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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 1995.
Commission file number 0-26836
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WIRELESS ONE, INC.
(Exact name of registrant as specified in its charter)
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Delaware 72-1300837
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11301 Industriplex, Suite 4, Baton Rouge, LA 70809-4115
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (504) 293-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
----------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 21, 1996 at a closing sale price of $14.25 as reported by
the Nasdaq National Market was approximately $81,626,237.
As of March 21, 1996, the Registrant had 13,498,752 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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WIRELESS ONE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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PAGE NO.
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PART I ........................................................................................... 1
Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 21
Item 3. Legal Proceedings......................................................... 21
Item 4. Submission of Matters to a Vote of Security-Holders....................... 21
Item 4A. Executive Officers of the Registrant...................................... 22
PART II........................................................................................... 23
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 23
Item 6. Selected Financial Data................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 24
Item 8. Financial Statements and Supplementary Data............................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 30
PART III.......................................................................................... 30
Item 10. Directors and Executive Officers of the Registrant........................ 30
Item 11. Executive Compensation.................................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 30
Item 13. Certain Relationships and Related Transactions............................ 30
PART IV........................................................................................... 30
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........... 30
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The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, as filed with the Securities and Exchange Commission (the "SEC") on
March 29, 1996 and as amended by the Company's Form 10-K/A, as filed with the
SEC on , 1996 (the "Form 10-K") is hereby amended and restated in its
entirety as follows:
PART I
ITEM 1. BUSINESS.
OVERVIEW
The Company develops, owns and operates wireless cable television systems,
primarily in small to mid-size markets located in the southeastern United
States. Wireless cable television systems transmit programming via microwave
frequencies from a headend to a small receive-site antenna at each subscriber's
location. The Company has targeted 37 markets located in Texas, Louisiana,
Tennessee, Alabama, Georgia and Florida, representing approximately 4.7 million
households, approximately 3.4 million of which the Company believes can be
served by line-of-sight ("LOS") transmissions. LOS transmissions generally
require a direct, unobstructed transmission path from the central transmitting
antenna to an antenna located at the subscriber's location.
The Company targets small to mid-size markets with a significant number of
LOS households that are unpassed by traditional hard-wire cable. Many of these
households, particularly in rural areas, have limited access to local off-air
VHF/UHF programming (such as ABC, NBC, CBS and Fox), and typically do not have
access to subscription television service except via satellite receivers which
generally are more costly than wireless cable. The Company offers its
subscribers local off-air VHF/UHF programming, as well as HBO, Showtime, The
Disney Channel, ESPN, CNN, USA, WGN, WTBS, The Discovery Channel, The Nashville
Network, A&E and other programming services. The programming that the Company
offers in each market varies depending upon market conditions and the
availability of channel capacity. Generally, once a system is launched, the
Company increases channel offerings when possible. Substantially all of the
Company's subscribers have set-top converters that are addressable, which
enhances the Company's ability to offer subscribers pay-per-view services. The
Company markets its wireless cable service by highlighting four major
competitive advantages over traditional hard-wire cable services and other
subscription television alternatives: picture quality and reliability,
customer service, programming features and price.
The Company's targeted markets include (i) 13 markets in which the Company
currently has systems in operation (the "Operating Systems"), (ii) two markets
in which the Company's systems are currently under construction and in which
the Company expects to begin operations by April 1996, (iii) 10 near-term
launch markets in which the Company believes that it has obtained sufficient
wireless cable channel rights to launch commercially viable systems, and (iv)
12 long-term launch markets in which the Company believes that it has obtained
or expects to obtain, subject to necessary approvals by the Federal
Communications Commission (the "FCC"), sufficient wireless cable channel rights
to launch commercially viable systems. At December 31, 1995 and February 29,
1996, the Company's Operating Systems had approximately 7,525 and 10,372
subscribers, respectively.
In October 1995, the Company acquired (i) the wireless cable business
previously conducted by Wireless One Operating Company ("Old Wireless One") and
(ii) the wireless cable television assets and all related liabilities of
certain subsidiaries of Heartland Wireless Communications, Inc. ("Heartland")
with respect to certain of Heartland's markets (the "Heartland Division").
Unless the context otherwise requires, references herein to the "Company"
include (i) Wireless One, Inc. and its direct and indirect subsidiaries,
1
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including the operations of the Heartland Division subsequent to its
acquisition by the Company, and (ii) the business conducted by Old Wireless One
and its direct and indirect subsidiaries prior to the Company's acquisition of
the Heartland Division.
BUSINESS OPERATING STRATEGY
The Company's primary business objective is to develop, own and operate
wireless cable television systems in rural markets in which the Company
believes it can achieve positive system cash flow within 18 months after
commencing operations. The Company plans to further its business objective
through implementation of the following operating strategies.
Rural Market Focus. The Company obtains wireless cable channel rights and
locates operations in geographic clusters of small to mid-size markets that
have a significant number of households not currently passed by traditional
hard-wire cable. The Company believes that such markets have less competition
from alternative forms of entertainment and that wireless cable service is the
most economical subscription television alternative for many of these
households. The Company believes that it can commence service successfully in
most of its markets with as few as 12 wireless cable channels. Nevertheless,
the Company typically commences operations in a given market utilizing all of
the channels available to it at such time, which in most cases has exceeded 12.
This strategy gives the Company a leading position in its markets, facilitating
the Company's ability to acquire additional wireless cable channel rights in
such markets. In addition, the Company enjoys low labor costs in its rural
markets. Finally, the Company believes that its markets typically have a
stable base of potential subscribers that will enable it to maintain a
subscriber turnover rate of below 2% per month, as compared to a turnover rate
of approximately 3% per month typically experienced by traditional hard-wire
cable operators, resulting in reduced installation and marketing expenses.
Consequently, the Company believes that its rural market focus will enable it
to achieve positive system cash flow with relatively few subscribers.
Low Cost Structure. Wireless cable systems typically cost significantly
less to build and operate than traditional hard-wire cable systems. While both
traditional hard-wire cable operators and wireless cable operators must
construct a headend in each market, traditional hard-wire operators must
install an extensive network of co-axial or fiber optic cable, amplifiers and
related equipment (the "Cable Plant") in order to transmit signals from the
headend to subscribers. In contrast, once the headend is constructed, the
additional costs to add a subscriber are variable and are further offset by
installation fees paid by subscribers. Additionally, without a Cable Plant,
wireless cable operators typically incur lower system maintenance costs and
depreciation costs. At December 31, 1995, the Company estimates that each
additional wireless cable subscriber with a single set-top converter requires
an incremental capital expenditure of approximately $425, consisting of, on
average, $290 of materials and $135 of installation labor and overhead charges.
Managed Subscriber Penetration. The Company attempts to manage system
launch costs and subscriber growth in order to achieve positive system cash
flow rapidly. Within a system, the Company initially directs its marketing
efforts at households not currently passed by hard-wire cable. The Company
then expands its marketing efforts into the more competitive segments of the
market, targeting both passed and unpassed households.
Geographic Clusters and Economies of Scale. The Company believes that its
geographic clustering strategy will enable it to achieve cost savings through
economies of scale in management, sales and customer service.
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OPERATING SYSTEMS AND THE COMPANY'S MARKETS
The table below provides information regarding the Company's markets.
"Estimated Total Households" represents the Company's estimate of the total
households that are within the Company's service area (i.e., signal pattern).
"Estimated LOS Households" represents the Company's estimate of the households
that can receive the Company's signal after applying a discount to account for
those homes that the Company estimates will be unable to receive service due to
certain characteristics of the particular market, such as terrain and foliage.
The Company does not hold directly any of the FCC channel licenses.
Instead, the Company has acquired the right to transmit over those channels
under leases with holders of channel licenses and applicants for channel
licenses. Although the Company has obtained or anticipates that it will be
able to obtain access to a sufficient number of channels to operate
commercially viable wireless cable systems in its markets, if a significant
number of the Company's channel leases are terminated or not renewed, a
significant number of pending FCC applications in which the Company has rights
are not granted or the FCC terminates, revokes or fails to extend or renew the
authorizations held by the Company's channel lessors, the Company may be unable
to provide a commercially viable programming package to customers in some or
all of its markets. In addition, with the cooperation of the Company, certain
channel lessors may file applications with the FCC to modify certain channel
licenses in the near-term and long-term launch markets to allow for the
relocation of some channels from their currently authorized transmission site.
While the Company's leases with such licensees require their cooperation, it is
possible that one or more of such lessors may hinder or delay the Company's
efforts to use the channels in accordance with the Company's plans for the
particular market. Further, FCC interference protection requirements may impact
efforts to modify licenses.
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APPROXIMATE
SUBSCRIBERS
ESTIMATED ESTIMATED ACQUISITION OR CHANNELS AT
TOTAL LOS LAUNCH AT LAUNCH OR CURRENT DECEMBER 31,
HOUSEHOLDS/(1)/ HOUSEHOLDS/(1)/ DATE ACQUISITION/(2)/ CHANNELS/(2)/ 1995
--------------- --------------- ------------------ ----------------- ------------- -------------
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OPERATING SYSTEMS:
Brenham, Tx................. 42,931 38,638 February 1996 20 20 -
Bryan/College Station, Tx... 102,676 92,408 May 1995 31 32 1,445
Milano, Tx.................. 40,880 36,792 October 1995 20 20 1,297
Wharton, Tx................. 102,252 92,027 June 1994 20 21 1,579
Bunkie, La.................. 96,157 81,752 December 1995 20 20 62
Lafayette, La/(3)/.......... 180,277 144,222 January 1994 11 11 593
Lake Charles, La/(3)/....... 111,560 89,248 April 1994 17 23 487
Monroe, La.................. 114,137 87,885 October 1995 10 23 829
Gainesville, Fl............. 121,768 93,761 January 1996 14 14 -
Panama City, Fl............. 108,327 83,412 September 1995 23 23 442
Pensacola, Fl............... 230,122 184,098 July 1995 28 28 658
Jeffersonville, Ga.......... 189,321 145,777 March 1996 20 20 -
Tullahoma, Tn............... 151082 76,498 November 1995 20 20 133
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Total Operating Systems..... 1,591,490 1,246,518 7,525
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ESTIMATED TOTAL ESTIMATED LOS EXPECTED CHANNELS AT
HOUSEHOLDS/(1)/ HOUSEHOLDS/(1)/ LAUNCH/(2)(5)/
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SYSTEMS UNDER CONSTRUCTION/(4)/:
Bucks, Al/(6)/........................................ 150,802 113,102 20
Fort Walton Beach, Fl................................. 64,216 54,584 19
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Total Systems Under Construction............... 215,018 167,686
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ESTIMATED TOTAL ESTIMATED LOS EXPECTED CHANNELS AT
HOUSEHOLDS/(1)/ HOUSEHOLDS/(1)/ LAUNCH/(2)(5)/
------------------ ----------------- --------------------
NEAR-TERM LAUNCH MARKETS/(7)/:
Bedias/Huntsville, Tx....................... 74,681 67,213 20
Freeport, Tx................................ 140,116 126,104 16
Houma, La................................... 81,741 69,480 26
Alexandria, La.............................. 31,683 25,864 23
Ruston, La.................................. 44,697 26,968 18
Chattanooga, Tn............................. 257,082 133,734 18
Florence, Al................................ 112,820 82,358 20
Tarboro, Ga................................. 81,492 52,970 20
Ocala, Fl................................... 284,926 227,940 15
Tallahassee, Fl............................. 149,368 104,558 16
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Total Near-Term Launch Markets....... 1,258,606 917,189
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ESTIMATED TOTAL ESTIMATED LOS EXPECTED CHANNELS AT
HOUSEHOLDS/(1)/ HOUSEHOLDS/(1)/ LAUNCH/(2)(5)/
------------------ ----------------- -------------
LONG-TERM LAUNCH MARKETS/(9)/:
Abita Springs, La/(10)/................... 219,915 175,948 20
Amite, La/(11)/........................... 99,208 74,404 20
Baton Rouge, La/(12)/..................... 261,691 201,501 15
Bankston, Al.............................. 103,570 51,112 20
Selma, Al................................. 158,661 109,535 16
Six Mile, Al.............................. 96,424 43,287 16
Charing, Ga............................... 156,371 78,336 16
Groveland, Ga/(8)/........................ 172,802 112,321 16
Hoggards Mill, Ga......................... 77,005 57,753 20
Matthews, Ga.............................. 170,271 85,136 20
Valdosta, Ga.............................. 110,381 77,267 16
Marianna, Fl.............................. 56,734 39,714 20
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Total Long-Term Launch Markets..... 1,683,033 1,106,314
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COMPANY TOTALS.................. 4,748,147 3,437,707
========= =========
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(1) Estimated Total Households represents the Company's estimate of the total
households that are within the Company's service area. Estimated LOS
Households represents the Company's estimate of the households that can
receive the Company's signal after applying a discount to account for those
homes that the Company estimates will be unable to receive service due to
certain characteristics of the particular market, such as terrain and
foliage.
(2) Includes local off-air VHF/UHF channels, some or all of which may be
retransmitted by the Company via wireless cable frequencies.
(3) The Company is not actively marketing, and does not currently intend to
actively market, its service in the Lafayette and Lake Charles markets
until an increase in the channel offering is achieved, which the Company
expects to occur within 3 months from the date hereof.
(4) Systems Under Construction include markets in which the system headend is
under construction and in which the Company expects to complete
construction and begin operations by the end of April 1996.
(5) Expected Channels at Launch includes channels with respect to which the
Company has a lease with a channel license holder or applicant for a
channel license or with a qualified, non-profit educational organization
that has filed an application for an ITFS license. There can be no
assurance that applications for channel licenses will be granted.
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(6) Household count based on operation at 50 watts. The present operating
signal pattern covers an estimated 42,766 total households and an estimated
38,628 LOS households.
(7) Near-Term Launch Markets include markets in which the Company has obtained
sufficient wireless cable channel rights to launch commercially viable
systems.
(8) A petition to deny applications for extension of time to construct eight
channels is pending before the FCC. The outcome of this matter cannot be
determined.
(9) Long-Term Launch Markets include markets in which the Company has obtained
or expects to obtain, subject to necessary FCC approvals, sufficient
wireless cable channel rights to launch commercially viable systems.
(10) Approximately 50% of the Company's LOS households in this market will
require high gain receive-site equipment to avoid interference from an
adjacent wireless cable system.
(11) The Company's channel rights in this market consist of channel lease
agreements with educational institutions which have filed ITFS
applications with the FCC in October 1995. There can be no assurance that
the applications for channel rights will be granted.
(12) An existing wireless cable operator is serving approximately 300
subscribers in this market with an 11 channel MDS system. The Company's
ITFS applications for the market are subject to comparative disposition
with competing applications. The outcome of that disposition cannot be
reliably projected at this time.
Operating Systems
Brenham System. The Company launched service in the Brenham, Texas System
in February 1996. The Brenham System serves portions of Washington, Austin,
Waller, Burleson, Lee, Fayette and Colorado counties in Texas. The Brenham
System did not have any subscribers at December 31, 1995.
The Company leases 20 of the wireless cable channels available for the
Brenham market. The Company transmits on all 20 channels. The Brenham System
currently offers an 18 channel basic package, including five local off-air
VHF/UHF channels which are being retransmitted, for $19.95 per month. In
addition, a subscriber may purchase one premium service channel, HBO, for
$9.95. The Brenham System also offers one pay-per-view channel. The Brenham
System transmits at 10 watts of power from the 500 foot level of a 709 foot
tower, located .2 miles southwest of Brenham, Texas. The Brenham System's
signal pattern covers a radius of approximately 40 miles, encompassing
approximately 42,931 households, of which the Company believes approximately
38,638 can be served by LOS transmissions. The principal hard-wire cable
competitor in the city of Brenham is Northland Cable TV.
Bryan/College Station System. The Company launched service in the
Bryan/College Station, Texas System in May 1995. The Bryan/College Station
System serves all of Brazos, Grimes and Burleson counties and parts of
Washington, Madison, Robertson, Milano and Lee counties in Texas. The
Bryan/College Station System had approximately 1,445 subscribers on December
31, 1995, primarily in single-family homes.
The Company leases 32 of the wireless cable channels available for the
Bryan/College Station market. The Company transmits on all 32 of these
channels. The Bryan/College Station System currently offers a 27 channel basic
package, including five local off-air VHF/UHF channels which are being
retransmitted, for $19.95 per month. In addition, a subscriber may purchase
four premium service channels, HBO, The Disney Channel, Showtime and Starz, for
$9.95, $5.95, $6.95 and $4.95 per month, respectively. The Bryan/College
Station System also offers one pay-per-view channel. The Bryan/College Station
System transmits at 10 watts of power from the 484 foot level of a 499 foot
tower, three miles southwest of Bryan/College Station. The Bryan/College
Station System's signal pattern covers a radius of approximately 40 miles,
encompassing approximately 102,700 households, of which the Company believes
approximately 92,400 can be served by LOS transmissions. The principal hard-
wire cable competitor in the city of Bryan/College Station is TCA Cable TV,
Inc.
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Milano System. The Company acquired the Milano, Texas System in October
1995. Prior thereto, the Milano System was operated by Heartland since
December 1994. The Milano System serves all of the Milano area and parts of
Milam, Burleson, Bell and Brazos counties. The Milano System had approximately
1,297 subscribers on December 31, 1995, primarily in single-family homes.
The Company leases 20 of the wireless cable channels available for the
Milano market. The Company transmits on all 20 of these channels. The Milano
System currently offers an 18 channel basic package, including five local off-
air VHF/UHF channels which are being retransmitted, for $19.95 per month. In
addition, a subscriber may purchase one premium service channel, HBO, for
$9.95 per month. The Milano System also offers one pay-per-view channel. The
Milano System transmits at 10 watts of power from the 695 foot level of a 700
foot tower, two miles northeast of Milano. The Milano signal pattern covers a
radius of approximately 39 miles, encompassing approximately 40,900
households, of which the Company believes approximately 36,800 can be served
by LOS transmissions. The principal hard-wire cable competitor in the city of
Milano is Cable Video Enterprises.
Wharton System. The Company launched service in the Wharton, Texas
System in June 1994. The Wharton System serves all of Wharton county and parts
of Fort Bend, Matagorda, Brazoria and Colorado counties. The Wharton System
had approximately 1,579 subscribers on December 31, 1995, primarily in single-
family homes.
The Company leases 21 of the wireless cable channels available for the
Wharton market. The Company transmits on all 21 of these channels. The
Wharton System currently offers an 18 channel basic package, including five
local off-air VHF/UHF channels which are being retransmitted, for $19.95 per
month. In addition, a subscriber may purchase two premium service channels,
HBO and Showtime, for $10.95 and $6.95 per month, respectively. The Wharton
System also offers one pay-per-view channel. The Wharton System transmits at
50 watts of power from the 436 foot level of a 440 foot tower, 4.2 miles
southeast of Wharton. The Wharton System's signal pattern covers a radius of
approximately 39 miles, encompassing approximately 102,300 households, of
which the Company believes approximately 92,000 can be served by LOS
transmissions. The principal hard-wire cable competitor in the city of Wharton
is Falcon Cable.
Bunkie System. The Company launched service in the Bunkie, Louisiana
System in December 1995. The Bunkie System serves all of Evangeline parish and
parts of Acadia, Allen, Avoyelles, Point Coupee, Rapides and St. Landry
parishes in Louisiana. The Bunkie System had approximately 62 subscribers on
December 31, 1995, primarily in single-family homes.
The Company leases 20 of the wireless cable channels available for the
Bunkie market. The Bunkie System currently offers an 18 channel basic package,
including five local off-air VHF/UHF channels which are being retransmitted,
for $19.95 per month. In addition, a subscriber may purchase one premium
service channel, HBO, for $9.95 per month. The Bunkie System also offers one
pay-per-view. The Bunkie System transmits at 50 watts of power from the 705
foot level of a 709 foot tower, located 3.1 miles east of Bunkie, Louisiana.
The Bunkie System's signal pattern covers a radius of approximately 40 miles,
encompassing approximately 96,157 households, of which the Company believes
approximately 81,752 can be served by LOS transmissions. The principal hard-
wire competitor is the city of Bunkie's Laribay Cablevision Limited.
Lafayette System. The Company launched service in the Lafayette,
Louisiana System in January 1994. The Lafayette System serves all of
Lafayette, St. Martin, Iberia, Vermillion and Acadia parishes, and parts of
St. Landry and St. Mary parishes in Louisiana. The Lafayette System had
approximately 593 subscribers on December 31, 1995, primarily in single-family
homes.
6
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The Company leases 30 of the wireless cable channels available for the
Lafayette market. The Company transmits on six of these channels. Collocation
applications were recently granted for four channels. Collocation applications
are pending for 12 additional channels. New station applications are pending
for eight channels. The Lafayette System currently offers an 11 channel basic
package, consisting of six wireless cable channels and five local off-air
VHF/UHF channels, for $15.95 per month. The Lafayette System transmits at 10
watts of power from the 220 foot level of a 228 foot tower, 2.8 miles west
of Lafayette. The Company has filed and anticipates approval of modification
applications to increase to 50 watts of power, to transmit at the 588 foot
level of a 604 foot tower and to move 8.6 miles south of Lafayette. Upon such
modifications, the Lafayette System's signal pattern will cover a radius of
approximately 38 miles, encompassing approximately 180,300 households, of which
the Company believes approximately 144,200 can be served by LOS transmissions.
These LOS household counts do not differ materially from the Company's present
transmission site. The principal hard-wire cable competitor in the city of
Lafayette is TCA Cable TV, Inc.
Lake Charles System. The Company launched service in the Lake Charles,
Louisiana System in April 1994. The Lake Charles System serves all of
Calcasieu, Jefferson Davis and Cameron parishes, and parts of Beauregard and
Allen parishes in Louisiana. The Lake Charles System had approximately 487
subscribers on December 31, 1995, primarily in single-family homes.
The Company leases 31 of the wireless cable channels available for the
Lake Charles market. The Company transmits on nine of these channels.
Collocation applications were recently granted for two channels. New station
applications are pending for the remaining twenty channels. The Lake Charles
System currently offers a 16 channel basic package, consisting of eight
wireless cable channels and eight local off-air VHF/UHF channels, for $19.95
per month. In addition, a subscriber may purchase one premium service channel,
HBO, for $9.95 per month. The Lake Charles System transmits at 50 watts of
power from the 407 foot level of a 411 foot tower, 5.5 miles west of Lake
Charles. Applications have been filed to operate the remaining 20 channels at
50 watts of power from the same tower. The Lake Charles System's signal
pattern covers a radius of approximately 38 miles, encompassing approximately
111,600 households, of which the Company believes approximately 89,200 can be
served by LOS transmissions. The principal hard-wire cable competitor in the
city of Lake Charles is TCI Cable TV, Inc.
Monroe System. The Company acquired the Monroe System in October 1995.
Heartland completed construction of the Monroe System in March 1993. The
Monroe System had approximately 829 subscribers on December 31, 1995, primarily
in single-family homes.
The Company leases 29 of the wireless cable channels available for the
Monroe market. The Company transmits on 17 of these channels and new station
applications are pending for the remaining 12 channels. Four of these channels
also are subject to an administrative petition that, if granted, could result
in the loss of the license therefor. The Monroe System currently offers a 21
channel basic package, consisting of 15 wireless cable channels and six local
off-air VHF/UHF broadcast channels, for $19.95 per month. In addition, a
subscriber may purchase one premium service channel, HBO, for $9.95 per month.
The Monroe System also offers one pay-per-view channel. The Monroe System
transmits at 50 watts of power from the 650 foot level of a 906 foot tower,
located 10.0 miles north of Monroe. The Monroe System's signal pattern covers
a radius of approximately 39 miles, encompassing approximately 114,140
households, of which the Company believes approximately 87,900 can be served by
LOS transmissions. The principal hard-wire cable competitor in the city of
Monroe is Louisiana Cablevision.
Gainesville System. The Company launched service in the Gainesville,
Florida System in January 1996. The Gainesville System serves parts of Clay,
Duval, Gilchrist, Dixie, Levy, Lafayette, Putnam,
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Swannee, Hamilton and Marion and all of Alachua, Bradford, Baker, Columbia and
Union counties in Florida. The Gainesville System did not have any subscribers
on December 31, 1995.
The Company leases 26 of the wireless cable channels available for the
Gainesville, Florida market. The Company transmits on 14 of these channels and
has modification applications pending for the remaining 12 channels. The
Gainesville System currently offers a 13 channel basic package, including four
local off-air VHF/UHF channels which are being retransmitted, for $15.95 per
month. In addition, a subscriber may purchase one premium channel, HBO, for
$9.95. The Gainesville System transmits at 50 watts of power from the 706 foot
level of a 709 foot tower, located 24.0 miles southeast of Lake City, Florida.
The Gainesville System's signal pattern covers a radius of approximately 40
miles, encompassing approximately 121,800 households, of which the Company
believes approximately 93,760 can be served by LOS transmissions. The principal
hard-wire cable competitor in the area of Gainesville is Warner Cable.
Pensacola System. The Company launched service in the Pensacola, Florida
System in July 1995. The Pensacola System serves all of Escambia and Santa Rosa
counties in Florida, and parts of Okaloosa and Baldwin counties in Alabama.
The Pensacola System had approximately 658 subscribers on December 31, 1995,
primarily in single-family homes.
The Company leases 28 of the wireless cable channels available for the
Pensacola market. The Company transmits on all 28 of these channels. The
Pensacola System currently offers a 22 channel basic package, including six
local off-air VHF/UHF channels which are being retransmitted, for $19.95 per
month. In addition, a subscriber may purchase two premium services, HBO and a
five channel Showtime package, for $9.95 and $10.95 per month, respectively.
The Pensacola System transmits at 50 watts of power from the 493 foot level of
a 499 foot tower, located 11.0 miles north of Pensacola. The Pensacola
System's signal pattern covers a radius of approximately 38 miles, encompassing
approximately 230,100 households, of which the Company believes approximately
184,100 can be served by LOS transmissions. The principal hard-wire cable
competitor in the city of Pensacola is Cox Cable Communications.
Panama City System. The Company launched service in the Panama City,
Florida System in September 1995. The Panama City System serves all of Bay
County and parts of Calhoun, Gulf Holmes, Jackson, Walton and Washington
counties in Florida. The Panama City System had approximately 442 subscribers
on December 31, 1995, primarily in single-family homes.
The Company leases 27 of the wireless cable channels available for the
Panama City market. The Company transmits on 23 of these channels. An
application for a license for the remaining four channels was dismissed by the
FCC and is subject to an administrative petition to reinstate. The Panama City
System currently offers a 21 channel basic package, including five off-air
VHF/UHF channels which are being retransmitted, for $19.95 per month. In
addition, a subscriber may purchase HBO for $9.95 per month and Showtime for
$6.95 per month. The Panama City System transmits at 50 watts of power from
the 450 foot level of a 500 foot tower, located 9.7 miles north of Panama City.
The Panama City System's signal pattern covers a radius of approximately 40
miles, encompassing approximately 108,300 households, of which the Company
believes approximately 83,400 can be served by LOS transmissions. The
principal hard-wire cable competitor in the city of Panama City is Comcast.
Jeffersonville System. The Company launched service in the
Jeffersonville, Georgia System in March 1996. The Jeffersonville System serves
portions of Laurens, Pulaski, Peach, Macon, Crawford, Monroe, Jones, Baldwin
and Johnson and all of Beckly, Wilkinson, Houston, Twiggs and Bibb counties in
Georgia. The Jeffersonville System did not have any subscribers at December 31,
1995.
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The Company leases 20 of the wireless cable channels available for the
Jeffersonville, Georgia market. The Company transmits on all 20 channels. The
Jeffersonville System currently offers an 18 channel basic package, including
five local off-air VHF/UHF channels which are being retransmitted, for $19.95
per month. In addition, a subscriber may purchase one premium service channel,
HBO, for $10.95. The Jeffersonville System also offers one pay-per-view
channel. The Jeffersonville System transmits at 50 watts of power from the 706
foot level of a 709 foot tower, located 3.3 miles northeast of Jeffersonville,
Georgia. The Jeffersonville System's signal pattern covers a radius of
approximately 39 miles, encompassing 189,321 households, of which the Company
believes approximately 145,777 can be served by LOS transmissions. The
principal hard-wire cable competitor in the area of Jeffersonville is Cox
Cable.
Tullahoma System. The Company launched service in the Tullahoma,
Tennessee System in November 1995. The Tullahoma System serves parts of
Coffee, Cannon, Bedford, Moore, Franklin, Grundy and Warren counties in
Tennessee. The Tullahoma System had approximately 133 subscribers on December
31, 1995, primarily in single-family homes.
The Company leases 20 of the wireless cable channels available for the
Tullahoma, Tennessee market. The Company transmits on all 20 channels. The
Tullahoma System currently offers an 18 channel basic package, including five
local off-air VHF/UHF channels which are being retransmitted, for $19.95 per
month. In addition, a subscriber may purchase one premium service channel,
HBO, for $9.95. The Tullahoma System also offers one pay-per-view channel.
The Company transmits at 10 watts of power from the 751 foot level of a 755
foot tower, located 7.5 miles east of Tullahoma, Tennessee. The Tullahoma
System's signal pattern covers a radius of approximately 40 miles, encompassing
approximately 151,082 households, of which the Company believes approximately
76,498 can be served by LOS transmissions. The principal hard-wire cable
competitor in the city of Tullahoma is Tullahoma Cablevision.
Systems Under Construction
The Company currently has two additional systems under construction, which
are located in Bucks, Alabama and Fort Walton Beach, Florida. In each of the
systems, the Company will have ordered substantially all of the equipment
necessary to transmit on its channels in such markets by April 1996.
The Company currently leases 20 of the wireless cable channels available
for the Bucks, Alabama market. All 20 channels are granted and collocated.
The Company expects to launch this system by April 1996. The Company will
transmit at 10 watts of power from the 853 foot level of a 859 foot tower,
located 9.6 miles northwest of Bucks, Alabama. The Bucks System's signal
pattern covers a radius of approximately 36 miles, encompassing 150,802
households, of which the Company believes approximately 113,102 can be served
by LOS transmissions. The principal hard-wire cable competitor in the area of
Bucks is Cablevision.
The Company currently leases 23 of the wireless cable channels available
for the Fort Walton Beach, Florida market. Fifteen of these channels are
granted and collocated. Eight of these channels are subject to pending
modification applications. The Company expects to launch this system by April
1996. The Company will transmit at 50 watts of power from the 276 foot level
of a 279 foot tower, located approximately four miles northeast of Fort Walton
Beach, Florida. The Fort Walton Beach System's signal pattern covers a radius
of approximately 39 miles, encompassing 64,216 households, of which the Company
believes approximately 54,584 can be served by LOS transmissions. The
principal hard-wire cable competitor in the area of Fort Walton Beach is
Emerald Coast Cable.
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Near-term and Long-term Launch Markets
In these markets, the Company has obtained or expects to obtain, subject
to necessary FCC approvals, sufficient wireless cable channel rights to launch
commercially viable systems. In the near-term launch markets, the Company
believes that it has obtained such wireless cable channel rights. Many of the
Company's channel rights in the long-term launch markets are in the form of
lease agreements with qualified, non-profit educational organizations that have
licenses for channels ("ITFS" channels) which must be modified by the FCC to be
utilized by the Company as planned, that have pending applications for ITFS
channels that have not yet been granted or for which application to the FCC has
yet to be made. The Company is considering modifying certain channel licenses
in near-term and long-term markets to allow for the relocation of some channels
from their currently authorized or proposed transmission sites. While
management believes that the relocation would increase the total number of
potential subscribers in those systems, the Company does not intend to delay
construction of a new system if the modifications are not approved by the FCC.
Currently, the FCC will not accept applications for new ITFS licenses or
"major" modifications of ITFS licenses which affects channel rights in several
of the Company's long-term launch markets. A five-day window for filing ITFS
applications was most recently completed on October 20, 1995, in which the
Company's lessors filed the majority of the applications required to effectuate
its long-term launch plans. The Company's currently pending ITFS applications
are expected to undergo review by FCC engineers and staff attorneys over the
next 24 months. If the FCC staff determines that an application meets certain
basic technical and legal qualifications, the staff will then determine whether
the application proposes facilities that would result in signal interference to
facilities proposed in other pending applications. If so, the conflicting
applications undergo a comparative selection process. The FCC's ITFS
application selection process is based on a set of objective criteria that
includes whether an applicant is located in the community to be served and is
an accredited educator proposing to serve its own students. Historically, the
outcome of the selection process when two or more qualified applicants are
competing for the same channels has been somewhat predictable based on the
particular facts and circumstances. A small portion of the Company's lease
agreements involve applications for channel licenses for which competing
applications have been filed. The Company therefore anticipates that a
substantial number of the pending applications will be granted. However, given
the considerable number of applications involved, no assurance can be given as
to the precise number of applications that will be granted. The failure of the
Company to obtain a sufficient number of channel rights in a particular market
could have a material adverse effect on the growth of the Company.
The Company currently expects to construct and to begin operations in 10
near-term launch markets by the end of 1996 and 11 additional markets in 1997.
Construction will entail the construction of a transmission building near a
transmission tower and the installation of transmission equipment and, in
certain cases, the construction of the transmission tower. The construction of
the transmission facility will enable the Company to launch wireless cable
service in such markets. For the remaining markets, the Company expects to
begin operations by the end of 1998. The Company is analyzing the appropriate
construction schedule for the remaining near-term launch markets and for the
remaining long-term launch markets. This analysis is being performed based
upon multiple factors including, but not limited to, the expiration dates of
channel leases and FCC construction authorizations, the number of potential
subscribers in each market, the availability of capital and the proximity of a
market to operating systems and other markets ready for construction. In
managing its wireless cable channel assets, the Company may, at its option,
trade or exchange existing channel rights in order to acquire, directly or
indirectly, channel rights in markets that have a greater strategic value to
the Company.
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Other Potential Markets
In addition to the Company's markets described above, the Company
continually evaluates other potential markets in which to implement its
business strategy, either independently or through one or more strategic
alliances. The Company is currently attempting to acquire a sufficient number
of wireless cable channel rights to operate commercially viable wireless cable
systems in additional markets and is currently participating in the auction for
the award of wireless cable channels that can be owned by for-profit entities
("MDS" channels), which commenced on November 13, 1995. The Company
anticipates acquiring additional channel rights in the States of Kentucky and
South Carolina through the auction process. In addition, the Company has
entered into channel lease agreements with local, accredited educational
institutions in several such markets that have filed ITFS applications with the
FCC relating to such markets. Through its 50% owned joint venture, the Company
has filed for ITFS channels across the State of North Carolina and expects to
acquire MDS channels in 6 to 9 markets in North Carolina through the auction
process. No assurance can be given that the Company will acquire a sufficient
number of wireless cable channel rights to operate commercially viable wireless
cable systems in such markets or that the Company will have sufficient capital
resources to construct, launch and finance the addition of subscribers in such
markets in the event the Company does obtain such wireless cable channel
rights.
SYSTEM COSTS
The Company estimates that the current cost per market for transmission
(or headend) equipment and a headend build-out in a typical 20 channel system
will be approximately $570,000. The additional cost to expand a system to a
full 32 channels is approximately $180,000. At December 31, 1995, the Company
estimates that each additional wireless cable subscriber with a single set-top
converter requires an incremental capital expenditure of approximately $425,
consisting of, on average, $290 of materials and $135 of installation labor and
overhead charges.
The operating costs for wireless cable systems are generally lower than
those for comparable traditional hard-wire systems. This is attributable to
lower system network maintenance and depreciation expense. Programming is
generally available to traditional hard-wire and wireless cable operators on
comparable terms, although operators that have a smaller number of subscribers
often are required to pay higher per subscriber fees. Accordingly, operators
in the initial operating stage generally pay higher programming fees on a per
subscriber basis. The Company believes that its markets typically have a
stable base of potential subscribers that will enable it to maintain a
subscriber turnover rate of below 2% per month, as compared to a turnover rate
of approximately 3% per month typically experienced by traditional hard-wire
cable operators, resulting in reduced installation and marketing expenses. By
locating its operations in geographic clusters, the Company believes that it
can further contain costs by taking advantage of economies of scale in
management, sales and customer service. For each Operating System, the Company
employs a general manager, salespersons and installation and repair personnel.
All other functions are centralized, including engineering, marketing, billing,
customer service, finance and administration.
MARKETING AND CUSTOMER SERVICE
The Company markets its wireless cable service by highlighting for major
competitive advantages over traditional hard-wire cable services and other
subscription television alternatives: picture quality and reliability, customer
service, programming features and price.
Picture Quality and Reliability. Wireless cable subscribers enjoy
substantially outage-free, highly reliable picture quality because there is no
Cable Plant between the headend and the subscriber's location, as in the case
of traditional hard-wire cable. Within the signal range of the Operating
Systems, the picture
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quality of the Company's service is generally equal or
better in quality to that typically received by traditional hard-wire cable
subscribers because, absent any LOS obstruction, there is less opportunity for
signal degradation between the Company's headend and the subscriber.
Customer Service. The Company has established the goal of maintaining
high levels of customer satisfaction. In furtherance of that goal, the Company
emphasizes responsive customer service and convenient installation scheduling.
The Company has established customer retention and referral programs in an
effort to obtain and retain new subscribers. Because traditional hard-wire
cable companies enjoyed virtual monopolies in the past, few have had an
incentive to provide as high levels of customer service as the Company
provides. The regulations promulgated under the 1992 Cable Act require
traditional hard-wire cable companies to provide improved customer service
which may decrease the Company's competitive advantage in this area.
Programming Features. In the Operating Systems and systems under
construction, the Company believes that it has assembled sufficient channel
rights and programming agreements to provide a programming package competitive
with those offered by traditional hard-wire cable operators. Additionally, the
Company uses equipment which (when channel availability is sufficient) enables
it to offer pay-per-view programming and addressability not currently offered
by many of the rural hard-wire cable operators with which it competes.
Price. The Company offers its subscribers a programming package
consisting of basic service, enhanced basic service and premium programs. The
Company can offer a price to its subscribers for basic service and enhanced
basic service that is typically lower than prices for the same services offered
by traditional rural hard-wire cable operators because of lower capital and
operating costs. The rates charged by cable operators for their programming
services are regulated pursuant to the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act"), as modified by the
Telecommunications Act of 1996 (the "1996 Act"). The Company is unable to
predict precisely what effect FCC rate regulations will have on the rates
charged by traditional hard-wire cable operators. Notwithstanding the
regulations, however, the Company believes it will continue to be price
competitive with traditional hard-wire cable operators with respect to
comparable programming.
EMPLOYEES
As of December 31, 1995, the Company had a total of 179 employees, of whom
142 are employed by the Company's subsidiaries. None of the Company's
employees is subject to a collective bargaining agreement. The Company has
experienced no work stoppages and believes that it has good relations with its
employees. The Company also utilizes the services of unaffiliated independent
contractors to build and install its wireless cable systems and to market its
service.
WIRELESS CABLE INDUSTRY
SUBSCRIPTION TELEVISION INDUSTRY
The subscription television industry began in the late 1940s to serve the
needs of residents in predominantly rural areas with limited access to local
off-air VHF/UHF channels. At that time, the industry was limited to "community
antenna relay" systems which received off-air television broadcasts and
transmitted them to homes via cable. Over time, cable television expanded to
metropolitan areas due to, among other things, the fact that it offered
subscribers better reception and more programming. Currently, subscription
television systems offer various types of programming, which generally include
basic service, enhanced basic service, premium service and, in some instances,
pay-per-view service.
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A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from area to area and is a function, in part, of the
number of channels and services included in the basic service package and the
cost of such services to the subscription television system operator. In most
instances, a separate monthly fee for each premium service and certain other
specific programming is charged to customers, with discounts generally
available to customers receiving multiple premium services. Monthly service
fees for basic, enhanced basic, premium and pay-per-view services constitute
the major source of revenue for subscription television systems. Subscribers
typically are free to discontinue service at any time. Converter rentals,
remote control rentals, advertising revenues, connection charges and
reconnection charges for customers who were previously disconnected are also
included in a subscription television system's revenues, but generally are not
a major component of such revenues.
TRADITIONAL HARD-WIRE CABLE TECHNOLOGY
Most subscription television systems are traditional hard-wire cable
systems which use coaxial cable to transmit television signals. Traditional
hard-wire cable operators receive, at a headend, signals of programming
services, such as CBS, NBC, ABC, HBO, Cinemax and CNN, which have been
transmitted to such operators by broadcast or satellite. A headend consists of
signal reception, decryption, retransmission, encoding and related equipment.
The operator delivers the signal from the headend to customers via a Cable
Plant. As a direct result of the use of a Cable Plant to deliver signals
throughout a service area, traditional hard-wire cable systems are susceptible
to signal quality problems. Signals can only be transmitted via coaxial cable
a relatively short distance without amplification. Each time a television
signal passes through an amplifier, some measure of noise is added. A series
of amplifiers between the headend and the viewing customer leads to
progressively greater noise and, accordingly for some viewers, a noticeably
degraded picture. Also, an amplifier must be properly balanced or the signal
may be improperly amplified. Failure of any one amplifier in the chain of a
Cable Plant will black out the transmission signal from that point on. Regular
system maintenance is required due to water ingress, temperature changes and
equipment failures, all of which may affect the quality of the picture
delivered to subscribers. Some traditional hard-wire cable operators have
begun installing fiber optic networks which will substantially reduce the
transmission and reception problems currently experienced by traditional hard-
wire cable systems and will expand the channel capacity of such systems. The
installation of such fiber optic networks will require a substantial investment
by such operators.
WIRELESS CABLE TECHNOLOGY
The wireless cable industry was made commercially possible in 1983 when
the FCC reallocated a portion of the electromagnetic radio spectrum located
between 2500 and 2686 MHZ, permitted this spectrum to be used for commercial
purposes and modified its rules on the usage of the remaining portion of such
spectrum. Nevertheless, regulatory and other obstacles impeded the growth of
the wireless cable industry through the remainder of the 1980s. In addition,
before the 1992 Cable Act became effective, the availability of some
programming from hard-wire cable-controlled programmers was not assured. The
factors contributing to the increasing growth of wireless cable systems since
the effectiveness of the 1992 Cable Act include (i) regulatory reforms by the
FCC to facilitate competition with hard-wire cable, (ii) increasing
availability of programming for wireless cable systems, (iii) consumer demand
for alternatives to traditional hard-wire cable service, (iv) increasing
accumulation by wireless cable operators of a sufficient number of channels in
each market to offer a competitive service and (v) increased availability of
capital to wireless cable operators in the public and private markets.
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Wireless cable can provide subscribers the same or superior video
television signal as that provided by traditional hard-wire cable. Like a
traditional hard-wire cable system, a wireless cable system receives
programming at a headend. Unlike traditional hard-wire cable systems, however,
the programming is then retransmitted by microwave from an antenna located on a
tower associated with the headend to a small receive antenna located at a
subscriber's premises. At the subscriber's premises, the signals are converted
to frequencies that can pass through conventional coaxial cable into a
descrambling converter located on top of a television set. Wireless cable
requires a clear LOS because the microwave frequencies used will not pass
through dense foliage, hills, buildings or other obstructions. Some of these
obstructions can be overcome with the use of signal repeaters which retransmit
an otherwise blocked signal over a limited area. Because wireless cable
systems do not require a Cable Plant, wireless cable operators can provide
subscribers with a high quality picture with few transmission disruptions at a
significantly lower system capital cost per installed subscriber than
traditional hard-wire cable systems.
To ensure the clearest LOS possible in the Company's markets, the Company
has placed, and plans to place, its headend antennas on top of tall structures
or accessible mountain tops located in its markets. There exists, in each of
the Company's markets, a number of acceptable locations for the placement of
headend antennas, and the Company does not believe that the failure to secure
any one location for such placement in any single market will materially
adversely affect the Company's operations in such market.
REGULATORY ENVIRONMENT
General. The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment and/or transfer of control of such licenses;
to approve the location of channels that comprise wireless cable systems; to
regulate the kind, configuration and operation of equipment used by wireless
cable systems; and to impose certain equal employment opportunity and other
reporting requirements on channel license holders and wireless cable operators.
The FCC has determined that wireless cable systems are not "cable systems"
for purposes of the Communications Act, and, therefore, a wireless cable system
does not require a local franchise and is subject to fewer local regulations
than a hard-wire cable system. Moreover, all transmission and reception
equipment for a wireless cable system can be located on private property;
hence, there is no need to make use of utility poles or dedicated easements or
other public rights of way. Although wireless cable operators typically must
lease the right to use wireless cable channels from the holders of channel
licenses, unlike hard-wire cable operators they do not have to pay local
franchise fees. Recently, legislation has been introduced in some states to
authorize state and local authorities to impose on all video program
distributors (including wireless cable distributors) a tax on the distributors'
gross receipts comparable to the franchise fees cable operators pay. Similar
legislation might be introduced in states where the Company does business or
intends to do business. While the proposals vary among states, all of the
proposed bills would require, if enacted, as much as 5% of gross receipts to be
paid by wireless cable operators to local authorities. The wireless cable
industry trade association is attempting to prevent the assessment of such
state taxes through federal preemptive legislation. In addition, the industry
is opposing the state bills as they are introduced, and in Virginia, it was
exempted from the video tax that was eventually enacted into law. However, it
is not possible to predict whether or not new state laws will be enacted which
impose new taxes on wireless cable operators.
Channels Available for Wireless Cable. The FCC licenses and regulates the
use of channels by wireless cable operators to transmit video programming,
entertainment services and other information. A maximum of 32 wireless cable
channels (constituting a spectrum bandwidth of 192 MHZ) may be
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authorized for use in a wireless cable market. The actual number of wireless
cable channels available for licensing at any one location is determined by the
FCC's interference-protection rules and by its channel allocation rules. In
each of the Company's operating or targeted markets, either up to 20 or 32
wireless cable channels are available for wireless cable (in addition to any
local off-air VHF/UHF channels which are not retransmitted over the wireless
cable channels). Except in limited circumstances, 20 wireless cable channels in
each of these geographic service areas are licensed to qualified, non-profit
educational organizations (commonly referred to as ITFS channels). In general,
each of these channels must be used an average of a minimum of 20 hours per
week for educational programming. The remaining "excess air time" on an ITFS
channel may be leased to wireless cable operators for commercial use, without
further restrictions (other than the right of the ITFS license holder, at its
option, to recapture up to an additional 20 hours of air time per week for
Wireless cable can provide subscribers the same or superior video television
signal as that provided by traditional hard-wire cable. Like a traditional
hard-wire cable system, a wireless cable system receives programming at a
headend. Unlike traditional hard-wire cable systems, however, the programming
is then retransmitted by microwave from an antenna located on a tower
associated with the headend to a small receive antenna located at a
subscriber's premises. At the subscriber's premises, the signals are converted
to frequencies that can pass through conventional coaxial cable into a
descrambling converter located on top of a television set. Wireless cable
requires a clear LOS because the microwave frequencies used will not pass
through dense foliage, hills, buildings or other obstructions. Some of these
obstructions can be overcome with the use of signal repeaters which retransmit
an otherwise blocked signal over a limited area. Because wireless cable systems
do not require a Cable Plant, wireless cable operators can provide subscribers
with educational programming). Certain program networks (e.g., Univision and
The Discovery Channel) provide educational programming and thereby may
facilitate greater usage by the Company of an ITFS channel. Also, a technique
known as "channel mapping" permits ITFS licensees to meet their minimum
educational programming requirements by transmitting educational programming
over several ITFS channels at different times, but in a manner which appears to
the viewer as one channel. As a result of recent FCC rule changes, lessees of
ITFS "excess air time," including the Company, generally have the right to
transmit to their customers the educational programming on one or more of their
ITFS channels, thereby providing wireless cable operators leasing such
channels, including the Company, with greater flexibility in their use of ITFS
channels. The remaining 12 wireless cable channels (commonly referred to as MDS
or commercial channels) available in most of the Company's operating and
targeted markets are made available by the FCC for full-time commercial usage
without programming restrictions. There is no FCC-imposed restriction on the
length or the terms of MDS leases, other than the requirement that the licensee
maintain effective control of its MDS station. The same FCC control requirement
applies to ITFS licensees. In addition, ITFS excess capacity leases cannot
exceed a term of 10 years from the time that the lessee begins using the
channel capacity. The Company's ITFS leases generally grant the Company a right
of first refusal to match any new lease offer after the end of the lease term
and require the parties to negotiate in good faith to renew the lease.
Licensing Procedures. The FCC awards licenses to ue MDS and ITFS
channels based upon applications demonstrating that the applicant is qualified
to hold the license and that the operation of the proposed channels will not
cause impermissible interference to other channels entitled to interference
protection. Once an MDS license application is granted by the FCC, a
conditional license is issued, allowing construction of the station to commence
upon the satisfaction of certain specified conditions. Construction of MDS
stations generally must be completed within one year of the date of grant of
the conditional license. Where two or more ITFS applicants file for the same
channels in the same geographic area, the FCC employs a set of comparative
criteria to select among the competing applications. Construction of ITFS
channels generally must be completed within 18 months of the award of the
license. If construction is not completed in a timely manner, the license
holder must file an extension application with the FCC. If the extension
application is not filed or granted, the channel license may be forfeited.
ITFS and MDS licenses generally have terms of 10 years. FCC rules prohibit the
sale for profit of a MDS conditional license or of a controlling interest in
the MDS conditional license holder prior to construction of the station or, in
certain instances, prior to the completion of one year of operation. The FCC,
however, does permit the leasing of 100% of a MDS license holder's spectrum
capacity to a third party and the granting of options to purchase a controlling
interest in a license once the required license holding period has elapsed.
In April 1992, the FCC imposed a freeze on the filing of applications and
amendments to applications for new MDS licenses. In February 1993, the FCC
imposed a similar freeze on the filing of applications for new ITFS licenses
and, generally, for major ITFS modifications. Since February 1993, on a
limited basis, the FCC has accepted applications for major ITFS modifications.
The freezes were intended to allow time for the FCC to update its MDS and ITFS
data bases and to allow the FCC to review and possibly modify its application
rules related to these channels. The freezes do not apply to the granting of
licenses applied for
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prior to the freeze. Recently, the FCC converted ITFS
processing to a "window" filing approach in which the FCC announces five-day
windows during which it will accept ITFS applications. Competing applications
filed in the same window will be processed under the existing comparative
criteria. A five-day window for ITFS applications was completed on October 20,
1995.
Recently the FCC adopted a competitive bidding (auction) mechanism for the
award of initial licenses for MDS channels. Auctions to award initial MDS
licenses began on November 13, 1995. Successful bidders will receive a blanket
authorization to serve entire "Basic Trading Areas" or "BTAs" (as defined by
Rand McNally) on all MDS channels. The blanket authorization will be subject
to the submission of applications for MDS channels demonstrating interference
protection to the 35-mile-radius protected service areas of MDS
and ITFS stations licensed, or for which there is an application for a license
pending as of September 15, 1995. A BTA license holder must show coverage of
at least two-thirds of the BTA within five years of receiving the BTA
authorization. ITFS licenses are exempt from the auction process and
applications for ITFS licenses are expected to continue to be awarded according
to the FCC's existing comparative criteria.
Applications for renewal of MDS and ITFS licenses must be filed within a
certain period prior to the expiration of the license term, and petitions to
deny applications for renewal may be filed during certain periods following the
filing of such applications. Licenses are subject to revocation or
cancellation for violations of the Communications Act or the FCC's rules and
policies. Conviction of certain criminal offenses may also render a licensee
or applicant unqualified to hold a license. The Company's lease agreements
with license holders typically require the license holders, at the Company's
expense, to use their best efforts, in cooperation with the Company, to make
various required filings with the FCC in connection with the maintenance and
renewal of licenses. The Company believes this reduces the likelihood that a
license will be revoked, canceled or not renewed by the FCC.
Wireless cable transmissions are governed by FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (i.e.,
analog or digital). Current FCC regulations require wireless cable systems to
transmit only analog signals, although a petition is pending before the FCC to
allow MDS and ITFS stations to employ digital formats.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the collocation of a
commercially viable number of channels operating with common technical
characteristics. In order to commence operations in many of the Company's
unlaunched markets, the Company has filed or will be required to file
applications with the FCC to modify licenses for unbuilt stations. In applying
for these modifications, the Company must demonstrate that its proposed signal
does not violate interference standards in the FCC-protected area of another
wireless cable channel license holder. A wireless cable license holder
generally is protected from interference within 35 miles of the transmission
site. If such changes would cause the Company's signal to cause interference
in the FCC-protected area of another wireless cable channel license holder,
the Company would be required to obtain the consent of such other license
holder; however, there can be no assurance that such consent would be received
and the failure to receive such consent could adversely affect the Company's
ability to serve the affected market.
The 1992 Cable Act. The 1992 Cable Act imposes additional regulation on
traditional hard-wire cable operators and permits regulation of hard-wire cable
rates in markets in which there is no "effective competition." The 1992 Cable
Act, among other things, directs the FCC to adopt comprehensive new federal
standards for local regulation of certain rates charged by traditional hard-
wire cable operators. The 1992 Cable Act also provides for deregulation of
traditional hard-wire cable in a given market once other subscription
television providers serve, in the aggregate, at least 15% of the cable
franchise area. Rates
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charged by wireless cable operators, typically already lower than traditional
hard-wire cable rates, are not subject to regulation under the 1992 Cable Act.
Pursuant to the 1992 Cable Act, the FCC has required traditional hard-wire
cable operators to implement rate reductions.
The 1996 Act. The Telecommunications Act of 1996 became law on February
8, 1996. A principal focus of the 1996 Act is freeing local telephone
companies and long distance telephone companies from barriers to competing in
each other's lines of business, and preempting State restrictions on
competition in the provision of local telephone service. In addition, the 1996
Act contains provisions which amend the 1992 Cable Act and which affect
wireless cable operators.
A significant potential effect on the Company of the 1996 Act may result
from its provisions exempting traditional hardwire cable systems from rate
regulation. In particular, the 1996 Act will end rate regulation of all but
basic cable service by 1999, and immediately removes virtually all rate
regulation of "small cable operators" -- those cable systems not owned by MSOs
and serving 50,000 or fewer subscribers. While the FCC has not yet implemented
those provisions, the Company anticipates that cable systems in many of the
Company's markets will qualify for small system rate deregulation. The Company
anticipates that some number of such cable systems will raise their service
rates, although the Company cannot predict the number of its cable system
competitors which will raise service rates, the timing of the rate increases or
the amounts of the rate increases. The Company regards the 1996 Act's rate
deregulation of cable systems as generally positive because it can be expected
to improve the Company's price advantages over competing cable services.
The 1996 Act also contains provisions allowing local exchange telephone
companies to offer cable service within their telephone service areas. Under
the 1992 Cable Act, exchange telephone companies were free to offer wireless
cable service anywhere, but could offer wired cable service only outside of
their exchange telephone areas or solely as common carriers, subject to FCC
authorization. The 1996 Act allows exchange telephone companies to offer video
programming services via radio communications (such as wireless cable) without
regulation of rates or services, to offer hardwire or fiber cable service
channels for hire by video programmers, to offer their own hardwire or fiber
cable service over networks with channels also available for use by other video
program services providers under a modified regulatory scheme, and to provide
traditional cable service subject to local franchising requirements. The FCC
has not yet implemented those provisions of the 1996 Act and, accordingly, it
is difficult to predict the impact (if any) final FCC regulations with regard
to local exchange telephone companies in these respects will have on the
Company.
The 1996 Act offers wireless cable operators and satellite programmers
relief from private and local governmentally-imposed restrictions on the
placement of receive antennas. In some instances, wireless cable operators
have been unable to serve areas due to laws, zoning ordinances, homeowner
association rules or restrictive property covenants banning the erection of
antennas on or near homes. The 1996 Act directs the FCC to initiate
proceedings to promulgate rules implementing Congress' intent. The proceeding
on wireless cable operator antenna installations has not yet commenced.
Accordingly, the Company cannot predict if any FCC rules ultimately adopted
will materially improve the Company's access to homes subject to antenna
placement restrictions.
Finally, the 1996 Cable Act requires wireless cable companies and
traditional hardwire cable companies to "scramble" or encrypt channels which
ordinarily carry indecent or sexually explicit adult programming. The Company
does not anticipate any adverse impact from that provision.
Other Regulations. Wireless cable license holders are subject to
regulation by the Federal Aviation Administration with respect to the
construction, marking and lighting of transmission towers and to certain local
zoning regulations affecting construction of towers and other facilities.
There may also be restrictions
17
<PAGE>
imposed by local authorities. There can be no assurance that the Company will
not be required to incur additional costs in complying with such regulations
and restrictions.
Due to the regulated nature of the subscription television industry, the
Company's growth and operations may be adversely impacted by the adoption of
new, or changes to existing, laws or regulations or the interpretations
thereof.
AVAILABILITY OF PROGRAMMING
General. Currently, with the exception of the retransmission of local
off-air VHF/UHF channels, programming is made available to wireless cable
operators in accordance with contracts with program suppliers under which the
system operator generally pays a royalty based on the number of subscribers
receiving service each month. Individual program pricing varies from supplier
to supplier; however, more favorable pricing for programming is generally
afforded to operators with larger subscriber bases. The likelihood that
program material will be unavailable to the Company has been significantly
mitigated by the 1992 Cable Act and FCC regulations issued thereunder which,
among other things, impose limits on exclusive programming contracts and
prohibit programmers in which a cable operator has an attributable interest
from discriminating against cable competitors with respect to the price, terms
and conditions of the sale of programming. Only a few of the major cable
television programming services carried by the Company are not directly or
indirectly owned by vertically integrated cable companies and the Company
historically has not had difficulty in arranging satisfactory contracts for
these services. The Company believes that it will have access to sufficient
programming material to enable it to provide full channel lineups in its
markets for the foreseeable future. Current fair access to programming rules
imposed by the 1992 Cable Act only apply to programming owned or controlled by
a cable company which is delivered by satellite. Consequently, unless changed,
any programming developed for transmission to subscribers over telephone lines,
or any programming developed by an entity not owned or controlled by a cable
company, is not required to be made available to wireless cable operators so
long as the programming suppliers do not exercise undue influence to have such
programming made unavailable. The basic programming package offered by the
Company's Operating Systems is comparable to that offered by the local
traditional hard-wire cable operators in such systems' markets. However,
several of such local traditional hard-wire cable operators may, because of
their greater channel capacity, currently offer more basic, enhanced basic,
premium, pay-per-view and public access channels than are offered by the
Company. The Company's programming is supplied by numerous distributors.
Copyright. Under the federal copyright laws, permission from the
copyright holder generally must be secured before a video program may be
retransmitted. Under Section 111 of the Copyright Act of 1976, as amended,
certain "cable systems" are entitled to retransmit programming without the
prior permission of the holders of copyrights in the programming. In order to
do so, a cable operator must secure a "compulsory copyright license." Cable
operators obtain compulsory copyright licenses by filing certain reports with
and paving certain fees to the U.S. Copyright Office. In 1994, Congress
enacted the Satellite Home Viewers Act of 1994 which enables operators of
wireless cable television systems to rely on the cable compulsory copyright
license.
Retransmission Consent. Under the retransmission consent provisions of
the 1992 Cable Act, wireless cable and hard-wire cable operators seeking to
retransmit certain commercial television broadcast signals must first obtain
the permission of the broadcast station in order to distribute its signal. The
FCC has exempted wireless cable operators from the retransmission consent rules
if the receive-site antenna is either owned by the subscriber or within the
subscriber's control and available for purchase by the subscriber upon the
termination of service. In all other cases, wireless cable operators must
obtain consent to retransmit local broadcast signals. The Company has obtained
such consents with respect to the Operating Systems where
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<PAGE>
it is retransmitting local VHF/UHF channels. Although there can be no assurance
that the Company will be able to obtain any additional required broadcaster
consents, the Company believes in most cases it will be able to do so for
little or no additional cost. Wireless cable systems, unlike hard-wire cable
systems, are not required under the FCC's "must carry" rules to retransmit a
specified number of television signals or qualified low power television
station signals in their markets.
SUBSCRIPTION TELEVISION INDUSTRY TRENDS
The Company's business will be affected by subscription television
industry trends and, in order to maintain and increase its customer base in the
years ahead, the Company will need to adapt rapidly to industry trends and
modify its business to remain competitive.
Pay-Per-View. Over recent years, the subscription television industry has
been developing a service that enables customers to order, and pay for, one
program at a time. This "pay-per-view" service has been successful for
specialty events such as professional wrestling, boxing and movies. The
subscription television industry is promoting the pay-per-view concept for
purchase of movies in competition with video rental stores. Pay-per-view
requires the customer to have an addressable converter.
Addressability. Beginning in the early 1980s, the cable industry began
promoting and installing addressable converters. These converters allow the
cable company to remotely control the channels to which the customer has
access. In order for customers to most conveniently order pay-per-view
programming, however, an impulse pay-per-view converter is required. The
Company believes that traditional hard-wire cable operators will need to incur
significant cost in order to upgrade their systems to be able to offer impulse
addressability. An impulse pay-per-view converter, which has a return line via
phone or cable to the cable operator's computer system, enables a customer to
order pay-per-view events by pushing a button on a remote control rather than
requiring the customer to make a telephone call to order an event. Where
sufficient channels are available, impulse pay-per-view programming may be
purchased by the Company's subscribers who request impulse pay-per-view
programming.
Compression. Several equipment manufacturers are developing digital video
compression ("DVC") technology which would allow several programs to be carried
in the amount of bandwidth where only one program is currently capable of being
carried. Manufacturers have projected varying compression ratios for future
equipment, ranging from 4 to 1 to 10 to 1, which would increase the channels
available on a wireless cable system using DVC technology from up to 20 to 32
to up to 80 to 320 channels. Due to the limited number of physical components
of the wireless transmission system, the Company believes it will be easier for
it to adapt to DVC than for traditional hardware cable operators. The cost of
such adaptation by the Company could nonetheless be substantial. Current FCC
regulations will have to be interpreted, modified, or waived to permit the use
of DVC when DVC technology becomes commercially available. A petition for that
purpose is pending before the FCC.
Interactivity. Certain traditional hard-wire cable operators have
announced their intentions to develop interactive features for use by their
customers. Interactivity would allow customers to utilize their television for
two-way communications such as video games, home shopping and video-on-demand.
Use of interactivity will likely require the development and utilzation of
DVC. Wireless cable operators may be able to utilize a "return-path" frequency
which the FCC has made available for interactive communications. The Company
believes that the widespread commercial availability of many interactive
products is at least several years away.
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<PAGE>
Advertising. Local and national advertising through various interconnects
continues to grow as a source of revenue for cable operators. The Company
currently generates approximately $20,000 per year in advertising revenue and
expects to generate additional advertising revenue as its systems grow.
COMPETITION
In addition to competition from traditional hard-wire cable television
systems and other wireless cable systems, wireless cable television operators
face competition from a number of other sources, including potential
competition from emerging trends and technologies in the subscription
television industry, some of which are described below.
Direct-to-Home ("DTH"). DTH satellite television services originally were
available via satellite receivers which generally employed seven to 12 foot
dishes mounted in the yards of homes to receive television signals from
orbiting satellites. Prior to the implementation of encryption, these dishes
enabled reception of any and all signals without payment of fees. Having to
purchase decoders and pay for programming has reduced their popularity,
although the Company does to some degree compete with these systems in
marketing its services.
Direct Broadcast Satellite ("DBS"). DBS involves transmission of an
encoded signal directly from a satellite to the customer's home. Because the
signal is at a higher level and frequency than most satellite- transmitted
signals, its reception can be accomplished with a relatively small (18-inch to
three-foot) dish mounted on a rooftop or in the yard. In the fall of 1994,
DirecTV, Inc. ("DirecTV") began offering nationwide DBS service capable of
providing approximately 150 channels of programming. The cost to a DirecTV
customer of a DBS system to service one television set is approximately $700
plus the cost of installation. Primestar, which in 1994 also began offering
nationwide DBS service capable of providing approximately 70 channels of
programming, does not charge subscribers for equipment but does charge
installation fees of as much as $300. DBS providers are currently unable to
provide locally broadcast channels as part of their service. DBS subscribers
also pay monthly subscription fees. Because of the higher initial cost of DBS,
and the generally higher income level of targeted subscribers, the Company does
not believe that DBS is currently competitive with wireless cable television.
However, as such costs are reduced, DBS could become competitive with wireless
cable television.
SMATV. SMATV is a multi-channel subscription television service where
the programming is received by satellite receiver and then transmitted via
coaxial cable for wireless point-to-multipoint transmission in the 18 gigahertz
("GHz") band primarily to MDUs without crossing public rights of way. SMATV
operates under agreements with a private landowner to service a specific MDU,
commercial establishment or hotel. SMATV operators compete with the Company
for rights of entry into MDUs.
Telephone Companies. The 1996 Act contains provisions allowing local
exchange telephone companies to offer cable service within their telephone
service areas. Previously, exchange telephone companies were free to offer
wireless cable service anywhere, but could offer wire cable service only
outside of their exchange telephone areas or solely as common carriers, subject
to FCC authorization. The 1996 Act allows exchange telephone companies to
offer video programming services via radio communications (such as wireless
cable) without regulation of rates or services, to offer hardwire or fiber
cable service channels for hire by video programmers, to offer their own
hardwire or fiber cable service over networks with channels also available for
use by other video program services providers under a modified regulatory
scheme, and to provide traditional cable service subject to local franchising
requirements. Several telephone companies have offered hardwire cable plant to
third parties, and additional telephone companies have announced plans to build
such plants. Whether those efforts will continue under the regulatory scheme
implementing the 1996 Act cannot now be known. In addition, Bell Atlantic,
NYNEX and Pacific Telesis have acquired interests
20
<PAGE>
in wireless cable operations, either through investments in existing
enterprises or through the purchase of wireless cable systems. Other companies,
including Ameritech, have taken the traditional cable approach, and are seeking
franchises from local authorities to provide competitive cable services. The
FCC has not yet implemented those provisions of the 1996 Act and, accordingly,
it is difficult to predict the extent to which those provisions will lead to
the development of exchange telephone company provision of cable services.
Local Off-Air VHF/UHF Broadcasts; LPTV. Local off-air VHF/UHF broadcasts
(such as ABC, NBC, CBS and Fox) provide free programming to the public. In
some areas, low power television ("LPTV") stations authorized by the FCC are
used to provide subscription or free television service to the public. LPTV
transmits on conventional broadcast frequencies. The principal difference
between LPTV and full-powered television is that LPTV is restricted to very low
power levels, which limits the area where a high-quality signal can be
received. In addition, LPTV stations are not permitted to cause interference to
full-power television reception.
Local Multi-Point Distribution Service ("LMDS"). In 1993, the FCC
initially proposed to redesignate the 28 GHz band to create a new video
programming delivery service referred to as LMDS. In July 1995, the FCC
proposed to award licenses in each of 493 BTAs pursuant to auctions.
Sufficient spectrum for up to 49 analog channels has been designated for the
LMDS service. The FCC has not determined how many licenses it will award in
each BTA. Final rules for LMDS have not been established. Auctions are not
expected to begin any earlier than 1996.
Video Stores. Retail stores rent VCRs and/or video tapes, and are a major
participant in the television program delivery industry. According to Paul
Kagan Associates, Inc., as of the end of 1994 there were over 75.5 million
households with VCRs in the United States.
ITEM 2. PROPERTIES.
The Company leases approximately 2,500 square feet of office space for its
corporate headquarters in Baton Rouge, Louisiana under a lease that expires on
April 30, 1997. The Company pays approximately $25,000 per annum for such
space. On December 17, 1995, the Company entered into a five-year lease for
approximately 15,700 square feet for its new corporate headquarters in Baton
Rouge. Annual base lease payments will be approximately $115,000 during the
first three years and approximately $122,000 in the remaining two final years.
The Company has the option to renew this lease at the end of the first five-
year term for two additional five-year terms on similar terms and conditions.
The Company expects to move into its new corporate headquarters in May, 1996.
The Company will not incur any payments or penalties in connection with the
early termination of its existing lease.
The Company leases additional office space for the Operating Systems and
will, in the future, purchase or lease additional office space in other
locations where it launches additional systems. In addition to office space,
the Company also leases space on transmission towers located in its various
markets. The Company believes that office space and space on transmission
towers is readily available on acceptable terms in the markets where the
Company intends to operate wireless cable systems.
Item 3. Legal Proceedings.
The Company is a party to certain legal actions arising in the ordinary
course of its business. Based on information presently available to the
Company, the Company believes that it has adequate legal defenses or insurance
coverage for these actions, and that the ultimate outcome of these actions will
not have a material adverse effect on the Company.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On October 18, 1995, stockholders representing 3,361,538 shares of the
3,461,538 of the shares of Common Stock then outstanding (approximately 97%)
approved, at a duly convened special meeting of stockholders of the Company,
the adoption of the Company's 1995 Long-Term Performance Incentive Plan and
1995 Directors' Stock Option Plan.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under this Item is furnished pursuant to Instruction 3 to
Item 401(b) of Regulation S-K. Executive officers of the Company are elected
by and serve at the discretion of the Board of Directors.
HANS J. STERNBERG has been Chairman of the Company since its founding in
June 1995 and as Chairman of the Board of Old Wireless One since its founding
in 1993. He has also served as the Chairman and Chief Executive Officer of
Starmount Life Insurance Company ("Starmount") since 1983. He is a former
owner and President and Chief Executive Officer of Maison Blanche Department
Stores, a chain of 24 department stores which had annual revenues of
approximately $480 million prior to its 1992 sale. He invested in cellular
telephone in the early 1980s, began in cable television in 1972 as a founding
partner and director of Cablesystems of Hammond, Inc., and later helped found
Cablesystems of Alabama, Inc. He was an owner and a director of radio stations
WQXY, KQXY, WLCS and WWUN. Mr. Sternberg graduated from Princeton University
in 1957. Mr. Sternberg is 60 years old.
SEAN E. REILLY has served as Chief Executive Officer, President, and
director of the Company since its founding in June 1995 and as Chief Executive
Officer and President of Old Wireless One since its founding in late 1993.
Prior to joining Old Wireless One, Mr. Reilly served as Vice-President of Real
Estate/Mergers and Acquisitions for Lamar Advertising Company ("Lamar"), an
outdoor advertising company, and continues to serve as a member of the Lamar
board of directors. Mr. Reilly served in the Louisiana Legislature as a State
Representative from March 1988 to January 1996. Mr. Reilly graduated from
Harvard University in 1984 and from Harvard Law School in 1989. Mr. Reilly is
34 years old.
ALTON C. RYE became Senior Vice President--Operations of the Company in
August 1995. Prior to joining the Company, Mr. Rye served as Vice President--
Operations for Sammons Communications, Inc. ("Sammons"), of Dallas, Texas,
which is the twelfth largest cable television company in the United States,
from August 1993 to August 1995 and was responsible for Sammons' largest
operating division, which serviced approximately 350,000 subscribers. From May
1988 to August 1993, Mr. Rye served as Vice President--Finance, Chief Financial
Officer and Treasurer of Sammons. Mr. Rye received a B.S. in Accounting from
Arkansas Tech University in 1965. Mr. Rye is 52 years old.
J. ROBERT GARY became Senior Vice President--Chief Financial Officer of
the Company in September 1995. Prior to joining the Company and since 1992,
Mr. Gary served as Executive Vice President, Chief Financial Officer and Chief
Operating Officer of Greentree Software Inc., a publicly-traded software
company located in Marlboro, Massachusetts. From 1990 through 1992, Mr. Gary
was Vice President -Business Manager of Simon & Schuster, Inc.'s Trade
Division. Mr. Gary received a B.B.A. in Accounting from North Texas State
University in 1977. Mr. Gary is 41 years old.
WILLIAM C. NORRIS, JR. PH.D. has served as Senior Vice President--System
Launches and Secretary of the Company since its founding in June 1995 and as
Chief Operating Officer and Secretary of Old Wireless One since its founding in
1993. Prior to working at Old Wireless One, he developed cable systems in
Texas, Louisiana, Mississippi and Alabama over a 25-year period. He was an
investor in, and functioned as the Chief Executive Officer of, those systems.
He is a board member and stockholder in the Baton Rouge
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Cellular Telephone Company. A native of Louisiana, he earned a PhD in
Telecommunications from the University of Southern California in 1971. Mr.
Norris is 61 years old.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock is quoted through the Nasdaq National Market under the
symbol "WIRL." The Common Stock commenced trading on October 19, 1995. The
following table sets forth on a per share basis, the high and low closing sale
prices per share for the Common Stock as reported by the Nasdaq National Market
for the period from October 19, 1995 through the end of the fourth quarter of
1995.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C> <C>
Fourth Quarter 1995
(beginning October 19, 1995) 18 1/8 11 3/8
</TABLE>
As of the close of business on March 21, 1996, there were approximately 81
holders of record of Common Stock. The Company believes that it has a
significantly larger number of beneficial holders.
The Company does not presently intend to pay any cash dividends on the
Common Stock in the foreseeable future. Furthermore, as a holding company, the
ability of the Company to pay dividends in the future is dependent upon the
receipt of dividends or other payments from its operating subsidiaries. The
Indenture (the "Indenture") pursuant to which the Company's 13% Senior Notes
due 2003 (the "Senior Notes") were issued prohibits the Company from making any
cash dividends on the Common Stock unless, after giving effect to such
dividend, (i) no default or event of default shall have occurred or be
continuing under the Indenture, (ii) the Company could incur $1.00 of
additional indebtedness under the terms of the Indenture and (iii) the
aggregate amount of such dividends, when added together with all Restricted
Payments (as defined in the Indenture) declared or made after the date of the
Indenture does not exceed the sum of (a) an amount equal to the Company's
cumulative operating cash flow less 2.0 times the Company's cumulative
consolidated interest expense, and (b) the aggregate net cash proceeds received
after the date of the Indenture by the Company from capital contributions or
from the issuance or sale of capital stock or options, warrants or rights to
purchase capital stock. As of December 31, 1995, the Company would not have
been permitted to declare any cash dividends on its Common Stock under this
provision.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below as of December
31, 1993, 1994 and 1995 and for the period from February 4, 1993 (inception) to
December 31, 1993 and the years ended December 31, 1994 and 1995 were derived
from the consolidated financial statements of the Company and its subsidiaries,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The consolidated financial
statements as of December 31, 1994 and 1995, and for the period from February
4, 1993 (inception) to December 31, 1993 and the years ended December 31, 1994
and 1995, and the report thereon, are included elsewhere in this Form 10-K. On
October 18, 1995, the Company acquired the Heartland Division in exchange for
approximately 3.5 million shares of Common Stock and $10 million in notes,
which were repaid from the proceeds of the Company's recently completed
offerings. As a result, the statement of operations data for the year ended
December 31, 1995 includes the operating results of the Company for the period
from January 1, 1995 through October 18, 1995 and the combined operating
results of the Company and the Heartland Division for the period from October
19, 1995 through December 31, 1995. This selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
(including the notes thereto) of the Company contained elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED DECEMBER 31,
FEBRUARY 4, 1993 -----------------------
(INCEPTION) TO
DECEMBER 31,
1993 1994 1995
----------------- ------------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................... $ - $ 380,077 $ 1,343,969
------------ ----------- ------------
Operating expenses:
Systems operations............................. 24,429 274,886 841,819
Selling, general and administrative expenses... 110,281 1,800,720 4,431,839
Depreciation and amortization.................. 27,489 413,824 1,783,066
-------- --------- ---------
Total operating expenses.......................... 162,199 2,489,430 7,056,724
-------- --------- ---------
Operating loss.................................... (162,199) (2,109,353) (5,712,755)
Interest expense and other, net................... (411) (152,460) (1,979,719)
--------- --------- ---------
Net loss.......................................... $(162,610) $(2,261,813) $(7,692,474)
Preferred stock dividends and discount accretion.. - - (786,389)
Net loss applicable to common stockP.............. $(162,610) $(2,261,813) $(8,478,863)
========= =========== ============
Net loss per common share......................... $(0.30) $(1.21) $(2.02)
Weighted average common shares outstanding........ 538,127 1,863,512 4,187,736
DECEMBER 31,
---------------------------------------
1993 1994 1995
--------- ----------- ------------
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 57,786 $(1,537,244) $122,084,511(1)
Total assets...................................... 514,223 8,914,224 213,799,874
Current portion of long-term debt................. 4,714 1,457,295 376,780
Long-term debt.................................... 14,903 2,839,602 150,871,267
Total stockholders' equity........................ 458,370 4,343,713 55,649,687
___________________
</TABLE>
(1) Includes approximately $13,954,000 of funds held in escrow to be used to
pay interest on the Senior Notes due in 1996.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements (including the notes thereto) included elsewhere in this Form 10-K.
OVERVIEW
The Company develops, owns and operates wireless cable television systems.
The Company has targeted small to mid-size markets, located in Texas,
Louisiana, Tennessee, Alabama, Georgia and Florida, with approximately 25% to
35% of the households not currently passed by traditional hard-wire cable
systems. The Company currently has Operating Systems located in Brenham,
Bryan/College Station, Milano and Wharton, Texas; Bunkie, Lafayette, Monroe and
Lake Charles, Louisiana; Gainesville, Panama City and Pensacola, Florida;
Jeffersonville, Georgia and Tullahoma, Tennessee.
Since inception, the Company has sustained substantial net losses, due
primarily to start-up costs, interest expense and charges for depreciation and
amortization of capital expenditures to develop its wireless cable systems, and
has incurred negative cash flow. At December 31, 1995, none of the Operating
Systems had positive cash flow from operations, primarily as a result of their
early stages of development. In the fourth quarter of 1995, the Company
disconnected a number of its Milano System subscribers for nonpayment.
Consequently, the Milano System is no longer generating positive cash flow. The
Company expects to replace such subscribers over the next six months. There can
be no assurance that any system or the Company as a whole will generate
positive cash flow. In addition, losses may increase as operations in
additional systems are commenced or acquired. As the Company continues to
develop systems, positive cash flow from more mature systems is expected to be
partially or completely offset by operating losses from less developed systems
and from development costs associated with establishing systems in new markets.
This trend is expected to continue until the Company has a sufficiently large
subscriber base to absorb operating and development costs of recently launched
systems. Based on its current system launch schedule and targeted penetration
and subscriber revenue rates, the Company believes it will reach a subscriber
level in its more mature systems (those systems with positive cash flow) in
1998 to generate revenues sufficient to offset these operating and development
costs desired. There can be no assurance, however, that the Company will meet
its current launch schedule or achieve the desired penetration and subscriber
revenue rates necessary to acquire this subscriber base or that revenues will
be sufficient to offset such costs by that time. Cash flow is a commonly used
measure of performance in the wireless cable industry. However, cash flow does
not purport to represent cash provided by or used by operating activities and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
On April 25, 1996, pursuant to an Agreement and Plan of Merger, dated as
of April 25, 1996, among the Company, TruVision Wireless, Inc. ("TruVision")
and Wireless One MergerSub, Inc. ("MergerSub"), the Company agreed to acquire
all of the outstanding capital stock of TruVision Wireless, Inc. TruVision
acquires, develops, owns and operates wireless cable television systems within
the southeastern United States, including the state of Mississippi, western
Tennessee and western Alabama and nearby markets in Alabama, Arkansas and
Tennessee. The Company plans on utilizing the geographical advantages gained
in the merger with TruVision to achieve cost savings through centralization of
operations. Currently, the Company does not anticipate a significant decrease
in corporate overhead or selling, general and administrative expense due to the
merger. Management of the Company will evaluate the possible synergies of the
two corporate facilities and functional
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<PAGE>
departments within the next year to determine if stockholder value can be
increased through centralization.
RESULTS OF OPERATIONS SINCE INCEPTION
The results of operations for the years ended December 31, 1993, 1994 and
1995 were prepared based on the historical results of the Company for the
period from February 4, 1993 (inception) to December 31, 1993, and the years
ended December 31, 1994 and 1995. On October 18, 1995, the Company acquired
the Heartland Division in exchange for approximately $3.5 million shares of
Common Stock and $10 million in notes, which were repaid from the proceeds of
the Company's recently completed offerings. As a result, the results of
operations for the year ended December 31, 1995 includes the operating results
of the Company for the period from January 1, 1995 through October 18, 1995 and
the combined operating results of the Company and the Heartland Division for
the period from October 19, 1995 through December 31, 1995. Period-to-period
comparisons of the Company's financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance due to the
acquisition of the Heartland Division and the development of the Company's
business and system launches during the periods presented.
Historically, the Company subscribers have been located in single-family
homes. The number of subscribers located in multiple-dwelling units ("MDUs")
in the Operating Systems increased as a percentage of total subscribers from
approximately 1.5% at December 31, 1994 to approximately 1.9% at December 31,
1995. MDU subscribers typically generate lower per subscriber revenue than
single-family units.
The table below sets forth for each of the Operating Systems the later of
the date of launch or acquisition by the Company and the approximate number of
subscribers at December 31, 1994 and 1995 and February 29, 1996.
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE APPROXIMATE
LAUNCH OR SUBSCRIBERS AT SUBSCRIBERS AT SUBSCRIBERS AT
MARKET ACQUISITION DATE DECEMBER 31, 1994 DECEMBER 31, 1995 FEBRUARY 29, 1996
- ------ ---------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Brenham, Tx............................. February 1996 - - 126
Bryan/College Station, Tx............... May 1995 - 1,445 1,809
Milano, Tx(1)........................... October 1995 - 1,297 1,428
Wharton, Tx............................. June 1994 1,401 1,579 1,768
Bunkie, La.............................. December 1995 - 62 463
Lafayette, La(2)........................ January 1994 500 593 610
Lake Charles, La(2)..................... April 1994 603 487 476
Monroe, La(3)........................... October 1995 - 829 1,045
Gainesville, Fl......................... January 1996 - - 100
Panama City, Fl......................... September 1995 - 442 1,039
Pensacola, Fl.......................... July 1995 - 658 1,086
Jeffersonville, Ga..................... March 1996 - - -
Tullahoma, Tn.......................... November 1995 - 133 422
----- ----- ------
TOTAL............................. 2,054 7,525 10,372
===== ===== ======
___________________
</TABLE>
(1) The Milano System was acquired by the Company from Heartland in October
1995.
(2) The Company is not actively marketing, and does not currently intend to
actively market, its service in the Lafayette and Lake Charles markets
until an increase in the channel offering is achieved, which the Company
expects to occur within 3 months from the date hereof.
26
<PAGE>
(3) The Monroe System was acquired by the Company from Heartland in October
1995.
<TABLE>
<CAPTION>
Revenue Information
YEAR ENDED DECEMBER 31,
-------------------------------
APPROXIMATE
AVERAGE REVENUE
PER SUBSCRIBER AT
1993 1994 1995 DECEMBER 31, 1995
--------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
SUBSCRIPTION REVENUES:
Brenham, Tx................... $ - $ - $ - $ -(1)
Bryan/College Station, Tx..... - - 185,195 33.70
Milano, Tx.................... - - 89,798 31.40
Wharton, Tx................... - 159,507 620,650 35.90
Bunkie, La.................... - - 554 -(2)
Lafayette, La................. - 46,057 125,727 22.60
Lake Charles, La.............. - 48,739 182,760 30.10
Monroe, La.................... - - 66,124 27.40
Gainesville, Fl............... - - - -(1)
Panama City, Fl............... - - 11,644 31.90
Pensacola, Fl................. - - 59,814 37.50
Jeffersonville, Ga............ - - - -(1)
Tullahoma, Tn................. - - 1,703 -(2)
----- -------- ----------
TOTAL $ - $254,303 $1,343,969
===== ======== ==========
____________
</TABLE>
(1) Operating System not launched at December 31, 1995.
(2) Number not meaningful due to timing of subscribers being put on service.
Revenues. The Company had no operating revenues for the period from
February 4, 1993 (inception) through December 31, 1993. The Company revenues
for the year ended December 31, 1994 were $380,077. Subscription revenues from
new subscribers totaled $255,547 or 67% of revenues. Equipment sales and other
revenues accounted for $103,837 and $20,693, respectively, in 1994. All
revenues were related to the Lafayette, Lake Charles and Wharton Systems, each
of which was launched during 1994.
For the year ended December 31, 1995 revenues, which were all
subscription revenues, were $1,343,969. The increase in subscription revenues
of $1,089,666 or 428% over 1994 was primarily attributable to the acquisition
of the Heartland Division in October 1995, the launch of the Bryan/College
Station and Pensacola Systems and the increase in revenues in the Company's
existing Operating Systems. This increase in revenues from existing Operating
Systems was primarily due to the Wharton and Lake Charles Systems being
operational for 12 months in 1995 versus seven and eight months, respectively,
for 1994, and an increase in average monthly subscribers in 1995 over 1994 for
the Lafayette System.
Systems Operations Expense. Systems operations expense includes
programming costs, channel lease payments, tower site rentals and repair and
maintenance. Programming costs (with the exception of minimum
27
<PAGE>
payments) and channel lease payments (with the exception of certain fixed
payments for both operating and non-operating markets) are variable expenses
which increase as the number of subscribers increases. The Company incurred
$24,429 of systems operations expense during 1993, primarily representing
channel lease expense. For 1994, the Company incurred $274,886 of systems
operations expense. The increase from 1993 to 1994 is attributable to 11
additional months of operation in 1994.
For the year ended December 31, 1995, systems operations expense amounted
to $841,819 as compared to $274,886 for the prior-year period. The increase was
primarily attributable to the increase in the number of subscribers and new
market launches.
SG&A Expense. The Company has experienced increasing SG&A since its
inception as a result of its increasing wireless cable activities and
associated administrative costs, including costs related to opening and
maintaining additional offices and additional compensation expense. The Company
believes such selling, general and administrative costs will not stabilize
until 1998 when all Systems are expected to be launched. At that time,
administration expenses should remain constant with selling and general expense
stabilizing when desired penetration rates are achieved. In order for such
stabilization to occur within this time period, however, the current system
launch schedule must be met and desired penetration rates must be achieved.
There can be no assurance that the Company will meet the current launch
schedule or that desired penetration and subscriber rates will be achieved or
consequently that such selling, general and administrative expenses will
stabilize within this time period. SG&A increased from $110,281 in 1993 to
$1,800,720 in 1994, primarily due to a longer operating period in 1994. For the
year ended December 31, 1995, SG&A was $4,431,839 as compared to $1,800,720 for
the prior period. The $2,631,119 increase is due primarily to increases in
personnel costs, advertising and marketing expenses and other overhead expenses
required to support the expansion of the Company's operations.
Depreciation and Amortization Expense. Depreciation and amortization
expense includes depreciation of systems and equipment and amortization of
channel right and organizational costs. Depreciation and amortization expense
for 1994 amounted to $413,824 as compared to the partial year 1993 of $27,489.
For the year ended December 31, 1995, depreciation and amortization
expense totaled $1,783,066 compared to $413,824 for the same period in 1994.
The increase was primarily attributable to additional costs incurred by the
Company through its acquisition of the Heartland Division and development and
implementation of the Company's operating plan.
Interest Income. Interest income includes amounts earned on the Company's
cash equivalents and the escrowed funds required to cover the first three
years' interest payments as required by the terms of the Indenture relating to
the Senior Notes. For the year ended December 31, 1995, the Company had earned
$1,473,432 on its cash equivalents and $550,684 from the escrowed funds.
Interest Expense. Interest expense incurred during 1993 and 1994 amounted
to $411 and $171,702, respectively. During 1994, the Company established a $3.0
million revolving credit facility from a bank secured by subscription
receivables. The revolving credit facility accounted for $52,485 of interest
expense in 1994. The outstanding balance on the facility at December 31, 1994
amounted to $1.1 million. Additionally, the Company has two discount notes that
relate to the acquisition of channel rights in Pensacola and Panama City,
Florida. The discount notes have a face value of $3.7 million and are due in
installments through 1997. Interest expense related to the notes during 1994
amounted to $104,767. Finally, the subsidiary of the Company that owns and
operates the Bryan/College Station System has outstanding a $150,000
convertible debenture that bears interest at the prime rate. The debenture is
convertible at the option of the holder into a 20% minority interest in such
subsidiary and is callable at a fixed price.
28
<PAGE>
On an aggregate basis, for the year ended December 31, 1995, interest
expense totaled $4,070,184. The revolving credit facility was repaid in full
from the proceeds of the private placement of redeemable convertible preferred
stock in April 1995. Interest expense of $41,858 was incurred in 1995 for this
revolving credit facility. In October 1995, the Company issued the Senior Notes
with an aggregate principle amount of $150,000,000. At December 31, 1995,
interest expense of $3,683,333 had been accrued for the Senior Notes. Interest
expense for the two discount notes described above was $289,170 for the year
ended December 31, 1995. Interest expense on the convertible debenture described
above related to the Bryan/College Station System was $13,046 for the year
ended December 31, 1995.
Net Loss. During 1993, the Company had no revenues and incurred a loss of
$162,610, primarily due to SG&A. During 1994, the Company had total revenues of
$380,077 and an operating loss of $2,109,353. The net loss for the Company
during 1994 amounted to $2,261,813. For the year ended December 31, 1995, the
Company had an operating loss of $8,478,864 on total revenues of $1,343,969.
See "Overview" for an analysis of operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital intensive business.
The Company's operations require substantial amounts of capital for (i) the
installation of equipment at subscribers' location, (ii) the construction of
additional transmission and headend facilities and related equipment purchases,
(iii) the funding of start-up losses and other working capital requirements,
(iv) the acquisition of additional wireless cable channel rights and systems
and (v) investments in, and, maintenance of, vehicles and administrative
offices. Since inception, the Company has expended funds to lease or otherwise
acquire channel rights in various markets, to construct or acquire its
Operating Systems, to commence construction of operating systems in different
markets and to finance initial operating losses.
In order to finance the expansion of its Operating Systems and finance
the launch of additional markets, in October 1995, the Company consummated its
initial public offering of 3,450,000 shares of common stock, $0.01 par value,
(the "Common Stock") at $10.50 per share (the "Common Stock Offering"). The
Company received approximately $32.3 million in net proceeds from the Common
Stock Offering. Concurrent with the Common Stock Offering, the Company issued
150,000 units (the "Units") consisting of $150 million aggregate principal
amount of Senior Notes and 450,000 warrants to purchase an equal number of
shares of Common Stock at an exercise price of $11.55 per share to the initial
purchasers (the "Unit Offering" and together with the Common Stock Offering,
the "Offerings"). The Company placed approximately $53.2 million of the
approximately $143.8 million of net proceeds realized from the sale of the
Units into an escrow account to cover the first three years' interest payments
as required by terms of the Indenture. Additionally, in April 1995, the Company
completed a private placement of 14,781.75 shares of redeemable convertible
preferred stock, receiving net proceeds of approximately $13.8 million. Such
preferred stock was converted into Common Stock at the time of the Common Stock
Offering.
The Indenture pursuant to which the Senior Notes were issued contains
representations and warranties, affirmative and negative covenants and events
of default customary for financing of this type. As of December 31, 1995, the
Company was in compliance with all covenants in the Indenture.
The Company made capital expenditures of approximately $9.8 million and
$3.0 million for the years ended December 31, 1995 and 1994, respectively.
These expenditures primarily related to the acquisition of equipment in certain
of the Company's operating markets, as well as those markets under construction
or near-term launches. In addition, in October 1995, the Company acquired the
Heartland Division in exchange for approximately 3.5 million shares of Common
Stock and $10 million in notes, which were repaid from the
29
<PAGE>
proceeds of the Offerings. The Company estimates that approximately $38.8
million in capital expenditures will be required in 1996 to continue to fund
growth in the Operating Systems and the systems under construction and to
complete the construction and finance the addition of subscribers to 12
additional markets.
At March 13, 1996, the Company had commitments to purchase approximately
$6.2 million in equipment for existing and future markets, primarily for set-top
converters and headend equipment.
The Company has experienced negative cash flow from operations in each year
since its formation, and the Company expects to continue to experience negative
consolidated cash flow from operations due to operating costs associated with
system development and costs associated with expansion and acquisition
activities. Until sufficient cash flow is generated from operations, the Company
will be required to utilize its current capital resources or external sources of
funding to satisfy its capital needs. The Company currently believes that the
aggregate net proceeds from the Company's Offerings will be sufficient to meet
its expected capital needs at least over the next twelve months.
Subject to the limitations of the Company's Indenture relating to the
Senior Notes, in order to accelerate its growth rate and to finance general
corporate activities and the launch or build-out of additional systems, the
Company may supplement its existing sources of funding with financing
arrangements at the operating system level or through additional borrowings, the
sale of additional debt or equity securities, including a sale to a strategic
investor, joint ventures or other arrangements, if such financing is available
to the Company on satisfactory terms.
As a result of the Unit Offering, and the possible incurrence of additional
indebtedness, the Company will be required to satisfy certain debt service
requirements. Following the disbursement of all of the funds in the escrow
account in October 1998, a substantial portion of the Company's cash flow will
be devoted to debt service on the Senior Notes and the ability of the Company to
make payments of principal and interest will be largely dependent upon its
future performance. Many factors, some of which will be beyond the Company's
control (such as prevailing economic conditions), may affect its performance.
There can be no assurance that the Company will be able to generate sufficient
cash flow to cover required interest and principal payments when due on the
Senior Notes or other indebtedness of the Company. If the Company is unable to
meet interest and principal payments in the future, it may, depending upon the
circumstances which then exist, seek additional equity or debt financing,
attempt to refinance its existing indebtedness or sell all or part of its
business or assets to raise funds to repay its indebtedness. The incurrence of
additional indebtedness is restricted by the Indenture.
In managing its wireless cable assets, the Company may, at its option,
exchange or trade existing wireless cable channel rights for channel rights in
markets that have a greater strategic value to the Company. The Company
continually evaluates opportunities to acquire, either directly or indirectly
through the acquisition of other entities, wireless cable channel rights. There
is no assurance that the Company will not pursue any such opportunities that may
utilize capital currently expected to be available for its current markets.
For the year ended December 31, 1993, cash used in operating activities
was $.11 million consisting primarily of a net loss of $.16 million and offset
by an increase in accounts payable and accrued expenses of $.04 million an
increase in prepaids of $.01 million and depreciation and amortization of $.03
million. For the year ended December 31, 1993, cash used in investing
activities was $.44 million, consisting primarily of capital expenditures and
payments for licenses and organizational costs of approximately $.28 million
and $.15 million, respectively. These capital expenditures principally related
to the construction of new markets and certain license and organization costs
related to those markets. For the year ended December 31, 1993 cash flows
provided
30
<PAGE>
by financing activities was $.63 million, consisting primarily of the proceeds
from issuance of 538,127 shares of common stock and recapitalization upon
merger with Wireless One, L.L.C., and proceeds from the issuance of long-term
debt.
For the year ended December 31, 1994, cash used in operating activities was
$1.7 million consisting primarily of a net loss of $2.3 million and offset by
an increase in accounts payable and accrued expenses of $.2 million, an
increase in receivables and prepaids of $.2 million, depreciation and
amortization of $.4 million, and non-cash expenses of $.16 million. For the
year ended December 31, 1994, cash used in investing activities was $8.2
million, consisting primarily of capital expenditures and payments for licenses
and organizational costs of approximately $3.0 million and $5.1 million,
respectively. These investing activities principally related to the acquisition
of equipment in certain of the Company's operating markets, as well as those
markets under construction or near term launch markets and certain license and
organization costs related to those markets. For the year ended December 31,
1994, cash flows provided by financing activities was $9.8 million, consisting
primarily of $5.6 million from the issuance of 1,475,823 shares of common stock
and $4.3 million from the issuance of long-term debt associated with license
acquisition costs in near term launch markets.
For the year ended December 31, 1995, cash used in operating activities was
$.6 million consisting primarily of a net loss of $7.7 million and offset by an
increase in accounts payable and accrued expenses of $6 million, an increase in
receivables of $.6 million, an increase in prepaids of $.5 million, depreciation
and amortization of $1.8 million, and net non-cash expenses of $.3 million. For
the year ended December 31, 1995, cash used in investing activities was $71.3
million, consisting primarily of the $53.1 million purchase of restricted
marketable investment securities and capital expenditures and payments for
licenses and organizational costs of approximately $9.8 million and $6.8
million, respectively. The capital expenditures and acquisition costs
principally related to the purchase of equipment in certain of the Company's
operating markets, as well as those markets under construction or near term
launch markets and certain license and organization costs related to those
markets. For the year ended December 31, 1995, cash flows provided by financing
activities was $182.3 million. These financing activities are described in
detail in paragraph two of this section on Liquidity and Capital Resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is set forth on pages F-1 through F-18 of
this Form 10-K. The Company is not required to provide the supplementary
financial information required by Item 302 of Regulation S-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the executive officers of the Company is included as
Item 4A of Part I of this Form 10-K as permitted by Instruction 3 to Item
401(b) of Regulation S-K.
31
<PAGE>
Information regarding the current Directors of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ------------
<S> <C> <C>
Hans J. Sternberg 60 Chairman of the Board
Sean E. Reilly(1) 34 Chief Executive Officer, President
and Director
Henry M. Burkhalter 48 Director
Arnold L. Chavkin 44 Director
J. R. Holland, Jr.(1)(2)(3) 52 Director
William K. Luby(1)(2)(3) 35 Director
Daniel L. Shimer(2) 51 Director
David E. Webb(1) 49 Director
</TABLE>
- -------------------
(1) Member of the Operating Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
There are no family relationships between or among any Directors or
executive officers of the Company.
HANS J. STERNBERG has served as Chairman of the Company since its
founding in June 1995 and as Chairman of the Board of the Company's predecessor
("Old Wireless One") since its founding in late 1993. He has also served as the
Chairman and Chief Executive Officer of Starmount Life Insurance Company
("Starmount") since 1983. He is a former owner and President and Chief Executive
Officer of Maison Blanche Department Stores, a chain of 24 department stores
which had annual revenues of approximately $480 million prior to its 1992 sale.
He invested in cellular telephones in the early 1980s, began in cable television
in 1972 as a founding partner and director of Cablesystems of Hammond, Inc., and
later helped found Cablesystems of Alabama, Inc. He was an owner and a director
of radio stations WQXY, KOXY, WLCS and WWUN. Mr. Sternberg graduated from
Princeton University in 1957.
SEAN E. REILLY has served as Chief Executive Officer, President and
Director of the Company since its founding in June 1995 and as Chief Executive
Officer and President of Old Wireless One since its founding in late 1993. Prior
to joining Old Wireless One, Mr. Reilly served as Vice-President of Real
Estate/Mergers and Acquisitions for Lamar Advertising Company ("Lamar"), an
outdoor advertising company, and continues to serve as a member of the Lamar
board of directors. Mr. Reilly served in the Louisiana Legislature as a State
Representative from March 1988 to January 1996. Mr. Reilly graduated from
Harvard University in 1984 and from Harvard Law School in 1989.
HENRY M. BURKHALTER became a Director of the Company in April 1995.
Mr. Burkhalter has been Chairman of the Board of Directors, President and Chief
Executive Officer of TruVision Wireless, Inc. ("TruVision") since its
incorporation in April 1994. Since 1993, he has been a director, President and
Chief Executive Officer of Wireless TV, Inc., the general partner of Mississippi
Wireless TV L.P. He has been a director, President and Chief Executive Officer
of Vision Communications, Inc. since 1992. He has been the Chairman of Pacific
Coast Paging, Inc. since 1990. From 1974 through 1992, he was the President and
founder of Burkhalter & Company, a certified public accounting firm.
32
<PAGE>
ARNOLD L. CHAVKIN became a Director of the Company in April 1995.
He has been a General Partner of Chase Capital Partners ("CCP") since January
1992 and has served as the President of Chemical Investments, Inc. since March
1991. CCP is the general partner of Chase Venture Capital Associates. Prior to
joining CCP, Mr. Chavkin was a member of Chemical Bank's merchant banking group
and a generalist in its corporate finance group specializing in mergers and
acquisitions and private placements for the energy industry. His experience
prior to Chemical Bank included corporate development for Freeport McMoRan as
well as positions with Gulf and Western Industries and Arthur Young & Company.
Mr. Chavkin is also a director of TruVision, Reading & Bates Corporation,
American Radio Systems Corporation, Inc., Bell Sports, Inc., Envirotest Systems,
Forcenergy Gas Exploration, Inc. and several privately held firms.
J. R. HOLLAND, JR. became a Director of the Company in June 1995.
He began advising Heartland Wireless Communications, Inc. ("Heartland") as a
consultant in October 1992 and became Chairman of the Board of Directors of
Heartland in October 1993. Mr. Holland has been employed as President of Unity
Hunt Resources, Inc. since September 1991. Unity Hunt Resources is a large
international, private holding company with interests in entertainment, cable
television, retail, investments, real estate, natural resources and energy
businesses. Mr. Holland is also the President of Hunt Capital, a principal
stockholder of Heartland. From November 1988 to September 1991, Mr. Holland was
Chairman of the Board and Chief Executive Officer of Nedinco, Inc., a large
diversified international holding company. Prior to that, Mr. Holland was
President and a director of KSA Industries, Inc., a private, diversified company
involved in entertainment, retail, transportation and energy businesses, and
President and a director of Western Services International, Inc., a company
involved in energy services, equipment and chemicals. Mr. Holland began his
career with Booz-Allen & Hamilton, Inc., a major management consulting firm. In
addition, Mr. Holland is currently a director of Placid Refining Company and
Optical Securities Group, Inc.
WILLIAM K. LUBY became a Director of the Company in June 1995 and a
director of Old Wireless One in April 1995. From June 1992 to March 1996, Mr.
Luby was a managing director at Chase Manhattan Capital Corporation ("CMCC"), a
private equity investing affiliate of the Chase Manhattan Corporation. From 1985
to 1992, Mr. Luby held various positions in the Leveraged Lending and
Restructuring groups at The Chase Manhattan Bank, N.A. He is currently a
director of numerous private companies.
DANIEL L. SHIMER became a Director in March 1996. Mr. Shimer has
served as Executive Vice President and Chief Financial Officer of COREStaff,
Inc. since April 1994. Formed in late 1993, COREStaff has rapidly grown,
principally through acquisitions, to a $400 million top ten provider of staffing
services in the United States. From March 1991 to March 1994, Mr. Shimer served
as the Executive Vice-President, Chief Financial Officer, and President of
National Accounts for Brice Foods, Inc. From February 1983 to March 1991, he was
associated with Bard & Company, Inc. in various senior financial capacities
among its publicly traded affiliates, including Foxmeyer Corporation, Coast
America Corporation, and Computerland Corporation. Mr. Shimer, a certified
public accountant, began his career at KPMG Peat Marwick LLP and has over 25
years of financial management experience.
DAVID E. WEBB became a Director of the Company in June 1995. He is a
co-founder of Heartland, and has been President and Chief Executive Officer and
a director of Heartland since its founding in September 1990. During 1989 and
1990, Mr. Webb began acquiring rights to wireless cable channels. From 1979 to
January 1989, Mr. Webb was a shareholder, director and manager of Durant
Cablevision, Inc. and its predecessor, a traditional hard-wire cable system
company. Mr. Webb has been a shareholder and director of several
media/communications companies involved in network and independent television
stations, AM and FM radio stations, paging and telephony.
33
<PAGE>
The Board of Directors of the Company is divided into three
classes, as nearly equal in numbers as possible, having terms expiring at the
annual meeting of the Company's stockholders in 1996 (comprised of Messrs.
Sternberg, Chavkin and Webb), 1997 (comprised of Messrs. Luby and Holland) and
1998 (Messrs. Reilly, Burkhalter and Shimer). At each annual meeting of
stockholders, successors of the class of Directors whose term expires at such
meeting will be elected to serve for three-year terms and until their successors
are elected and qualified. All current Directors were elected or appointed
pursuant to the terms of a stockholders agreement. See "Security Ownership of
Certain Beneficial Owners and Management-Stockholders Agreement."
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's officers,
Directors and persons who beneficially own more than ten percent of the
Company's Common Stock to file reports of securities ownership and changes in
such ownership with the Securities and Exchange Commission ("SEC"). Officers,
Directors and greater than ten percent beneficial owners also are required by
rules promulgated by the SEC to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to
the Company, or written representations that no Form 5 filings were required,
the Company believes that during the period from October 19, 1995 (the date
the Company's Common Stock became registered under the Exchange Act) through
December 31, 1995, all Section 16(a) filing requirements applicable to its
officers, Directors and greater than ten percent beneficial owners were
complied with other than by Messrs. Gary and Rye, each of whom filed a late
Form 4 disclosing the purchase of shares of Common Stock.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The table below provides information relating to compensation for the
Company's last two fiscal years for the Chief Executive Officer. No other
executive officers of the Company received compensation in excess of $100,000 in
either of those years. The amounts shown include compensation for services in
all capacities that were provided to the Company or Old Wireless One and their
respective subsidiaries.
<TABLE>
<CAPTION>
Long-Term
Compensation
--------------------------
Awards
--------------------------
Annual Compensation Restricted Securities
Name and --------------------------- Stock Underlying All Other
Principal Position Year Salary($) Bonus($) Awards($) Options(#) Compensation
- ------------------ ---- --------- ------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sean E. Reilly 1994 $87,692 __ __ 201,394(1) __
President and Chief 1995 $35,000(2)
Executive Officer
</TABLE>
- --------------------
(1) Such options were originally issued in April 1995 and were to purchase
shares of common stock of Old Wireless One. Such options were assumed by the
Company under its 1995 Long-Term Performance Incentive Plan (the "Incentive
Plan") in October 1995 in connection with the Heartland Transaction (as
defined).
(2) Mr. Reilly began receiving compensation from Old Wireless One on June 1,
1994.
(3) Such options were originally issued in September 1994 and were to purchase
shares of common stock of Old Wireless One. Such options were assumed by the
Company under its Incentive Plan in October 1995 in connection with the
Heartland Transaction (as defined).
35
<PAGE>
STOCK OPTION GRANTS
The following table provides information relating to the stock
options awarded to the Chief Executive Officer during the Company's last
fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (1)
- ----------------------------------------------------------------------------------------------- ---------------------------
Number of Percent of
Securities Total
Underlying Options
Options Granted in Exercise Expiration
Name Granted (#)(2) Fiscal Year Price ($) Date(3) 5% ($) 10% ($)
- -------------------------- ---------------- --------------- ------------ ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sean E. Reilly 201,395(4) 36.3% (5) 4/14/01 $57,196 $199,784
</TABLE>
- -------------
(1) Amounts reflect certain assumed rates of appreciation set forth in the SEC's
executive compensation disclosure rules. Actual gains, if any, on stock
options exercises depend on future performance of the Company's Common Stock
and overall market conditions. The fair market value of the common stock on
the date of grant was estimated to be $4.16 per share. See Note (4). At an
annual rate of appreciation of 5% per year for the option term, the stock
price would be $5.57 per share. At an annual rate of appreciation of 10% per
year for the option term, the stock price would be $7.37 per share.
(2) All options vest in five equal installments, with accelerated vesting in the
event of a change in control of the Company.
(3) All options listed in the table also expire one year following the
termination of employment with the Company of such holder for any reason.
(4) Such options were originally issued in April 1995 and were to purchase
shares of common stock of Old Wireless One. Such options were assumed by the
Company under its Incentive Plan in October 1995 in connection with the
Heartland Transaction (as defined).
(5) The exercise price of such options varies depending upon the date such
options become exercisable. The exercise price with respect to the first 20%
installment of options is $4.16 per share, which is increased 35% per year
for each of the remaining four installments.
36
<PAGE>
STOCK OPTION HOLDINGS
The following table sets forth information with respect to the Chief
Executive Officer concerning the stock options held as of December 31, 1995.
There were no stock options exercised during the last fiscal year of the
Company.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year-End (#) at Fiscal Year-End ($)
------------------------- ----------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable(2)
- ------------------ ------------------------- ----------------------------
<S> <C> <C>
Sean E. Reilly (1) 62,908/251,631 $729,893/$2,088,212
</TABLE>
- ----------
(1) Of these shares underlying the options held by Mr. Reilly, options for
113,144 shares are exercisable at a price of $6.21 per share and options for
201,395 shares are exercisable at various prices depending upon the date
such options became exercisable. The first 20% installment of options are
exercisable at $4.16 per share, which is increased 35% per year for each of
the remaining four installments.
(2) The closing sale price of the Common Stock on December 29, 1995 was $16.50
as reported by the Nasdaq National Market. The value of such options at the
fiscal year end is calculated on the basis of the difference between the
option exercise price and $16.50 multiplied by the number of shares of
Common Stock underlying the option.
EMPLOYMENT AGREEMENTS
In connection with the consummation of the Heartland Transaction, the
Company entered into employment agreements with Messrs. Sternberg, Reilly and
Norris. The employment agreements provide for payment of a specified base
salary indexed to inflation and bonuses in the sole discretion of the
Compensation Committee based upon the executive's performance and the Company's
operating results. The term of each agreement is for two years, subject to
automatic annual renewal until the tenth anniversary of the date of such
agreement. Each employment agreement provides that each executive may be
terminated with or without cause, and will provide that the executive will not
compete with the Company or its subsidiaries within a specified area during the
period of employment and for the two years thereafter. Each executive will be
entitled to receive a severance payment in the event of a resignation caused by
the relocation of the Company's executive offices to a location more than 60
miles from its present location.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Company's Compensation Committee are Messrs.
Holland, Luby and Shimer. No officers or employees of the Company serve on the
Compensation Committee. The Compensation Committee was established in October
1995 in connection with the Company's initial public offering. Previous
compensation levels for Messrs. Sternberg, Reilly and William C. Norris, Senior
Vice President-- System Launches and Secretary, were established pursuant to
the terms of their respective employment agreements. See "Employment
Agreements." The compensation for Messrs. J. Robert Gary and Alton C.
37
<PAGE>
Rye, the other executive officers of the Company, was approved by the full
Board of Directors upon the recommendation of Hans J. Sternberg, Chairman of
the Board. Executive officers who are also Directors of the Company did not
participate in discussions relating to their individual compensation
arrangements.
COMPENSATION OF DIRECTORS
At present, non-employee Directors of the Company receive an annual
fee of $5,000 and a meeting fee of $500 per meeting attended, plus
reimbursement of out-of-pocket expenses, for their services as Directors of the
Company. In addition, each non-employee Director of the Company who does not
serve on the Compensation Committee of the Board of Directors is eligible to
receive stock options under the Company's 1995 Directors' Option Plan.
Directors who are also employees of the Company do not receive any additional
compensation for serving on the Board of Directors. In addition, Directors do
not receive any additional compensation for committee participation.
38
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Except as otherwise noted, the following table sets forth certain
information as of April 1, 1996 as to the security ownership of those persons
owning of record or known to the Company to be the beneficial owner of more than
five percent of the voting securities of the Company and the security ownership
of equity securities of the Company by (i) each of the Directors of the Company,
(ii) each of the executive officers named in the Summary Compensation Table, and
(iii) all Directors and executive officers as a group. All information with
respect to beneficial ownership has been furnished by the respective Director,
executive officer or five percent beneficial owner, as the case may be. Unless
otherwise indicated, the persons named below have sole voting and investment
power with respect to the number of shares set forth opposite their names.
Beneficial ownership of the Common Stock has been determined for this purpose in
accordance with the applicable rules and regulations promulgated under the
Exchange Act.
<TABLE>
<CAPTION>
COMMON STOCK (1)
-----------------------
DIRECTORS, OFFICERS NUMBER PERCENT
AND 5% STOCKHOLDERS OF SHARES OF CLASS
- ------------------------------------------------------------------- -----------------------
<S> <C> <C>
Heartland Wireless Communications, Inc. (2)(3)..................... 3,361,538 24.9%
903 North Bowser, Suite 140
Richardson, Texas 75081
Chase Manhattan Capital Corporation (2)(4)......................... 1,991,690 14.8%
One Chase Manhattan Plaza
New York, New York 10081
Premier Venture Capital Corporation (2)(5)......................... 754,268 5.6%
451 Florida Street
Baton Rouge, Louisiana 70821
Advantage Capital Corporation (2)(6)............................... 630,489 4.7%
LL&E Tower
909 Poydras Street, Suite 2230
New Orleans, Louisiana 70112
Hans J. Sternberg (2)(7)........................................... 374,193 2.7%
Sean E. Reilly (2)(8).............................................. 101,755 *
James J. Collis (9)................................................ -- --
J. R. Holland, Jr. (10)............................................ 3,361,538 24.9%
William K. Luby (11)............................................... 393,226 2.9%
Daniel L. Shimer................................................... 4,800 *
David E. Webb (12)................................................. 3,361,538 24.9%
All Directors and executive officers as a group.................... 4,376,222 32.4%
(10 persons, including those listed above)
</TABLE>
39
<PAGE>
- --------------------
* Less than one percent.
(1) Does not include an aggregate of 200,000 of such shares currently being
held in escrow. Such shares will be distributed to either the Old Wireless
One stockholders or the Heartland subsidiaries. The distribution of shares
held in escrow will depend upon certain working capital post-closing
adjustments.
(2) Heartland and certain of its subsidiaries, CMCC, Premier Venture Capital
Corporation, Advantage Capital Partners Limited Partnership and Advantage
Capital Partners II Limited Partnership, Mr. Sternberg and Mr. Reilly, each
of whose ownership of Common Stock is disclosed in the table, are parties
to Stockholders Agreement. See "Stockholders Agreement." Each of the
parties to the Stockholders Agreement disclaims beneficial ownership of the
shares of Common Stock owned by the other parties to such agreement.
(3) Heartland reported on a Schedule 13G filed with the SEC, as of December 31,
1995, shared voting and dispositive power with respect to an aggregate of
3,361,538 shares of Common Stock owned by certain direct and indirect
subsidiaries of Heartland.
(4) CMCC reported on a Schedule 13G filed with the SEC, as of December 31,
1995, shared voting and dispositive power with respect to 1,991,690 shares
of Common Stock, together with The Chase Manhattan Bank (National
Association), the direct parent of CMCC, and The Chase Manhattan
Corporation, the ultimate parent of CMCC.
(5) As reported on a Schedule 13G filed with the SEC with respect to the shares
of Common Stock held by Premier Venture Capital Corporation ("PVCC") as of
December 31, 1995. PVCC is an indirect wholly owned subsidiary of Premier
Bancorp, Inc., which is a publicly-traded corporation.
(6) Advantage Capital Corporation ("ACC"), as the sole general partner of
Advantage Capital Partners Limited Partnership and Advantage Capital
Limited Partners II Limited Partnership, reported on a Schedule 13G filed
with the SEC, as of December 31, 1995, sole voting and dispositive power
with respect to the shares held by such partnerships. Mr. Steven T. Stull
is the majority stockholder of ACC.
(7) Includes 12,520 shares owned by Mr. Sternberg's wife and 85,537 shares
issuable upon the exercise of presently exercisable options.
(8) Includes 85,537 shares issuable upon the exercise of presently exercisable
options.
(9) Mr. Collis resigned from the Board of Directors on April 25, 1996. At such
time, Messrs. Burkhalter and Chavkin were appointed to the Board.
(10) Includes 3,361,538 shares beneficially owned by Heartland. Mr. Holland is
the Manager and President of Hunt Capital Group, L.L.C., a principal
stockholder of Heartland. Mr. Holland is the Chairman of the Board of
Heartland. Mr. Holland disclaims beneficial ownership of shares owned by
Heartland.
(11) Reflects shares of Common Stock are beneficially owned by Baseball
Partners. Mr. Luby is a general partner of Baseball Partners and therefore
may be deemed to be a beneficial owner of such shares. Mr. Luby disclaims
beneficial ownership of all of the shares of Common Stock owned by Baseball
Partners in which Mr. Luby has no pecuniary interest. Certain affiliates of
CMCC are general partners of Baseball Partners.
(12) Includes 3,361,538 shares beneficially owned by Heartland. Mr. Webb is
President and Chief Executive Officer and a director and principal
stockholder of Heartland. Mr. Webb disclaims beneficial ownership of the
shares of Common Stock owned by Heartland and in which Mr. Webb has no
pecuniary interest.
40
<PAGE>
STOCKHOLDERS AGREEMENT
In connection with the Heartland Transaction, CMCC, Baseball Partners,
Premier Venture Capital Corporation, affiliates of Advantage Capital
Corporation, Mr. Sternberg and Mr. Reilly, each of whom was a former
stockholder of Old Wireless One, and Heartland and certain of its subsidiaries
entered into a stockholders agreement (the "Stockholders Agreement"), whereby,
among other things, they agreed to vote their Common Stock so that the Board of
Directors of the Company will have up to seven members, up to three of whom
will be designated by Heartland (at least one of whom must be independent of
Heartland, the Company and the Old Wireless One stockholders who are parties to
the Stockholders Agreement other than CMCC), up to two of whom will be
designated by a majority of the Old Wireless One stockholders who are parties
to the Stockholders Agreement other than CMCC (at least one of whom must be
independent of the Company and such stockholders), and up to two of whom will
be designated by CMCC. The current Directors proposed by Heartland are Messrs.
Holland, Shimer and Webb; the current Directors proposed by the Old Wireless
One stockholders are Messrs. Sternberg and Luby; and the current Directors
designated by CMCC are Messrs. Burkhalter and Chavkin.
Based upon certain filings made by the parties to the Stockholders
Agreement with the SEC, the Company believes that the parties to the
Stockholders Agreement collectively beneficially own an aggregate of 7,607,159
shares of Common Stock (including 171,074 shares of Common Stock issuable upon
the exercise of presently exercisable stock options held by Messrs. Sternberg
and Reilly), which represents approximately 55.6% of the outstanding Common
Stock. As a result, such stockholders are able to control the election of the
members of the Company's Board of Directors and to generally exercise control
over the Company's affairs. The Stockholders Agreement also provides that,
without the prior approval of the Board and until the third anniversary of the
closing of the Heartland Transaction, the parties to the Stockholders Agreement
may not, without the approval of a majority of the Directors, (i) acquire
equity securities of the Company (or rights or options to acquire equity
securities of the Company other than equity securities issued or issuable with
respect to such Common Stock, securities issued to Messrs. Sternberg or Reilly
pursuant to Board-approved option plans and the acquisition of up to 250,000
shares of Common Stock by Heartland or ACC), (ii) solicit proxies or consents
in opposition to solicitations made by or on behalf of the Board or (iii) other
than in connection with the Stockholders Agreement, act together with any other
person to acquire, hold, vote or dispose of securities of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April 1995, certain investors purchased redeemable convertible
preferred stock and warrants to acquire common stock of Old Wireless One in a
private placement resulting in net proceeds of approximately $14 million to Old
Wireless One. The following investors purchased redeemable convertible
preferred stock and warrants to acquire common stock in the amounts indicated:
CMCC--8,000 preferred shares and warrants to purchase 320,000 shares of common
stock ($8.0 million); Premier Venture Capital Corporation--2,500 preferred
shares and warrants to purchase 100,000 shares of common stock ($2.5 million);
affiliates of Advantage Capital Corporation--2,000 preferred shares and
warrants to purchase 80,000 shares of common stock ($2.0 million); and certain
members of Mr. Sternberg's immediate family--252 preferred shares and warrants
to purchase 8,400 shares of common stock. All such preferred shares and
warrants to purchase shares of common stock were converted into shares of
Common Stock of the Company in the Heartland Transaction (defined below).
In October 1995, Heartland and all the stockholders of Old Wireless One
consummated a transaction (the "Heartland Transaction"), whereby the Company
acquired (i) all of the outstanding capital stock of Old
41
<PAGE>
Wireless One (which retained all of its assets and liabilities except its
wireless cable television assets and certain related liabilities with respect
to the Springfield, Missouri market which Heartland acquired) through the
merger of a subsidiary of the Company with Old Wireless One and (ii) the
wireless cable television assets and all related liabilities of certain
subsidiaries of Heartland with respect to certain of Heartland's markets
located in Texas, Louisiana, Alabama, Georgia and Florida. In connection with
the Heartland Transaction, the contributing subsidiaries of Heartland and the
stockholders of Old Wireless One received an aggregate of approximately 3.5
million and approximately 6.5 million shares of Common Stock, respectively,
with an aggregate of 200,000 of such shares of Common Stock placed in escrow to
be distributed to either the Old Wireless One stockholders and/or the
contributing subsidiaries of Heartland, but not to the Company. The
distribution of the shares of Common Stock held in escrow will depend upon
certain working capital post-closing adjustments. Upon consummation of the
Heartland Transaction, the contributing subsidiaries of Heartland received a
promissory note for $3 million and a promissory note for $7 million, which
notes were repaid from the proceeds of the Company's debt and equity offerings.
In connection with the Heartland Transaction, Heartland and the Company
entered into an agreement whereby (i) the Company agreed not to compete with
Heartland or any of Heartland's subsidiaries in the wireless cable television
business in specified markets in which Heartland and its subsidiaries operate
or have significant channel rights, (ii) Heartland agreed not to compete with
the Company in the wireless cable television business in specified markets,
including all of the markets described herein and (iii) if at any time a
wireless cable television system operated by the Company interferes with the
signal transmission of a wireless cable television system operated by Heartland
or one of Heartland's subsidiaries (or vice versa), then the Company, Heartland
and their respective subsidiaries will use their best efforts to negotiate and
enter into an appropriate non-interference agreement.
In connection with the Heartland Transaction, the Company entered into a
registration agreement with Heartland, the contributing Heartland subsidiaries
and all of the former stockholders of Old Wireless One (the "Registration
Agreement"). Under the Registration Agreement, at any time after the second
anniversary of the Heartland Transaction, the holders of a majority of the
Common Stock issued to the former stockholders of Old Wireless One in the
Heartland Transaction and the holders of a majority of the Common Stock issued
to certain of Heartland's subsidiaries in the Heartland Transaction shall each
have the right, subject to certain conditions, to require the Company to
register any or all of such Common Stock under the Securities Act on Form S-1
on three occasions at the Company's expense and on Form S-2 or S-3 on an
additional three occasions at the Company's expense. Heartland and its
subsidiaries and the stockholders of Old Wireless One are also entitled to
request the inclusion of any Common Stock subject to the Registration Agreement
in any registration statement at the Company's expense whenever the Company
proposes to register any of its securities under the Securities Act, subject to
certain conditions.
In connection with the Heartland Transaction, the Company, Heartland and
certain of the Old Wireless One stockholders entered into the Stockholders
Agreement. See "Security Ownership of Certain Beneficial Owners and
Management-Stockholders Agreement."
The Company leases approximately 2,500 square feet of office space for its
corporate headquarters in Baton Rouge, Louisiana, under a lease from Starmount.
Mr. Sternberg is Chairman, Chief Executive Officer and owner of Starmount. The
Company pays approximately $25,000 to Starmount annually for such space. The
Company believes the lease was entered into on terms reflecting then current
market rates. The lease with Starmount expires on April 30, 1997. The Company
is currently in the process of moving into larger corporate headquarters and
expects to terminate such lease as of April 30, 1996 without further payment or
penalty.
42
<PAGE>
The terms of the transactions described above were determined by the
parties thereto, and the Company believes that such transactions involving
affiliates were on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties in arms-length transactions. The
Company expects that all future transactions between the Company and its
officers, Directors, principal stockholders and affiliates will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following consolidated financial
statements of the Company and the report of the independent
auditors thereon, are included in this Form 10-K on pages F-1
through F-__:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1994 and 1995
Consolidated Statements of Operations for the period from
February 4, 1993 (inception) to December 31, 1993 and for
the years ended December 31, 1994 and 1995
Consolidated Statements of Changes in Stockholders'
Equity for the period from February 4, 1993 (inception)
to December 31, 1993 and for the years ended December 31,
1994 and 1995
Consolidated Statements of Cash Flows for the period from
February 4, 1993 (inception) to December 31, 1993 and for
the years ended December 31, 1994 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The following financial
statement schedule of the Company for the period from February
4, 1993 (inception) to December 31, 1993 and the years ended
December 31, 1994 and 1995 is included in this Form 10-K on page
S-1.
SCHEDULE NO. DESCRIPTION PAGE NO.
------------ ----------- --------
Schedule II Valuation and Qualifying Accounts S-1
All other financial statement schedules have been omitted
because they are inapplicable or the required information is
included or incorporated by reference elsewhere herein.
3. Exhibits. The Company will furnish to any eligible stockholder,
upon written request of such stockholder, a copy of any exhibit
listed below upon the payment of a reasonable fee equal to the
Company's expenses in furnishing such exhibit.
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -------
<C> <S>
2.1 Contribution Agreement and Agreement and Plan of Merger, dated October
18, 1995, among, inter alia, the Company, Wireless One Operating
Company and its former stockholders and Heartland.(1)
2.2 Escrow Agreement, dated October 24, 1995, among the parties to Exhibit
2.1.(1)
3.1(i) Amended and Restated Certificate of Incorporation of
the Company.(2)
3.1(ii) By-Laws of the Company.(2)
4.1 1995 Long-Term Performance Incentive Plan of the Company.(1)+
4.2 1995 Directors' Stock Option Plan of the Company.(1)+
4.3 Warrant Agreement, dated October 18, 1995, between the Company and
Gerard Klauer Mattison & Co., LLC (including form of warrant
certificate).(1)
4.4 Registration Agreement, dated October 24, 1995, among the Company,
Heartland and the former stockholders of Wireless One Operating
Company.(1)
4.5 Stockholders Agreement, dated October 18, 1995, among the Company,
Heartland and certain former stockholders of Wireless One Operating
Company.(1)
4.6 Indenture, dated October 24, 1995, between the Company and United States
Trust Company of New York, as Trustee.(1)
4.7 Warrant Agreement, dated October 24, 1995, between the Company and
United States Trust Company of New York, as Warrant Agent.(1)
4.9 Unit Agreement, dated October 24, 1995, between the Company and United
States Trust Company of New York, as Unit Agent and Warrant Agent.(1)
10.1 Standard forms of MDS License Agreement of the Company.(2)
10.2 Standard forms of ITFS License Agreement of the Company.(2)
21.1 Subsidiaries of the Company.*
24.1 Powers of Attorney.*
___________
</TABLE>
45
<PAGE>
(1) Incorporated herein by reference to the same numbered exhibit to the
Company's Form 10-Q for the quarterly period ended September 30, 1995
(Commission File No. 0-26836).
(2) Incorporated herein by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-1 (Commission File No. 33-
94942), as declared effective by the Commission on October 18, 1995.
+ Denotes a management contract or compensatory plan or arrangement
required to be filed with this Form 10-K pursuant to Item 14(c) of
Form 10-K.
* Previously filed.
(b) Reports on Form 8-K.
None.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 1st day of July, 1996.
WIRELESS ONE, INC.
By /s/ Sean E. Reilly
--------------------------------------
Sean E. Reilly
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 2 to Annual Report has been signed below by the following persons
on behalf of the registrant in the capacities indicated on this 1st day of
July, 1996.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ----------------------- -------------------------------------------------
<S> <C>
/s/ Sean E. Reilly President, Chief Executive Officer and Director
- ----------------------- (Principal Executive Officer)
Sean E. Reilly
/s/ Michael C. Ellis Vice President and Controller (Principal
- ----------------------- Accounting Officer)
Michael C. Ellis
* Director
- -----------------------
Arnold L. Chavkin
* Director
- -----------------------
Henry M. Burkhalter
* Director
- -----------------------
William K. Luby
* Director
- -----------------------
J.R. Holland, Jr.
* Director
- -----------------------
Daniel L. Shimer
Director
*
- -----------------------
David E. Webb
</TABLE>
47
<PAGE>
* The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Powers of Attorney executed by
the above-named Officers and Directors of the Company and filed with the
Securities and Exchange Commission on behalf of such Officers and
Directors.
By /s/ Sean E. Reilly
----------------------------------
Sean E. Reilly, Attorney-in-Fact
48
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ---------------------------------------------------------------------- -------------
<C> <S> <C>
2.1 Contribution Agreement and Agreement and Plan of Merger, dated
October 18, 1995, among, inter alia, the Company, Wireless One
Operating Company and its former stockholders and Heartland (1)
2.2 Escrow Agreement, dated October 24, 1995, among the parties to
Exhibit 2.1 (1)
3.1(i) Amended and Restated Certificate of Incorporation of the Company (2)
3.1(ii) By-Laws of the Company (2)
4.1 1995 Long-Term Performance Incentive Plan of the Company+ (1)
4.2 1995 Directors' Stock Option Plan of the Company+ (1)
4.3 Warrant Agreement, dated October 18, 1995, between the Company and
Gerard Klauer Mattison & Co., LLC (including form of warrant
certificate) (1)
4.4 Registration Agreement, dated October 24, 1995, among the Company,
Heartland and the former stockholders of Wireless One Operating
Company (1)
4.5 Stockholders Agreement, dated October 18, 1995, among the Company,
Heartland and certain former stockholders of Wireless One Operating
Company (1)
4.6 Indenture, dated October 24, 1995, between the Company and United
States Trust Company of New York, as Trustee (1)
4.7 Warrant Agreement, dated October 24, 1995, between the Company and
United States Trust Company of New York, as Warrant Agent (1)
4.9 Unit Agreement, dated October 24, 1995, between the Company and
United States Trust Company of New York, as Unit Agent and Warrant
Agent (1)
10.1 Standard forms of MDS License Agreement of the Company (2)
10.2 Standard forms of ITFS License Agreement of the Company (2)
21.1 Subsidiaries of the Company*
24.1 Powers of Attorney*
</TABLE>
49
<PAGE>
_______________
(1) Incorporated herein by reference to the same numbered exhibit to the
Company's Form 10-Q for the quarterly period ended September 30, 1995
(Commission File No. 0-26836).
(2) Incorporated herein by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-1 (Commission File No. 33-
94942), as declared effective by the Commission on October 18, 1995.
+ Denotes a management contract or compensatory plan or arrangement required to
be filed with this Form 10-K pursuant to Item 14(c) of Form 10-K.
* Previously filed.
50
<PAGE>
WIRELESS ONE, INC.
Consolidated Financial Statements
December 31, 1994 and 1995
With Independent Auditors' Report Thereon
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Wireless One, Inc.:
We have audited the accompanying consolidated balance sheets of Wireless One,
Inc. and subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the period from February 4, 1993 (inception) through December 31, 1993 and the
years ended December 31, 1994 and 1995. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless One, Inc.
and subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period from February 4, 1993 (inception)
through December 31, 1993 and the years ended December 31, 1994 and 1995, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
March 22, 1996
F-1
<PAGE>
WIRELESS ONE, INC.
Consolidated Balance Sheets
December 31, 1994 and 1995
<TABLE>
<CAPTION>
Assets 1994 1995
----- ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,481 110,380,329
Marketable investment securities - restricted (note 3) - 17,637,839
Subscriber receivables, less allowance for doubtful accounts of
$4,000 and $73,641 in 1994 and 1995, respectively 110,219 143,633
Accrued interest and other receivables 3,450 405,241
Prepaid expenses 55,515 796,389
----------- -----------
Total current assets 193,665 129,363,431
Property and equipment, net (note 4) 3,078,523 14,266,755
Leased license investment, net of accumulated amortization of
$230,902 and $548,283 in 1994 and 1995, respectively 5,540,036 26,724,238
Marketable investment securities - restricted (note 3) - 35,755,505
Other assets (note 5) 102,000 7,689,945
----------- -----------
$ 8,914,224 213,799,874
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable 228,835 2,356,707
Accrued expenses 44,779 862,100
Accrued interest - 3,683,333
Current maturities of long-term debt (note 6) 1,457,295 376,780
----------- -----------
Total current liabilities 1,730,909 7,278,920
Long-term debt (note 6) 2,839,602 150,871,267
----------- -----------
4,570,511 158,150,187
----------- -----------
Redeemable convertible preferred stock, $.01 par value; 15,000
shares authorized, no shares issued or outstanding (note 8) - -
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $0.01 par value, 50,000,000 shares authorized,
2,013,950 and 13,498,752 shares issued and outstanding in
1994 and 1995, respectively 20,139 134,988
Additional paid-in capital 9,979,861 65,631,596
Subscriptions receivable (3,231,864) -
Accumulated deficit (2,424,423) (10,116,897)
----------- -----------
Total stockholders' equity 4,343,713 55,649,687
Commitments and contingencies (note 11)
----------- -----------
$ 8,914,224 213,799,874
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
WIRELESS ONE, INC.
Consolidated Statements of Operations
The period from February 4, 1993 (inception)
through December 31, 1993 and the
years ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ - 380,077 1,343,969
---------- ---------- ----------
Operating expenses:
Systems operations 24,429 274,886 841,819
Selling, general and administrative 110,281 1,800,720 4,431,839
Depreciation and amortization 27,489 413,824 1,783,066
---------- ---------- ----------
162,199 2,489,430 7,056,724
----------- ---------- ----------
Operating loss (162,199) (2,109,353) (5,712,755)
---------- ----------- -----------
Other income (expense):
Interest expense (411) (171,702) (4,070,184)
Interest income - - 2,024,116
Other - 19,242 66,349
---------- ---------- ----------
Total other income (expense) (411) (152,460) (1,979,719)
---------- ---------- ----------
Net loss (162,610) (2,261,813) (7,692,474)
Preferred stock dividends and discount
accretion (note 8) - - (786,389)
---------- ---------- ----------
Net loss applicable to common stock $ (162,610) (2,261,813) (8,478,863)
========== ========== ==========
Net loss per common share $(.30) (1.21) (2.02)
========== ========== ==========
Weighted average common shares outstanding 538,127 1,863,512 4,187,736
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WIRELESS ONE, INC.
Consolidated Statements of Stockholders' Equity
The period from February 4, 1993 (inception)
through December 31, 1993 and the
years ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Additional Subscrip-
Common paid-in tions Accumulated
stock capital receivable deficit Total
---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Issuance of 538,127 shares of
common stock and recapi-
talization upon merger with
Wireless One, L.L.C.
(note 1 (a)) $ 5,381 834,619 (219,020) - 620,980
Net loss - - - (162,610) (162,610)
---------- ---------- ---------- ----------- ----------
Balance at December 31, 1993 5,381 834,619 (219,020) (162,610) 458,370
Issuance of 1,475,823
shares of common stock 14,758 9,145,242 (8,660,000) - 500,000
Collections of subscriptions receivable - - 5,647,156 - 5,647,156
Net loss - - - (2,261,813) (2,261,813)
---------- ---------- ---------- ----------- ----------
Balance at December 31, 1994 20,139 9,979,861 (3,231,864) (2,424,423) 4,343,713
Collections of subscriptions
receivable - - 3,231,864 - 3,231,864
Conversion of redeemable
preferred stock and warrants
into 4,524,512 shares of
common stock 45,246 14,453,442 - - 14,498,688
Issuance of 3,450,000 shares of
common stock pursuant to
initial public offering 34,500 32,340,708 - - 32,375,208
Issuance of 750,000 warrants - 3,015,000 - - 3,015,000
Issuance of 3,510,290 shares of
common stock in purchase
transactions 35,103 6,628,974 - - 6,664,077
Preferred stock dividends and
accretion of discount - (786,389) - - (786,389)
Net loss - - - (7,692,474) (7,692,474)
---------- ---------- ---------- ----------- ----------
Balance at December 31, 1995 $134,988 65,631,596 - (10,116,897) 55,649,687
========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WIRELESS ONE, INC.
Consolidated Statements of Cash Flows
The period from February 4, 1993 (inception)
through December 31, 1993 and the
years ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(162,610) (2,261,813) (7,692,474)
Adjustments to reconcile net loss to net cash
used in operating activities:
Bad debt expense - 54,608 196,281
Depreciation and amortization 27,489 413,824 1,783,066
Amortization of debt discount - 104,767 328,301
Non-cash interest income - - (213,230)
Changes in assets and liabilities:
Receivables - (167,277) (571,957)
Prepaid expenses (9,000) (46,515) (468,707)
Accounts payable and accrued expenses 36,236 237,378 6,004,541
--------- ---------- -----------
Net cash used in operating activities (107,885) (1,665,028) (634,179)
--------- ---------- -----------
Cash flows from investing activities:
Purchase of investments and other assets - (102,000) (1,533,446)
Capital expenditures (288,123) (2,960,842) (9,805,057)
Acquisition of intangible assets (154,854) (5,156,054) (6,762,415)
Purchase of marketable investment securities - - (53,180,114)
--------- ---------- -----------
Net cash used in investing activities (442,977) (8,218,896) (71,281,032)
--------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and
warrants 20,722 4,275,819 150,014,902
Principal payments on long-term debt (1,104) (103,306) (11,502,054)
Debt issuance costs - - (5,593,839)
Issuance of common stock 619,980 5,647,156 35,008,396
Issuance of redeemable preferred stock - - 14,343,654
--------- ---------- -----------
Net cash provided by financing activities 639,598 9,819,669 182,271,059
--------- ---------- -----------
Net increase (decrease) in cash 88,736 (64,255) 110,355,848
Cash and cash equivalents at beginning of period - 88,736 24,481
--------- ---------- -----------
Cash and cash equivalents at end of period $ 88,736 24,481 110,380,329
========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
December 31, 1994 and 1995
(1) Description of Business and Summary of Significant Accounting Policies
----------------------------------------------------------------------
(a) Description of Organization
---------------------------
Wireless One Inc. was formed in June 1995 by the shareholders of a
predecessor company (Old Wireless One) and Heartland Wireless
Communications, Inc. (Heartland) for the purpose of further developing,
owning, and operating wireless cable television systems primarily in select
southern and southeastern markets. Old Wireless One had been formed on
December 23, 1993, in conjunction with the merger of its predecessor,
Wireless One, L.L.C., a Limited Liability Company (LLC). LLC had been
formed on February 4, 1993 with six members and on December 23, 1993, Old
Wireless One acquired all of the net assets and outstanding interests of
LLC in a tax free reorganization. Accordingly, the accompanying
consolidated financial statements include results of operations of Wireless
One, Inc. and its predecessor companies since February 4, 1993. Unless
otherwise indicated, references to the Company include Wireless One, Inc.
and its predecessors.
(b) Consolidation Policy
--------------------
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions are eliminated in consolidation.
(c) Property and Equipment
----------------------
Property and equipment are stated at cost and include the cost of
transmission equipment as well as subscriber installations. The Company
capitalizes the excess of direct costs of subscriber installations over
installation fees. These direct costs include reception materials and
equipment on subscriber premises, installation labor and overhead charges
and direct commissions. Prior to 1995, installation fees were recognized in
revenues and commissions were expensed. The effect of the above change had
no material effect on the 1994 and 1995 results of operations.
Depreciation and amortization are recorded on a straight-line basis for
financial reporting purposes over the estimated useful lives of the assets.
Any unamortized balance of the nonrecoverable portion of the cost of a
subscriber installation is fully depreciated upon subscriber disconnect and
the related cost and accumulated depreciation are removed from the balance
sheet. Repair and maintenance costs are charged to expense when incurred;
renewals and betterments are capitalized.
Equipment awaiting installation consists primarily of accessories, parts
and supplies for subscriber installations, and is stated at the lower of
average cost or market.
(Continued)
F-6
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(d) Leased License Investment
-------------------------
Leased license investment consists primarily of costs incurred in
connection with the Company's acquisition of channel rights. Channel rights
represent the right to utilize all of the capacity on channels operated
under a license received from the Federal Communications Commission
("FCC"). These assets are recorded at cost and amortized using the straight
line method over the assets' estimated useful lives, usually 10-20 years,
beginning with inception of service in each market. As of December 31, 1994
and 1995, approximately $4,686,000 and $17,809,000 of channel rights were
not subject to amortization.
The Company periodically evaluates the propriety of the carrying amounts of
the leased license investment in each market, as well as the amortization
period based on estimated undiscounted future cash flows to determine
whether current events or circumstances warrant adjustments to the carrying
amounts or a revised estimate of the useful life. If warranted, an
impairment loss would be recognized to reduce the carrying amount of the
related assets to management's estimate of the fair value of the individual
market.
(e) Revenue Recognition
-------------------
Revenues from subscribers are recognized in the month that the service is
provided.
(f) Income Taxes
------------
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
A valuation allowance is provided to reduce the carrying value of deferred
tax assets to an amount which more likely than not will be realized.
Changes in the valuation allowance represent changes in an estimate and are
reflected as an adjustment to income tax expense in the period of the
change.
The Company files a consolidated federal income tax return which includes
all of its subsidiaries. Losses incurred from inception through December
22, 1993 were attributed directly to the members of the L.L.C., and,
accordingly, are not available to offset the Company's future taxable
income.
(Continued)
F-7
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(g) Net Loss Per Common Share
-------------------------
Net loss per common share is based on the net loss applicable to common
stock divided by the weighted average number of common shares outstanding
during the period presented. All share and per share data, including the
weighted average number of common shares outstanding, for all periods prior
to the Heartland Transaction (see note 2) gives retroactive effect to the
exchange of approximately one share of Old Wireless One common stock for 4
shares of Wireless One, Inc. Shares issuable upon exercise of stock options
and warrants are antidilutive and have been excluded from the calculation.
(h) Debt Issuance Costs
-------------------
Costs incurred in connection with issuance of the Company's 13% Senior
notes are included in other assets and are being amortized using the
interest method over the term of the notes.
(i) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents includes cash and temporary cash investments that
are highly liquid and have original maturities of three months or less.
(j) Use of Estimates
----------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(k) Marketable Investment Securities
--------------------------------
Investments in marketable securities at December 31, 1995 consist of U.S.
Treasury securities which mature periodically through October 1998. The
Company has the ability and intent to hold these investments until maturity
and, accordingly, has classified these investments as held-to-maturity
investments. Held-to-maturity investments are recorded at amortized cost,
adjusted for amortization of premiums or discounts. Premiums and discounts
are amortized over the life of the related held-to-maturity investment as
an adjustment to yield using the effective interest method. A decline in
market value of the Company's investments below cost that is deemed other
than temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the investment
is established.
(Continued)
F-8
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(2) Initial Public Offering and Heartland Transaction
-------------------------------------------------
During October, 1995, the Company completed a series of transactions which
included (i) the issuance of 3,450,000 shares of common stock at $10.50 per
share in an initial public offering; (ii) the issuance of $150,000,000 of
13% Senior Notes due in 2003 and warrants to purchase 450,000 shares of the
Company's common stock, and (iii) the acquisition of certain wireless cable
television assets and related liabilities of certain subsidiaries of
Heartland for common stock of the Company and notes (the Heartland
Transaction).
The consummation of the Heartland transaction included the Company's
acquisition of all of the outstanding capital stock of Old Wireless One and
certain wireless cable television assets and related liabilities in
Heartland's markets in Texas, Louisiana, Alabama, Georgia and Florida. In
connection with the Heartland transaction, the shareholders of Old Wireless
One received approximately 6.5 million shares of the Company's common stock
and Heartland received approximately 3.5 million shares of the Company's
common stock. In addition, Heartland received notes in the amount of
$10,000,000, which were subsequently repaid by the Company from the
proceeds of the offerings of the Company's common stock and Senior Notes.
The Heartland transaction has been accounted for as a business combination
using the purchase method of accounting. In accordance with Staff
Accounting Bulletin No. 48, the Heartland assets and liabilities acquired
have been recorded using the historical cost basis previously reported by
Heartland, reduced by the amount of notes issued to Heartland in connection
with the transaction. The assets acquired consist primarily of systems and
equipment and various wireless cable channel rights. The following is a
summary of the net assets acquired:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 318,892
Current liabilities (35,956)
Systems and equipment, net 2,392,711
Leased license investment and other intangibles 13,476,534
------------
Net assets acquired 16,152,181
Notes issued to Heartland (10,000,000)
------------
$ 6,152,181
============
</TABLE>
(Continued)
F-9
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
The 1995 financial statements of Wireless One, Inc. include the results of
operations of the business interests acquired in the Heartland Transaction
since October 18, 1995. Pro forma unaudited consolidated operating results of
the Company and the Heartland business acquired for the years ended December
31, 1994 and 1995, assuming the transaction had been completed as of January
1, 1994 and 1995, are summarized below (in thousands except per share
amounts):
<TABLE>
<CAPTION>
1994 1995
------------ -----------
<S> <C> <C>
Total revenues $ 1,287,312 1,976,142
Operating expenses:
Systems operations 1,052,799 1,433,934
Selling, general and administrative 2,306,280 4,780,286
Depreciation and amortization 658,177 1,977,028
----------- ----------
Total operating expenses 4,017,256 8,191,248
----------- ----------
Operating loss (2,729,944) (6,215,106)
Interest expense (1,065,967) (4,738,611)
Interest income and other 19,242 2,090,465
----------- ----------
Net loss $(3,776,669) (8,863,252)
=========== ==========
Net loss per share $(0.29) (0.68)
=========== ==========
</TABLE>
These pro forma results have been prepared for comparative purposes only and
include an adjustment for additional interest expense associated with the
portion of the proceeds of the notes utilized to repay $7 million of notes to
Heartland. They do not purport to be indicative of the results of operations
which actually would have resulted had the combination been in effect on
January 1, 1994 and 1995 or of future results of operations of the consolidated
entities.
(3) Marketable Investment Securities - Restricted
---------------------------------------------
Marketable investment securities - restricted at December 31, 1995 consists
of U.S. Treasury securities placed in escrow pursuant to the bond indenture
relating to the 13% Senior Notes due 2003. The investments have been
deposited into an escrow account and, pending disbursement, the collateral
agent has a first priority lien on the escrow account for the benefit of
the holders of the notes. Such funds may be disbursed from the escrow
account only to pay interest on the Notes and, upon certain repurchases or
redemptions of the Notes, to pay principal of and premium, if any, thereon.
The maturities of the securities purchased have been matched to the
interest payment dates of the notes.
(Continued)
F-10
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
A summary of the Company's restricted marketable securities as of December
31, 1995 follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Loss Gain Value
---------- ------------ ----------- -------
<S> <C> <C> <C> <C>
12/31/95
- --------
U.S. Treasury Notes 22,343,879 (1,110) 113,163 22,455,932
Other Debt Securities 31,049,415 -- 199,185 31,248,600
---------- ------ ------- ----------
53,393,294 (1,110) 312,348 53,704,532
========== ====== ======= ==========
</TABLE>
Scheduled maturities for the marketable securities held at December 31,
1995, are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- ----------
<S> <C> <C>
Maturing in less than 1 year 11,471,559 17,665,069
Maturing from 1-5 years 41,921,735 36,039,463
----------- ----------
53,393,294 53,704,532
=========== ==========
</TABLE>
(4) Property and Equipment
----------------------
Major categories of property and equipment at December 31, 1994 and 1995 are
as follows :
<TABLE>
<CAPTION>
Estimated
Life 1994 1995
------------ ------------- ------------
<S> <C> <C> <C>
Equipment awaiting installation 5 $ 422,109 2,230,144
Subscriber premises equipment
and installation costs 5 1,021,382 3,561,714
Transmission equipment and system
construction costs 10 1,534,028 8,092,890
Office furniture and equipment 7 219,629 1,270,131
Buildings and leasehold improvements 31.5 91,723 523,203
------------ ------------
3,288,871 15,678,082
Less accumulated depreciation (210,348) (1,411,327)
----------- ------------
$ 3,078,523 14,266,755
=========== ==========
</TABLE>
(5) Other Assets
------------
Other assets at December 31, 1994 and 1995
consist of the following:
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Debt issuance costs, net of
accumulated amortization
of $163,927 $ - 6,053,898
Deposits - 1,410,543
Other 102,000 225,504
----------- -----------
$ 102,000 7,689,945
=========== ===========
</TABLE>
(6) Long-term Debt
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1994 1995
------------ -----------
<S> <C> <C>
13% Senior Notes due 2003;
face value of $150,000,000, net of
unamortized discount $ - 148,149,131
Subordinated non-interest bearing notes
(face value of $3,700,000),
discounted to an 8% effective rate,
principal and interest due in
installments through July 1997 2,949,986 2,939,156
</TABLE>
(Continued)
F-11
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
$3,000,000 revolving line of credit, due September
30, 1995, with interest due quarterly at the prime
rate, (7.25% at December 31, 1994) secured by
assignment of stock subscriptions receivable $ 1,106,243 -
Other 240,668 159,760
------------ ------------
4,296,897 151,248,047
Less current maturities (1,457,295) (376,780)
------------ ------------
Long-term debt, excluding current maturities $ 2,839,602 150,871,267
============ ============
Long term debt matures as follows:
1996 $ 376,780
1997 2,572,136
1998 -
1999 150,000
2000 -
Thereafter 148,149,131
</TABLE>
Interest on the Senior Notes (the "Notes") is payable semi-annually on April 15
and October 15 of each year, commencing April 15, 1996. The Notes are
redeemable at the option of the Company, in whole or in part, at any time on or
after October 15, 1999, at variable redemption prices in excess of par. On or
prior to October 15, 1998, the Company may redeem up to 30% of the aggregate
principal amount of the Notes with the proceeds from a sale to a strategic
investor, as defined. In addition, upon the occurrence of a change of control,
as defined, each holder of Notes may require the Company to repurchase all or a
portion of such holder's Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest.
The notes are issued and outstanding under an indenture which contains certain
covenants, including limitations on the incurrence of indebtedness, the making
of restricted payments, transactions with affiliates, sale and leaseback
transactions, the existence of liens, disposition of proceeds of asset sales,
the making of guarantees and pledges by restricted subsidiaries, transfers and
issuance of stock of subsidiaries, investments in unrestricted subsidiaries,
the conduct of the Company's business and certain mergers and sales of assets.
(7) Income Taxes
------------
The Company has not recognized any income tax benefit for any of the
periods presented due to management's conclusion that a 100% valuation
allowance for the net deferred tax asset is warranted. Statement of
Financial Accounting Standards ("SFAS") 109 provides that the tax benefit
of net operating loss carryforwards is recorded as an asset only to the
extent that management assesses the realization of such carryforwards to be
"more likely than not."
(Continued)
F-12
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 808,064 2,955,166
Allowance for bad debts - 25,038
Reserve for obsolescence in equipment - 68,000
Accrued liabilities deductible when paid - 152,320
--------- ----------
808,064 3,200,524
Less valuation allowance (224,410) (2,136,029)
--------- ----------
Deferred tax asset 583,654 1,064,495
--------- ----------
Deferred tax liabilities:
Fixed assets, principally due to differences in
depreciation and underlying basis 10,737 11,700
Intangibles, due to differences in basis and
amortizable lives 572,917 440,795
Purchase accounting adjustments resulting in
differences in bases of underlying assets - 612,000
--------- ----------
Deferred tax liabilities 583,654 1,064,495
--------- ----------
Net deferred tax asset $ - -
========= ==========
</TABLE>
The net changes in total valuation allowance for the years ended December 31,
1994 and 1995 were increases of $224,410 and $1,911,619, respectively. In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon these
considerations, the Company has recognized deferred tax assets to the extent
such assets can be realized through future reversals of existing taxable
temporary differences.
The Company had net operating loss carryforwards for Federal income tax purposes
of approximately $8,700,000 as of December 31, 1995. The carryforwards expire
in years 2008-2010.
(Continued)
F-13
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(8) Redeemable Convertible Preferred Stock
--------------------------------------
On April 14, 1995, the Company completed a private placement of 14,781.75
shares of redeemable convertible preferred stock and 591,270 warrants to
purchase common stock (collectively the "Units") at a price of $1,000 per
Unit. The proceeds from the issue were $13,866,000, net of issuance costs.
The excess of the liquidation value over the carrying value was accreted by
periodic charges to additional paid-in capital during the period the stock
was outstanding. Contemporaneously with the closing of the initial public
offering of common stock in October 1995, the preferred stock and warrants
were converted into approximately 4,524,512 shares of common stock.
(9) Stockholders' Equity
--------------------
In connection with the sale of the 13% Senior notes due 2003, the company
issued warrants to acquire 450,000 shares of its common stock. Each warrant
entitles the holder to purchase one share of common stock at $11.55 per
share. The warrants are exercisable at any time on or after October 24,
1996 and will expire on October 24, 2000. For financial reporting purposes,
these warrants were valued at $1,890,000.
In connection with the Heartland transaction, the Company issued warrants
(the "GKM Warrants") to purchase 300,000 shares of common stock to an
underwriter for nominal consideration. The GKM Warrants are initially
exercisable at $12.60 per share through October 18, 2000. For financial
reporting purposes, these warrants were valued at $1,125,000.
In connection with the Heartland Transaction, certain of the shareholders
of the Company with beneficial ownership of approximately 56% of the
Company's outstanding common stock at December 31, 1995 have entered into
an agreement whereby, among other things, they have agreed to vote their
common stock to elect a specified slate of directors, which will be
designated by the parties to the stockholders agreement.
(10) Stock Option Plan
-----------------
The Company has adopted the 1995 Long-Term Performance Incentive Plan (the
"Incentive Plan"), which provides for the grant to key employees of the
Company of stock options, appreciation rights, restricted stock,
performance grants and any other type of award deemed to be consistent with
the purpose of the Incentive Plan.
The total number of shares of Common Stock which may be granted pursuant to
the Incentive Plan is 1,300,000. The Incentive Plan will terminate upon the
earlier of the adoption of a Board of Directors' resolution terminating the
Incentive Plan or on the tenth anniversary of the date of adoption, unless
extended for an additional five-year period for grants of awards other than
incentive stock options.
The exercise price of stock options is determined by the Compensation
Committee of the Board of Directors, but may not be less than 100% of the
fair market value of the common stock on the date of the grant and the
(Continued)
F-14
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
term of any such option may not exceed 10 years from the date of grant. With
respect to any employee who owns stock representing more than 10% of the voting
power of the outstanding capital stock of the Company, the exercise price of any
incentive stock option may not be less than 110% of the fair market value of
such shares on the date of grant and the term of such option may not exceed five
years from the date of grant.
Awards granted under the Incentive Plan will generally vest upon a proposed sale
of substantially all of the assets of the Company, or the merger of the Company
with or into another corporation. Options generally vest over a five-year
period commencing on the date of grant and expire ten years from the date of
grant.
Directors of the Company who are not employees of the Company are eligible to
receive options under the Directors' Plan. The total number of shares of Common
Stock for which options may be granted under the Directors' Plan is 100,000.
Options granted under the Directors' Plan may be subject to vesting and certain
other restrictions. Subject to certain exceptions, the right to exercise an
option generally terminates at the earlier of (i) the first date on which the
initial grantee of such option is no longer a director of either the Company or
any subsidiary for any reason other than death or permanent disability or (ii)
the expiration date of the option. Options granted under the Directors' Plan
will also generally vest upon a "change in control" of the Company. No options
have been granted under the Directors' Plan as of December 31, 1995.
Information regarding the Company's stock option plans is summarized as follows:
<TABLE>
<CAPTION>
Number of shares
---------------------------- Exercise
Incentive Directors' Price
Plan Plan Range
---------------- ---------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 - - -
1994 activity:
Granted 248,917 - $ 6.21
------- ---------- -------------
December 31, 1994 outstanding 248,917 - 6.21
1995 activity:
Granted 555,270 - 4.16 - 13.83
------- ---------- -------------
December 31, 1995 outstanding 804,187 - $4.16 - 13.83
======= ========== =============
Exercisable at December 31, 1995 138,395 - $4.16 - 13.83
======= ========== =============
Available for future grants at
December 31, 1995 495,813 100,000
======= ==========
</TABLE>
(Continued)
F-15
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies
-----------------------------
The Company leases, from third parties, channel rights licensed by the FCC.
Under FCC policy, the base term of these leases cannot exceed the term of
the underlying FCC license. FCC licenses for wireless cable channels
generally must be renewed every five to ten years, and there is no
automatic renewal of such licenses. The use of such channels by third
parties is subject to regulation by the FCC and, therefore, the Company's
ability to enjoy the benefit of these leases is dependent upon the third
party lessor's continuing compliance with applicable regulations. The
remaining terms of the Company's leases range from approximately five to
twenty years. Most of the Company's leases provide for rights of first
refusal for their renewal. The termination of or failure to renew a channel
lease or termination of the channel license would result in the Company
being unable to deliver television programming on such channel. Although
the Company does not believe that the termination of or failure to renew a
single channel lease could adversely affect the Company, several of such
terminations or failures in one or more markets that the Company actively
serves could have a material adverse effect on the Company. Channel rights
lease agreements generally require payments based on the greater of
specified minimums or amounts based upon various factors, such as
subscriber levels or subscriber revenues.
Payments under the channel rights lease agreements generally begin upon the
completion of construction of the transmission equipment and facilities and
approval for operation pursuant to the rules and regulations of the FCC.
However, for certain leases, the Company is obligated to begin payments
upon grant of the channel rights. Channel rights lease expense was $9,000,
$179,172, and $380,346 for the period from February 4, 1993 (inception) to
December 31, 1993, and for the years ended December 31, 1994 and 1995,
respectively.
The Company also has certain operating leases for office space, equipment
and transmission tower space. Rent expense incurred in connection with
other operating leases was $6,996, $79,791 and $183,003 for the period from
February 4, 1993 (inception) to December 31, 1993 and for the years ended
December, 1994 and 1995, respectively.
Future minimum lease payments due under channel rights leases and other
noncancelable operating leases at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Channel Other
Year ending rights operating
December 31 leases leases
- ------------- ----------- ---------
<S> <C> <C>
1996 $1,097,075 487,666
1997 1,146,307 515,916
1998 1,167,319 515,955
1999 1,175,415 523,625
2000 1,165,755 520,344
---------- ---------
$5,751,871 2,563,506
========== =========
</TABLE>
(Continued)
F-16
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
The Company has entered into various service agreements to obtain programming
for delivery to customers of the Company. Such agreements require a per
subscriber fee to be paid by the Company on a monthly basis. These agreements
range in life from two to ten years.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
The Company is actively competing in the FCC auction program designed to award
initial licenses for MDS channels. Successful bidders will receive a blanket
authorization to serve entire "Basic Trading Areas" or "BTA's" on all MDS
channels. The Company estimates its commitment related to this auction of
BTA's to be approximately $16,000,000 to $18,000,000. At the conclusion of
the auction, the Company will be required to remit 20% of the total committed
amount (less its deposit of $900,000 remitted prior to December 31, 1995) with
the remaining 80% being paid out over a 10 year period. Over this ten year
period commencing on the date the BTA is authorized by the FCC, the Company
will be required to make quarterly interest only payments for the first two
years and then quarterly payments of principal and interest over the remaining
years of the agreement. The interest rate related to this installment plan is
equal to the ten year U.S. Treasury rate at the time of the issuance of the
BTA authorization plus 2-1/2%.
(12) Concentrations of Credit Risk
-----------------------------
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash, temporary cash
investments, and accounts receivable. The Company places its cash and
temporary cash investments with high credit quality financial services
companies. Collectibility of subscriber accounts receivable is impacted by
economic trends in each of the Company's markets. Such receivables are
typically collected within thirty days, and the Company has provided an
allowance which it believes is adequate to absorb losses from
uncollectible accounts.
(13) Supplemental Cash Flow Information
----------------------------------
Cash interest payments made in 1993, 1994, and 1995 totaled $143, $168,512
and $351,178, respectively.
During 1995, the Company paid $288,104 in cash and issued 48,752 shares of
its common stock in connection with the acquisition of channel rights in
Tennessee. The cost of the channel rights and other intangible assets
acquired was $800,000 based on the initial public offering price per share
of $10.50.
(Continued)
F-17
<PAGE>
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(14) Disclosures About Fair Value Of Financial Instruments
-----------------------------------------------------
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995. The fair value
of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
At December 31, 1995
--------------------
Carrying Estimated
Amount Fair Value
------ ----------
Marketable investment securities $ 53,393,344 53,704,532
Long-term debt 151,248,047 160,598,916
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies as
follows:
. The carrying amounts of cash and cash equivalents, subscriber
receivable, accrued interest and other receivables, accounts payable and
accrued expenses approximate fair value because of the short maturity of
these items.
. The fair values of the Company's marketable investment securities
are based on quoted market prices.
. The fair value of long-term debt is based upon market quotes
obtained from dealers.
Fair value estimates are subject to inherent limitations. Estimates of fair
value are made at a specific point in time, based on relevant market
information and information about the financial instrument. The estimated
fair values of financial instruments presented above are not necessarily
indicative of amounts the Company might realize in actual market transactions.
Estimates of fair value are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-18
<PAGE>
SCHEDULE II
WIRELESS ONE, INC.
VALUATION AND QUALIFYING ACCOUNTS
THE PERIOD FROM FEBRUARY 4, 1993 (INCEPTION)
THROUGH DECEMBER 31, 1993 AND THE
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------- ---------- ---------- ---------- ---------
BALANCE AT CHANGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
1995
Deducted in balance sheet from
subscription receivables:
Allowance for doubtful accounts $ 4,000 196,281 126,640 73,641
-------- ------- ------- ------
Deducted in balance sheet from
leased license investment:
Amortization of leased license
investment $230,902 317,381 - 548,283
-------- ------- ------- -------
Deducted in balance sheet from
other asset:
Amortization of debt
issuance costs $ - 163,926 - 163,926
-------- ------- ------- -------
1994
Deducted in balance sheet from
subscription receivables:
Allowance for doubtful accounts $ - 54,605 50,608 4,000
-------- ------- ------- -------
Deducted in balance sheet from
leased license investment:
Amortization of leased license
investment $ 4,116 226,786 - 230,902
-------- ------- ------- -------
Deducted in balance sheet from
other assets:
Amortization of debt
issuance costs $ - - - -
-------- ------- ------- -------
1993
Deducted in balance sheet from
subscription receivables:
Allowance for doubtful accounts $ - - - -
-------- ------- ------- -------
Deducted in balance sheet from
leased license investment:
Amortization of leased license
investment $ - 4,116 - 4,116
-------- ------- ------- -------
Deducted in balance sheet from
other assets:
Amortization of debt
issuance costs $ - - - -
-------- ------- ------- -------
</TABLE>
S-1
