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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23694
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Heartland Wireless Communications, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 73-1435149
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Chisholm Place, Suite 200, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 423-9494
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N/A
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Former Name, Former Address and Former Fiscal Year,if Changed Since Last Report.
Indicate by check X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Shares Outstanding
Class as of May 7, 1998
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Common Stock, $.001 par value 19,716,974
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 40,977 $ 42,821
Restricted assets - investment in debt securities ..................... 9,778 9,818
Subscriber receivables, net of allowance for doubtful accounts of
$377 in 1998 and $340 in 1997 ................................... 1,621 2,198
Prepaid expenses and other ............................................ 1,654 1,390
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Total current assets ...................................... 54,030 56,227
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Investments in affiliates, at equity ........................................ 28,662 34,167
Systems and equipment, net .................................................. 116,855 122,653
License and leased license investment, net of accumulated amortization of
$14,696 in 1998 and $12,929 in 1997 ................................... 121,762 123,369
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $4,184 in 1998 and $3,685 in 1997 ..................... 25,728 26,226
Restricted assets - investment in debt securities ........................... 515 515
Note receivable from affiliate .............................................. 2,220 2,069
Other assets, net ........................................................... 6,694 6,908
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$ 356,466 $ 372,134
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LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable and accrued expenses ................................. $ 25,945 $ 17,381
Current portion of long-term debt ..................................... 1,702 1,358
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Total current liabilities ................................. 27,647 18,739
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Long-term debt, less current portion ........................................ 307,450 306,838
Minority interests in subsidiaries .......................................... 149 149
Stockholders' equity:
Common stock, $.001 par value; authorized 50,000,000 shares, issued
19,701,871 shares in 1998 and 19,688,527 shares in 1997 ............. 20 20
Additional paid-in capital ............................................ 261,894 261,880
Accumulated deficit ................................................... (240,336) (215,134)
Treasury stock, 13,396 shares, at cost ................................ (358) (358)
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Total stockholders' equity ................................ 21,220 46,408
Commitments and contingencies
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$ 356,466 $ 372,134
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
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1998 1997
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(UNAUDITED)
<S> <C> <C>
Revenues .............................................. $ 19,099 $ 19,185
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Operating expenses:
Systems operations .............................. 9,315 8,861
Selling, general and administrative ............. 9,126 10,273
Depreciation and amortization ................... 11,300 11,118
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Total operating expenses ...................... 29,741 30,252
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Operating loss ................................ (10,642) (11,067)
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Other income (expense):
Interest income ................................. 816 1,732
Interest expense ................................ (10,000) (9,933)
Equity in losses of affiliates .................. (5,376) (8,302)
Other expense, net .............................. -- (3)
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Total other income (expense) .................. (14,560) (16,506)
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Loss before income taxes ...................... (25,202) (27,573)
Income tax ............................................ -- --
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Net loss ............................ $(25,202) $(27,573)
======== ========
Net loss per common share - basic and diluted ......... $ (1.28) $ (1.41)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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1998 1997
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(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $(25,202) $(27,573)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization ..................................... 11,300 11,118
Debt accretion and debt issuance cost amortization ................ 1,506 1,681
Equity in losses of affiliates .................................... 5,376 8,302
Other ............................................................. 14 --
Changes in assets and liabilities, net of acquisitions:
Restricted assets ............................................. (120) --
Subscriber receivables ........................................ 577 389
Prepaid expenses and other .................................... (479) (563)
Accounts payable, accrued expenses and other liabilities ...... 8,564 (4,585)
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Net cash provided by (used in) operating activities ...... 1,536 (11,231)
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Cash flows from investing activities:
Purchases of systems and equipment .................................. (3,024) (13,192)
Expenditures for license and leased licenses ........................ -- (355)
Acquisitions, net of cash acquired .................................. -- (1,622)
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Net cash used in investing activities .................... (3,024) (15,169)
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Cash flows from financing activities:
Payments on short-term borrowings and notes payable ................. (356) (323)
Other ............................................................... -- (90)
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Net cash used in financing activities .................... (356) (413)
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Net decrease in cash and cash equivalents ................................. (1,844) (26,813)
Cash and cash equivalents at beginning of period .......................... 42,821 79,596
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Cash and cash equivalents at end of period ................................ $ 40,977 $ 52,783
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HEARTLAND WIRELESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1998
(1) General
(a) Description of Business
The primary business objective of Heartland Wireless
Communications, Inc. (the "Company") is to develop, own and
operate single family unit ("SFU") and multiple-dwelling unit
("MDU") analog video businesses and retail high-speed digital
Internet access businesses (on a developmental basis in 1998)
in markets in which the Company owns or leases sufficient
wireless cable channel rights that will allow the Company to
best utilize its spectrum and maximize its return on
investment. The Company holds wireless cable channel rights
primarily in small to mid-size markets located in the central
United States. The Company had wireless cable television
systems in operation in 57 markets at March 31, 1998.
(b) Liquidity and Capital Resources
Wireless cable television and high-speed Internet access
businesses are capital intensive. Since inception, the Company
has expended funds to lease or otherwise acquire channel
rights and operating video systems in various markets, to
construct new video systems and to finance system operating
losses. The Company's primary sources of capital have been
from subscription fees, 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
growth of the Company's business requires substantial
investment in capital expenditures for SFU and MDU subscriber
growth, the development of alternative spectrum usages such as
high-speed Internet access, and the launch of additional
markets for video and/or Internet access businesses.
The Company does not expect to generate sufficient cash flow
in 1998 and beyond to implement its business plan while
continuing to service the Company's existing indebtedness.
Accordingly, the implementation of the Company's business plan
is subject to and dependent upon obtaining additional capital
and restructuring the Company's existing 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. ("Wasserstein Perella") as a
financial advisor to assist the Company in analyzing all
options available to finance the Company's business plan and
restructure its 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 debt and/or
equity, including converting part or all of the Company's
existing indebtedness and/or related interest obligations into
equity of the Company (see Note 2 of Notes to Condensed
Consolidated Financial Statements).
The Company's ability to implement such options is limited by
the indentures governing its $115.0 million in original
principal amount of 13% Series B and C Notes due 2003 (the
"13% Notes") and $125.0 million in original principal amount
of 14% Senior Notes (the "14% 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 ("Convertible Notes"). There can be no assurance that
the Company will be able to enter into new financing
arrangements or a recapitalization or restructuring in a
timely manner and on terms satisfactory to the Company.
If the Company is unable to obtain financing in a timely
manner and on acceptable terms, management has developed and
intends to implement a revised plan that would allow the
Company to continue operating in the normal course of business
at least through 1998. More specifically, this revised plan
would include delaying, reducing or eliminating the launch of
new wireless cable television and/or developmental Internet
systems, reducing or eliminating new subscriber installations
and related marketing expenditures and reducing or eliminating
other discretionary expenditures.
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(c) Principles of Consolidation
The condensed consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries.
Significant intercompany balances and transactions between the
entities have been eliminated in consolidation.
(d) Interim Financial Information
In the opinion of management, the accompanying unaudited
condensed consolidated financial information of the Company
contains all adjustments, consisting only of those of a
recurring nature, necessary to present fairly the Company's
financial position as of March 31, 1998 and the results of
operations and cash flows for the three months ended March 31,
1998 and 1997. These results are not necessarily indicative of
the results to be expected for the full fiscal year. The
accompanying financial statements are for interim periods and
should be read in conjunction with the audited consolidated
financial statements of the Company for the year ended
December 31, 1997, included in the Company's Form 10-K for the
year ended December 31, 1997.
(e) Net Loss Per Common Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128"). SFAS No. 128 revised
the previous calculation methods and presentation of earnings
per share under APB 15 and requires that all prior-period
earnings (loss) per share data be restated. The Company
adopted SFAS No. 128 in the fourth quarter of 1997 as
required. 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 period, and diluted loss per share, computed on the basis
of the weighted average number of common shares and all
dilutive potential common shares outstanding during the
period. All prior period loss per share amounts have been
restated in accordance with SFAS 128.
Net loss per basic and diluted common share is based on the
net loss applicable to the weighted average number of common
shares outstanding of approximately 19,683,000 and 19,588,000
for the three-month periods ended March 31, 1998 and 1997,
respectively. The potentially dilutive effect of the Company's
outstanding stock options and warrants has not been considered
in the computation of diluted net loss per common share since
their effect would be antidilutive.
(2) Subsequent Events
In conjunction with an ongoing evaluation of the Company's capital
structure by management and in consultation with the Company's
financial advisor, on April 15, 1998, the Company announced that it
would not make a semiannual interest payment due on that date of $7.5
million on the 13% Notes. Failure to make this interest payment could
permit the trustee or the holders of 25% or more in principal amount of
the 13% Notes to accelerate payment of the 13% Notes and all unpaid and
accrued interest thereon. Acceleration of the 13% Notes could permit
the trustee and holders of 25% or more in principal amount of the
Company's 14% Notes to accelerate payment of the 14% Notes and all
unpaid and accrued interest thereon. The Company currently does not
have sufficient funds available to pay in full the indebtedness
outstanding under either the 13% Notes or the 14% Notes in the event
that any of such indebtedness is accelerated. At March 31, 1998 the
principal amounts outstanding under the Senior Notes have been
classified as long-term in accordance with EITF 86-30.
As noted above, the Company has retained Wasserstein Perella as a
financial advisor to assist the Company in evaluating all options
available to finance the Company's business plan and restructure its
debt. The
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Company has had preliminary discussions with certain of the holders of
the Senior Notes and intends to continue to pursue restructuring and
recapitalization alternatives with all debt holders on a consensual
basis. There is no guarantee, however, that any such alternatives will
be agreed to by any or all such parties.
In April 1998, the Company entered into a five-year marketing agreement
with DIRECTV, Inc. ("DIRECTV") that will allow the Company to offer up
to 185 channels of DIRECTV digital programming to single family homes,
either alone or in combination with the Company's local and premium
channels. This agreement is in addition to the Cooperative Marketing
Agreement signed by the Company and DIRECTV in November 1997 for MDU
subscribers. The SFU agreement provides for a commission to the Company
for each SFU subscriber to whom the Company sells a DIRECTV programming
package, as well as equipment and marketing subsidies that the Company
believes could materially reduce the capital expenditures required for
such new subscribers.
(3) Comprehensive Income (Loss)
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") was issued. SFAS No.
130 establishes standards for reporting and displaying comprehensive
income and its components in an annual financial statement that is
displayed with the same prominence as other annual financial
statements. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. The statement
also requires the accumulated balance of other comprehensive income to
be displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Comprehensive income (loss) and net loss for the three months
ended March 31, 1998 and 1997 was $25.2 million and $27.6 million,
respectively.
(4) Contingencies
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a
material adverse effect on the Company's consolidated financial
position or operating results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the Company's
condensed consolidated financial statements and notes thereto.
OVERVIEW
The Company develops, owns and operates wireless cable television systems and
channel rights in small to mid-size markets in the central United States. The
Company currently offers its subscribers local off-air VHF/UHF channels, as well
as premium and basic programming channels such as HBO, HBO2, Cinemax, Showtime,
Disney, ESPN, CNN, USA, WGN, WTBS, Discovery, the Nashville Network, A&E and
other popular cable television networks. In addition, subject to the capital
considerations discussed elsewhere in this report, the Company intends to launch
a developmental high-speed Internet access business in two to four markets in
1998. At March 31, 1998, the Company had wireless cable channel rights in 90
markets, including 57 markets with analog video systems in operation, providing
service to approximately 175,000 subscribers, adjusted to reflect the change in
the Company's EBU (defined below) rate in calculating MDU subscribers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations; Change in EBU Rate for Calculating MDU Subscribers." The remaining
33 markets represent potential future launch systems. In addition, the Company
owns approximately 20% of the outstanding common stock of Wireless One, Inc.
("Wireless One") and approximately 36% of the outstanding common stock of CS
Wireless Systems, Inc. ("CS Wireless").
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) the
Company's ability to restructure and/or recapitalize its existing indebtedness
and access additional capital to finance its current business plan, (ii)
business and economic conditions in the Company's existing markets, (iii) the
Company's ability to implement a successful marketing plan and competitive price
structure to produce subscriber growth, (iv) the successful implementation of
the Company's MDU and SFU alliances with DIRECTV, (v) regulatory and
interference issues, including the grant of two-way transmission authority and
pending applications for new licenses or for modification of existing licenses
and the grant of applications for new licenses and license modification
applications that have not yet been filed with the Federal Communications
Commission ("FCC"), and (vi) competitive products and services, as well as those
matters discussed specifically elsewhere herein. Consequently, the actual future
results realized by the Company could differ materially from the statements made
herein. Investors are cautioned not to place undue reliance on the forward
looking statements made in this report.
RECENT DEVELOPMENTS
As reported in the Company's Form 8-K filed with the Securities and Exchange
Commission on April 15, 1998, the Company announced that it would not make a
semiannual interest payment due on that date of $7.5 million on the 13% Notes.
Under the indentures governing the 13% Notes, failure to make an interest
payment within 30 days of the due date constitutes an event of default and
allows the trustee or the holders of 25% or more in principal amount of the 13%
Notes to accelerate payment of the 13% Notes and all unpaid and accrued interest
thereon. In addition, acceleration of the 13% Notes would constitute an event of
default under the indenture governing the 14% Notes and permit the trustee or
the holders of 25% or more in principal amount of the 14% Notes to accelerate
payment of the 14% Notes and all unpaid and accrued interest thereon. The
Company currently does not have sufficient funds available to pay in full the
indebtedness outstanding under either the 13% Notes or the 14% Notes in the
event that any of such indebtedness is accelerated.
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The Company has retained Wasserstein Perella as a financial advisor to assist
the Company in evaluating all options available to finance the Company's
business plan and restructure its existing debt. The Company has had preliminary
discussions with certain of the holders of the Senior Notes and intends to
continue to pursue restructuring and recapitalization alternatives with all debt
holders on a consensual basis. There is no guarantee, however, that any such
alternatives will be agreed to by any or all such parties.
In April 1998, the Company entered into a five-year marketing agreement with
DIRECTV that will allow the Company to offer up to 185 channels of DIRECTV
digital programming to single family homes, either alone or in combination with
the Company's local and premium channels. This agreement is in addition to the
Cooperative Marketing Agreement signed by the Company and DIRECTV in November
1997 for MDU subscribers. The SFU agreement provides for a commission to the
Company for each SFU subscriber to whom the Company sells a DIRECTV programming
package, as well as equipment and marketing subsidies that the Company believes
could materially reduce the capital expenditures required for such new
subscribers.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1997
Revenues; Subscribers. The Company's revenues consist of monthly fees paid by
subscribers for basic programming, premium programming, program guides,
equipment rental and other miscellaneous fees. The Company's revenues for the
first quarter of 1998 were $19.1 million, compared to $19.2 million for the
first quarter of 1997. At March 31, 1998, the Company had approximately 175,000
subscribers, compared to approximately 199,000 subscribers at March 31, 1997.
The decrease in subscribers primarily is the result of the delayed launch of the
Company's marketing plan in the first quarter of 1998, a change in the Company's
EBU (defined below) rate for calculating MDU subscribers and the transfer of
operational control of one operating market to CS Wireless in December 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations; Change in EBU Rate for Calculating MDU Subscribers." Subscriber
information for the first quarter of 1998 is reported using the new EBU rate.
Subscriber information for prior periods will not be recalculated under the new
EBU rate, as any resulting change would not be material.
Although the number of subscribers and operating systems has decreased since the
first quarter of 1997, revenues have remained relatively stable due to overall
higher average subscription rates. Average monthly recurring revenue per
subscriber was $33.47 for the quarter ended March 31, 1998 compared to $30.51
for the same period in 1997.
Systems Operations. Systems operations expenses include programming costs,
channel lease payments, labor and overhead, costs of service calls and churn,
transmitter site and tower rentals, cost of program guides and certain repairs
and maintenance expenditures. Programming costs (with the exception of minimum
payments), cost of program guides and channel lease payments (with the exception
of certain fixed payments) are variable expenses based on the number of
subscribers. Systems operations expense was $9.3 million for the first quarter
of 1998, versus $8.9 million for the first quarter of 1997. As a percentage of
revenues, systems operations expense was 48.8% for the first quarter of 1998,
compared to 46.2% for the first quarter of 1997. The increase in systems
operating expense was primarily due to higher programming costs resulting from
rate increases by certain providers.
Selling, General and Administrative ("SG&A"). SG&A expense for the first quarter
of 1998 decreased 11% to $9.1 million from $10.3 million during the same period
in 1997. As a percentage of revenues, SG&A was 47.8% in the first quarter of
1998 compared with 53.5% for the first quarter of 1997. The decrease in SG&A was
primarily due to labor savings and efficiencies realized from consolidation of
management and staff in certain markets.
Depreciation and Amortization. Depreciation and amortization expense includes
depreciation of systems and equipment, amortization of license and leased
license investment and the excess of cost over fair value of net assets
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acquired. The Company's policy is to capitalize the excess of direct costs of
subscriber installations over installation fees. These direct costs include
reception materials and equipment on subscriber premises, installation labor and
direct commissions. These direct costs are capitalized as systems and equipment
in the accompanying condensed consolidated balance sheet. Depreciation and
amortization expense was $11.3 million for the first quarter of 1998, compared
to $11.1 million for the first quarter of 1997. The slight increase in
depreciation and amortization expense over the periods presented was due to a
change in the third quarter of 1997 of the Company's estimate of the useful life
of the nonrecoverable portion of subscriber installation costs from four years
to three years, as well as the commencement, during the fourth quarter of 1997,
of amortizing the cost of basic trading areas, or "BTAs," that were acquired in
a prior period.
Operating Loss. The Company generated operating losses of $10.6 million for the
first quarter of 1998, compared to $11.1 million for the first quarter of 1997.
Consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") was $658,000 for the first quarter of 1998, versus $51,000 for the
first quarter of 1997. EBITDA for the fourth quarter of 1997 was $279,000.
EBITDA is presented because it is a widely accepted financial indicator of a
Company's ability to service and/or incur indebtedness. However, EBITDA is not a
financial measure determined under generally accepted accounting principles and
should not be considered as an alternative to net income as a measure of
operating results or as an alternative to cash flows as a measure of funds
available for discretionary or other liquidity purposes.
Interest Income. Interest income was $816,000 during the first quarter of 1998,
versus $1.7 million for the first quarter of 1997. The decrease in interest
income is due to higher interest earnings in the first quarter of 1997 on larger
escrowed balances segregated for the payment of interest on senior debt and
higher interest earnings on a note receivable that was partially repaid during
the second and third quarters of 1997.
Interest Expense. The Company incurred interest expense of $10.0 million during
the first quarter of 1998, compared to $9.9 million during the first quarter of
1997. The increase in interest expense is due to higher average borrowings
outstanding during the first quarter of 1998 of $308.7 million compared to
$304.4 million during the first quarter of 1997. Interest expense for the first
quarter of 1998 included non-cash interest of $1.2 million versus $1.1 million
during the first quarter of 1997. Non-cash interest expense during the periods
presented relates to interest on the Convertible Notes which accrete through
November 1999.
Equity in Losses of Affiliates. The Company owns approximately 20% of the
outstanding common stock of Wireless One and approximately 36% of the
outstanding common stock of CS Wireless. The Company had equity in losses of
affiliates of $5.4 million for the first quarter of 1998 and $8.3 million for
the first quarter of 1997. The decrease is primarily due to the reduction of the
Company's investment in Wireless One to zero in November 1997, after which time
the Company stopped recording equity in losses of such affiliate.
Net Loss. The Company has recorded net losses since inception. The Company
incurred net losses of $25.2 million, or $1.28 per basic and diluted common
share, during the first quarter of 1998, versus $27.6 million, or $1.41 per
basic and diluted common share, during the first quarter of 1997. As previously
discussed, although the Company's total revenue remained fairly constant from
the first quarter of 1997 to the first quarter of 1998, the Company's net losses
decreased over the periods presented. As discussed above, the decrease in net
loss was primarily due to a decrease in losses of affiliates and decreases in
SG&A, partially offset by lower interest income. The Company expects to continue
to incur net losses throughout 1998 and beyond.
BALANCE SHEET
Subscriber Receivables. Subscriber receivables decreased from $2.2 million at
December 31, 1997 to $1.6 million at March 31, 1998 as a result of stricter
credit screening policies and improved collections procedures. The Company's
monthly churn rate also has declined from an average of 4.6% during 1997 to 3.5%
in the first quarter of 1998.
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Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses
increased from $17.4 million at December 31, 1997 to $25.9 million at March 31,
1998. This increase was primarily due to additions to accrued interest on the
Company's Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
Wireless cable television and high-speed Internet access businesses are capital
intensive. Since inception, the Company has expended funds to lease or otherwise
acquire channel rights and operating video systems in various markets, to
construct new video systems and to finance system operating losses. The
Company's primary sources of capital have been from subscription fees, 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
SFU and MDU subscriber growth, the development of alternative spectrum usages
such as high-speed Internet access, and the launch of additional markets for
video and/or Internet access businesses.
The Company estimates that a launch of a wireless cable analog video system in a
typical market will involve the initial expenditure of approximately $820,000 to
$1.3 million for 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 has converted two operating
systems from a boxed to a boxless technology and plans to convert additional
operating systems to realize future cost savings. The Company 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. In addition, the Company estimates that the launch of a developmental
Internet access business will require initial incremental capital expenditures
of approximately $250,000 per market. Operating losses are likely to be incurred
by both a video and Internet access business during the start-up period.
In conjunction with the Company's strategic plan to increase subscribers in its
existing markets, launch up to three new wireless cable television markets and
launch two to four developmental Internet access systems during 1998, the
Company projects capital expenditures for 1998 of approximately $23.0 million to
$26.5 million. This includes $15.0 million to $17.0 million to fund video
subscriber growth in existing markets and build out BTAs, $3.0 million to $4.0
million for analog video transmission and subscriber equipment in up to three
new markets, approximately $4.5 million for MDU property builds and MDU
subscriber equipment, and approximately $500,000 to $1 million for equipment
related to the launch of developmental Internet access businesses.
Cash provided by operations of the Company was $1.5 million during the first
quarter of 1998 compared to cash used in operations of $11.2 million during the
first quarter of 1997. The increase in cash from operations during 1998 was
primarily due to lower SG&A expenses related to labor savings and efficiencies
at the market level.
Cash used in investing activities was $3.0 million during the first quarter of
1998 compared to $15.2 million in the same period last year. Cash provided
by/used in investing activities principally relates to the acquisition and
installation of subscriber receive-site equipment, the upgrade of transmission
equipment in certain markets and the acquisition of wireless cable channel
rights and operating systems, partially offset by the sale of wireless cable
channel rights that are not a part of the Company's strategic plan. During the
first quarter of 1998 cash used in investing activities included purchases of
subscriber equipment and the upgrade of transmission equipment in certain
markets. Cash used in investing activities during the first quarter of 1997
included $9.0 million for purchases of subscriber equipment related to existing
system growth and $3.0 million to upgrade transmission equipment in certain
markets. Also during the first quarter of 1997, the Company paid $1.6 million
for the acquisition of operating systems in Woodward and Watonga, Oklahoma.
- 11 -
<PAGE> 12
Net cash used in financing activities was $356,000 during the first quarter of
1998 and $413,000 during the first quarter of 1997. Expenditures in both periods
primarily relate to payments on obligations related to capital leases and
various prior period acquisitions.
At April 30, 1998, the Company had approximately $44.0 million of cash-on-hand,
including $1.6 million of restricted cash.
FUTURE CASH REQUIREMENTS
As of March 31, 1998 the Company had $240.0 million outstanding principal amount
of Senior Notes, approximately $53.9 million in accreted outstanding principal
amount of Convertible Notes and approximately $15.8 million outstanding
principal amount of installment notes payable to the FCC for the Company's BTAs.
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
and in April 1998 the Company disbursed all of the funds in the escrow account
established in connection with the indenture governing the 14% Notes. Cash
interest obligations on the 13% Notes and the 14% Notes total approximately
$16.2 million every six months or $32.4 million per year (excluding any interest
payable as a result of delinquent interest payments). 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). In November 1999, the Company will be required
to make its first semiannual cash interest payment of approximately $2.8 million
on the Convertible Notes.
Beginning in the second quarter of 1997 and continuing throughout the first
quarter of 1998, in an effort to conserve capital resources, the Company
suspended new system launches and decreased marketing efforts directed at
acquiring new subscribers. During the remainder of 1998, the Company intends to
increase marketing efforts in selected markets and implement a 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 plan consists of (1)
maintaining moderate SFU subscriber growth through traditional analog video
service in selected markets, (2) pursuing SFU and MDU subscriber and revenue
growth through cooperative marketing alliances 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 and debt
restructuring alternatives to allow the Company to carry out this business plan.
This plan currently contemplates total capital expenditures of up to $26.5
million, depending primarily upon the number and timing of new market launches
(video and Internet).
Despite the Company's efforts to conserve capital and the improvement in its
EBITDA during the second half of 1997 and the first quarter of 1998, the Company
does not expect to generate sufficient cash flow in 1998 and beyond to implement
its business strategy while continuing to service the Company's existing
indebtedness. Accordingly, the implementation of the above-described business
strategy is subject to and dependent upon obtaining additional capital and
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 as a financial advisor to assist the Company
in analyzing all options available to finance the Company's business plan and
restructure its 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 debt and/or equity, including
converting part or all of the Company's existing indebtedness and related
interest obligations into equity of the Company.
The Company's ability to implement such options 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 new
financing arrangements or a recapitalization or restructuring in a timely manner
and on terms satisfactory to the Company that will enable the Company to
implement the above-described business strategy.
If the Company is unable to obtain financing in a timely manner and on
acceptable terms, management has developed and intends to implement a revised
plan that would allow the Company to continue operating in the normal course of
- 12 -
<PAGE> 13
business at least through 1998. More specifically, this revised plan would
include delaying, reducing or eliminating the launch of new wireless cable
television and/or developmental Internet systems, reducing or eliminating new
subscriber installations and related marketing expenditures and reducing or
eliminating other discretionary expenditures (see Note 2 to Condensed
Consolidated Financial Statements).
CHANGE IN EBU RATE FOR CALCULATING MDU SUBSCRIBERS
In the first quarter of 1998, the Company introduced a new program offering to
new subscribers and existing subscribers who desired to upgrade program
services. This new program offering upgraded the Company's programming packages
and increased the basic program pricing structure. The Company's current
programming packages for new SFU subscribers range from $24.99 for basic service
to $39.99 for basic service plus four premium channels. Accordingly, effective
March 31, 1998, all existing and future MDU subscribers who are billed in bulk
to the MDU owner will be converted to SFU subscribers for reporting purposes
using an equivalent basic unit ("EBU") rate of $24.99, to correspond to the
Company's lowest current pricing tier for basic programming for SFU subscribers.
Previously, the Company had used an EBU rate of $17.95 for such conversions
which represented generally the basic rate in effect at the time the applicable
MDU bulk billed contracts were executed. The Company believes that using an EBU
rate of $24.99 will more accurately reflect the revenue derived from bulk-billed
MDU subscribers, and will minimize the impact on monthly recurring revenue per
subscriber resulting from future changes in the number of MDU subscribers
relative to SFU subscribers.
MDU and EBU subscriber reporting conventions are subjective, and any changes in
the EBU rate that decrease subscriber count result in a corresponding increase
in average recurring revenue per subscriber. As a result of the increase in EBU
rate, the Company's total subscribers as of March 31, 1998 decreased from
approximately 179,000 to approximately 175,000. As adjusted, during the first
quarter of 1998, the Company's average monthly recurring revenue per subscriber
was $34.23, compared to $33.47 using an EBU rate of $17.95. Although the Company
has no current plans to change the EBU rate from $24.99, any future change based
on then-current programming packaging could affect the total number of reported
subscribers and average monthly recurring revenue per subscriber.
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 January 1, 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.
FUTURE OPERATING RESULTS
The Company's future revenues and profitability are difficult to predict due to
a variety of risks and uncertainties, including those described under "Forward
Looking Statements" above.
The rate of growth of the Company's video or other subscriber base during 1998
and beyond cannot be estimated with precision or certainty. Successful
implementation of the Company's business strategy, the Company's ability to
obtain timely financing on acceptable terms and the restructuring of the
Company's debt will have a significant impact on the
- 13 -
<PAGE> 14
Company's 1998 operating and financial performance. In addition, the Company
cannot quantify the potential impact on its 1998 financial performance of the
implementation of its 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 and debt.
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
adoption of SFAS 131 is not expected to have a material impact on the Company's
consolidated financial statements and related disclosures.
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As reported in the Company's Form 8-K filed with the Securities and Exchange
Commission on April 15, 1998, the Company announced that it would not make a
semiannual interest payment due on that date of $7.5 million on the 13% Notes.
The indentures governing the 13% Notes provide that if an interest payment is
not made within 30 days of an interest payment due date, the failure to make
such a payment will constitute an event of default under such indentures. Upon
the occurrence of such an event of default, the trustee under the indentures or
the holders of 25% or more in principal amount of the Senior Notes may
accelerate payment of the 13% Notes and all unpaid and accrued interest thereon.
In addition, acceleration of the 13% Notes would constitute an event of default
under the indenture governing the 14% Notes and permit the trustee or the
holders of 25% or more in principal amount of the 14% Notes to accelerate
payment of the 14% Notes and all unpaid and accrued interest thereon. The
Company currently does not have sufficient funds available to pay in full the
indebtedness outstanding under either the 13% Notes or the 14% Notes in the
event that any of such indebtedness is accelerated.
The Company has retained Wasserstein Perella as a financial advisor to assist
the Company in evaluating all options available to finance the Company's
business plan and restructure its existing debt. The Company has had preliminary
discussions with certain of the holders of its Senior Notes and intends to
organize meetings with holders of all of its debt as soon as practicable.
ITEM 5. OTHER INFORMATION
On April 24, 1998, the Company received notice from The Nasdaq Stock Market,
Inc. ("Nasdaq") that the Company's common stock had failed to maintain a closing
bid price of at least $1.00 for 30 consecutive trading days, in violation of
Nasdaq's Marketplace Rule 4450(a)(5). The notice further stated that in order
for the Company to maintain listing of the Company's common stock on the Nasdaq
National Market, the closing bid price of the Company's common stock must be
$1.00 or more for at least 10 consecutive trading days within a period of 90
calendar days from the date of the notice, and that the Company's common stock
would be delisted at the opening of business on July 27, 1998 if such condition
was not met. In the event that the Company's common stock is not able to comply
with these requirements, the Company intends to evaluate all of its options,
including pursuing any available procedural remedies under Nasdaq's Marketplace
Rules. Any such delisting could adversely affect the liquidity of the Company's
common stock.
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<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
*10.1 Non-Qualified Stock Option Agreement between
Heartland Wireless Communications, Inc. and Carroll
D. McHenry dated as of January 20, 1998.
*10.2 Employment Agreement between Heartland Wireless
Communications, Inc. and Carroll D. McHenry dated as
of March 6, 1998.
*27 Financial Data Schedule
- -------------------------
*Filed herewith.
(b) REPORTS ON FORM 8-K
None.
- 15 -
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1998 HEARTLAND WIRELESS COMMUNICATIONS, INC.
By: /s/ Carroll D. McHenry
-------------------------------------------------
Carroll D. McHenry
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
By: /s/ Marjean Henderson
-------------------------------------------------
Marjean Henderson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE> 17
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Non-Qualified Stock Option Agreement between
Heartland Wireless Communications, Inc. and Carroll
D. McHenry dated as of January 20, 1998.
10.2 Employment Agreement between Heartland Wireless
Communications, Inc. and Carroll D. McHenry dated as
of March 6, 1998.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
REVISED FORM FOR NSO UNDER
1994 EMPLOYEE STOCK OPTION PLAN
NONTRANSFERABLE NON-QUALIFIED STOCK
OPTION AGREEMENT dated as of January 20,
1998, between HEARTLAND WIRELESS
COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and CARROLL
D. MCHENRY (the "Optionee", which term as
used herein shall be deemed to include
any successor to the Optionee by will or
by the laws of descent and distribution,
unless the context shall otherwise
require).
Pursuant to the Company's 1994 Employee Stock Option Plan (the
"Plan"), the Company, acting through the Compensation Committee of its Board of
Directors (the "Committee"), approved the issuance to the Optionee, effective as
of the date set forth above, of a non-qualified option to purchase up to an
aggregate of 100,000 shares of Common Stock, $.001 par value, of the Company
(the "Common Stock"), at the price of (the "Option Price") [not less than 100%
of the fair market value of a share of Common Stock on the date of grant]
$1.4375 per share, upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual premises and
undertakings hereinafter set forth, the parties hereto agree as follows:
1. OPTION; OPTION PRICE. On behalf of the Company, the
Committee hereby grants to the Optionee the option (the "Option") to purchase,
subject to the terms and conditions of this Agreement and the Plan (which are
incorporated by reference herein and which in all cases shall control in the
event of any conflict with the terms, definitions and provisions of this
Agreement), 100,000 shares (the "Option Shares") of Common Stock of the Company
at an exercise price per share equal to the Option Price, which Option is not
intended to qualify for Federal income tax purposes as an "incentive stock
option" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). A copy of the Plan as in effect on the date hereof has
been supplied to the Optionee, and the Optionee hereby acknowledges receipt
thereof.
2. TERM. The term (the "Option Term") of the Option shall
commence on the date of this Agreement (the "Grant Date") and shall expire on
the seventh anniversary of the Grant Date, unless such Option shall theretofore
have been terminated in accordance with the terms hereof or of the Plan.
3. TIME OF EXERCISE.
(a) Unless accelerated in the discretion of the
Committee or as otherwise provided herein, the Option shall be exercisable as to
the total number of Option Shares multiplied by the fraction specified in
Exhibit A hereto, for the periods specified in Exhibit A hereto; provided,
however, that the Option shall in no event be exercisable during the 180-day
period (the "Offering Period") immediately following the effective date of the
Registration Statement on Form S-1 filed by
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<PAGE> 2
the Company under the Securities Act of 1933, as amended (the "Securities Act"),
for an initial public offering of the Common Stock; provided further, however,
that the Option shall be exer cisable during the 180-day period after the
expiration of the Offering Period if the Option Term expires during the Offering
Period. Subject to the provisions of Sections 5 and 8 hereof, shares as to which
the Option becomes exercisable pursuant to the foregoing provisions may be
purchased at any time thereafter prior to the expiration or termination of the
Option.
(b) Anything contained herein to the contrary
notwithstanding, the Option shall become fully exercisable (to the extent it has
not already done so) as to the total number of shares of Common Stock subject to
the Option upon the Optionee's death or permanent and total disability (within
the meaning of Section 22(e)(3) of the Code).
(c) (i) Anything contained herein to the
contrary notwithstanding, in the event of a Change in Control (as hereinafter
defined), the Option shall become fully exercisable (to the extent it has not
already done so) as to the total number of shares of Common Stock subject to the
Option. For purposes of this Agreement, a Change in Control of the Company shall
be deemed to have occurred if (A) there shall be consummated (x) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Common
Stock would be converted into cash, securities or other property, other than a
merger of the Company in which the holders of the Common Stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company; or (B)
the stockholders of the Company approve any plan or proposal for the liquidation
or dissolution of the Company; or (C) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"))(other than Hunt Capital Group, L.L.C., David E. Webb or L.
Allen Wheeler), shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 30% or more of the Company's outstanding Common
Stock; or (D) during any period of two consecutive years, individuals who at the
beginning of such period constitute the entire Board of Directors shall cease
for any reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period. Anything contained herein to
the contrary notwithstanding, any exercise of the Option permitted pursuant to
this Section 3(c) may be made at any time before the seventh anniversary of the
Grant Date.
(ii) The parties agree that they intend for
Section 9.b(ii) of the Plan to apply to any Corporate Transaction (as defined in
the Plan) with respect to the Option and the exercisability of the Option in the
event of a Change of Control or any Corporate Transaction. Accordingly, in the
event of a Corporate Transaction or a Change of Control identified in Section
3(c)(i)(A) or (B) above, the Company shall, as a condition to the consummation
of such Corporate Transaction or Change of Control, require the surviving or
acquiring entity or Person to assume in writing the obligations of the Company
under this Agreement (including without limitation the obligations under this
Section 3(c)) or substitute for the Option a new option covering the stock of
the surviving, successor or purchasing entity, or a parent or subsidiary
thereof, with appropriate adjustments as to the number, kind and option price of
shares subject to such new option. Nothing
2
<PAGE> 3
contained in this provision is intended to limit the ability of Optionee to
exercise the Option with respect to all Option Shares that are subject to the
Option in the event of a Corporate Transaction or Change of Control.
4. TERMINATION OF OPTION.
(a) Except as set forth in Section 3(c), the
unexercised portion of the Option shall automatically terminate and shall become
null and void and be of no further force or effect upon the first to occur of
the following:
(i) the expiration of the Option Term;
(ii) the expiration of three months from the
date that the Optionee ceases to be an employee of the Company or any of its
subsidiaries (other than as a result of an Invol untary Termination (as defined
in subparagraph (iii) below) or a termination for Cause (as defined in
subparagraph (b) below)); provided, however, that if the Optionee shall die
during such three-month period, the time of termination of the unexercised
portion of the Option shall be determined in accordance with subparagraph (iii)
below;
(iii) the expiration of 12 months from the
date that the Optionee ceases to be an employee of the Company or any of its
subsidiaries as a result of the Optionee's death or permanent and total
disability (within the meaning of Section 22(e)(3) of the Code) (an "Involun
tary Termination");
(iv) immediately if the Optionee ceases
to be an employee of the Company or any of its subsidiaries if such termination
is for Cause; and
(v) except to the extent permitted by
Section 9.b.(ii) of the Plan, the date on which the Option or any part thereof
or right or privilege relating thereto is transferred (otherwise than by will or
the laws of descent and distribution), assigned, pledged, hypothecated, attached
or otherwise disposed of by the Optionee.
(b) "Cause" shall have the same meaning as set
forth in Section 1(b) of that Employee Agreement dated as of March 6, 1998
between Optionee and the Company.
(c) Anything contained herein to the contrary
notwithstanding, the Option shall not be affected by any change of duties or
position of the Optionee (including a transfer to or from the Company or one of
its subsidiaries), so long as the Optionee continues to be an officer or
employee of the Company or one of its subsidiaries.
5. PROCEDURE FOR EXERCISE.
(a) The Option may be exercised, from time to
time, in whole or in part (but for the purchase of whole shares only), by
delivery of a written notice (the "Notice") from the Optionee to the Secretary
of the Company, which Notice shall:
3
<PAGE> 4
(i) state that the Optionee elects to
exercise the Option;
(ii) state the number of Option Shares
with respect to which the Option is being exercised (the "Optioned Shares");
(iii) state the method of payment for the
Optioned Shares pursuant to Section 5(b);
(iv) state the date upon which the
Optionee desires to consummate the purchase of the Optioned Shares (which date
must be prior to the termination of such Option and no later than 30 days from
the delivery of such Notice);
(v) include any representations of the
Optionee required under Section 8(b); and
(vi) if the Option shall be exercised
pursuant to Section 10 by any person other than the Optionee, include evidence
to the satisfaction of the Committee of the right of such person to exercise the
Option.
(b) Payment of the Option Price for the Optioned
Shares shall be made (i) in cash or by personal or certified check, (ii) by
delivery of stock certificates (in negotiable form) representing shares of
Common Stock that have been owned of record by the Optionee for at least six
months prior to the date of exercise and that have a Fair Market Value on the
date of exercise (determined in the manner set forth in Section 6.b. of the
Plan) equal to the aggregate Option Price of the Optioned Shares or (iii) a
combination of the methods set forth in the foregoing clauses (i) and (ii).
(c) The Company shall issue a stock certificate
in the name of the Optionee (or such other person exercising the Option in
accordance with the provisions of Section 10) for the Optioned Shares as soon as
practicable after receipt of the Notice and payment of the aggregate Option
Price for such shares.
6. NO RIGHTS AS A STOCKHOLDER. The Optionee shall not
have any privileges of a stockholder of the Company with respect to any Optioned
Shares until the date of issuance of a stock certificate pursuant to Section
5(c).
7. ADJUSTMENTS. If, at any time while the Option is
outstanding, the Common Stock is changed by reason of a stock split, reverse
stock split, stock dividend or recapitalization, or converted into or exchanged
for other securities as a result of a merger, consolidation or reor ganization,
the Committee shall make adjustments in the number and class of shares of stock
subject to the Option, and the Option Price of the Option, subject to the
provisions of Sections 9.a. and 9.c. of the Plan (or any similar or successor
provisions of the Plan which may be hereafter adopted).
4
<PAGE> 5
8. ADDITIONAL PROVISIONS RELATED TO EXERCISE.
(a) The Option shall be exercisable only on such
date or dates and during such period and for such number of shares of Common
Stock as are set forth in this Agreement.
(b) To exercise the Option, the Optionee shall
follow the procedures set forth in Section 5 hereof. Upon the exercise of the
Option at a time when there is not in effect a registration statement under the
Securities Act relating to the shares of Common Stock issuable upon exercise of
the Option, the Committee in its discretion may, as a condition to the exercise
of the Option, require the Optionee (i) to represent in writing that the shares
of Common Stock received upon exercise of the Option are being acquired for
investment and not with a view to distribution and (ii) to make such other
representations and warranties as are deemed appropriate by counsel to the
Company. No shares of Common Stock shall be issued and delivered upon the
exercise of the Option unless and until the Company and/or the Optionee shall
have complied with all applicable Federal or state registration, listing and/or
qualification requirements and all other requirements of law or of any
regulatory agencies having jurisdiction.
(c) Stock certificates representing shares of
Common Stock acquired upon the exercise of the Option that have not been
registered under the Securities Act shall, if required by the Committee, bear
the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THE SHARES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE PLEDGED,
HYPOTHECATED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL TO THE COMPANY
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
9. NO EVIDENCE OF EMPLOYMENT OR SERVICE. Nothing
contained in the Plan or this Agreement shall confer upon the Optionee any right
to continue in the employ of the Company or any of its subsidiaries or interfere
in any way with the right of the Company or its subsidiaries (subject to the
terms of any separate agreement to the contrary) to terminate the Optionee's
employment or to increase or decrease the Optionee's compensation at any time.
10. RESTRICTION ON TRANSFER. The Option may not be
transferred, pledged, assigned, hypothecated or otherwise disposed of in any way
by the Optionee, except by will or by the laws of descent and distribution, and
may be exercised during the lifetime of the Optionee only by the Optionee. If
the Optionee dies, the Option shall thereafter be exercisable, during the period
specified in Section 4(a)(iii), by his executors or administrators to the full
extent to which the Option was exercisable by the Optionee at the time of his
death. The Option shall not be subject to execution, attachment or similar
process. Any attempted assignment, transfer, pledge, hypothecation or other
disposition of the Option contrary to the provisions hereof, and the levy of any
execution, attachment or similar process upon the Option, shall be null and void
and without effect.
5
<PAGE> 6
11. TAXES. Whenever under the Plan shares of Common Stock
are to be delivered to an Optionee upon exercise of an Option, the Company shall
be entitled to require as a condition of delivery that the Optionee remit or, in
appropriate cases, agree to remit when due, an amount sufficient to satisfy all
current or estimated future Federal, state and local withholding tax and
employment tax requirements relating thereto. At the time of a Disqualifying
Disposition (as defined in the Plan), the Optionee shall remit to the Company in
cash the amount of any applicable Federal, state and local withholding taxes and
employment taxes.
12. NOTICES. All notices or other communications which
are required or permitted hereunder shall be in writing and sufficient if (i)
personally delivered, (ii) sent by nationally-recognized overnight courier or
(iii) sent by registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
if to the Optionee, to the address set forth on the
signature page hereto; and
if to the Company, to:
Heartland Wireless Communications, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
Attention: Secretary
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, (ii) on the first Business Day (as hereinafter defined)
after dispatch, if sent by nationally-recognized overnight courier and (iii) on
the third Business Day following the date on which the piece of mail containing
such communication is posted, if sent by mail. As used herein, "Business Day"
means a day that is not a Saturday, Sunday or a day on which banking
institutions in the city to which the notice or communication is to be sent are
not required to be open.
13. NO WAIVER. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature.
14. OPTIONEE UNDERTAKING. The Optionee hereby agrees to
take whatever additional actions and execute whatever additional documents the
Company may in its reasonable judgment deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
the Optionee pursuant to the express provisions of this Agreement.
15. MODIFICATION OF RIGHTS. The rights of the Optionee
are subject to modification and termination in certain events as provided in
this Agreement and the Plan.
16. GOVERNING LAW. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Delaware applicable
to contracts made and to be wholly performed therein.
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17. COUNTERPARTS. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
18. ENTIRE AGREEMENT. This Agreement and the Plan
constitute the entire agreement between the parties with respect to the subject
matter hereof, and supersede all previously written or oral negotiations,
commitments, representations and agreements with respect thereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Nontransferable Non-Qualified Stock Option Agreement as of the date first
written above.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By: /s/ John A. Sprague
-------------------------------------
John A. Sprague
Director
OPTIONEE:
/s/ Carroll D. McHenry
-----------------------------------------
Name: Carroll D. McHenry
Address: 3515 McFarlin
Dallas, TX 75205
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EXHIBIT A
This Option shall become exercisable as to one-third (1/3) of the
aggregate number of Option Shares on each anniversary of the Grant Date on which
the Optionee is employed by the Company or any of its subsidiaries.
<PAGE> 1
EXHIBIT 10.2
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;
(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);
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(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 during the six month period prior to termination of
Executive's employment, its intention to engage in the Wireless Cable Business.
(f) Good Reason: a resignation for Good Reason shall mean the
resignation by Executive from employment by Heartland after:
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(i) any material reduction of Executive's
compensation or benefits to which Executive was entitled immediately before the
reduction; or
(ii) any other material adverse change to the terms
and conditions of Executive's employment or benefits as in effect immediately
before the change;
provided, that, (A) if Executive consents in writing to any event described in
clauses (i) or (ii) of this Subsection 1(f), then Executive's subsequent
resignation shall not be treated as a resignation for Good Reason unless a
subsequent event described in such clauses to which Executive did not consent
occurs and (B) any changes in Executive's discretionary bonus, if any, as from
time to time may be determined by the Board of Directors of Heartland shall not
constitute Good Reason. Notwithstanding the foregoing, Executive shall be
entitled to resign for Good Reason only if any occurrence referred to in clauses
(i) or (ii) of this Subsection 1(f) is not remedied within 30 calendar days
after receipt by Heartland of written notice from Executive setting forth in
reasonable detail the facts and circumstances giving rise to such Good Reason.
(g) Person: shall mean any individual, group, partnership,
corporation, association, trust or other entity or organization.
(h) Permanent Disability: shall mean any physical or mental
disability which renders Executive unable to perform the essential functions of
his job as an employee of Heartland on a full-time basis with or without
reasonable accommodation for 180 calendar days whether or not consecutive,
within any period of 12 consecutive months; provided, however, that during any
period of Executive's disability Heartland may assign Executive's duties to any
other employee of Heartland or any Affiliate of Heartland or may engage or hire
a third party to perform such duties and any such action shall not be deemed
"Good Reason" for Executive to terminate his employment.
(i) Subsidiary: shall mean any non-individual Person of which
a majority of the combined voting power of the outstanding voting securities (or
other voting interests) is owned, directly or indirectly, by Heartland.
(j) Wireless Cable Business: shall mean the installing,
licensing, sale and/or marketing of wireless video or wireless data
communication services utilizing MMDS, MDS or ITFS frequencies (as defined at 47
C.F.R. 21.901 and 47 C.F.R. 74.902 or any successor regulation or statute),
including, without limitation, wireless cable television and direct broadcast
satellite businesses or any other installing, licensing, selling or marketing
services in which Heartland, directly or indirectly through one or more
Subsidiaries, engages.
2. Employment and Term.
(a) Heartland hereby agrees to employ Executive as its
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
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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.
(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.
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(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.
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
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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(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.
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(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.
(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,
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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 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
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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 giving rise to Executive's
termination (and, if curable, the action required to cure same) and will permit
Executive thirty (30) days to cure such failure to comply or perform and an
opportunity to discuss the facts and circumstances regarding the Notice of
Termination with the Board of Directors. Executive's termination for Cause shall
be effective as of the date specified in the Notice of Termination or, if
Executive's failure to comply is curable, shall be effective within thirty (30)
days following Executive's receipt of a Notice of Termination for Cause unless
Executive has cured the facts or circumstances giving rise to Executive's
termination for Cause.
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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.
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.
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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 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 7 of this Agreement shall survive indefinitely any
termination of this Agreement. The foregoing is without prejudice to express
time periods set forth in other sections of this Agreement.
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.
11
<PAGE> 12
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/ C. D. McHenry
------------------------------ -----------------------------------
Name: John A. Sprague Signature
Title: Director
12
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