
Other income (expense):
Interest income 5,546 3,811 2,860
Interest expense (39,867) (21,977) (13,717)
Equity in losses of affiliates (notes 8 and 9) (32,037) (18,612) (1,369)
Other income (expense), net (note 8) (54) 4,981 (247)
--------- --------- ---------
Total other income (expense) (66,412) (31,797) (12,473)
--------- --------- ---------
Loss before income taxes and
extraordinary item (134,583) (78,793) (20,187)
Income tax benefit (note 6) -- 28,156 4,285
--------- --------- ---------
Loss before extraordinary item (134,583) (50,637) (15,902)
Extraordinary item - loss on extinguishment
of debt, net of tax (note 3) -- (10,424) --
--------- --------- ---------
Net loss $(134,583) (61,061) (15,902)
========= ========= =========
Loss per common share - basic and diluted:
Loss before extraordinary item $ (6.85) (2.74) (1.34)
Extraordinary item (.57) --
--------- --------- ---------
Net loss $ (6.85) (3.31) (1.34)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 38
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three years ended December 31, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common stock paid-in Accumulated Treasury stock
Shares Amount capital deficit Shares Amount Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 11,109,280 $ 11 33,658 (3,588) -- -- $ 30,081
Issuance of common stock for
minority interest
acquisitions (note 4) 338,121 1 5,263 -- -- -- 5,264
Issuance of common stock for
acquisitions (note 8) 1,122,730 1 21,999 -- -- -- 22,000
Issuance of warrants (note 3) -- -- 4,200 -- -- -- 4,200
Exercise of stock options 41,000 -- 396 -- -- -- 396
Gain on equity investment, net
of taxes of $3,318 (note 8) -- -- 5,649 -- -- -- 5,649
Net loss -- -- -- (15,902) -- -- (15,902)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 12,611,131 13 71,165 (19,490) -- -- 51,688
Issuance of common stock for
acquisitions (note 8) 6,934,040 7 184,840 -- (10,252) (274) 184,573
Exercise of stock options,
warrants and other,
including tax benefit 49,310 -- 658 -- -- -- 658
Gain on equity investment, net
of taxes of $2,931 (note 8) -- -- 4,989 -- -- -- 4,989
Net loss -- -- -- (61,061) -- -- (61,061)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 19,594,481 20 261,652 (80,551) (10,252) (274) 180,847
Issuance of common stock to
officer (note 5) 75,000 -- 159 -- -- -- 159
Issuance of common stock for
401(k) Plan 19,046 -- 69 -- -- -- 69
Acquired shares from escrow -- -- -- -- (3,144) (84) (84)
Net loss -- -- -- (134,583) -- -- (134,583)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 19,688,527 $ 20 261,880 (215,134) (13,396) (358) $ 46,408
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 39
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three years ended December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(134,583) (61,061) (15,902)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 65,112 39,323 6,234
Deferred income tax benefit -- (29,240) (4,285)
Debt accretion and debt issuance cost amortization 4,985 4,331 4,467
Equity in losses of affiliates 32,037 18,612 1,369
Compensation expense related to issuance of common stock 228 -- --
Gain on sale of assets -- (5,279) (43)
Extraordinary item - debt extinguishment -- 4,253 --
Changes in operating assets and liabilities, net of acquisitions:
Subscriber receivables 3,194 (2,568) (2,109)
Prepaid expenses and other 830 (414) (955)
Accounts payable, accrued expenses and other
liabilities (13,449) 9,289 4,750
--------- --------- ---------
Net cash used in operating activities (41,646) (22,754) (6,474)
--------- --------- ---------
Cash flows from investing activities:
Investments and advances to affiliates -- (3,050) (5,426)
Distributions from affiliates 18,749 58,340 10,000
Proceeds from assets held for sale 126 24,139 3,423
Purchases of systems and equipment (29,402) (93,298) (43,151)
Expenditures for licenses and leased licenses (310) (2,382) (2,883)
Purchases of other investments (900) -- --
Purchases of debt securities -- (24,550) (24,120)
Proceeds from maturities of debt securities 19,935 14,250 5,380
Acquisitions, net of cash acquired (1,622) (7,618) (38,723)
Collection of (investment in) note receivable 250 -- (250)
Other -- -- (953)
--------- --------- ---------
Net cash provided by (used in) investing activities 6,826 (34,169) (96,703)
--------- --------- ---------
</TABLE>
(Continued)
F-5
<PAGE> 40
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants $ -- -- 24,596
Proceeds from long-term debt -- 141,350 95,800
Payment of debt issuance costs and consent fees (597) (12,973) (5,948)
Payments on long-term debt -- (13,017) --
Proceeds from other notes payable -- 6,700 3,070
Payments on other notes payable (1,358) (9,233) (3,243)
Other -- 549 59
-------- -------- --------
Net cash provided by (used in) financing activities (1,955) 113,376 114,334
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (36,775) 56,453 11,157
Cash and cash equivalents at beginning of year 79,596 23,143 11,986
-------- -------- --------
Cash and cash equivalents at end of year $ 42,821 79,596 23,143
======== ======== ========
Cash paid for interest $ 31,017 14,434 6,362
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 41
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three Years Ended December 31, 1997
(tables in thousands, except per share data)
(1) General and Summary of Significant Accounting Policies
(a) Description of Business
Heartland Wireless Communications, Inc. (the "Company") develops, owns
and operates wireless cable television systems, primarily in small to
mid-size markets located in the central United States. At December 31,
1997, including one operating system and two nonoperating systems
managed by the Company, the Company had wireless cable channel rights
in 93 markets, comprised of 58 markets in which the Company has
systems in operation (the "Existing Systems") and 35 future launch
markets in which the Company owns the BTA authorization from the
Federal Communications Commission (the "FCC"), has aggregated
sufficient wireless cable channel rights to commence construction of a
system or has leases with or options from applicants for channel
licenses that the Company expects to be granted by the FCC.
The Company currently operates in one industry segment and generally
targets small to mid-size markets with line-of-sight households that
are unpassed by traditional hard-wire cable. Many of these households,
particularly in rural areas, have limited access to local off-air
VHF/UHF channels (such as ABC, NBC, CBS and Fox), and typically do not
have access to pay television service except via satellite receivers.
As a result, the Company believes that its wireless cable television
service is an attractive alternative to existing choices for such
households.
Wireless cable programming is transmitted through the air via
microwave frequencies from a transmission facility to a small
receiving antenna at each subscriber's location, which generally
requires a direct, unobstructed line-of-sight from the transmission
facility to the subscriber's receiving antenna, by utilizing up to 198
megahertz ("MHz") of radio spectrum allocated by the FCC. Traditional
hard-wire cable systems also transmit signals from a transmission
facility, but deliver the signal to a subscriber's location through an
extensive network of coaxial cable and amplifiers. Because wireless
cable systems do not require such an extensive cable network, wireless
cable operators such as the Company can provide subscribers with a
high quality picture and a reliable signal resulting in fewer
transmission disruptions at a lower system capital cost per installed
subscriber than traditional hard-wire cable systems.
Like traditional hard-wire cable system operators, the Company
generally can offer its subscribers local off-air VHF/UHF channels
from ABC, NBC, CBS and Fox affiliates and other local independent
broadcast stations, as well as HBO, HBO2, Cinemax, Showtime, Disney,
ESPN, CNN, USA, WGN, WTBS, Discovery, the Nashville Network, A&E and
other programming services. The channels that the Company offers in
each market will vary depending upon the channel rights secured in
such market at the time of system launch and as the Company continues
to acquire channel rights.
(Continued)
F-7
<PAGE> 42
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
Wireless cable television is a relatively new industry within the
highly competitive pay television industry. The Company's cable
television systems face or may face competition from several sources,
such as traditional hard-wire cable companies, satellite master
antenna television systems, direct broadcast satellite and other
alternate methods of distributing and receiving television
transmissions. As the telecommunications industry continues to evolve,
the Company may face additional competition from new providers of
entertainment and data services. There can be no assurance that the
Company will compete successfully with existing or potential
competitors in the pay television industry.
(b) Liquidity and Capital Resources
The Company's consolidated financial statements have been presented on
a going concern basis which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.
During the years ended December 31, 1997, 1996 and 1995, the Company
reported net losses of $134.6 million, $61.1 million and $15.9
million, respectively, and reported net cash used in operating
activities of $41.6 million, $22.8 million and $6.5 million,
respectively.
The wireless cable television business is a capital intensive
business. Since inception, the Company has expended funds to lease or
otherwise acquire channel rights in various markets and systems in
operation, to construct operating systems and to finance initial
system operating losses. The Company's primary sources of capital have
been from the sale of the Company's common stock, debt financing and
the sale of wireless cable rights that are not part of the Company's
strategic plan. The growth of the Company's business requires
substantial investment in capital expenditures for subscriber growth,
system development and other uses of the radio spectrum.
Despite the Company's efforts to conserve capital in 1997, the Company
does not expect to generate sufficient cash flow to implement its
projected business strategy and service the Company's existing
indebtedness in 1998. Accordingly, the continued growth of the
Company's subscriber base and the implementation of its projected
business strategy is subject to and dependent upon obtaining
additional capital on terms and conditions acceptable to the Company
and in a timely manner. The Company has retained the investment
banking firm of Wasserstein Perella & Co., Inc. as a financial advisor
to analyze all options available to finance the Company's projected
business plan and service its existing debt. Such financing may
include the sale or exchange of debt or equity securities, borrowings
under secured or unsecured loan arrangements, sales of assets
including wireless cable systems and channel rights, and/or a
recapitalization or restructuring of the Company's current debt and/or
equity, including converting part or all of existing indebtedness
and/or related interest payments into equity of the Company and/or
delaying certain interest payments on the Senior Notes (defined
below).
(Continued)
F-8
<PAGE> 43
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
The Company's ability to effect certain financings, asset sales and
recapitalizations is limited by the indentures governing its $115.0
million in aggregate principal amount of 13% Series B and C Notes due
2003 (the "13% Notes") and $125.0 million in aggregate principal
amount of 14% Senior Notes due 2004 (collectively, the "Senior
Notes"), and the agreements governing its issuance of $40.2 million of
9% Convertible Subordinated Discount Notes due 2004. There can be no
assurance that the Company will be able to enter into financing
arrangements, asset sales or a recapitalization or restructuring in a
timely manner and on terms satisfactory to the Company that will be
necessary to implement its projected business strategy and service its
debt.
In the event that the Company is unable to obtain financing in a
timely manner and on acceptable terms, management has developed and
intends to implement a plan that would allow the Company to continue
operating in the normal course of business at least through 1998. More
specifically, this plan would include delaying, reducing or
eliminating the launch of new systems (including Internet
developmental systems), reducing or eliminating new subscriber
installations and related marketing expenditures and reducing or
eliminating other discretionary expenditures.
(c) Principles of Consolidation
The consolidated financial statements include the financial statements
of the Company and its majority-owned subsidiaries. Investments in 20%
to 50% owned affiliates are accounted for on the equity method and
investments in less than 20% owned affiliates are accounted for on the
cost method. All significant intercompany balances and transactions
have been eliminated in consolidation.
(d) Investments in Securities
Investments in debt securities at December 31, 1997 consist of U.S.
Treasury Notes which mature periodically through April 15, 1998. Such
securities are restricted as to the payment of interest under the 13%
and 14% Senior Notes as described in note 3. The Company has the
ability and intent to hold these investments until maturity and,
accordingly, has classified these investments as held-to-maturity
investments at December 31, 1997 and 1996. Held-to-maturity
investments are recorded at amortized cost, adjusted for amortization
or accretion of premiums or discounts. Premiums and discounts are
amortized or accreted over the life of the related held-to-maturity
investment as an adjustment to yield using the effective interest
method. A decline in the market value of the Company's investments
below cost that is deemed other than temporary results in a reduction
in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the investment security is
established. As of December 31, 1997, no such impairment has occurred.
As of December 31, 1997 and 1996, gross unrealized gains and losses
related to the Company's investments
(Continued)
F-9
<PAGE> 44
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
in debt securities were not material. Dividend and interest income are
recognized when earned.
The Company has other restricted investment securities classified as
both current and noncurrent at December 31, 1997 consisting primarily
of certificates of deposits representing collateral securing various
outstanding letters of credit to certain vendors of the Company. These
securities are carried at cost, which approximates fair value.
(e) Systems and Equipment
Systems and equipment are recorded at cost and include the cost of
transmission equipment as well as subscriber installations. In the
third quarter of 1995, the Company changed, effective January 1, 1995,
its method of accounting for the direct costs and installation fees
related to subscriber installations to achieve a better matching of
its revenues and expenses. Pursuant to the change, the Company's
policy is to capitalize the excess of direct costs of subscriber
installations over installation fees. These direct costs include
reception materials and equipment on subscriber premises, installation
labor and overhead charges, and direct commissions. Such capitalized
costs are amortized on a subscriber-by-subscriber basis over the
useful life of the asset (presently seven years) for the recoverable
portion of such costs and the estimated average subscription term
(presently three years) for the non-recoverable portion of such costs.
Any unamortized balance of the non-recoverable portion of the cost of
a subscriber installation becomes fully depreciated upon subscriber
disconnect and the related cost and accumulated depreciation are
removed from the balance sheet.
Prior to the accounting change, the Company's policy was to expense
all direct commissions associated with subscriber installations and to
recognize as revenue all installation fees to the extent of selling
costs (including direct commissions) incurred to obtain subscribers.
Historically, such selling costs have exceeded installation fees. In
addition, upon subscriber disconnect, the Company continued to
depreciate the full capitalized installation cost subsequent to the
disconnection. The Company has not presented the cumulative effect of
the change in accounting because the effect of this change on periods
prior to January 1, 1995 was not material. In addition, the results of
operations for any prior annual period would not differ materially
from results under the new method of accounting. The effect of this
change on the results of operations for the year ended December 31,
1995 was to decrease net loss by approximately $1.1 million ($.09 per
basic common share).
The cost and related accumulated depreciation of assets sold or
retired are removed from the accounts and any resulting gain or loss
is reflected in operations. Upon installation and when the asset is
ready for its intended use, depreciation and amortization of systems
and equipment is recorded on a straight-line basis for financial
reporting purposes over the estimated useful lives ranging from three
to 20 years. Repair and maintenance costs are charged to expense when
incurred, while renewals and betterments are capitalized.
(Continued)
F-10
<PAGE> 45
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
In the third quarter of 1997 and the fourth quarter of 1996, the
Company reduced its estimates of the useful lives of the
nonrecoverable portion of subscriber installation costs. The
amortization period related to the nonrecoverable portion of
subscriber installation costs was reduced from six years to four years
in the fourth quarter of 1996 and from four years to three years in
the third quarter of 1997 to correspond to the Company's estimate of
its average subscription term. The effect of this change in estimate
was to increase 1997 and 1996 depreciation expense by $1.2 million and
$2.9 million, respectively, and increase 1997 and 1996 net loss by
$1.2 million and $1.9 million ($.04 and $.10 per basic common share),
respectively.
In the third quarter of 1997, the Company charged operations for $6.1
million related to the write-off of installed subscriber equipment for
lost subscribers which was deemed unrecoverable and $1.7 million
related to the write-off of obsolete subscriber equipment that was not
available for future use.
Equipment awaiting installation consists primarily of accessories,
parts and supplies for subscriber installations and is stated at the
lower of average cost or market.
(f) License and Leased License Investment
License and leased license investment includes costs incurred to
acquire and/or develop wireless cable channel rights. Costs incurred
to acquire channel rights issued by the FCC are deferred and amortized
ratably over an estimated useful life of 15 years beginning with
inception of service in each respective market. As of December 31,
1997, approximately $30.2 million of the license and leased license
investment was not yet subject to amortization.
In the fourth quarter of 1996, the Company reduced its estimate of the
useful life of license and leased license investment from 20 years to
15 years. The effect of this change in estimate was to increase 1996
amortization expense by $400,000 and increase 1996 net loss by
$260,000 ($.01 per basic common share).
(g) Excess of Cost over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is amortized
on a straight-line basis over the expected periods to be benefited,
generally 15 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of
impairment, if any, is measured based on projected discounted future
operating cash flows. The assessment of the recoverability of excess
of
(Continued)
F-11
<PAGE> 46
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
cost over fair value of net assets acquired will be impacted if
estimated future operating cash flows are not achieved. At December
31, 1997 no such impairment existed.
In the fourth quarter of 1996, the Company reduced its estimate of the
useful life of its excess of cost over fair value of net assets
acquired from 20 years to 15 years. The effect of this change in
estimate was to increase 1996 amortization expense by $100,000 and
increase 1996 net loss by $65,000 (no material effect on a per basic
common share basis).
(h) Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. The adoption of this
Statement did not have a material impact on the Company's consolidated
financial statements.
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both
could be reduced in the future due to changes in, among other things,
technology, government regulation, available financing, interference
issues or competition. As a result, the carrying amounts of long-lived
assets, including excess of cost over fair value of net assets
acquired, could be reduced by amounts which would be material to the
consolidated financial statements.
(i) Investments in Affiliated Companies
Investments in the common stock of two affiliated companies are
accounted for by the equity method. The excess of cost of the stock of
those affiliates over the Company's share of their net assets at the
acquisition date is being amortized on a straight-line basis over 15
years.
(j) Revenue Recognition
Revenues from subscribers are recognized as service is provided.
Amounts paid in advance are recorded as deferred revenue.
(Continued)
F-12
<PAGE> 47
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
(k) System Operations
System operations expenses consist principally of programming fees,
channel lease costs, tower rental and other costs of providing
services.
(l) Income Taxes
The Company utilizes the asset and liability method for accounting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
(m) Sales of Subsidiary and Affiliate Stock
Gains and losses from the sales of capital stock by the Company's
majority-owned subsidiaries and affiliates accounted for using the
equity method are recognized as equity transactions in consolidation.
(n) Net Loss Per Common Share - Basic and Diluted
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
methods and presentations 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 by this Statement. In accordance with SFAS No. 128,
the Company has presented basic loss per share, computed on the basis
of the weighted average number of common shares outstanding during the
year, and diluted loss per share, computed on the basis of the
weighted average number of common shares and all dilutive potential
common shares outstanding during the year. All prior period loss per
share amounts have been restated in accordance with this Statement.
Net loss per common basic and diluted share is based on the net loss
applicable to common stock divided by the weighted average number of
common shares outstanding of 19,649,000, 18,473,000 and 11,866,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(Continued)
F-13
<PAGE> 48
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
At December 31, 1997, the Company has 1,357,000 outstanding options at
a weighted-average exercise price per share of $6.42 (note 5), 600,000
warrants to purchase an equal number of shares of common stock at an
exercise price of $19.525 per share (note 3), and notes which are
convertible into common stock of the Company at $15.34 per share (note
3). The potentially dilutive effect of these securities has not been
considered in the computation of diluted net loss per common share
since their effect would be antidilutive.
(o) Statements of Cash Flows
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Cash and cash equivalents consist of money market funds, certificates
of deposit, overnight repurchase agreements and other investment
securities.
During the year ended December 31, 1997, the Company entered into
capital lease agreements of $1.0 million. During the year ended
December 31, 1996, the Company entered into capital leases and a
noncompetition agreement of $676,000 and $750,000, respectively.
During the year ended December 31, 1995, the Company entered into
capital leases and noncompetition agreements of $872,000 and $315,000,
respectively.
(p) Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted SFAS No. 123, Accounting for Stock-Based Compensation,
which permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
(loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures of SFAS No. 123.
(q) Use of Estimates
Management of the Company has made a number of estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period to prepare these consolidated
financial
(Continued)
F-14
<PAGE> 49
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(r) Concentrations of Credit Risk and Accounts Receivable
The Company's subscribers are primarily residential subscribers that
are concentrated in the central United States. A significant portion
of the Company's accounts receivable is due from these subscribers.
The Company has subscriber receivables which are past due. However, in
the opinion of management of the Company, the allowance for doubtful
accounts is adequate and subscriber receivables are presented at net
realizable value. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific
subscribers, historical trends and other information.
(s) Other Assets
At December 31, 1997 and 1996, other assets consists principally of
debt issuance costs related to the issuance of the Company's long-term
debt. Such costs include legal, accounting, underwriting and printing
costs and are being amortized using the straight-line method over the
term of the related indebtedness, which method approximates the
effective interest method.
(t) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(2) Systems and Equipment
Systems and equipment consists of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Equipment awaiting installation $ 5,812 14,114
Subscriber premises equipment and installation costs 102,892 98,290
Transmission equipment and system construction costs 45,961 43,309
Office furniture and equipment 8,811 6,858
Buildings and leasehold improvements 1,786 1,603
-------- --------
165,262 164,174
Accumulated depreciation and amortization 42,609 18,377
-------- --------
$122,653 145,797
======== ========
</TABLE>
(Continued)
F-15
<PAGE> 50
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
(3) Long-term Debt
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Convertible Notes $ 52,678 48,239
13% Senior Notes 112,111 111,565
14% Senior Notes 125,000 125,000
Other notes payable 18,407 18,734
--------- --------
308,196 303,538
Less current portion 1,358 1,188
--------- --------
$ 306,838 302,350
========= ========
</TABLE>
Convertible Notes
On November 30, 1994, the Company consummated the private placement of
$40.1 million in gross proceeds of 9% Convertible Subordinated Discount
Notes (the "Convertible Notes") pursuant to the terms of a Note Purchase
Agreement. The Convertible Notes accrete at a rate of 9% compounded
semiannually, to an aggregate principal amount of $62.4 million at November
30, 1999. Thereafter, interest accrues at the rate of 9% per annum and is
payable semiannually from November 30, 1999 or earlier upon the occurrence
of a Material Default (as defined in the Note Purchase Agreement). The
Convertible Notes mature on November 1, 2004 and are subordinated as to all
existing and future indebtedness of the Company other than indebtedness
that is expressly subordinated to the Convertible Notes.
At the option of the holders, the Convertible Notes are convertible into
common stock of the Company at $15.34 per share (the "Conversion Price").
The Convertible Notes are redeemable at the option of the Company at any
time on or after November 30, 1999 at 100% of the principal amount at
maturity plus accrued and unpaid interest. However, such redemption right
is only available if the market price of the Company's common stock exceeds
150% of the Conversion Price for a specified trading period.
13% Senior Notes
In April 1995, the Company consummated a private placement of 100,000 units
consisting of $100.0 million aggregate principal amount of 13% Senior Notes
due 2003 (the "13% Senior Notes") and 600,000 warrants to purchase an equal
number of shares of common stock at an exercise price of $19.525 per share.
The warrants are exercisable beginning April 1996 and terminate in April
2000. For financial reporting purposes, the warrants were valued at $4.2
million. In March 1996, the Company consummated a private placement of an
additional $15.0 million aggregate principal amount of 13% Senior Notes.
The 13% Senior Notes are redeemable,
(Continued)
F-16
<PAGE> 51
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
in whole or in part, at the option of the Company at any time on or after
April 15, 1999 at redemption prices ranging from 105.6% to 100% of par.
Interest on the 13% Senior Notes is payable semiannually on April 15 and
October 15 of each year.
In October 1995, by consent of certain bond holders and through the
execution of a supplemental indenture, certain provisions, definitions and
covenants were amended to permit the Company to consummate the Wireless One
Transaction, the CableMaxx, AWS and Technivision Acquisitions and the CS
Wireless Transaction (as hereinafter defined). The Company paid an
aggregate of $955,000 to consenting holders in October 1995.
In October 1996, by consent of certain bond holders and execution of a
supplemental indenture, certain covenants and definitions were amended to
provide for the issuance of the 14% Senior Notes discussed below. The
Company paid each consenting holder $60 for each $1,000 principal amount of
13% Senior Notes held by such holder.
As a result of a substantive modification of the terms of the debt and due
to the amount of consent fees paid for financial reporting purposes, the
13% Senior Notes have been treated as extinguished and reissued (at their
estimated fair value) upon the consummation of the offering of the 14%
Senior Notes. The write-off of debt issuance costs of $5.3 million, the
consent payments, certain other costs of $7.3 million, and a fair value
adjustment of $1.1 million related to the 13% Senior Notes have been
recorded as an extraordinary loss of $11.5 million, net of tax of $1.1
million.
14% Senior Notes
In December 1996, the Company consummated a private placement of $125.0
million of 14% Senior Notes due 2004 (the "14% Senior Notes"). The 14%
Senior Notes are redeemable, in whole or in part, at the option of the
Company at any time on or after October 15, 2002 at redemption prices
ranging from 102.333% to 100% of par. Interest on the 14% Senior Notes is
payable semiannually on April 15 and October 15 of each year. The Company
placed $22.0 million of the net proceeds realized from the sale of the 14%
Senior Notes into an escrow account for the payment of the first three
interest payments on the 14% Senior Notes. The amounts placed in the escrow
account have been invested in U.S. Treasury Notes, which mature
periodically through April 15, 1998. As of December 31, 1997, the escrow
account amounted to $8.0 million.
On April 10, 1997, the Company consummated the exchange of $125.0 million
aggregate principal amount of 14% Series B Senior Notes due 2004 for $125.0
million aggregate principal amount of 14% Senior Notes containing identical
terms, except that the 14% Senior Notes are registered under the Securities
Act of 1933, as amended.
(Continued)
F-17
<PAGE> 52
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
Other Notes Payable
Other notes payable at December 31, 1997 and 1996 includes $15.8 million
relating to the acquisition of certain basic trading areas ("BTAs"). In
March 1996, the FCC concluded an auction (the "BTA Auction") for the award
of initial commercial wireless cable licenses for BTAs. The Company
acquired 93 BTAs for approximately $19.8 million. The Company remitted a
$1.0 million deposit at the commencement of the BTA Auction and qualified
as a "small business" for purposes of the BTA Auction. Subsequently, only
20% of the total committed amount (less the $1.0 million deposit), or
approximately $3.0 million was remitted. The remaining 80% of the committed
amount, or approximately $15.8 million, bears interest at 9.5% to be paid
over a 10-year period that began in the fourth quarter of 1996. The Company
is required to make quarterly interest payments for the first two years and
quarterly principal and interest payments over the remaining eight years.
The Company and CS Wireless Systems, Inc. ("CS Wireless") entered into a
lease and purchase option agreement for 10 BTAs and portions of four
additional BTAs (collectively, the "Leased BTAs") that were awarded to the
Company at a total cost of approximately $5.2 million. Under this
agreement, CS has reimbursed the Company, and will continue to reimburse
the Company, for all amounts paid by the Company to the FCC for the Leased
BTAs. As of December 31, 1997, CS Wireless has reimbursed the Company
approximately $1.3 million. The remaining amount owed to the Company of
$3.5 million has been included in the investment in affiliates balance at
December 31, 1997.
In September 1997, the Company entered into lease and purchase option
agreements with CS Wireless and People's Choice TV Corp. ("PCTV") for two
BTAs (the "Additional Leased BTAs"). Under these agreements, CS Wireless
and/or PCTV have reimbursed the Company, and will continue to reimburse the
Company, for all amounts paid by the Company to the FCC for the Additional
Leased BTAs. The remaining amount owed to the Company of $400,000 has been
included in the other assets balance at December 31, 1997.
The Senior Notes and Convertible Notes contain covenants that, among other
things, prohibit or limit the ability of the Company and its subsidiaries
to pay dividends, sell or lease channel rights, make certain acquisitions
and incur certain indebtedness.
As discussed in note 1(b), the Company is currently highly leveraged, and
it expects to continue to maintain a high level of debt for the foreseeable
future. The Company will be required to generate substantial operating cash
flow to fund future growth and to service and repay its existing
indebtedness. The ability of the Company to meet these requirements will
depend on, among other things, prevailing economic conditions and
financial, business, financing, competitive and other factors, some of
which are beyond the control of the Company.
(Continued)
F-18
<PAGE> 53
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
Aggregate maturities of long-term debt as of December 31, 1997 for the five
years ending December 31, 2002 are as follows: 1998 - $1.4 million; 1999 -
$2.4 million; 2000 - $1.8 million; 2001 - $2.0 million and 2002 - $2.0
million.
(4) Minority Interests
In connection with the development of certain wireless cable television
markets, the Company sold stock in certain of its subsidiary companies
principally for cash. In addition to providing a portion of the cash
necessary for market development, the sales of subsidiary stock were
intended to provide for local community involvement and ownership in the
related wireless cable systems.
In March 1995, the Company issued 338,121 registered shares of common stock
in exchange for minority interests in 23 subsidiaries (20 of which became
wholly-owned). The acquisitions of the minority interests were accounted
for using the purchase method of accounting. For financial reporting
purposes, the total purchase price was approximately $5.3 million,
including out-of-pocket expenses of approximately $500,000. A deferred tax
liability of approximately $1.4 million was recorded for differences
between the assigned values and the tax bases of assets and liabilities
recognized in the acquisitions of the minority interests. A corresponding
amount has been recorded as excess of cost over fair value of net assets
acquired.
(5) Stockholders' Equity
(a) Stock Options
In May 1996, the Company amended the 1994 Employee Stock Option Plan
which provides for the granting of options to purchase a maximum of
1,950,000 shares of common stock. Options may be granted to employees
at exercise prices of not less than 100% of the fair market value of
the common stock on the date of grant. Options typically vest over a
five-year period (although options granted to certain employees were
40% vested upon grant and vest an additional 20% per year over a
three-year period) and expire at the end of option periods of not more
than seven years.
The Company's 1994 Stock Option Plan for Non-Employee Directors
provides for the granting of options to purchase a maximum of 50,000
shares of common stock. Generally, each non-employee director will be
granted on an annual basis an option to acquire 2,000 shares of common
stock at exercise prices equal to the quoted price of the common stock
on the date of grant. Options granted generally become exercisable in
25% cumulative annual installments beginning one year from the date of
grant and expire at the end of option periods of not more than seven
years.
At December 31, 1997, there were 562,133 additional shares available
for grant under the plans. The per share weighted average fair value
of stock options granted during fiscal years
(Continued)
F-19
<PAGE> 54
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
1997, 1996 and 1995 was $1.70, $10.82 and $11.71, respectively, on the
dates of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Stock price volatility 80% 36% 36%
Risk-free interest rate 6.0% 6.5% 6.75%
Expected option term 5 years 5 years 5 years
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, no
compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its
stock options under SFAS No. 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss available for common shareholders:
As reported $ (134,583) (61,061) (15,902)
Pro forma (137,126) (64,349) (17,192)
Net loss per share:
As reported - basic and diluted $ (6.85) (3.31) (1.34)
Pro forma - basic and diluted (6.98) (3.48) (1.45)
</TABLE>
Pro forma net loss reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
loss amounts presented above because compensation cost is reflected
over the options' vesting period of three to five years and
compensation cost for options granted prior to January 1, 1995 is not
considered.
(Continued)
F-20
<PAGE> 55
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
A summary of option activity during 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
Number Weighted average
of options exercise price
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1994 413 $ 10.55
Granted 371 16.73
Exercised (41) 10.50
------
Outstanding at December 31, 1995 743 13.64
Granted 514 25.09
Exercised (40) 10.50
Cancelled (16) 24.41
------
Outstanding at December 31, 1996 1,201 18.50
Granted 867 2.49
Cancelled (711) 22.03
------
Outstanding at December 31, 1997 1,357 6.42
======
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
--------------- ------------- ------------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$1.9375 to $3.1875 789 6.3 years $ 2.18 44 $ 2.07
$9.375 to $14.25 556 3.7 12.07 503 11.97
$22.125 to $29.25 12 4.7 23.40 5 22.97
----- -----
$1.9375 to $29.25 1,357 5.2 6.42 552 11.27
===== =====
</TABLE>
At December 31, 1996 and 1995, the number of options exercisable and
the weighted average exercise prices of those options were 396,200 and
279,800 and $12.51 and $11.71, respectively.
(b) Common Stock to Officer
In April 1997 the Company issued 75,000 shares of common stock to an
officer of the Company. The quoted market price at the grant date of
the award has been expensed in the accompanying consolidated financial
statements.
(Continued)
F-21
<PAGE> 56
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
(6) Income Taxes
In addition to the income tax benefit related to continuing operations of
$28.2 million and $4.3 million for the years ended December 31, 1996 and
1995, respectively, deferred income tax benefits of $1.1 million and
$110,000 were allocated to the extraordinary item and stockholders' equity,
respectively, for the year ended December 31, 1996.
Income tax benefit for the years ended December 31, 1997, 1996 and 1995
differed from the amount computed by applying the U.S. federal income tax
rate of 35% to loss before income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax benefit $(47,104) (27,578) (7,065)
Amortization of goodwill 738 521 104
Loss for which no tax benefit
was recognized 49,058 -- 3,190
Other (2,692) (1,099) (514)
-------- -------- --------
$ -- (28,156) (4,285)
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 61,555 25,200
Investments in affiliates 9,303 263
Subscriber receivables 96 1,970
Debt restructuring 1,172 1,574
Systems and equipment 3,543 --
Other 1,091 124
-------- --------
Total gross deferred tax assets 76,760 29,131
Less valuation allowance (68,697) (20,011)
-------- --------
Net deferred tax assets 8,063 9,120
-------- --------
Deferred tax liabilities:
License and leased license investment (8,063) (8,308)
Systems and equipment -- (812)
-------- --------
Total gross deferred tax liabilities (8,063) (9,120)
-------- --------
Net deferred tax liability $ -- --
======== ========
</TABLE>
(Continued)
F-22
<PAGE> 57
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
The net changes in the total valuation allowance for the years ended
December 31, 1997, 1996 and 1995 were increases of $48.6 million, $16.0
million and $3.2 million, respectively. In assessing the realizability of
deferred tax assets, the Company considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon
these considerations, the Company has recognized deferred tax assets to the
extent such assets can be realized through future reversals of existing
taxable temporary differences.
As of December 31, 1997, the Company has approximately $172.0 million of
federal income tax loss carryforwards which expire in years 2013 through
2017. The Company estimates that approximately $38.0 million of the above
carryforwards relate to various acquisitions and are subject to certain
limitations.
(7) Leases and FCC Licenses
The Company is dependent on leases with third parties for most of its
wireless cable channel rights. Under FCC rules, the base term of each lease
cannot exceed the term of the underlying FCC license. FCC licenses for
wireless cable channels generally must be renewed every ten years, and
there is no automatic renewal of such licenses. The use of such channels by
the lessors is subject to regulation by the FCC and, therefore, the
Company's ability to continue to enjoy the benefits of these leases is
dependent upon the lessors' continuing compliance with applicable
regulations. The remaining initial terms of most of the Company's channel
leases range from 5 to 10 years, although certain of the Company's channel
leases have initial terms expiring in the next several years. Most of the
Company's leases grant the Company a right of first refusal to purchase the
channels after the expiration of the lease if FCC rules and regulations so
permit, provide for automatic renewal of the lease term upon FCC renewal of
the license and/or require the parties to negotiate lease renewals in good
faith. Although the Company does not believe that the termination of or
failure to renew a single channel lease would adversely affect the Company,
several of such terminations or failures in one or more markets that the
Company actively serves could have a material adverse effect on the
Company. Channel rights lease agreements generally require payments based
on the greater of specified minimums or amounts based upon various
subscriber levels. Additionally, FCC licenses also specify construction
deadlines, which, if not met, could result in the loss of the license.
Requests for additional time to construct may be filed and are subject to
review pursuant to FCC rules.
Payments under the channel rights lease agreements generally begin upon the
completion of construction of the transmission equipment and facilities and
approval for operation pursuant to the rules and regulations of the FCC.
However, for certain leases, the Company is obligated to begin
(Continued)
F-23
<PAGE> 58
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
payments upon grant of the channel rights. Channel rights lease expense was
$3.6 million, $3.3 million and $2.1 million for the years ended December
31, 1997, 1996 and 1995, respectively.
The Company also has certain other operating leases for office space,
equipment and transmission tower space. Rent expense incurred in connection
with other operating leases was $3.4 million, $3.5 million and $436,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments due under channel rights leases and other
noncancellable operating leases at December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Channel Other
Year ending rights operating
December 31, leases leases
------------ ------ ------
<S> <C> <C>
1998 $ 2,866 $ 3,479
1999 2,896 3,071
2000 2,907 1,198
2001 2,717 554
2002 1,959 359
</TABLE>
(8) Acquisitions/Dispositions
(a) RuralVision Joint Venture
In January 1995, the Company, Cross Country Wireless, Inc. ("Cross
Country") and RuralVision Joint Venture entered into the Venture
Distribution Agreement, as a result of which the Company (i) paid an
additional $4.3 million in satisfaction of 50% of the remaining
balance of the RuralVision Note, (originally a $46.0 million note
bearing interest at the rate at 8% per annum) (ii) paid $513,000 in
satisfaction of 50% of the remaining balance of certain liabilities
which RuralVision Joint Venture had assumed, (iii) paid transaction
costs of $592,000, and (iv) received a distribution from RuralVision
Joint Venture of an operating wireless cable system and wireless cable
channel rights in 36 markets with a carrying amount of approximately
$17.4 million. As part of this transaction, the Company granted to
Cross Country the right to sell certain remaining RuralVision Joint
Venture assets to the Company for $3.3 million in May 1995. Cross
Country subsequently exercised its right to sell these assets to the
Company and, as a consequence, the Company acquired such markets. In
addition, in May 1995, the Company ceased to be a joint venturer in
RuralVision Joint Venture.
In connection with the Company's allocation of the purchase price of
the acquisition in December 1994, the Company identified wireless
cable channel rights in certain markets which management expected to
sell and classified $12.5 million of such assets as assets held
(Continued)
F-24
<PAGE> 59
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
for sale. Based on management's analysis of additional assets to be
sold that were included in the assets distributed to the Company as
part of the January 27, 1995 Venture Distribution Agreement, the
assets held for sale increased to $21.5 million. During 1995, losses
of $265,000 (consisting primarily of rental expense under channel
rights lease agreements) related to the assets held for sale were
excluded from the statement of operations and accounted for as an
adjustment to the carrying amount of assets held for sale. The Company
received cash and notes of approximately $11.0 million and $2.2
million during 1995 and 1996, respectively, related to the assets held
for sale. The remaining portion of assets originally classified as
held for sale has been allocated to the net assets of the respective
markets based on management's decision to retain such markets.
(b) Wireless One Transaction
In October 1995, the Company contributed certain assets and related
liabilities with respect to two operating wireless cable systems and
certain other wireless cable markets in Texas, Louisiana, Alabama,
Georgia and Florida to Wireless One, Inc. ("Wireless One") for
consideration consisting of approximately 35% of the outstanding
common stock of Wireless One and approximately $10.0 million of notes
(the "Wireless One Transaction"). In October 1995, Wireless One
completed an initial public offering of 3,000,000 shares of its common
stock and, concurrently therewith, consummated the sale of $150.0
million in gross proceeds of 13% Senior Notes due 2003. As a result
and pursuant to the merger agreement, Wireless One repaid the $10.0
million of notes from the proceeds of the offerings. As a result of
the initial public offering of Wireless One, the Company's investment
in Wireless One increased approximately $9.0 million and its ownership
interest decreased to approximately 26%. Such increase (net of tax of
$3.3 million has been recorded by the Company as additional paid-in
capital in the accompanying consolidated statement of stockholders'
equity. During 1996, Wireless One completed additional equity
transactions which increased the Company's investment in Wireless One
by $7.9 million and decreased its ownership interest to approximately
20%. Such increase (net of tax of $2.9 million) has been recorded by
the Company as additional paid-in capital in the accompanying
consolidated statement of stockholders' equity.
(c) CableMaxx, AWS and Technivision Acquisitions
Effective February 23, 1996, the Company acquired all the assets and
liabilities and succeeded to the businesses of American Wireless
Systems, Inc. and CableMaxx, Inc. and acquired substantially all of
the assets and certain of the liabilities and succeeded to all of the
businesses of Fort Worth Wireless Cable T.V. Associates, Wireless
Cable TV Associates #38 and Three Sixty Corp., the successor to
Technivision, Inc., for an aggregate of 6,757,000 shares of the
Company's common stock (the aforementioned five transactions are
collectively referred to herein as the "CableMaxx, AWS and
Technivision Acquisitions").
(Continued)
F-25
<PAGE> 60
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
The CableMaxx, AWS and Technivision Acquisitions were accounted for as
a purchase. The aggregate purchase price of approximately $190.0
million has been allocated to the net assets acquired based on
management's estimates of the fair values of assets acquired and
liabilities assumed. The excess purchase price over the fair value of
net assets acquired is being amortized on a straight-line basis over
15 years.
(d) CS Wireless Transaction
Effective February 23, 1996, immediately following the closing of the
CableMaxx, AWS and Technivision Acquisitions, the Company, CAI
Wireless Systems, Inc. ("CAI") and CS Wireless consummated the CS
Wireless Participation Agreement pursuant to which the Company
contributed a substantial portion of the assets received in the
CableMaxx, AWS and Technivision Acquisitions and certain other assets
to CS Wireless (the "CS Wireless Transaction"). Simultaneously with
the contribution of such assets by the Company to CS Wireless, CAI
also contributed to CS Wireless certain wireless cable television
assets.
In connection with the CS Wireless Transaction, the Company received
(i) shares of CS Wireless common stock constituting approximately 35%
of the outstanding shares of CS Wireless common stock, (ii)
approximately $28.3 million in cash paid at closing, (iii) a
promissory note in the principal sum of $25.0 million payable on or
before nine months from the closing and secured by proceeds of a
contemplated issuance by CS Wireless of senior discount notes (which
note has been repaid) and (iv) a promissory note in the amount of
$15.0 million (the "CS Wireless Note") payable ten years from closing
and prepayable from asset sales and certain other events. The interest
rate on the CS Wireless Note increases from 10% to 15% if such note is
not repaid within one year of issuance, with interest accruing and
added to the balance annually. During 1997, CS Wireless made a payment
on the CS Wireless Note of approximately $15.0 million in cash as a
result of the sale by CS Wireless of certain wireless cable assets in
several markets in Georgia.
The CS Wireless transaction involved certain post-closing net working
capital calculations. Components of such calculations included the
relative accounts payable, accounts receivable and related working
capital assets of the contributed systems, the number of granted
channels represented and actually contributed to CS Wireless for each
market, the amount of any increase or decrease in the number of
subscribers in each contributed system from the number of subscribers
stated in the CS Wireless Participation Agreement and related factors.
On November 8, 1996, CS Wireless made an initial payment of $5.0
million in cash to the Company that was applied to the final amount
owed to the Company pursuant to the CS Wireless Transaction. In
September 1997, the Company, CAI and CS Wireless completed the
post-closing adjustments. The Company received approximately 257,000
shares of newly issued common stock of CS Wireless in connection with
these adjustments.
(Continued)
F-26
<PAGE> 61
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
(e) Other Acquisitions/Dispositions
In May 1995, the Company purchased an operating wireless cable system
in the Lubbock, Texas market for approximately $5.4 million in cash
and wireless cable channel rights in the Tulsa, Oklahoma market for
approximately $2.0 million in cash and forgiveness of a $2.0 million
note receivable.
In July 1995, the Company privately placed 1,029,707 shares of its
common stock to RuralVision Joint Venture in exchange for $20.0
million in cash. Immediately subsequent to the issuance of the shares
to RuralVision Joint Venture, the Company acquired substantially all
of the remaining assets of RuralVision Joint Venture, consisting
primarily of wireless cable systems located in Lykens, Ohio;
Paragould, Arkansas; Sikeston, Missouri and channel rights in
additional markets located in five states for $20.0 million in cash
(the "Cross Country Acquisition").
In January 1996, the Company acquired an operating wireless cable
television system in Champaign, Illinois for approximately $2.1
million in cash and sold two nonoperating wireless cable markets for
approximately $2.2 million in cash. No gain or loss was recognized on
the sale of the two nonoperating markets.
In May 1996, the Company consummated the sale of the Memphis and
Flippin, Tennessee wireless cable markets for approximately $5.4
million in cash, resulting in a gain of $400,000 related to the sale
of the Flippin market. No gain or loss was recognized on the sale of
the Memphis market.
In June 1996, the Company sold the wireless cable channel rights in
Los Angeles, California for approximately $9.0 million in cash at
closing and $750,000 in notes and deferred payments. The notes and
deferred payments were paid subsequent to December 31, 1996. No gain
or loss was recognized on the sale of the Los Angeles wireless cable
channel rights.
In June 1996, the Company acquired operating wireless cable systems in
George West and Kingsville, Texas for $350,000 in cash and 126,601
unregistered shares of the Company's common stock.
In July 1996, the Company consummated the sale of wireless cable
channel rights in Adairsville, Powers Crossroads and Rutledge, Georgia
to CS Wireless for total consideration of approximately $7.2 million
in cash, resulting in a gain of $4.8 million.
In August 1996, the Company acquired an operating wireless cable
system in Gainesville/Rosston, Texas for approximately $1.0 million in
cash and $1.4 million in notes secured by the assets acquired.
(Continued)
F-27
<PAGE> 62
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
In January 1997, the Company acquired two operating wireless cable
television systems in Woodward and Watonga, Oklahoma for approximately
$1.6 million in cash and $150,000 in escrowed cash.
In April 1997, the Company consummated an exchange with American
Telecasting Inc. of wireless cable channel rights and related assets
in South Dakota and Florida for wireless cable channel rights and
related assets in Michigan and Illinois. No gain or loss was recorded
in connection with the exchange.
In September 1997, the Company sold a 39% equity interest in
Television Interactiva del Norte, S.A. de C.V. ("Telinor") for
approximately $915,000 to CS Wireless. In addition, the Company sold
to CS Wireless two promissory notes payable by Telinor for
approximately $2.6 million representing principal and accrued interest
payable under such notes. Following this transaction, the Company
retained a 10% equity interest in Telinor.
All acquisitions have been accounted for as purchases, and operations
of the companies and businesses acquired have been included in the
accompanying consolidated financial statements from their respective
dates of acquisition.
The Company allocated the purchase prices of the acquisitions
consummated in 1997, 1996 and 1995 discussed above to the assets
acquired and liabilities assumed based on estimated fair values of
such assets and liabilities as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Working capital (deficit) $ 10 (19,790) 858
Assets held for sale -- 11,819 --
Systems and equipment 1,241 19,489 6,784
License and leased license investment
and goodwill 371 88,292 43,856
Deferred income taxes -- (24,851) (1,404)
------- ------- -------
Total purchase price $ 1,622 74,959 50,094
======= ======= =======
</TABLE>
(f) Pro Forma Information (Unaudited)
The Company made various acquisitions during the year ended December
31, 1997, none of which had a material effect on the Company's
financial position or results of operations. Pro forma disclosure
relating to these 1997 acquisitions/transactions is not presented, as
the impact is immaterial to the Company.
Summarized below is the unaudited pro forma information for the years
ended December 31, 1996 and 1995 as if the acquisitions/transactions
discussed above had been consummated as of the beginning of 1996 and
1995, after giving effect to certain adjustments, including
amortization of intangibles and selected income tax effects. The pro
forma information does
(Continued)
F-28
<PAGE> 63
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
not purport to represent what the Company's results of operations
actually would have been had such transactions or events occurred on
the dates specified, or to project the Company's results of operations
for any future period.
<TABLE>
Year ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Revenues $ 58,353 16,584
Net loss (82,594) (17,546)
Net loss per basic and diluted common share (4.17) (1.40)
</TABLE>
(9) Investments in Affiliates
Investments in affiliates consists of approximately 20% of the outstanding
common stock of Wireless One and approximately 36% of the outstanding
common stock of CS Wireless. Wireless One and CS Wireless develop, own and
operate wireless cable television systems primarily in the southeast and
central United States, respectively. The unamortized portion of the
difference between the Company's investment in CS Wireless and the
Company's share of net assets of CS Wireless was $6.7 million and $7.2
million at December 31, 1997 and 1996, respectively. Such amount is being
amortized over 15 years based on CS Wireless' estimated useful life of
license and leased license investment. As of December 31, 1997, the
Company's investment in and related advances to CS Wireless includes
amounts due to the Company from CS Wireless for certain BTAs in the amount
of $3.5 million (see note 3).
(Continued)
F-29
<PAGE> 64
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
Summary combined financial information for Wireless One and CS Wireless as
of and for the years ended December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Current assets $ 120,283 241,560
Current liabilities 25,358 30,071
--------- ---------
Working capital 94,925 211,489
Systems and equipment 160,618 125,592
Other assets 407,389 442,694
Long-term debt (604,489) 572,345
--------- ---------
Stockholders' equity $ 53,243 195,501
========= =========
Revenues $ 61,500 34,103
========= =========
Net loss $ 141,705 68,197
========= =========
</TABLE>
(10) Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued interest $ 6,873 4,165
Accrued programming 2,937 4,507
Accrued property taxes 1,110 729
Accrued sales taxes 1,056 328
Other accrued expenses and other
liabilities 5,144 5,328
------- -------
$17,120 15,057
======= =======
</TABLE>
(11) Related Party Transactions
The Company leases office space from entities owned by certain current and
former officers and directors of the Company for which the expense amounted
to approximately $171,000 in 1997, $187,000 in 1996 and $66,000 in 1995.
The Company paid and/or accrued $181,000 in 1997, $97,000 in 1996 and
$52,000 in 1995 to an affiliate of a former officer and director of the
Company for certain administrative services. During 1995, an entity owned
by a former director of the Company was paid $44,000 for certain
(Continued)
F-30
<PAGE> 65
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
marketing services. The Company paid $57,000 in 1995 to an entity owned by
a former director for certain consulting services.
In 1996, in exchange for the delivery of certain equipment and receipt of a
promissory note in the principal amount of $400,000, the Company acquired a
10% interest in a limited liability company formed to acquire and operate
wireless cable channel rights and operating systems in Chile. An affiliate
of a former employee of the company holds a 22% interest in such limited
liability company.
In 1996, the Company purchased a paging franchise and related equipment for
intracompany use from an entity owned by certain current and former
directors and officers of the Company for $123,000.
In 1997, the Company, CS Wireless, Wireless One and CAI Wireless Systems,
Inc. formed Wireless Enterprises, LLC ("Wireless Enterprises"). Wireless
Enterprises is a programming cooperative that negotiates programming and
marketing services with suppliers of programming. In 1997, the Company paid
approximately $15.5 million to Wireless Enterprises as reimbursement of
programming expenses and for other administrative services.
(12) Commitments and Contingencies
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through
2000. The agreements generally require monthly payments based upon the
number of subscribers to the Company's systems, subject to certain
minimums.
The Company is a party to legal proceedings, a majority of which are
incidental to its business. In the opinion of management, and after
consideration for amounts recorded in the accompanying consolidated
financial statements, the ultimate effects of such matters are not expected
to have a material adverse effect on the Company's consolidated financial
position, liquidity or operating results.
(Continued)
F-31
<PAGE> 66
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
(13) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1997 and 1996. The
fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing
parties:
<TABLE>
<CAPTION>
1997 1996
----------------------------- ---------------------------
Carrying Fair Carrying Fair
amount value amount value
--------- ------ ------ ------
<S> <C> <C> <C> <C>
Restricted assets - investments
in U.S. Treasury securities $ 10,333 10,194 30,007 28,802
Note receivable from affiliate 2,069 2,069 16,275 16,275
13% and 14% Senior Notes (237,111) (83,250) (236,565) (236,565)
Convertible Notes and other
notes payable (71,085) (23,500) (66,973) (66,973)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and cash equivalents, accounts receivable and accounts payable:
The carrying amounts of these assets and liabilities approximate fair
value because of the short maturity of these instruments.
Investments in U.S. Treasury securities: The fair values of debt
securities are based on quoted market prices at the reporting date for
those investments.
Note receivable from affiliates: The carrying amount of this asset
approximates fair value since the interest rates equate to market rate
of interest.
13% and 14% Senior Notes: The fair values of the Company's 13% and 14%
Senior Notes are based on market quotes obtained from dealers.
Convertible Notes and other notes payable: The fair values of the
Company's Convertible Notes and other notes payable are based on
management's estimate derived from market quotes obtained from dealers
on the Company's 13% and 14% Senior Notes.
(Continued)
F-32
<PAGE> 67
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(tables in thousands, except per share data)
(14) Quarterly Financial Data (Unaudited)
The following tables present unaudited financial data of the Company for
each quarter of fiscal years 1997 and 1996.
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Revenues $ 19,185 19,741 19,890 19,976
Operating loss (11,067) (19,098) (25,053) (12,953)
Net loss (27,573) (35,791) (41,847) (29,372)
Net loss per common share -
basic and diluted (1.41) (1.82) (2.13) (1.49)
</TABLE>
During the third quarter of 1997 the Company recorded a nonrecurring
noncash charge to depreciation expense which included (i) $6.1 million
related to subscriber equipment determined by the Company to be
unrecoverable upon completion of its equipment recovery program; (ii) $1.7
million related to a write-off of obsolete subscriber equipment; and (iii)
$1.2 million resulting from the Company's reduction of its estimate for the
useful lives of the nonrecoverable portion of subscriber installation costs
from four to three years.
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Revenues $ 9,512 13,801 15,651 17,053
Operating loss (3,410) (5,644) (7,176) (30,766)
Loss before extraordinary item (8,244) (10,404) (5,443) (26,546)
Net loss (8,244) (10,404) (5,443) (36,970)
Loss per basic and diluted share
before extraordinary item (.54) (.54) (.28) (1.36)
Net loss per common share -
basic and diluted (.54) (.54) (.28) (1.89)
</TABLE>
During the fourth quarter of 1996, the Company recorded bad debt expense
and associated depreciation of nonrecoverable costs of $5.2 million and
$5.2 million, respectively, related to certain subscribers with past due
balances which the Company has disconnected or intends to disconnect during
the first quarter of 1997. In addition, during the fourth quarter of 1996,
the Company recorded additional expense of $2.5 million related to changes
in estimated programming costs, a write-down of certain subscriber
equipment of $2.3 million and a write-down of license and leased license
investment of $1.6 million.
(Continued)
F-33
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on its behalf
by the undersigned, thereunto duly authorized, on the 27th day of March, 1998.
HEARTLAND WIRELESS COMMUNICATIONS, INC.
By: /s/ C. D. McHenry
--------------------------------------
Carroll D. McHenry
Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on the 27th day of March, 1998, by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ C. D. McHenry Chairman of the Board, President and Chief
------------------------------- Executive Officer (Principal Executive Officer)
Carroll D. McHenry
/s/ Marjean Henderson Senior Vice President and Chief Financial
------------------------------- Officer (Principal Financial Officer)
Marjean Henderson
/s/ Amy E. Manning Controller (Principal Accounting Officer)
-------------------------------
Amy E. Manning
/s/ Robert S. Cecil Director
-------------------------------
Robert S. Cecil
/s/ Jack R. Crosby Director
-------------------------------
Jack R. Crosby
/s/ J. R. Holland, Jr. Director
-------------------------------
J. R. Holland, Jr.
/s/ John A. Sprague Director
-------------------------------
John A. Sprague
/s/ L. Allen Wheeler Director
-------------------------------
L. Allen Wheeler
</TABLE>
<PAGE> 69
Schedule II
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions
----------------------
Balance at Charged to Balance at
beginning costs and Charged to end of
Description of period expenses other Deductions period
----------- --------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for
doubtful accounts $ 5,468 3,465 -- (8,593)(a) 340
======= ===== ========== ====== =======
Valuation allowance
for deferred tax
assets $20,011 -- 48,686 (b) -- 68,697
======= ===== ========== ====== =======
Year ended December 31, 1996:
Allowance for
doubtful accounts $ 961 7,295 169 (c) (2,957)(a) 5,468
======= ===== ========== ====== =======
Valuation allowance
for deferred tax
assets $ 3,981 -- 16,030 (b) -- 20,011
======= ===== ========== ====== =======
Year ended December 31, 1995:
Allowance for
doubtful accounts $ 123 838 -- -- 961
======= ===== ========== ====== =======
Valuation allowance
for deferred tax
assets $ 791 -- 3,190 (b) -- 3,981
======= ===== ========== ====== =======
</TABLE>
(a) Accounts written off.
(b) Recognized as a component of deferred tax assets.
(c) Allocation of assets from the CableMaxx and Technivision acquisitions.
S-1
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C> <C>
2.1 -- Letter Agreement regarding formation of the Registrant
(filed as Exhibit 2.1 as the Registrant's Registration
Statement on Form S-1, File No. 33-74244 (the "Form
S-1"), and incorporated herein by reference)
2.2 -- Supplement to Letter Agreement regarding formation of
the Registrant (filed as Exhibit 2.2 to the Form S-1 and
incorporated herein by reference)
3.1 -- Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Form S-1 and incorporated
herein by reference)
3.2 -- Restated By-laws of the Registrant (filed as Exhibit 3.2 to
the Form S-1 and incorporated herein by reference)
4.1 -- 1994 Employee Stock Option Plan of the Registrant
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-04263) and
incorporated herein by reference
4.2 -- Revised Form of Nontransferable Incentive Stock Option
Agreement under the 1994 Employee Stock Option Plan of
the Registrant (filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-4, File No. 33-91930
(the "February 1996 Form S-4")and incorporated herein by
reference)
4.3 -- Revised Form of Nontransferable Non-Qualified Stock
Option Agreement under the 1994 Employee Stock Option
Plan of the Registrant (filed as Exhibit 4.3 to the
February 1996 Form S-4 and incorporated herein by
reference)
4.4 -- 1994 Stock Option Plan for Non-Employee Directors of
the Registrant (filed as Exhibit 4.4 to the Form S-1 and
incorporated herein by reference)
4.5 -- Form of Stock Option Agreement under the 1994 Stock
Option Plan for Non-Employee Directors of the Registrant
(filed as Exhibit 4.5 to the Form S-1 and incorporated
herein by reference)
4.6 -- Indenture between the Registrant and First Trust of New
York, National Association , as Trustee (the "Trustee")
(filed as Exhibit 4.20 to the Registrant's Registration
Statement on Form S-4, File No. 333-12577 (the "December
1996 Form S-4") and incorporated herein by reference)
4.7 -- Supplemental Indenture dated as of December 9, 1996,
between the Registrant and the Trustee (filed as Exhibit
4.21 to the December 1996 Form S-4 and incorporated
herein by reference)
</TABLE>
<PAGE> 71
<TABLE>
<S> <C> <C>
4.8 -- Heartland Wireless Communications, Inc. 401(k) Plan
(filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 (File No. 333-05943) and
incorporated herein by reference)
10.1 -- Standard Form of MMDS License Agreement (filed as
Exhibit 10.1 to the 1996 Form 10-K and incorporated
herein by reference)
10.2 -- Standard Form of ITFS License Agreement (filed as
Exhibit 10.2 to the 1996 Form 10-K and incorporated
herein by reference)
10.3 -- Form of Indemnity Agreement between the Registrant and
each of its directors (filed as Exhibit 10.3 to the Form S-1
and incorporated herein by reference)
10.4 -- Noncompetition Agreement between the Registrant and
J.R. Holland, Jr. (filed as Exhibit 10.4 to the Form S-1 and
incorporated herein by reference)
10.5 -- Noncompetition Agreement between the Registrant and
David E. Webb (filed as Exhibit 10.5 to the Form S-1 and
incorporated herein by reference)
10.6 -- Noncompetition Agreement between the Registrant and
John R. Bailey (filed as Exhibit 10.6 to the Form S-1 and
incorporated herein by reference)
10.7 -- Noncompetition Agreement between the Registrant and
Randy R. Hendrix (filed as Exhibit 10.7 to the Form S-1
and incorporated herein by reference)
10.8 -- Noncompetition Agreement between the Registrant and L.
Allen Wheeler (filed as Exhibit 10.9 to the Form S-1 and
incorporated herein by reference)
10.9 -- Building Lease Agreement dated June 1, 1990, between
Wireless Communications, Inc. and The Federal Building,
Inc. (filed as Exhibit 10.13 to the 1994 Form 10-K and
incorporated herein by reference)
10.10 -- Building Lease Agreement dated January 2, 1995, between
the Registrant and W&W Commercial Group, L.L.C. (filed
as Exhibit 10.14 to the 1994 Form 10-K and incorporated
herein by reference)
10.11 -- Building Lease Agreement dated May 1, 1994, between
Wireless Communications, Inc. and The Federal Building,
Inc. (filed as Exhibit 10.15 to the 1994 Form 10-K and
incorporated herein by reference)
10.12 -- Building Lease Agreement dated November 20, 1995,
between the registrant and the Federal Building, Inc.
(filed as Exhibit 10.18 to the February 1996 Form S-4 and
incorporated herein by reference)
</TABLE>
<PAGE> 72
<TABLE>
<S> <C> <C>
10.13 -- Office Lease dated April 10, 1996 between Merit Office
Portfolio Limited Partnership and the Registrant for the
Registrant's Plano, Texas office (filed as Exhibit 10.1
to the Form 10-Q Quarterly Report for the quarter ended
June 30, 1996 ("June 1996 Form 10-Q") and incorporated
herein by reference)
10.14 -- Sublease Agreement dated June 14, 1996 between the
Registrant and CS Wireless (filed as Exhibit 10.2 to the
June 1996 Form 10-Q and incorporated herein by reference)
10.15 -- Building Lease Agreement dated February 1, 1996, as amended
June 1, 1996, between Registrant and National Horizon
Development, L.C. (filed as Exhibit 10.16 to the 1996 Form
10-K and incorporated herein by reference)
*10.16 -- Cooperative Marketing Agreement between the Registrant
and DIRECTV, Inc. dated as of November 12, 1997, and the
following related agreements between the Registrant and
DIRECTV, Inc.: Transport Agreement, DSS Receiver
Support Agreement and Subscriber Service Payment
Agreement (collectively, the "DIRECTV Agreements")
**10.17 -- Heartland Wireless Communications, Inc. Performance
Incentive Compensation Plan.
**10.18 -- Employment Agreement between the Registrant and Carroll
D. McHenry dated as of March 6, 1998.
**21 -- List of Subsidiaries
**23 -- Consent of KPMG Peat Marwick LLP
**27 -- Financial Data Schedule
</TABLE>
__________
*Filed herewith. Confidential portions of the DIRECTV Agreements and
exhibits thereto have been omitted and filed separately with the Commission
under a confidential treatment request ("CTR") pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended. The Company will provide without
charge, upon written request, a copy of the exhibits to the DIRECTV Agreements,
with confidential portions omitted pursuant to the CTR.
** Filed herewith.
<PAGE> 1
"*" Confidential portions of this Agreement have been omitted and filed
separately with the Securities and Exchange Commission under a Confidential
Treatment Request, pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
EXHIBIT 10.16
EXECUTION COPY
DIRECTV--HEARTLAND WIRELESS COMMUNICATIONS
COOPERATIVE MARKETING AGREEMENT
This Cooperative Marketing Agreement ("Agreement") is made and entered
into as of this 12 day of November, 1997 ("Execution Date"), between DIRECTV,
Inc., a California corporation ("DIRECTV"), and Heartland Wireless
Communications, Inc., a Delaware corporation ("System Operator").
RECITALS
A. DIRECTV operates a direct broadcast satellite ("DBS") service
through which subscribers are able to receive video, audio, data and other
commercial programming distributed by DIRECTV via a direct broadcast satellite
system.
B. System Operator operates a wireless cable service through
which subscribers in single family homes and multiple dwelling units ("MDUs")
are able to receive video, audio, data and other commercial Programming
distributed via terrestrial microwave and broadcast facilities.
C. DIRECTV and System Operator desire to establish a business
relationship whereby (i) System Operator will establish and maintain in certain
MDU Properties Signal Distribution Systems, to enable MDU residents to receive
DIRECTV Satellite Television Programming via such systems, and (ii) System
Operator will act as a commissioned sales representative for DIRECTV to solicit
and take orders for DIRECTV Commissionable Programming Packages from residents
of MDU Properties, and (iii) DIRECTV will provide certain transport services to
enable System Operator to increase the amount of commercial programming
distributed by System Operator to its subscribers in certain MDU Properties
designated by System Operator, all according to this Agreement, the Terms and
Conditions attached hereto as Exhibit A, that certain Transport Agreement,
dated the Execution Date, by and between DIRECTV and System Operator (the
"Transport Agreement"), that certain Subscriber Service Payment Agreement, and
that certain DSS Receiver Support Agreement, each dated the Execution Date, by
and between DIRECTV and System Operator.
ARTICLE I
DEFINITIONS
1.1 The following capitalized terms shall have the meanings
assigned them. Certain other capitalized terms shall have the meanings given
them elsewhere in this Agreement.
"Commission" shall have the meaning assigned such term in
Section 2.4(a) hereof.
"Commissionable Programming Packages" shall mean the DIRECTV
Programming on Exhibit B hereto, which maybe amended upon the mutual agreement
of the parties, for which System Operator is authorized to solicit orders on
behalf of DIRECTV and is entitled to an Aggregate Commission thereon.
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<PAGE> 2
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"Components" shall mean such equipment, whether pre-existing
or newly installed within the MDU Property which is used to create the Signal
Distribution System, including, but not limited to, a satellite receiving dish
sold under the tradename "DSS(R)", cables, splitters, taps, connectors,
filters, amplifiers, switches, wiring and any other materials or equipment.
"DIRECTV Programming" shall mean those programming services
distributed by DIRECTV,including, but not limited to Commissionable Programming
Packages, which services and the prices therefor shall be provided to System
Operator by DIRECTV, from time to time.
"DSS Receiver" shall mean the integrated receiver and decoder
unit (IRD) sold under the tradename "DSS(R)" necessary to receive DIRECTV
Programming which is manufactured by a DIRECTV authorized manufacturer.
"Independent SO Subscriber" shall mean a DIRECTV subscriber
who currently resides in a SO Property whose original DIRECTV Programming order
was submitted directly by the subscriber to DIRECTV or by an entity other than
System Operator.
"Marketing Supplement" shall have the meaning assigned such
term in Section 2.4(a) hereof.
"MDU Property" shall mean a condominium complex, apartment
building (including both rental and cooperative apartments), or townhouse
community, comprised of multiple dwelling units, which units in each case are
occupied by single family households and are not generally accessible to the
public or otherwise share a common area to which there is unrestricted access
by two or more persons, and which units may receive DIRECTV Programming from a
common DSS dish and separate DSS Receivers in each individual dwelling unit.
"Net Receipts" shall mean gross receipts actually received by
DIRECTV from the sale of Commissionable Programming Packages during the Term,
net of any discounts, refunds, fees, credits, taxes or applicable governmental
charges (other than income or franchise taxes and copyright royalty fees)
related to the sale or the order or use of such DIRECTV Programming.
"NRTC Area" shall mean those areas in which DIRECTV has
granted the National Rural Telecommunications Cooperative distribution rights
and which, as of the Execution Date, are reflected on the map attached hereto
on Exhibit C, which may be amended from time to time by DIRECTV. Upon
execution, a complete list of NRTC zip codes will be provided by DIRECTV to
System Operator.
"Previous SO Subscriber" shall mean a DIRECTV subscriber who
was previously an SO Subscriber who no longer resides in a SO Property and who
purchased his or her DSS Receiver from the System Operator.
"Right of Entry" shall mean that certain written agreement
between System Operator and the owner or manager of an MDU Property or, in the
case of a cooperative apartment complex, the homeowners' association, which
authorizes System Operator to install and maintain a Signal Distribution
System in such MDU Property and solicit orders for Commissionable Programming
Packages therein.
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<PAGE> 3
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"Signal Distribution System" shall mean the integrated signal
delivery system including the DSS dish and DSS Receiver and any necessary
Components by which DIRECTV Programming is distributed throughout a SO
Property, which may also include off-air, wireless cable and/or cable
distribution systems.
"SO Property" shall mean any of the MDU Properties for which
System Operator has obtained and continues to maintain throughout the term of
the Agreement a valid Right of Entry and (i) in which System Operator has
installed a Signal Distribution System, (ii) the initial orders from residents
of such property for DIRECTV Programming are submitted by the System Operator
and transmitted to DIRECTV by System Operator in accordance with the terms of
this Agreement, (iii) is not located in an NRTC Area, and (iv) all occupiable
units in such property are capable of receiving DIRECTV Programming within five
(5) business days of ordering such programming.
"SO Subscriber" shall mean a DIRECTV subscriber residing in a
SO Property, who receives one of the DIRECTV Commissionable Programming
Packages, the initial order for which was submitted by the System Operator
and/or DIRECTV, and who was not a DIRECTV subscriber prior to becoming a SO
Subscriber.
"Technical Specifications" shall mean the requirements in
Exhibit D hereto or any other document(s) supplied by DIRECTV to System
Operator during the Term, which reasonably specify the minimum parameters any
and all Signal Distribution Systems must meet under this Agreement.
"Term" shall have the meaning assigned such term in Section
3.1 hereof.
"USSB Programming" shall mean programming distributed by
United States Satellite Broadcasting Company, Inc. or its successor via the
direct broadcast satellite(s) positioned at a 101 degrees west longitude orbit.
ARTICLE II
GENERAL RIGHTS AND OBLIGATIONS
2.1 Solicitation of DIRECTV Programming Services.
(a) Subject to the Terms and Conditions attached
hereto as Exhibit A, DIRECTV hereby grants to System Operator the right to (i)
market DIRECTV Programming to SO Properties and (ii) solicit and take orders
for DIRECTV Programming from residents of SO Properties.
(b) Nothing in this Agreement shall prevent
DIRECTV (or those DIRECTV's agents that are not system operators) from
marketing soliciting and taking orders from residents of MDU Properties. Nothing
in this Agreement shall prevent System Operator from marketing, soliciting and
taking orders from residents of MDU Properties for services provided via
terrestrial microwave and broadcast facilities.
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(c) System Operator understands that it shall not
have any right, unless specifically provided by DIRECTV under separate written
agreement, to: (1) solicit or take orders for DIRECTV Programming from any
person or entity that is not a resident of an MDU Property, including, without
limitation, commercial establishments, as such may be defined by DIRECTV in its
reasonable discretion; or (ii) use any person or entity other than its employees
in soliciting or taking orders for DIRECTV Programming without the prior written
consent of DIRECTV, which shall not be unreasonably withheld.
(d) "***"
(e) "***" Notwithstanding the foregoing, nothing
in this Agreement is intended to limit any agreement between System Operator
and any owner of an SO Property with respect to the installation and
maintenance of the Signal Distribution System.
(f) Only after receiving, approving and accepting
an order from System Operator shall DIRECTV be obligated to establish a
customer account for the subscriber and arrange for activation of DIRECTV
Programming. DIRECTV shall not be obligated to pay System Operator any
Commission or Marketing Supplements for incomplete order(s), regardless of
whether DIRECTV ultimately provides any DIRECTV Programming to the customer(s)
to which such order(s) pertained and regardless of whether DIRECTV receives any
payments as consideration for such DIRECTV Programming, unless and until
DIRECTV receives the Subscriber Information and, then, only for periods of time
following such receipt by DIRECTV. DlRECTV shall promptly notify System
Operator of any deficiencies with respect to particular subscriber information.
"Subscriber Information" shall mean that customer identification, location, and
billing, information which DIRECTV requires, as described in the DIRECTV Policy
Manual.
(g) In the event DIRECTV develops or promotes a
new commissionable product line or technology (a "New Product") which is
compatible with the Signal Distribution System and intended to be used in the
MDU environment, and DIRECTV reasonably believes System Operator has the
expertise and resources to support the exploitation of such New Product, DIRECTV
shall notify System Operator in writing and System Operator shall have the first
right to submit a proposal and negotiate with DIRECTV on an exclusive basis for
the exploitation of such New Product in SO Properties. Notwithstanding the
foregoing, nothing in this Agreement shall constitute a waiver by System
Operator
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of any exclusive rights of access to any MDU Property that redound to the
benefit of System Operator under any Right of Entry.
2.2 SO Properties: Right of Entry. Prior to any solicitation of
orders for DIRECTV Programming by System Operator, System Operator shall submit
to DIRECTV the complete address (including county and zip code) of any MDU
Property for which System Operator has or is seeking a Right of Entry and to
which System Operator intends to market DIRECTV Programming, in order to
confirm that (i) such MDU Property is not already being serviced by another
system operator authorized by DIRECTV and (ii) such MDU Property is not located
in an NRTC Area. In the event an MDU Property is being serviced by another
system operator, DIRECTV will provide System Operator with the name and, to the
extent not prohibited by a confidentiality agreement, telephone number of the
system operator. System Operator shall use commercially reasonable efforts to
maintain a valid Right of Entry for SO Properties for the entire Term of the
Agreement. Such Right of Entry will grant System Operator access to the MDU,
authorizing System Operator to install and maintain the Signal Distribution
System and Components, and granting System Operator permission to solicit
orders for DIRECTV Programming from MDU residents. System Operator shall
promptly forward to DIRECTV a fully executed Right of Entry for all SO
Properties in the Territory. In no event shall System Operator install a Signal
Distribution System in any MDU for which System Operator does not have a valid
Right of Entry and no compensation shall be paid or reimbursed by DIRECTV to
System Operator for any DIRECTV Programming sold to subscribers in a MDU
property unless and until DIRECTV has received a copy of the applicable Right
of Entry for such property. In no event shall System Operator continue to
service an MDU Property without a valid Right of Entry and, in the event System
Operator no longer has a valid Right of Entry with respect to a particular SO
Property, this Agreement shall terminate with respect to such property. System
Operator shall provide written notice to DIRECTV within ten (10) days of any
loss, suspension, or expiration of a Right of Entry.
2.3. Implementation of Signal Distribution System.
(a) Installation of Signal Distribution System and
Components.
(i) System Operator shall design, develop,
install, and maintain a Signal Distribution System for each SO Property which
must materially comply with the DIRECTV Technical Specifications as provided by
DIRECTV to System Operator, the current version of which is set forth in
Exhibit D hereto. DIRECTV reserves the right, in its sole discretion, to amend
or revise and reissue the Technical Specifications, which amendments or
revisions shall be promptly communicated by DIRECTV to System Operator. Upon
any such amendment or revision by DIRECTV to the Technical Specifications,
DIRECTV and System Operator shall discuss in good faith the extent to which
existing Signal Distribution Systems in SO Properties shall comply with such
amended or revised Technical Specifications, it being understood and agreed by
the parties that (i) System Operator shall be under no obligation to modify the
Design (as defined below) of any Signal Distribution System in an SO Property
that has been submitted to DIRECTV pursuant to Section 2.3(a)(ii); and (ii) the
Design for any Signal Distribution Systems submitted to DIRECTV pursuant to
Section 2.3(a)(ii) after receipt of the revised or amended Technical
Specifications shall comply with such revised or amended Technical
Specifications.
(ii) System Operator shall provide to DIRECTV a
design for the installation and integration of each Signal Distribution System
("Design") for each SO Property subject to this
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Agreement, together with a time schedule for installation. In creating,
installing and maintaining any Signal Distribution System, System Operator shall
materially comply with all DSS equipment manufacturers' or Component
manufacturers' policies as may be in effect from time to time. DIRECTV shall
provide to System Operator written notice as soon as commercially practicable,
but in any event prior to the construction start date (as long as System
Operator has provided DIRECTV such Designs at least five business days prior to
such construction start date), after receipt and review of Design(s) if DIRECTV
reasonably believes that any Design will not produce a Signal Distribution
System meeting the Technical Specifications. System Operator shall provide
installation progress reports to DIRECTV periodically or as DIRECTV may
reasonably request, and shall promptly notify DIRECTV of any material changes
to the installation schedule or Design.
(iii) Upon completion of installation, System
Operator shall promptly forward to DIRECTV an updated copy of the Design and
completed Technical Registration Form, included in the Technical Specifications
attached hereto as Exhibit D, which shall include, among other things, various
measurements of the signal from the Signal Distribution System. DIRECTV shall
provide to System Operator written notice as soon as commercially practicable
after receipt and review of the Technical Registration Form if DIRECTV
reasonably believes that such Technical Registration Form indicates that the
Signal Distribution System does not meet the Technical Specifications, and
where possible, DIRECTV shall recommend corrective actions. Unless and until
the Signal Distribution System materially complies with the Technical
Specifications, such MDU Property shall not be considered a SO Property.
(b) Technical Compliance. System Operator shall, at its own
cost and expense, (i) contract with an authorized DSS manufacturer(s) to obtain
DSS equipment and integrate such DSS equipment with any necessary Components to
create the Signal Distribution System, (ii) evaluate and test the Signal
Distribution System to insure material compliance with the Technical
Specifications for each unit in the SO Property, (iii) select Components that
will ensure that the Signal Distribution System materially meets the DIRECTV
Technical Specifications in the MDU Property environment and will allow System
Operator to fulfill its obligations under this Agreement, (iv) develop such
additional hardware or other elements as are necessary for the Signal
Distribution System materially to meet the Technical Specifications and allow
System Operator to fulfill its obligations under this Agreement, (v) provide
such technical demonstrations of the Signal Distribution System in any SO
Property as DIRECTV may require in its reasonable discretion upon advance
written notice to System Operator, at such times mutually agreed upon by the
parties, to provide assurance that the Signal Distribution System will
materially meet the DIRECTV Technical Specifications ("Technical
Demonstration"), and provide DIRECTV the opportunity to participate and provide
input in advance of completion of the Signal Distribution System or distribution
of DIRECTV Programming via the Signal Distribution System, (vi) in connection
with such Technical Demonstration, make such changes to the initial Signal
Distribution System as are reasonably necessary in order for the system
materially to meet the DIRECTV Technical Specifications, and (vii) take all
commercially reasonable actions necessary to ensure that the Signal Distribution
System continues materially to meet the Technical Specifications for the Term of
this Agreement. If at any time during the Term of this Agreement, DIRECTV
determines in good faith that a Signal Distribution System is not in material
compliance with all or any portion of the Technical Specifications, and such
noncompliance interferes with SO Subscribers' ability to receive DIRECTV
Programming of a quality received by other DIRECTV subscribers (i.e., the signal
does not meet the measurement standards), System Operator shall cure such
noncompliance, or commence and diligently
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pursue such cure, within sixty (60) days of DIRECTV's notice of noncompliance
(the "Cure Period"), and provide DIRECTV evidence of correction of such
noncompliance, which evidence may, at DIRECTV's request, include a Technical
Demonstration. Notwithstanding the foregoing, in no event may the Cure Period
last longer than four (4) months. In the event such evidence is not approved by
DIRECTV within the Cure Period, which approval shall not unreasonably be
withheld, DIRECTV shall have the right to cease paying Commissions and
Marketing Supplements due to System Operator with respect to SO Subscribers in
the noncomplying SO Property.
(c) Provision of Signal Distribution System and IRDs.
Except as otherwise provided in the Receiver Support Agreement, System Operator
shall, at its sole cost: (i) acquire and supply Signal Distribution Systems and
individual IRDs (if applicable) to SO Properties at commercially reasonable
prices (unless otherwise agreed to between System Operator and DIRECTV); (ii)
install at a commercially reasonable price and in a timely manner the Signal
Distribution System and any necessary Components which System Operator supplies
to any SO Property; (iii) maintain at commercially reasonable prices the Signal
Distribution System for any SO Properties; and (iv) provide, at a commercially
reasonable price and in a manner satisfactory to DIRECTV, customer service to
all SO Properties, subscribers and potential subscribers related to the supply,
installation and maintenance of the Signal Distribution System. System Operator
agrees to allow all authorized DSS equipment to be used by the SO Subscribers
and the Independent SO Subscribers and agrees to provide the same level of
Signal Distribution System installation and maintenance, and customer service
support, for the Independent SO Subscribers as System Operator does for the SO
Subscribers.
(d) Disclaimer of Warranties. SYSTEM OPERATOR UNDERSTANDS
AND AGREES THAT DIRECTV SHALL HAVE NO RESPONSIBILITY WHATSOEVER FOR ANY SIGNAL
DISTRIBUTION SYSTEM, INCLUDING THE DSS RECEIVER AND COMPONENTS CONTAINED
THEREIN. DIRECTV HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS AND IMPLIED, IN
CONNECTION WITH ANY SIGNAL DISTRIBUTION SYSTEM, INCLUDING THE DSS RECEIVER AND
COMPONENTS CONTAINED THEREIN, THE INSTALLATION AND FUNCTIONING OF SUCH SYSTEM
IN ANY MDU PROPERTY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES UNDER THE
UNIFORM COMMERCIAL CODE OR OTHERWISE IMPLIED IN LAW. NOTWITHSTANDING THE
FOREGOING, DIRECTV HEREBY ASSIGNS TO SYSTEM OPERATOR ALL MANUFACTURERS' AND
DISTRIBUTORS' WARRANTIES PROVIDED TO DIRECTV OR ANY AFFILIATE REGARDING ALL
EQUIPMENT FOR SIGNAL DISTRIBUTION SYSTEMS UTILIZED AT SO PROPERTIES, INCLUDING
WITHOUT LIMITATION DSS RECEIVERS, IRDS AND ALL COMPONENTS.
(e) New Technology: End-Use Testing. System Operator
understands and acknowledges that the technology (including some or all of the
Components) for providing DIRECTV to multiple-dwelling units is currently being
developed and has not been tested in the MDU environment by DIRECTV. DIRECTV
makes no representation or warranty as to how any commercially available
Components will perform with the DSS system in any particular MDU Property or
how the DSS system itself will perform in certain MDU environments. System
Operator shall be solely responsible for procuring and testing any and all
Components in the end-use environment prior to the design, development and
installation of the Signal Distribution System and for maintenance of any such
Components that fail to perform adequately in the end-use environment in order
that the Signal Distribution System will, at all times during the Term of this
Agreement, materially meet or exceed the
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Technical Specifications. Any material failure of the Signal Distribution
System to meet the Technical Specifications shall be the sole responsibility of
System Operator and System Operator agrees to indemnify and hold DIRECTV
harmless from any and all Claims (as such term is defined in the
Indemnification section of the Terms and Conditions attached hereto as Exhibit
A) from SO Subscribers arising from the failure of the Signal Distribution
System to deliver the necessary signal to such subscribers and from failure of
the Signal Distribution System to meet the Technical Specifications. In the
event of signal failure due to DIRECTV's error or negligence, DIRECTV agrees to
use its best efforts to treat the SO Subscribers equally with other DIRECTV
residential subscribers with respect to restoring service.
2.4 Commission and Payment Structure. The Subscriber Service
Payment Agreement, the DSS Receiver Support Agreement and the following set
forth all payments and commissions to be made by DIRECTV to System Operator as
full consideration for its fulfilling its obligations hereunder.
(a) Payment of Commissions and Marketing Supplements.
DIRECTV will pay System Operator a commission ("Commission") equal to "*"
percent "*" of all Net Receipts received by DIRECTV from each active SO
Subscriber per month for Commissionable Programming Packages, solely with
respect to those Net Receipts received by DIRECTV while this Agreement is in
effect. DIRECTV will further pay System Operator a marketing supplement (the
"Marketing Supplement") equal to "*" percent "*" of all Net Receipts received by
DIRECTV from each active SO Subscriber per month for Commissionable Programming
Packages, solely with respect to those Net Receipts received by DIRECTV while
this Agreement is in effect. The Commissions and Marketing Supplements shall
collectively be referred to herein as "Aggregate Commissions." System Operator
agrees that the Marketing Supplement will be applied by System Operator
throughout the Term of the Agreement toward the marketing of the Commissionable
Programming Packages to MDU Properties. In addition, DIRECTV will pay System
Operator a commission equal to "*" percent "*" of all Net Receipts received by
DIRECTV from each active Previous SO Subscriber per month for Commissionable
Programming Packages, solely with respect to those Net Receipts received by
DIRECTV while this Agreement is in effect. Commissions and Marketing Supplements
will be paid within "*" days after the accounting month in which DIRECTV
receives the Net Receipts.
(b) Commission Exclusion. "***"
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2.5 DIRECTV Programming.
(a) "***" System Operator agrees that all DIRECTV
Programming (including any commercial insertion) shall be exhibited in its
entirety, in original form, as provided by DIRECTV, without any modifications,
additions or deletions except that System Operator may package the programming
secured under the Transport Agreement with the other programming available to
the wireless cable subscribers. Except as provided in the Transport Agreement,
in no event shall System Operator repackage any other programming or services
with DIRECTV Programming. In addition to the DIRECTV Programming packages
DIRECTV currently offers, DIRECTV may create packages of programming specially
targeted for MDU subscribers. "***"
(b) System Operator shall not, and shall use commercially
reasonable efforts to ensure that SO Subscribers, residents and agents of SO
Properties do not, (i) resell, retransmit or rebroadcast or otherwise
redistribute in any manner or form whatsoever any DIRECTV Programming, or (ii)
make any modification, addition, or deletion to any of the DIRECTV Programming
(including any commercial insertions).
2.6 Exclusivity. "***"
2.7 Customer Service. System Operator shall undertake certain
customer service functions as described herein and in the DIRECTV Policy Manual
to all SO Subscribers and Independent SO Subscribers with respect to the
installation and maintenance of the Signal Distribution System and
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acceptance and transmission of orders for DIRECTV Programming. System Operator
agrees to provide the same level of installation and maintenance support for
the Independent SO Subscribers.
2.8 Policies and Procedures. Attached hereto in Exhibit F is a
copy of DIRECTV's System Operator Policies and Procedures Manual, which may be
amended, from time to time upon 60 days prior written notice from DIRECTV (such
Manual, as amended from time to time, the "DIRECTV Policy Manual"). As
DIRECTV's commissioned sales representative, System Operator hereby agrees that
it will materially follow and abide by the policies and procedures related to
soliciting and transmitting subscription orders for and the promotion of
DIRECTV Programming as specified in the DIRECTV Policy Manual. The DIRECTV
Policy Manual includes, among other things, customer authorization procedures,
DIRECTV receivables payment, and various requirements related to taking
subscription orders
ARTICLE III
TERM AND TERMINATION
3.1 Term and Termination.
(a) The term of this Agreement ("Term") shall commence on the
Execution Date and continue until the earlier to occur of (i) the seventh
anniversary of the Execution Date, or (ii) termination by either party pursuant
to the terms of this Agreement. Either party may terminate this Agreement,
effective immediately (i) upon "*" days written notice to the other
party following a material breach of this Agreement by the other party, unless
such material breach is cured, or the defaulting party commences and diligently
pursues such cure, within such period; provided, however, DIRECTV shall not
cease providing programming, or customer service to SO Subscribers; provided,
further, that in no event may the cure period last longer than "*" months;
(ii) upon the filing of a petition in bankruptcy or for reorganization by or
against the other party for the benefit of its creditors, or the appointment of
a receiver, trustee, liquidator or custodian for all or a substantial part of
the other party's property, if such order of appointment is not vacated within
thirty (30) days; and (iii) upon the assignment by the other party of this
Agreement contrary to the terms hereof.
(b) "***"
3.2 Obligations of the Parties Upon Termination or Expiration.
(a) System Operator's Obligations with Respect to
Installations and Activations. System Operator shall cooperate with DIRECTV to
enable DIRECTV or a substitute system operator to promptly perform and complete
all DSS Receiver installations and activations ordered by SO Subscribers and
Independent SO Subscribers prior to the termination of this Agreement according
to the regular installation and activation schedule System Operator used during
the Term of this Agreement; provided, however, and only to the extent that
DIRECTV or such substitute system operator has obtained or been assigned the
Right of Entry for an SO Property. System Operator shall direct all customer
inquiries it
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receives after the termination of this Agreement to DIRECTV (or such other
party as specified by DIRECTV).
(b) DIRECTV's and System Operator's Obligations with
Respect to SO Properties. Following the termination of this Agreement, (i)
DIRECTV may continue to deliver DIRECTV Programming and related services to all
SO Properties in accordance with DIRECTV's then-existing customer service
procedures; and (ii) DIRECTV shall notify the owner, manager or homeowners'
association of the MDU, as appropriate, of termination of System Operator as
DIRECTV's agent and recommend a substitute system operator to provide service to
SO Property with respect to delivery of DIRECTV Programming and services.
Subsequent to any termination or expiration of this Agreement, for a reasonable
transition period, not to exceed "*" days, System Operator shall not
impair the ability of any subscribers and residents of SO Properties to continue
to receive DIRECTV Programming nor shall System Operator impede in any manner
whatsoever DIRECTV's continued access (via the Signal Distribution System) to
deliver DIRECTV Programming to the subscribers and residents in all units of the
SO Property. DIRECTV shall continue to pay Commissions during any such
transition period.
ARTICLE IV
MISCELLANEOUS
4.1 Applicable Law: Entire Agreement: Modification. This Agreement
shall be construed in accordance with and be governed by the laws of the State
of California, applicable to contracts made and to be performed entirely
therein, by residents of the State of California. This Agreement, together with
all Exhibits hereto, the Terms and Conditions, the Transport Agreement, the
Subscriber Service Payment Agreement and the DSS Receiver Support Agreement,
constitute the entire agreement between the parties, and supersedes all
previous understandings, commitments or representations concerning the subject
matter. Each party acknowledges that the other party has not made any
representations other than those that are contained herein. This Agreement may
not be amended or modified, and none of its provisions may be waived, except by
a writing, signed by an authorized officer of the party against whom the
amendment, modification or waiver is sought to be enforced.
4.2 Review Of Agreement By Counsel: Interpretation. By executing,
this Agreement, each of the parties hereto is warranting and representing to
the other that he/she/it has had the opportunity to review this Agreement with
independent legal, financial, and tax counsel with respect to the effect of
each of the terms and conditions contained herein and has either reviewed this
Agreement with such counsel or has independently elected not to proceed with
such a review. Each of the parties further warrants and covenants that
he/she/it is satisfied with the results of such consultation or opportunity to
review and is signing this Agreement as his/her/its free act and deed and not
under any force or coercion. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY RULE
OF LAW, INCLUDING BUT NOT LIMITED TO SECTION 1654 OF THE CALIFORNIA CIVIL CODE,
OR ANY LEGAL DECISION THAT WOULD REQUIRE INTERPRETATION OF ANY CLAIMED
AMBIGUITIES IN THIS AGREEMENT AGAINST THE PARTY THAT DRAFTED IT, HAS NO
APPLICATION AND ANY SUCH RIGHT IS EXPRESSLY WAIVED. The provisions of this
Agreement shall be interpreted in a reasonable manner to effect the intent of
the parties.
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4.3 Counterparts. This Agreement may be executed by the parties in
counterparts, each of which shall be deemed an original and all such
counterparts together shall constitute but one and the same instrument.
4.4 Approvals. If at any time System Operator is required by the
terms of this Agreement to obtain DIRECTV's written approval of any matter,
such approval shall be deemed obtained unless specifically rejected by DIRECTV
within 30 days after DIRECTV's receipt of System Operator's written request for
such approval.
4.5 Right of Offset: "***"
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
DIRECTV, INC. HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By: /s/ JOHN M. MCKEE
----------------- By: /s/ CARROLL D. MCHENRY
-----------------------
Name: John M. McKee Name: Carroll D. McHenry
Title: Vice President Title: Chairman and Chief
Executive Officer
Federal Tax ID Number: 73-1435149
----------
DIRECTV Address: System Operator Address:
If By Mail: If By Mail:
2230 East Imperial Highway 200 Chisholm Place, Suite 200
El Segundo, CA 90245 Plano, Texas 75075
Attention: Vice President, Special Markets Attention: CEO/General Counsel
If By Personal Delivery: If By Personal Delivery:
2230 East Imperial Highway 200 Chisholm Place, Suite 200
Plano, Texas 75075 Plano, Texas 75075
Attention: Vice President, Special Markets Attention: CEO/General Counsel
If by FAX: (310) 726-5120 If by FAX: (2L2) 633-0074
Attention: Vice President, Special Markets Attention: CEO/General Counsel
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EXHIBIT A
DIRECTV MDU SYSTEM OPERATOR AGREEMENT TERMS AND CONDITIONS
[Attached hereto]
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EXHIBIT B
COMMISSIONABLE PROGRAMMING PACKAGES
[Attached hereto]
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EXHIBIT C
NRTC MAP
[Attached hereto]
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EXHIBIT D
TECHNICAL SPECIFICATIONS
[Current Edition attached hereto]
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EXHIBIT E
ADVERTISING GUIDELINES
[Attached hereto]
<PAGE> 18
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EXHIBIT F
DIRECTV SYSTEM OPERATOR POLICIES & PROCEDURES
[Attached hereto)
<PAGE> 19
"*" Confidential portions of this Agreement have been omitted and filed
separately with the Securities and Exchange Commission under a Confidential
Treatment Request, pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
EXECUTION COPY
November 12, 1997
Heartland Wireless Communications, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
Attn: Carroll D. McHenry
Re: Transport Rights
Dear Mr. McHenry:
Reference is made to that certain DIRECTV Cooperative Marketing Agreement
("Agreement"), dated the 12th day of November, 1997, by and between Heartland
Wireless Communications, Inc. ("System Operator") and DIRECTV, Inc.
("DIRECTV"). Capitalized terms not defined herein shall have the meaning
ascribed to them in the Agreement. All terms and conditions set forth in the
Agreement and the exhibits thereto are hereby incorporated by reference and
shall also apply to the transactions contemplated by this letter agreement
(this "Transport Agreement").
In connection with System Operator's program to establish and maintain
Signal Distribution Systems in MDU Properties and to act as DIRECTV's
commissioned sales representative therein, DIRECTV is willing to provide
certain transport rights to System Operator under the terms and conditions set
forth herein. SUCH RIGHTS ARE INTENDED TO ALLOW SYSTEM OPERATOR TO UTILIZE THE
SATELLITE FEED OF PROGRAMMING PROVIDED BY DIRECTV TO DELIVER DIRECTV
PROGRAMMING TO RESIDENTS OF WIRELESS CABLE PROPERTIES ("RESIDENTS") WHO RECEIVE
SYSTEM OPERATOR'S WIRELESS CABLE SERVICE.
ARTICLE I
DEFINITIONS
1.1 Defined Terms. The following capitalized terms shall have the
following definitions. Certain other capitalized terms shall have the meanings
given them elsewhere in this Transport Agreement or in the Agreement.
"Authorized Service" shall mean each DIRECTV Programming Service (as
defined below) as to which System Operator has executed an agreement with the
provider thereof (an "Affiliation Agreement"), satisfactory to DIRECTV, stating
that (a) System Operator possesses all of the necessary rights (including music
performance rights) to distribute such service as received from the DBS
Distribution System (as defined below) under and pursuant to such provider's
agreement with System Operator regarding distribution of the programming
service, (b) the distribution of such programming service by System Operator
shall not implicate in any way DIRECTV's agreements with the provider of
programming service and (c) in no event shall System Operator or any party to
whom System Operator distributes programming from the DBS Distribution System
pursuant to this Transport Agreement be counted or considered, as a subscriber
or customer of DIRECTV under DIRECTV's agreements with such programming
provider. DIRECTV may revoke the status of any DIRECTV Programming as an
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Authorized Service for failure to meet the definition set forth above, and as
directed by the programming provider for failure to comply with the terms of
the Affiliation Agreement.
"DBS Distribution System" shall mean the distribution system for video,
audio, data and other programming services (including without limitation, cable
programming services) whereby the cable programming satellite signal or feed is
received from DIRECTV's transponder source by a DIRECTV turnaround earth-station
facility which compresses and encrypts the signal or feed and then uplinks it at
one of the DIRECTV Frequencies on a DBS communications satellite located at or
about 101 degrees West Longitude orbital location for transmission to those
parties authorized by DIRECTV.
"DIRECTV Frequencies" shall mean the DBS operating frequencies
associated with the 101 degrees West Longitude orbital location for which
DIRECTV Enterprises, Inc. is the Federal Communications Commission-authorized
permitee.
"DIRECTV Programming Services" shall mean the programming services
described on Exhibit A hereto (as amended from time to time by DIRECTV in its
sole discretion).
"Wireless Cable Property" shall mean a condominium complex, apartment
building (including both rental and cooperative apartments), or townhouse
community, located in the Territory, comprised of multiple dwelling units,
which in each case is occupied by a single family household and is not
generally accessible to the public or otherwise shares a common area to which
there is unrestricted access by two or more persons, and which unit may receive
System Operator's wireless cable service.
ARTICLE II
GENERAL RIGHTS AND OBLIGATIONS
2.1 Grant of Rights.
(a) DIRECTV hereby grants to System Operator the
non-exclusive right to, and System Operator may, at its own cost, access the
Authorized Services provided via the DBS Distribution System for purposes of
distributing such Authorized Services to Wireless Cable Properties in
compliance with the terms of this Transport Agreement.
2.2 Satellite Feed Transmission. The parties acknowledge and agree
that System Operator shall distribute the satellite feed of Authorized Services
provided by DIRECTV to Residents via System Operator's Distribution Equipment
(as defined herein) pursuant to the terms of System Operator's agreements with
the providers of such Authorized Services. The parties further agree that each
such agreement with the providers of the Authorized Services is solely between
System Operator and the relevant provider of Authorized Services and that
DIRECTV bears no responsibility or liability whatsoever to any provider of
DIRECTV Programming Services or to any Wireless Cable Property relating to the
distribution to Residents. System Operator shall be responsible for all fees
and charges required to be paid by or on behalf of each Resident in connection
with the provision of the Authorized Services, including, but not limited to,
any copyright royalty fees.
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2.3 Performance Requirements.
Beginning "*" days following the date of the initial distribution by
System Operator of Authorized Services to any Resident, System Operator must
meet or exceed an "Aggregate Subscriber Penetration" of at least "***" . For
purposes of this Section, the term "Aggregate Subscriber Penetration" shall mean
the "***". The parties acknowledge the practical problems associated with
determining at any given time the number of occupied units and therefore agree
that the number of occupied units shall be presumed to be "*" of all occupiable
units. In the event System Operator fails to meet or exceed the "*" Aggregate
Subscriber Penetration for any calendar quarter, then DIRECTV, upon written
notice to System Operator, shall require System Operator to pay monthly
transport fees ("Transport Fees") for each Resident receiving Authorized
Services based on the following schedule:
"***"
Transport Fees shall be payable within "*" days after the end of the
calendar month in which they are incurred, and shall be accompanied by a
statement certified by System Operator's Chief Financial Officer or Controller
setting forth the basis on which the Transport Fees are submitted, including,
the number of Authorized Services and Residents for such month, as well as any
other information as may be reasonably requested by DIRECTV. System Operator's
obligation to pay Transport Fees will cease beginning in any calendar quarter
following a calendar quarter in which System Operator has maintained at least a
"*" Aggregate Subscriber Penetration for the entire quarter.
Notwithstanding the foregoing Transport Fee rate schedule, in the
event the Aggregate Subscriber Penetration drops below "*" percent "*" at any
time following the initial "*" days following the date of the initial
distribution by System Operator of Authorized Services to any Resident, DIRECTV
shall have the right, in its sole discretion, to notify System Operator of its
intent to terminate this Transport Agreement if during the "*" period following
receipt of such notice, System Operator's Aggregate Subscriber Penetration is
not increased to "*" or above. At the end of such "*" period, DIRECTV shall have
the right, in its sole discretion, to terminate this Transport Agreement
immediately upon written notice to System Operator.
2.4 Activation Information. System Operator shall forward to
DIRECTV a notice when a Wireless Cable Property is ready for activation, which
notice shall contain such information regarding the Wireless Cable Property as
may be reasonably requested by DIRECTV (the "Activation Request"). Only after
receiving and approving the Activation Request from System Operator shall
DIRECTV be obligated to arrange for the necessary authorization messages to the
Distribution Equipment.
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2.5 DIRECTV Programming. System Operator shall distribute each
Authorized Service in its entirety, in the original format and as provided by
DIRECTV. System Operator shall not modify, add to, delete or in any way alter
the satellite feed provided by DIRECTV, or insert any commercial announcement or
other materials in such feed.
2.6 Provision, Installation and Maintenance of Hardware: Disclaimer of
Warranty. "***" SYSTEM OPERATOR UNDERSTANDS AND AGREES THAT DIRECTV HAS NO
RESPONSIBILITY WHATSOEVER FOR THE DISTRIBUTION EQUIPMENT OR FOR THE PROVISION OF
THE SERVICES BY SYSTEM OPERATOR TO ITS RESIDENTS AND THAT DIRECTV HEREBY
DISCLAIMS ALL WARRANTIES, EXPRESS AND IMPLIED, IN CONNECTION WITH THE
DISTRIBUTION EQUIPMENT. ALL SUCH WARRANTIES ARE EXPRESSLY EXCLUDED. DIRECTV IS
NOT RESPONSIBLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT
LIMITATION, RELATING TO THE DISTRIBUTION EQUIPMENT. NOTWITHSTANDING THE
FOREGOING, DIRECTV HEREBY ASSIGNS TO SYSTEM OPERATOR ALL MANUFACTURERS' AND
DISTRIBUTORS' WARRANTIES PROVIDED TO DIRECTV OR ANY AFFILIATE REGARDING THE
DISTRIBUTION EQUIPMENT UTILIZED AT WIRELESS CABLE PROPERTIES.
ARTICLE III
TERM AND TERMINATION
3.1 Term. The term of this Transport Agreement (the "Term") shall
commence on the date first written above ("Execution Date") and continue until
the earliest to occur of (i) the seventh anniversary of the Execution Date, or
(ii) the termination of the Agreement for any reason, or (iii) any date on which
this Transport Agreement is terminated pursuant to the terms of this Transport
Agreement or at law.
3.2 Termination. Either party may terminate this Transport Agreement,
at any time upon any of the following occurrences: (a) upon the failure by the
other party, its successors or assignees to perform any material obligation
hereunder which is not cured or as to which reasonable steps to cure have not
been commenced (or are not thereafter diligently pursued) within "*" days
after receipt of written notice thereof from the affected party (provided,
however, that such cure period may not last longer than "*" months); or (b)
upon the assignment by the other party of this Transport Agreement contrary to
the terms hereof. Termination of this Transport Agreement pursuant to this
Section 3.2 shall not relieve either party of any of its liabilities or
obligations under this Transport Agreement which shall have accrued on or prior
to the date of such termination.
3.3 Renewal. "***"
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ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 System Operator. System Operator hereby represents, warrants
and covenants that:
(a) System Operator shall materially comply with and
abide by any and all agreements and/or requirements as may be requested by
providers of Authorized Services, each as applicable to System Operator and its
employees and agents in connection with the performance of its obligations
pursuant to this Transport Agreement;
(b) Prior to distributing any Authorized Service at a
Wireless Cable Property, System Operator shall have in effect, and shall
maintain in full force and effect throughout the Term or shall immediately
notify DIRECTV if not in full force and effect, (i) agreements with the
providers of Authorized Services granting to System Operator those rights
necessary to permit System Operator to distribute the Authorized Services to SO
Properties and (ii) agreements with such providers containing provisions
necessary to qualify such programming provided as Authorized Services (true and
complete copies of such agreements qualifying such programming shall be
attached hereto as Exhibit B). System Operator shall, from time to time as
agreements are signed with additional program providers, provide to DIRECTV,
for its approval in granting additional Authorized Services, true and complete
copies of those agreements containing provisions necessary to qualify such
programming as Authorized Services; and
(c) System Operator shall, at its sole expense, obtain
all permits and licenses which may be required under any applicable federal,
state or local law, rule, regulation or ordinance to perform its obligations
pursuant to this Transport Agreement.
4.2 DIRECTV. DIRECTV hereby represents, warrants and covenants
that DIRECTV shall, at its sole expense, obtain all permits and licenses which
may be required under any applicable federal, state or local law, rule,
regulation or ordinance to perform its obligations pursuant to this Transport
Agreement.
4.3 No Warranty. System Operator understands and agrees that
DIRECTV makes no warranty whatsoever concerning the rights of any provider of
programming, or any other person or entity, to offer, provide or utilize the
DBS Distribution System, including without limitation, the Authorized Services,
or any programming contained therein.
ARTICLE V
ADDITIONAL RIGHTS AND OBLIGATIONS
5.1 Indemnification.
(a) In addition to those indemnification obligations
contained in the Agreement, System Operator shall indemnify and hold harmless
each of DIRECTV, its Affiliated Companies (as defined below), and their
respective employees, officers, directors, contractors, subcontractors and
authorized distributors (the "DIRECTV Indemnitees") from and against any and
all claims, damages, costs, expenses and other liabilities (including
attorneys' fees and other costs of investigation and
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defense) (collectively, "Claims") arising out of, directly or indirectly, (i)
any breach or alleged breach of System Operator's obligations under this
Transport Agreement, (ii) any negligence in the performance of System
Operator's obligations under this Transport Agreement, (iii) any failure or
alleged failure by System Operator to obtain any necessary trademarks,
copyrights, licenses and any other intellectual property or use rights required
in connection with System Operator or the Residents' use of, or for DIRECTV's
distribution to System Operator of, the Authorized Services (including without
limitation, the right to use any of its programs, or the names, voices,
photographs, music, likenesses or biographies of any individual participant or
performer in, or contributor to, any program or any variations thereof), (iv)
System Operator's installation and/or maintenance of the Distribution Equipment
or any other equipment utilized in connection with the provision of services to
Residents, or (v) DIRECTV's feed transmission via the DBS Distribution System,
System Operator's distribution, or the cessation of either such feed
transmission or distribution of Authorized Services, to Residents (including,
without limitation, Claims for license fees by any person or entity and all
Claims by any programmer or any rights holder). As used in this Transport
Agreement, "Affiliated Companies" shall mean, with respect to any person or
entity, any other person or entity directly or indirectly controlling,
controlled by or under common control (i.e., the power to direct affairs by
reason of ownership of voting stock, by contract or otherwise) with such person
or entity and any member, director, officer or employee of such person or
entity.
(b) DIRECTV shall indemnify and hold harmless each of
System Operator, its Affiliated Companies, and their respective employees,
officers, directors, contractors, subcontractors and authorized distributors
from and against any and all Claims arising out of, directly or indirectly, any
breach or alleged breach of DIRECTV's obligations under this Transport
Agreement.
(c) Notwithstanding anything to the contrary contained
herein, System Operator expressly waives any right to indemnification arising
primarily out of (i) the content of any programming (including without
limitation claims relating to trademark, copyright, music, performance and
other proprietary interests), or (ii) the construction, use and/or operation of
DIRECTV's satellite(s) and related systems.
(d) Termination of this Transport Agreement shall not
affect the continuing obligations of the parties hereto as indemnitors
hereunder.
5.2 No Unauthorized Warranties or Representations. System
Operator shall not make any warranty or representation inconsistent with or in
addition to any warranty or representation stated in writing by DIRECTV. If
System Operator makes any such inconsistent or additional warranty or
representation, System Operator shall, at its own expense, indemnify, defend
and hold DIRECTV harmless from any claim relating thereto.
5.3 Cessation of Distribution/Termination of Transport Agreement.
"***"
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5.4 Force Majeure. Notwithstanding any other provision in this
Transport Agreement, neither System Operator nor DIRECTV shall have any
liability to the other or any other person or entity with respect to any
failure of System Operator or DIRECTV to perform its obligations under the
terms of this Transport Agreement if such failure is due to a Force Majeure.
"Force Majeure" shall mean any labor dispute; fire; flood; earthquake; riot;
legal enactment; government regulation; Act of God; any problem associated with
the construction, use and/or operation of DIRECTV's satellite(s) or related
systems; any problem associated with any scrambling/descrambling equipment or
any other equipment owned or maintained by others; or any cause beyond the
reasonable control of both parties.
5.5. Approvals. If at any time System Operator is required by the
terms of this Transport Agreement to obtain DIRECTV's written approval of any
matter, such approval shall be deemed obtained unless specifically rejected by
DIRECTV within 30 days after DIRECTV's receipt of System Operator's written
request for such approval.
5.6 Right of Offset: Payment. "***"
IN WITNESS WHEREOF, the parties have caused this Transport Agreement
to be executed as of the date first above written.
DIRECTV, INC. HEARTLAND WIRELESS
COMMUNICATIONS, INC.
BY: /s/ JOHN McKEE BY: /s/ CARROLL D. McHENRY
--------------------------- -------------------------------
Name: John McKee Name: Carroll D. McHenry
Title: Vice President Title: Chairman and CEO
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EXHIBIT A
DIRECTV PROGRAMMING SERVICES
"*"
<PAGE> 27
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EXHIBIT B
PROGRAM PROVIDER AGREEMENTS
[None provided as of date of Agreement]
<PAGE> 28
"*" Confidential portions of this Agreement have been omitted and filed
separately with the Securities and Exchange Commission under a Confidential
Treatment Request, pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
EXECUTION COPY
November 12, 1997
Heartland Wireless Communications, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
Attn: Carroll D. McHenry
RE: Subscriber Service Payment
Dear Mr. McHenry:
Reference is made to that certain DIRECTV Cooperative Marketing Agreement
("Agreement") dated the 12th day of November, 1997 between Heartland Wireless
Communications, Inc. ("System Operator") and DIRECTV, Inc. ("DIRECTV").
Capitalized terms not defined herein shall have the meaning ascribed to them in
the Agreement. All terms and conditions set forth in the Agreement (including
the exhibits thereto) are hereby incorporated by reference and shall also apply
to the transactions contemplated by this letter agreement (the "Subscriber
Service Payment Agreement").
In support of DIRECTV's program to introduce DIRECTV programming services
to residents of MDU Properties, DIRECTV agrees to help offset System Operator's
future expenses associated with the maintenance and servicing of SO
Subscribers.
DIRECTV will pay, on a one-time basis, "*" to System Operator for each
activation of Commissionable Programming Packages for each SO Subscriber
("Subscriber Service Payment") provided the following conditions and
requirements are met:
1. System Operator shall have submitted all required Subscriber Information
for each SO Subscriber in accordance with the Agreement.
2. DIRECTV will continue to pay the Subscriber Service Payment to System
Operator throughout the term of this Subscriber Service Payment Agreement;
provided, however, that with respect to each SO Property, System Operator
may only receive Subscriber Service Payments up to the total number of
units in such SO Property.
3. The SO Subscriber must subscribe to and pay for a Commissionable
Programming Package for a minimum of "*" months for System Operator to
be eligible to receive the entire Subscriber Service Payment; if an SO
Subscriber cancels, is disconnected or downgrades to a DIRECTV
programming package which is not a Commissionable Programming Package
prior to such time, System Operator shall be entitled to receive only a
prorated portion of the Subscriber Service Payment based on the number of
months the SO Subscriber subscribed to and paid for a Commissionable
Programming Package (the "Prorated Subscription Period").
<PAGE> 29
EXECUTION COPY
4. System Operator must be in compliance with all material terms and
conditions of the Agreement.
DIRECTV shall pay to System Operator the Subscriber Service Payment within
"*" days after the accounting month, as such accounting month is determined by
DIRECTV, of such SO Subscriber activation.
"***"
The term of this Subscriber Service Payment Agreement shall commence on
the date first above written ("Execution Date") and continue until the earliest
to occur of (i) the seventh anniversary of the Execution date, or (ii)
termination of the Agreement, or (iii) termination by either party of this
Subscriber Service Payment Agreement pursuant to the terms hereof. "***"
If at any time System Operator is required by the terms of this Subscriber
Service Payment Agreement to obtain DIRECTV's written approval of any matter,
such approval shall be deemed obtained unless specifically rejected by DIRECTV
within 30 days after receipt by DIRECTV of System Operator's written request
for such approval.
Kindly acknowledge your agreement to the foregoing terms by signing in the
space provided below.
Good selling.
DIRECTV, INC.
By: /s/ JOHN McKEE
----------------------------
John McKee
Vice President
Special Markets & Distribution
<PAGE> 30
EXECUTION COPY
Agreed and Accepted:
By: Heartland Wireless Communications, Inc.
---------------------------------------
System Operator Name
/s/ CARROLL D. McHENRY
---------------------------------------
Signature
Carroll D. McHenry
---------------------------------------
Print Name
Chairman and CEO
---------------------------------------
Title
November 7, 1997
---------------------------------------
Date
<PAGE> 31
"*" Confidential portions of this Agreement have been omitted and filed
separately with the Securities and Exchange Commission under a Confidential
Treatment Request, pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
EXECUTION COPY
November 12, 1997
Heartland Wireless Communications, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
Attn: Carroll D. McHenry
Re: DSS Receiver Support
Dear Mr. McHenry:
Reference is made to that certain DIRECTV Cooperative Marketing
Agreement ("Agreement"), dated the 12 day of November, 1997, by and between
Heartland Wireless Communications, Inc. ("System Operator") and DIRECTV, Inc.
("DIRECTV"). Capitalized terms not defined herein shall have the meaning
ascribed to them in the Agreement. All terms and conditions set forth in the
Agreement and the exhibits thereto are hereby incorporated by reference and
shall also apply to the transactions contemplated by this letter agreement
(this "DSS Receiver Support Agreement").
"***"
1
<PAGE> 32
EXECUTION COPY
The provision of DSS Receivers hereunder is subject to the following
conditions:
1. System Operator must be in compliance with all material terms
and conditions of the Agreement.
2. System Operator must submit all required Subscriber Information
for each SO Subscriber in material compliance with the Agreement. System
Operator must further maintain, and submit upon the request of DIRECTV,
inventory records reflecting the receipt of DSS Receivers from DIRECTV as well
as the placement of such DSS Receivers in Units.
3. "***"
4. System Operator shall be responsible for all taxes and shipping
charges in connection with the DSS Receivers.
5. "***"
6. "***"
7. The DSS Receivers are provided to System Operator "AS IS," and
System Operator shall own such DSS Receivers (subject to the repossession
provisions described herein). System Operator shall be solely responsible for
the proper installation and maintenance and all costs associated therewith. In
the event DIRECTV determines, after its receipt of written notification from
System Operator, that a DSS Receiver is not in proper working order, DIRECTV
will, for a one-year period following the date the DSS Receiver is received by
System Operator, provide a one-time replacement of such equipment
("Replacement DSS Receiver") to System Operator provided, however, that the
following conditions are met: (a) DIRECTV determines that the DSS Receiver is
not malfunctioning due to negligence or abuse by System Operator, SO Subscriber
or any other third party; (b) if a new Access Card is provided due to damage to
or loss or theft of the original Access Card, System Operator shall be
responsible for paying the Access Card Replacement Fee thereon, (c) System
Operator shall be responsible for all costs associated with deinstalling the
original DSS Receiver, installing the Replacement
2
<PAGE> 33
EXECUTION COPY
DSS Receiver, all costs associated with returning the original DSS Receiver to
DIRECTV, and the cost of shipping insurance in an amount reasonably specified
by DIRECTV.
8. EXCEPT AS EXPRESSLY PROVIDED HEREIN, DIRECTV MAKES NO WARRANTY,
EITHER EXPRESSED IMPLIED (INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), REGARDING THE DSS
RECEIVERS. ALL SUCH WARRANTIES ARE EXPRESSLY EXCLUDED. DIRECTV IS NOT
RESPONSIBLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT
LIMITATION, LOST PROFITS, RELATING TO THE DSS RECEIVERS, WHETHER BASED IN
NEGLIGENCE OR OTHERWISE. NOTWITHSTANDING THE FOREGOING, DIRECTV HEREBY ASSIGNS
TO SYSTEM OPERATOR ALL MANUFACTURERS' AND DISTRIBUTORS WARRANTIES PROVIDED TO
DIRECTV FOR DSS RECEIVERS UTILIZED AT SO PROPERTIES.
9. System Operator agrees to indemnify, defend and hold DIRECTV, its
officers, employees, agents and representatives harmless from and against any
and all claims, damages, liabilities, expenses (including reasonable attorneys'
fees and costs of litigation), losses, judgments and assessments of any kind
whatsoever directly or indirectly resulting from or in connection with System
Operator's use of the DSS Receivers. System Operator acknowledges and agrees
that, except for the limited remedy provided in the preceding paragraph and the
paragraph 7 any rights and remedies with respect to the DSS Receivers must be
handled directly with the manufacturer of such systems, not with DIRECTV.
10. "***"
11. "***"
12. "***"
****
The term of this DSS Receiver Support Agreement shall commence on the
date first above written ("Execution Date") and continue until the earliest to
occur of (i) the seventh anniversary of the Execution Date, or (ii) termination
by either party of this DSS Receiver
3
<PAGE> 34
EXECUTION COPY
Support Agreement pursuant to the terms hereof. "***"
If at any time System Operator is required by the terms of this DSS
Receiver Support Agreement to obtain DIRECTV's written approval of any matter,
such approval shall be deemed obtained unless specifically rejected by DIRECTV
within 30 days after receipt by DIRECTV of System Operator's written request
for such approval.
"***" The parties shall negotiate in good faith to resolve any
disputed amounts alleged to be owed under this DSS Receiver Support Agreement
for 30 days before taking other action under this DSS Receiver Support
Agreement, at law or in equity. Except as specifically provided herein, nothing
in this DSS Receiver Support Agreement shall operate as a waiver of either
party's rights under this DSS Receiver Support Agreement at law or in equity.
"***"
Except as supplemented and modified hereby, the terms of the Agreement
continue unmodified and in full force and effect.
Please sign in the space provided below to indicate your agreement to
the foregoing terms and conditions.
Good selling.
DIRECTV, INC.
By: /s/ JOHN MCKEE
------------------------------
John McKee
Vice President
Special Markets & Distribution
Agreed and Accepted:
Heartland Wireless Communications, Inc.
By: /s/ CARROLL D. MCHENRY
------------------------------
Carroll D. McHenry
Chairman and CEO
4
<PAGE> 1
EXHIBIT 10.17
HEARTLAND WIRELESS COMMUNICATIONS, INC.
PERFORMANCE INCENTIVE COMPENSATION PLAN
I. PURPOSE
The purpose of the Heartland Wireless Communications, Inc. Performance
Incentive Compensation Plan (the "Plan"), is to advance the interests of
Heartland Wireless Communications, Inc. (the "Company"), by strengthening,
through the payment of incentive awards, the linkage between executives of the
Company and stockholders of the Company, the decision-making focus of
executives of the Company upon improving stockholder wealth, and the ability of
the Company to attract and retain those key employees upon whose judgment,
initiative, and efforts the successful growth and profitability of the Company
depends.
II. DEFINITIONS
a. "AWARD" shall mean the amount payable to a Participant for a
Plan Year pursuant to the Plan.
b. "BASE COMPENSATION" shall mean the total salary or wages paid
by the Company or a Subsidiary for employment services during a Plan Year,
excluding any payments under this Plan or similar forms of additional
compensation, or any fringe benefits reportable on Form W-2 for federal income
tax purposes.
c. "BENEFICIARY" shall mean the beneficiary or beneficiaries
designated in accordance with Section XIII to receive any amount payable under
the Plan after the death of a Participant.
d. "BOARD" shall mean the board of Directors of the Company.
e. "CEO" shall mean the Chief Executive Officer of the Company.
f. "COMMITTEE" shall mean the Compensation Committee of the Board
of Directors of the Company, or any subcommittee thereof, as such Committee or
subcommittee shall be comprised from time to time.
g. "COMPANY" shall mean Heartland Wireless Communications, Inc.,
a Delaware corporation, its successors and survivors resulting from any merger
or acquisition of Heartland Wireless Communication, Inc. with or by any other
corporation or other entity or enterprise.
h. "CORPORATE/BUSINESS UNIT EARNINGS GROWTH OBJECTIVES" shall
mean the corporate and/or business unit earnings and/or EBITDA growth
objectives established by the Committee for the purpose of determining any
Award payable to a Participant for a Plan Year under the terms of the Plan.
1
<PAGE> 2
i. "DISABILITY" shall mean incapacity resulting in the
Participant's being unable to engage in gainful employment at his usual
occupation by reason of any medically demonstrable physical or mental
condition, excluding, however, incapacity contracted, suffered or incurred
while the Participant was engaged in, or which resulted from having engaged in,
a felonious enterprise; incapacity resulting from or consisting of chronic
alcoholism or addiction to drugs of abuse; and incapacity resulting from an
intentionally self-inflicted injury or illness.
j. "EBITDA" shall mean the consolidated earnings before interest,
taxes, depreciation and amortization of Heartland Wireless Communications, Inc.
as of the Plan Year, as reflected in its unaudited financial statements as
prepared by the Company's Chief Financial Officer and presented to the Board.
k. "EFFECTIVE DATE" shall mean January 1, 1998.
l. "ELIGIBLE EMPLOYEE" shall mean any officer or key management
employee of the Company or a Subsidiary who is a regular full-time employee of
the Company or a Subsidiary. A director of the Company or a Subsidiary is not
an Eligible Employee unless he is also a regular full-time salaried employee of
the Company or a Subsidiary. A "full time" employee means any employee who is
customarily employed more than 20 hours per week and at least six months per
year.
m. "INCENTIVE AWARD CLASSIFICATION" shall mean the classification
of Officers and other Participants established and used for payment of Awards
under Section VI.
n. "INCENTIVE PERFORMANCE OBJECTIVES" shall mean, collectively,
Corporate/Business Unit Earnings Growth Objectives and Specified Annual
Performance Objectives for a particular Participant.
o. "OFFICER" shall mean any Board-appointed officer of the
Company and any other executive of the Company or a Subsidiary whose individual
compensation during the Plan Year would be required to be disclosed in the
Company's corresponding annual proxy statement.
p. "PARTICIPANT" shall mean any Eligible Employee who is an
Officer and is designated by the Committee for participation in the Plan and
any other Eligible Employee designated by the Committee or by the CEO for
participation in the Plan, in each case for the Plan Year with respect to which
an Award may be made and which has not been paid, forfeited or otherwise
terminated or satisfied under the Plan.
q. "PLAN" shall mean the Heartland Wireless Communication, Inc.
Performance Incentive Compensation Plan, as set forth in this instrument, as
amended from time to time.
r. "PLAN YEAR" shall mean the year, which shall be the same as
the Company's fiscal year for tax and financial reporting purposes, to be used
to measure actual performance against Incentive Performance Objectives and to
determine the amount of Awards for Participants.
2
<PAGE> 3
s. "SPECIFIED ANNUAL PERFORMANCE OBJECTIVES" shall mean the
specific performance objectives established by the Committee or the CEO, other
than Corporate/Business Unit Earnings Growth objectives, for purposes of
determining any Award payable to a Participant for a Plan Year under the terms
of the Plan.
t. "SUBSIDIARY" shall mean a corporation of which fifty percent
(50%) or more of the issued and outstanding voting stock is owned (directly or
indirectly) by the Company.
III. ADMINISTRATION
Administration of the Plan shall be by the Committee, which shall, in
applying and interpreting the provisions of the Plan, have full power and
authority to construe, interpret and carry out the provisions of the Plan. All
decisions, interpretations and actions of the Committee under the Plan shall be
at the Committee's sole and absolute discretion and shall be final, conclusive
and binding upon all parties. The generality of the provisions of the
immediately preceding sentence shall not be deemed to be limited by any
reference to the Committee's discretion in any other provision of the Plan.
No member of the Committee shall be jointly or severally liable by
reason of any contract or other instrument executed by him or on his behalf in
his capacity as a member of the Committee, nor for any mistake of judgment made
in good faith, and the Company shall indemnify and hold harmless each member of
the Committee and each other officer, employee and director of the Company to
whom any duty or act relating to the administration of the Plan may be
allocated or delegated, against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of the claim with the approval
of the Board) arising out of any act or omission to act in connection with the
Plan, unless arising out of such person's or persons' own fraud or bad faith.
IV. ELIGIBILITY FOR PARTICIPATION
In the case of Eligible Employees who are Officers, participation
recommendations shall be provided to the Committee by the CEO and approved or
rejected by the Committee as soon as practicable after the beginning of each
Plan Year (or, if a person becomes an Officer during a Plan Year, as soon as
practicable after the person becomes an Officer). In the case of all other
Eligible Employees, participation recommendations shall be made by the CEO as
soon as practicable after the beginning of each Plan Year (or portion thereof)
for which participation has been approved. Each Eligible Employee shall be
notified of his participation in the Plan as soon as practicable after approval
of his participation for any Plan Year (or portion thereof) for which his
participation has been approved.
3
<PAGE> 4
V. INCENTIVE PERFORMANCE OBJECTIVES
At the beginning of each Plan Year, the Committee shall establish
Corporate and Business Unit Earnings Growth Objectives for the Plan Year. Such
Objectives shall be expressed as increases in EBITDA before extraordinary or
nonrecurring items as such items are determined by the Committee.
In addition, the Committee or the CEO may establish Specified Annual
Performance Objectives for each Participant for the Plan Year.
VI. INCENTIVE AWARD CLASSIFICATION
At the beginning of each Plan Year, (or, if an Eligible Employee
becomes a Participant during a Plan Year, on or before the date that Eligible
Employee becomes a Participant), the Committee shall assign each Participant
who is an Officer, and the Committee or the CEO shall assign each other
Participant, to an Incentive Award Classification which shall determine the
percentage of Base Compensation payable under the Plan for achievement of the
Incentive Performance Objectives established for the Participant for the Plan
Year.
The following table sets forth the percentage of Base Compensation
payable under the Plan as an Award for achievement of the Incentive Performance
Objectives established for a Participant for the Plan Year:
<TABLE>
<CAPTION>
Incentive Performance Award
As a Percentage of
Classification Base Compensation
-------------- -----------------
<S> <C>
1 50.0%
2 35.0%
3 25.0%
4 20.0%
5 15.0%
</TABLE>
VII. DETERMINATION OF AWARDS
During the first quarter of each Plan Year (or, if an Eligible Person
becomes a Participant during a Plan Year, on or before the date that Eligible
Employee becomes a Participant), the Committee, or, in the case of any Eligible
Employee who the CEO is entitled to approve as a Participant, the CEO shall
establish one or more formulas for determining the amount of Awards for the
Plan Year based upon the extent of attainment of the Corporate/Business Unit
Earnings Growth Objectives and Specified Annual Performance Objectives for the
Plan Year.
4
<PAGE> 5
Specified Annual Performance Objectives shall constitute no greater
than fifty percent (50%) of a Participant's Award and shall be based upon other
objective or subjective criteria which the Committee or CEO deems appropriate
for each Participant.
The Award for a Participant shall be determined according to actual
performance of the Company and/or Business Unit and the Participant when
compared with the Incentive Performance Objectives for the Company and/or
Business Unit and Participant. The Participant's Award shall be determined by
(1) multiplying the Participant's Base Compensation during the Plan Year by the
appropriate percentage corresponding to the Participant's Incentive Award
Classification from Section VI (with the resulting product of this calculation
referred to as the "Plan Year Base"), and (2) then multiplying the Plan Year
Base by the percentage by which the Participant and the Company/Business Unit
achieved their respective Incentive Performance Objectives based upon the
following table:
<TABLE>
<CAPTION>
Percentage of Achievement of Percentage of
Incentive Performance Objectives* Plan Year Base
--------------------------------- --------------
<S> <C>
Above 150% 150%
50% 50%
Less than 50% 0%
</TABLE>
*A linear interpolation to the nearest one percent shall be applied to
determine the appropriate percentage for performance not specified on the
table.
Notwithstanding the foregoing provisions of this Section, the
following provisions shall apply:
(1) In the event of extraordinary or nonrecurring items affecting
EBITDA and/or earnings or other financial line item as determined by the
Committee or CEO, the Committee or the CEO may, in its or his discretion,
modify the amount of the Awards, before payment thereof, for any Participant
designated by the Committee or by the CEO, as the case may be.
(2) In the event of a change in employment status of a Participant
during any Plan Year, the Committee or, in the case of Participants whose
participation in the Plan may be approved by the CEO, the CEO may, in its or
his discretion, adjust the Award determinants for the Participant from those
set at the beginning of the Plan Year to determinants based upon the
Participant's new status. Alternatively, the Committee or the CEO, as the case
may be, may in its or his discretion, prorate the Award payable to the
Participant in accordance with services rendered by the Participant during the
Plan Year in each status.
As soon as practicable after the establishment of the formula(s) and
other criteria for determining Awards for the Plan Year or any other action in
accordance with the preceding provisions of this Section, each affected
Participant shall be notified in writing of the formula(s) and other criteria
or action applicable to the Participant.
5
<PAGE> 6
As soon as practicable after the end of each Plan Year, the amount of
any Award payable for the Plan Year to each Participant shall be determined,
and each Participant shall be notified in writing thereof.
Notwithstanding any other provision of the Plan, in the case of a
Participant's or an Eligible Employee's separation from service with the
Company or a Subsidiary for any reason other than Disability or death, such
Participant or Eligible Employee shall become ineligible to participate in the
Plan and shall receive no Award for any Plan Year that has not ended prior to
the Participant's or Eligible Employee's separation from service. In the case
of separation from service due to Disability or death, a Participant shall be
eligible to receive an Award covering the period of time that he was employed
and was a Participant in the Plan Year during which the separation occurs.
VIII. PAYMENT OF AWARDS
Awards shall be paid as soon as practicable after the close of the
Plan Year, except that the Committee may, in its sole discretion, direct that
payments to the Participants be made during December of the Plan Year in the
amount of all or any portion specified by the Committee of the estimated Award
for that Plan Year, subject to adjustment as soon as practicable after the end
of the Plan Year and the determination of the exact amount of the Award
therefor.
No Participant shall have the unconditional right to an Award
hereunder until the Plan Year has concluded and the exact amount of the Award
has been determined by the Committee.
IX. AMENDMENT AND TERMINATION OF PLAN
The Board reserves the right, at any time, to amend, suspend or
terminate the Plan, in whole or in part, in any manner, and for any reason, and
without the consent of any Participant, Eligible Employee or Beneficiary or
other person; provided, that no such amendment, suspension or termination shall
adversely affect the payment of any amount for a Plan Year ending prior to the
action of the Board amending, suspending or terminating the Plan.
X. GOVERNING LAW
The provisions of the Plan shall be governed and construed in
accordance with the laws of the State of Delaware.
6
<PAGE> 7
XI. MISCELLANEOUS PROVISIONS
Nothing contained in the Plan shall give any employee the right to be
retained in the employment of the Company or a Subsidiary or affect the right
of the Company or a Subsidiary to dismiss any employee. The Plan shall not
constitute a contract between the Company or a Subsidiary and any employee.
Except as provided in Section VII, no Participant shall receive any right to be
granted an Award hereunder. No Award shall be considered as compensation under
any employee benefit plan of the Company or a Subsidiary, except as may be
otherwise provided in such employee benefit plan. No reference in the Plan to
any other plan or program maintained by the Company shall be deemed to give any
Participant or other person a right to benefits under such other plan or
program.
XII. NO ALIENATION OF BENEFITS
Except insofar as may otherwise be required by law, no amount payable
at any time under the Plan shall be subject in any manner to alienation by
anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment,
charge or encumbrance of any kind, nor in any manner be subject to the debts or
liabilities of a Participant or Beneficiary, and any attempt to so alienate or
subject any such amount, whether presently or thereafter payable, shall be
void. If a Participant or Beneficiary shall attempt to, or shall, alienate,
sell, transfer, assign, pledge, attach, charge or otherwise encumber any amount
payable under the Plan, or any part thereof, or if by reason of bankruptcy or
other event happening at any such time such amount would be made subject to his
debts or liabilities or would otherwise not be enjoyed by him, then, in the
event that Participant is an Officer, the Committee, and in all other cases,
the Committee or the CEO, may, if it or he so elects, direct that such amount
be withheld and that all or any part thereof be paid or applied to or for the
benefit of such Participant or Beneficiary, his spouse, children or other
dependents, or any of them, in such a manner and proportion as the Committee or
the CEO, as the case may be, may deem proper.
XIII. DESIGNATION OF BENEFICIARIES
Each Participant shall file with the Secretary of the Company a
written designation of one or more persons as the Beneficiary who shall be
entitled to receive any Award payable under the Plan after his death. A
Participant may, from time to time, revoke or change his Beneficiary
designation without the consent of any prior Beneficiary by filing a new
designation with the Company.
7
<PAGE> 8
The last such designation received by the Company shall be
controlling; except that no designation, or change or revocation thereof, shall
be effective unless received by the Company prior to the Participant's death,
and in no event shall it be effective as of any date prior to such receipt.
If no designation is in effect at the time of a Participant's death,
or if no designated Beneficiary survives the Participant, or if such
designation, in the Company's discretion, conflicts with applicable law, the
Participant's estate shall be deemed to have been designated his Beneficiary
and shall receive any Award payable under the Plan after his death. If the
Committee is in doubt as to the right of any person to receive such an amount,
the Company may retain such amount, without liability for any interest thereon,
until the rights thereto are determined, or the Company may pay such amount
into any court of appropriate jurisdiction, and such payment shall be a
complete discharge of the liability of the Plan, the Company and the Committee
therefor.
XIV. PAYMENTS TO PERSON OTHER THAN PARTICIPANT
If the Committee or, in the case of a Participant whose participation
in the Plan may be approved by the CEO, the CEO shall find that a Participant
or his Beneficiary to whom an Award is payable under the Plan is unable to care
for his affairs because of illness or accident, or is a minor, or has died,
then any payment due him or his estate (unless a prior claim therefor has been
made by a duly appointed representative) may, if the Committee or the CEO, as
the case may be, so directs, be paid to his spouse, child, a relative, an
institution maintaining custody of such person or any other person deemed by
the Committee or the CEO, as the case may be, to be a proper recipient on
behalf of such person otherwise entitled to payment. Any such payment shall be
a complete discharge of the liability of the Plan, the Company and the
committee therefor.
XV. NO RIGHT, TITLE OR INTEREST IN COMPANY'S ASSETS
No Participant or Beneficiary shall have any right, title or interest
whatsoever in or to any investments which the Company or a Subsidiary may make
to aid it in meeting its obligations under the Plan. Nothing contained in the
Plan, and no action taken pursuant to its provisions, shall create, or be
construed to create, a trust of any kind, or fiduciary relationship between the
Company or a Subsidiary and any Participant or Beneficiary or any other person.
To the extent that any person acquires a right to receive payments from the
Company under the Plan, such rights shall be no greater than the right of an
unsecured general creditor of the Company. All payments to be made hereunder
shall be paid from the general funds of the Company, and no special or separate
funds shall be established, and no segregation of assets shall be made, to
assure payment thereof.
8
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
as of the 6th day of March, 1998, between Heartland Wireless Communications,
Inc., a Delaware corporation ("Heartland"), and Carroll D. McHenry
("Executive").
WHEREAS, Executive currently is the Chairman, Chief Executive Officer
and President of Heartland; and
WHEREAS, it is the desire of the Board of Directors of Heartland (the
"Board of Directors") to assure itself of the continued 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;
<PAGE> 2
(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);
(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 6 (Non-Competition), 7 (Confidentiality), or 8
(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
2
<PAGE> 3
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:
(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.
3
<PAGE> 4
2. Employment and Term.
(a) Heartland hereby agrees to employ Executive as its
Chairman, Chief Executive Officer and President, 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 expiring as of
11:59 p.m. on the third 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 Three
Hundred Thousand Dollars ($300,000), 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.
4
<PAGE> 5
(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.
(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 Chairman, Chief Executive Officer and President, 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 Board of Directors.
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 Board of Directors 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
Board of Directors shall from time to time reasonably prescribe.
5. Termination of Severance Agreement. Executive and Heartland
are parties to a Severance Agreement dated April 23, 1997 (the "Severance
Agreement"). The parties agree that this Agreement shall supersede the
Severance Agreement in all respects, and that the Severance Agreement shall be
deemed terminated as of the effective date of this Agreement.
5
<PAGE> 6
6. 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,
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 6 only, the term "Heartland" shall include
Heartland and all Subsidiaries at the time the covenants in this Section 6 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 6(a) are applicable, Executive is not in
compliance with the terms of Subsection 6(a), Heartland shall be entitled to,
among other remedies, demand compliance by Executive with the terms of
Subsection
6
<PAGE> 7
6(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 6(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 6(a) of this Agreement be construed as a
series of separate covenants, one for each 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 6(a) hereof. Furthermore, each of the covenants in
Subsection 6(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 6(a) hereof.
7. 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 7:
(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.
7
<PAGE> 8
(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.
8. 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 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.
9. 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.
10. 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
8
<PAGE> 9
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 9(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 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.
11. 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 9(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 10(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
9
<PAGE> 10
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.
12. 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.
13. 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.
14. 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:
Carroll D. McHenry
3515 McFarlin
Dallas, TX 75205
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.
10
<PAGE> 11
15. Injunctive Relief. Executive acknowledges and agrees that a
remedy at law for any breach or threatened breach of the provisions of Sections
6, 7, and 8 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 nothing contained herein shall be construed as prohibiting
Heartland from pursuing any other rights and remedies available for any such
breach or threatened breach.
16. Arbitration. Subject to Section 15 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.
17. 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 17 shall
preclude Executive from designating a beneficiary to receive any benefit
payable hereunder upon his death or incapacity.
18. 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 6, 7, or 8 hereof
is void or constitutes an unreasonable restriction against the Employee, the
provisions of such Section 6, 7, or
11
<PAGE> 12
8, as applicable, shall not be rendered void but shall apply with respect to
such reasonable restriction under the circumstances.
19. Survival. The representations, warranties or covenants
contained in Sections 2(b)(i) and 8 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.
20. 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.
21. 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 CARROLL D. MCHENRY
COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ John A. Sprague /s/ Carroll D. McHenry
------------------------- ------------------------------------
Name: John A. Sprague Signature
Title: Director
12
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT(1)
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation Doing Business As
- ------------------ ---------------------- -----------------
<S> <C> <C>
Northern Oklahoma Wireless Cable, Inc.(2) Oklahoma Heartland
Heartland Wireless Portsmouth, L.L.C.(3) Texas Heartland
CS Wireless Systems, Inc.(4) Delaware CS Wireless
Wireless One, Inc.(5) Delaware Wireless One
</TABLE>
- -------------
(1) The names of consolidated wholly-owned subsidiaries in the wireless cable
television service business (31 of which operate in the United States and
none of which operate in foreign jurisdictions) have been omitted.
(2) The Registrant owns 85% of the outstanding common stock and 21.4% of the
outstanding preferred stock.
(3) The Registrant owns 80% of the outstanding membership interests.
(4) The Registrant owns approximately 36% of the outstanding common stock.
(5) The Registrant owns approximately 20% of the outstanding common stock.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Heartland Wireless Communications, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-04263 and No. 333-05943) on Form S-8 of Heartland Wireless Communications,
Inc. of our report dated March 24, 1998, relating to the consolidated balance
sheets of Heartland Wireless Communications, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows and related schedule for each
of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 annual report on Form 10-K of Heartland
Wireless Communications, Inc.
As discussed in note 1(e) to the consolidated financial statements, the Company
changed its method of accounting for the direct costs and installation fees
related to subscriber installations in 1995.
KPMG Peat Marwick LLP
Dallas, Texas
March 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 42,821
<SECURITIES> 9,818
<RECEIVABLES> 2,538
<ALLOWANCES> 340
<INVENTORY> 0
<CURRENT-ASSETS> 56,227
<PP&E> 165,262
<DEPRECIATION> 42,609
<TOTAL-ASSETS> 372,134
<CURRENT-LIABILITIES> 18,739
<BONDS> 306,838
0
0
<COMMON> 20
<OTHER-SE> 46,388
<TOTAL-LIABILITY-AND-EQUITY> 46,408
<SALES> 78,792
<TOTAL-REVENUES> 78,792
<CGS> 0
<TOTAL-COSTS> 146,963
<OTHER-EXPENSES> (26,545)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (39,867)
<INCOME-PRETAX> (134,583)
<INCOME-TAX> 0
<INCOME-CONTINUING> (134,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (134,583)
<EPS-PRIMARY> (6.85)
<EPS-DILUTED> (6.85)
</TABLE>
