SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-26836
WIRELESS ONE, INC.
(Exact name of registrant as specified in its charter)
Delaware 72-1300837
(State or other (I.R.S. Employer
jurisdiction of incorporation Identification No.)
or organization)
11301 Industriplex Boulevard, Suite 4
Baton Rouge, Louisiana 70809-4115
(Address of principal executive offices) (Zip Code)
(504) 293-5000
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value 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 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. X
The aggregate market value of the voting stock held by non-
affiliates (affiliates being directors, executive officers and holders
of more than 5% of the Company's common stock) of the Registrant at
March 21, 1997 was approximately $28.1 million.
The number of shares of the registrant's common stock, $0.01 par
value per share, outstanding at March 21, 1997 was 16,946,697.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1997 Annual
Meeting of stockholders have been incorporated by reference into Part
III of this Form 10-K.
WIRELESS ONE, INC.
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
PART I ----
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
Item 5. Market for Registrant's Common Equity and Related Matters..23
Item 6. Selected Financial Data....................................24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.......................26
Item 8. Financial Statements and Supplementary Data................31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................31
PART III
Item 10. Directors and Executive Officers of the Registrant........31
Item 11. Executive Compensation....................................31
Item 12. Security Ownership of Certain Beneficial Owners and
Management..............................................32
Item 13. Certain Relationships and Related Transactions............32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................32
Financial Statements...................................................F-1
Financial Statement Schedule..........................................F-22
Signatures.............................................................S-1
Exhibit Index..........................................................E-1
PART I
Item 1. Business
Overview
Wireless One, Inc. (the "Company") acquires, develops, owns and
operates wireless cable television systems, primarily in small to mid-
size markets in the southeastern United States. Wireless cable
programming is transmitted via microwave frequencies from a
transmission facility to a small receiving antenna at each
subscriber's location, which generally requires an unobstructed line-
of-sight ("LOS") from the transmission facility to the subscriber's
receiving antenna. The Company targets markets with a significant
number of households that can be served by LOS transmissions and that
are unpassed by traditional hard-wire cable. The Company estimates
that approximately 25% of the LOS households in its Markets (as
hereinafter defined) are unpassed by traditional hard-wire cable. The
Company's 83 Markets (including 13 held by a limited liability company
of which the Company owns 50%) are located in Texas, Louisiana,
Mississippi, Tennessee, Kentucky, Alabama, Georgia, Arkansas, North
Carolina, South Carolina and Florida and represent approximately 11.0
million households (including households in Markets held through such
limited liability company). The Company believes that approximately
8.1 million of these households (2.0 million of which are in Markets
held through such limited liability company) can be served by LOS
transmissions.
Many of the households in the Company's Markets, particularly in
rural areas, also have limited access to local off-air VHF/UHF
programming from ABC, NBC, CBS and Fox affiliates, and typically do
not have access to subscription television service except via
satellite television operators, whose equipment and subscription fees
generally are more costly than those of wireless cable, and which are
unable to retransmit local off-air channels. In many of the Company's
rural Markets, the Company believes a significant number of the
households that are passed by cable are served by cable operators with
lower quality service and limited reception and channel lineups than
the Company's services. As a result, the Company believes that its
wireless cable television service is an attractive alternative to
existing television choices for both passed and unpassed households in
many of its Markets.
At December 31, 1996, the Company's Markets included 32 markets
in which the Company has systems in operation ("Operating Systems")
and 38 markets ("Future Launch Markets," and together with the
Operating Systems, the "Markets") in which the Company has aggregated
either sufficient wireless cable channel rights to commence
construction of a system or leases with or options from applicants for
channel licenses that the Company expects to be granted by the Federal
Communications Commission (the "FCC"). In addition, the Company owns
a 50% interest in a limited liability company which holds channel
rights to serve 13 markets in North Carolina, all of which are Future
Launch Markets. Through increases in the number of subscribers in its
Operating Systems, the addition of eight Operating Systems through its
merger with Truvision Wireless, Inc. ("TruVision") and new system
launches, the Company was able to increase its aggregate number of
subscribers from 7,525 at December 31, 1995 to 69,825 at December 31,
1996, representing a penetration rate of 2.6% of the LOS households
in the Operating Systems at December 31, 1996.
Recent Developments
TruVision Transaction - In July 1996, the Company merged with
TruVision in exchange for approximately 3.4 million shares of the
Company's common stock (the "TruVision Transaction"). At the time of
the Merger, TruVision (i) had Operating Systems located in Jackson,
Natchez, Oxford and the Gulf Coast and Delta regions of Mississippi
and Demoplois, Alabama (ii) held wireless cable channel rights in
other areas of Mississippi, for Memphis and Flippin, Tennessee and for
Gadsden and Tuscaloosa, Alabama and (iii) had acquisition transactions
pending in a number of additional Markets, including Lawrenceburg,
Jackson and Chattanooga, Tennessee, Hot Springs, Arkansas, Huntsville,
Alabama, and Jacksonville, North Carolina. See "-Other Acquisitions"
and "-Pending Acquisitions." As of December 31, 1996, Markets
acquired as part of the TruVision Transaction included approximately
2.0 million LOS households and 31,639 subscribers. Unless the context
otherwise requires, references herein to the "Company" include (i)
Wireless One, Inc. and its direct and indirect subsidiaries and (ii)
TruVision and its direct and indirect subsidiaries.
Applied Video Acquisition - In May 1996, the Company acquired
Applied Video Technologies, Inc. ("Applied Video") for a total
purchase price of approximately $6.5 million. The acquisition of
Applied Video added one Operating System (Dothan, Alabama) and two
Future Launch Markets (Albany, Georgia and Montgomery, Alabama).
These three Markets consist of approximately 263,100 LOS households.
The Albany, Georgia System was launched in September 1996. Operations
in the Albany, Georgia System together with the Dothan, Alabama
system, as of December 31, 1996, accounted for 1,343 subscribers.
Other Acquisitions - In 1996, the Company also acquired (i)
Shoals Wireless, Inc., whose principal asset was an Operating System
in the Lawrenceburg, Tennessee Market, for approximately $1.2 million
(the "Shoals Purchase"), (ii) an Operating System and hard-wire cable
system in the Huntsville, Alabama Market (the "Madison Purchase") for
approximately $6 million, (iii) rights to 11 wireless cable channels
in the Macon, Georgia Market for approximately $600,000, (iv) rights
to eight wireless cable channels in the Bowling Green, Kentucky Market
for $300,000, (v) rights to 16 wireless cable channels in the
Jacksonville, North Carolina Market for approximately $820,000
($800,00 of which is being withheld pending grants of licenses) and 12
wireless cable channels in the Chattanooga, Tennessee Market for
$517,000 and (vi) rights to 11 MDS channels and filings for 20 ITFS
licenses (both as hereafter defined) and related transmission tower
leases and approvals in Auburn/Opelika, Alabama for $600,000.
Pending Acquisitions - The Company has entered into a
definitive agreement with SkyView Wireless Cable, Inc. to acquire
rights to 22 wireless cable channels and a substantially completed
transmission facility in the Jackson, Tennessee Market for
approximately $2.7 million and to acquire rights to 20 wireless cable
channels in the Hot Springs, Arkansas Market for approximately $1.5
million. The Company also has a pending agreement with Wireless
Ventures, L.L.C. ("Wireless Ventures") to acquire a fifty percent
interest in Wireless Ventures, which holds BTA (as hereinafter
defined) authorizations in certain markets in Georgia for
approximately $1.0 million.
BTA Auction - In March 1996, the Company, TruVision, Applied
Video and Wireless One of North Carolina, LLC ("WONC") participated in
an auction (the "BTA Auction") conducted by the FCC for the exclusive
right to apply for available Multipoint Distribution Services ("MDS")
commercial channels in certain designated Basic Trading Areas
("BTAs"), subject to compliance with the FCC's interference standards
and other rules. The Company, TruVision, Applied Video and WONC were
the winning bidders for FCC authorizations in 72 BTA markets (the "BTA
Markets"), and such authorizations, which primarily will increase,
upon FCC approval, the number of expected channels in the Company's
Markets where BTAs are held, are reflected in the information set
forth herein. Subsequent to the BTA Auction and consistent with FCC
rules, the Company filed applications for authorizations in each BTA
Market. Approximately 95% of these authorizations have been granted
by the FCC. The winning bids of the Company, TruVision and Applied
Video in the BTA Auction aggregated approximately $30.3 million (net
of a small business bidding credit), 80% of which was financed through
indebtedness provided to the Company by the United States government.
The FCC plans to auction off additional spectrum in the 2.3 GHz
band. Management is evaluating the potential use of this spectrum and
its participation in the upcoming auction.
Business Strategy
The Company's primary business objective is to develop wireless
cable television systems in markets in which the Company believes it
can achieve positive System EBITDA (as defined in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations") upon achieving 2,500 to 3,000 subscribers. The Company
intends to accomplish this business objective through implementation
of the following operating strategies.
Rural market focus - The Company generally 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 are characterized by a relatively high
number of "value conscious" consumers, and that the Company's low-
priced service is the most economical subscription television
alternative for many consumers in such markets. Furthermore, the
Company believes that its Markets typically have a stable base of
subscribers, which has allowed the Company to maintain an average
turnover or "churn" rate below 2.5% per month for the year ended
December 31, 1996. Lower churn rates result in reduced installation
and marketing expenses.
Contiguous geographic cluster - The Company believes that
through its large contiguous geographic cluster it is able to achieve
significant cost savings through centralization of operations. The
Company further believes that its contiguous cluster simplifies its
market launch program by facilitating the movement of skilled
personnel from one launch market to another. The Company also
believes that a contiguous cluster is more attractive to regional
advertisers and offers greater opportunities for telecommunications
and other sources of revenue.
Low cost structure - Wireless cable systems typically cost
significantly less to build and operate than traditional hard-wire
cable systems because, unlike traditional hard-wire cable systems,
they do not require an extensive network of coaxial or fiber optic
cable, amplifiers and related equipment (the "Cable Plant") for the
transmission of programming. Once the Company constructs a headend
for a system, the Company estimates that each additional subscriber
will require a capital expenditure of approximately $375 to $500,
consisting of, on average, $240 to $300 of equipment and $135 to $200
of installation labor and overhead charges. The Company also believes
that its cost structure compares favorably with that of direct
broadcast satellite ("DBS") operators, which must incur the fixed cost
of a satellite and the variable cost of subscriber receive site
equipment, which is typically twice the cost of the Company's receive
site equipment.
Focused operating strategy - The Company attempts to manage
subscriber growth in order to make the most efficient use of its
assets, assure customer satisfaction and minimize its churn rate.
Within a Market, the Company initially targets selected geographic
sub-markets characterized by a significant number of households that
are unpassed by cable or are served by smaller independent hard-wire
cable operators and focuses marketing on such sub-markets so that
subscribers generally wait no more than ten days from initial inquiry
to commencement of service. The Company seeks to maintain high levels
of customer satisfaction in installation, maintenance and customer
service. To minimize churn, the Company charges an up-front
installation fee, utilizes prequalified customer lists and performs
credit checks on potential subscribers that are not prequalified. In
addition, the Company has a customer retention program focused on
resolving customer complaints and identifying potential non-pays in a
timely manner.
Subscription Television Industry
The subscription television industry began in the late 1940s to
serve the needs of residents of predominantly rural areas having
limited access to local off-air VHF/UHF channels. The industry
subsequently expanded to metropolitan areas because, among other
reasons, its systems were able to offer better reception and more
programming than local off-air VHF/UHF channels. Currently,
subscription television systems typically offer a variety of services
including basic service, enhanced basic service, premium service and,
in some instances, pay-per-view service.
Typically, subscription television providers charge customers an
installation fee plus a fixed monthly fee for basic service. The
monthly fee for basic service is based on the number of channels
provided, operating and capital costs of the provider and competition
within the market, among other factors. Subscribers who purchase
enhanced basic service or premium services usually are charged
additional monthly fees corresponding thereto. Monthly fees for
basic, enhanced basic and premium services constitute the major source
of revenue for subscription television providers. Converter rentals,
remote control rentals, installation charges and reconnect charges
also comprise a portion of a subscription television provider's
revenues, but generally do not comprise a major component of revenues.
Traditional Hard-Wire Cable Technology
Most subscription television systems are hard-wire cable systems
which currently use coaxial cable to transmit television signals,
although many have upgraded or are considering upgrading to fiber
optic cable which provides greater channel capacity than coaxial
cable. Traditional hard-wire systems have headends which receive
signals for programming services, which signals have been transmitted
to the headend by local broadcast or satellite transmissions. A
headend consists of signal reception, decryption, retransmission,
encoding and related equipment. The operator then delivers the signal
from the headend to customers via an extensive network of coaxial or
fiber optic cable, amplifiers and related equipment. The use of a
network of coaxial cable inherently results in signal degradation and
increases the possibility of outages. Specifically, signals can be
transmitted via coaxial cable only a relative short distance without
amplification. However, each time a television signal passes through
an amplifier, some measure of noise is added. A series or "cascade"
of amplifiers between the headend and a customer leads to
progressively greater noise and for some viewers, a degraded picture.
In addition, 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 the failed
amplifier to the end of the cascade. Although fiber optic networks
will substantially reduce the transmission problems of coaxial cable
systems and will expand channel capacity, the installation of such
networks will require a substantial investment by hard-wire cable
operators.
Wireless Cable Development
Although regulatory and other obstacles impeded the growth of
the wireless cable industry through the 1980s, during the 1990s
several developments have facilitated the growth of the wireless cable
industry, including (i) regulatory reforms by the FCC intended to
encourage the growth of the wireless cable industry and its ability to
compete with hard-wire cable operators, (ii) Congressional scrutiny of
the rates and practices of the hard-wire cable industry, (iii) the
increasing availability of programming for wireless cable systems on
non-discriminatory terms, (iv) consumer demand for alternatives to
hard-wire cable service, (v) the aggregation by wireless cable
operators of a sufficient number of channels in certain markets to
create a competitive service and (vi) the increased availability of
capital to wireless cable operators in the public and private markets.
Like a traditional hard-wire cable system, a wireless cable
system receives programming at a headend. Unlike traditional hard-
wire cable systems, however, programming is then retransmitted by
microwave transmitters operating in the 2150-2162 MHZ and 2500-2686
MHZ portions of the electromagnetic radio spectrum from antennae
located on a tower or building to a small receiving antenna located at
each subscriber's premises. At the subscriber's location, the signals
are descrambled, converted to frequencies that can be viewed on a
television set and relayed to a subscriber's television set by coaxial
cable. Because the microwave frequencies used will not pass through
trees, hills, buildings or other obstructions, wireless cable systems
require a clear LOS from the headend to a subscriber's receiving
antenna. To ensure the clearest LOS possible, the Company has placed,
or plans to place, its transmitting antennae on towers and/or tall
buildings. In each of the Company's Markets, the Company believes
there to be a number of acceptable locations for the placement of its
towers. Additionally, many LOS 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 an
extensive network of coaxial cable and amplifiers, wireless cable
operators can provide subscribers with a reliable signal having few
transmission disruptions, resulting in a television signal of a
quality comparable or superior to traditional hard-wire cable systems,
and at a significantly lower system capital cost per installed
subscriber.
Channels and Channel Licensing
Channels Available for Wireless Cable - The FCC licenses and
regulates the use of channels used by wireless cable operators to
transmit video programming and other services, which are known as MDS
channels. In 50 large markets in the U.S., 33 analog channels are
available for wireless cable (in addition to any local off-air VHF/UHF
broadcast channels that are not retransmitted over wireless cable
channels). In each other market, 32 analog channels are available for
wireless cable (in addition to any local off-air VHF/UHF broadcast
channels that are not retransmitted over wireless cable channels).
The actual number of wireless cable channels available for licensing
in any market is determined by the FCC's interference protection and
channel allocation rules. Except in limited circumstances, 20 of
these channels in each geographic area are generally licensed to
qualified educational organizations ("ITFS" channels). In general,
each of these channels must be used an average of at least 20 hours
per week for educational programming. The educational requirement may
be satisfied by such programming as the Discovery Channel, PBS and C-
SPAN. The remaining air time ("excess air time") on each 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 educational programming). Lessees of ITFS excess air
time generally have the right to transmit to their customers at no
incremental cost the educational programming provided by the lessor
on one or more of its ITFS channels, thereby providing wireless cable
operators who lease such channels with greater flexibility in their
use of ITFS channels. The remaining MDS channels available in most
of the Company's operating and targeted markets are made available by
the FCC for full-time commercial usage without educational programming
requirements. The FCC does not impose any restrictions on the terms
of MDS channel leases, other than the requirement that the licensee
maintain effective control of its MDS station. The same FCC effective
control requirements apply 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 ITFS and MDS licenses
based upon applications demonstrating that the applicant is legally,
technically and financially qualified to hold the license and that the
operation of the proposed station will not cause impermissible
interference to other stations or proposed stations entitled to
interference protection. The FCC accepts applications for new ITFS
stations or major modifications to authorized ITFS stations in
designated filing "windows." Where two or more ITFS applicants file
for the same channels and the proposed facilities cannot be operated
without impermissible interference, the FCC employs a set of
comparative criteria to select from among the competing applicants.
In 1996, the FCC adopted a competitive bidding mechanism under
which initial MDS licenses for 493 designated BTAs were auctioned to
the highest bidder. Auction winners could obtain the exclusive right
to apply for available MDS channels within such BTA, subject to
compliance with FCC interference protection, construction and other
rules. The BTA Auction was concluded on March 28, 1996, and the
Company was the high bidder for its BTA Markets and timely submitted
to the FCC the required down payment for its BTA Markets. The Company
filed applications for MDS channels in all of its BTA Markets.
Approximately 95% of these authorizations have been granted by the
FCC.
Construction of ITFS stations generally must be completed within
18 months following the date authorization to construct is granted.
Construction of MDS stations licensed pursuant to initial applications
filed before the implementation of the BTA Auction rules generally
must be completed within 12 months. If construction of MDS or ITFS
stations is not completed within the authorized construction period,
the licensee must file an application with the FCC seeking additional
time to construct the station, demonstrating compliance with
certain FCC standards. If the extension application is not filed or
is not granted, the license will be deemed forfeited. FCC rules
prohibit the sale for profit of a conditional commercial license or of
a controlling interest in the conditional license holder prior to
construction of the station or, in certain instances, prior to the
completion of one year of operation. However, the FCC does permit the
leasing of 100% of a commercial license holder's spectrum capacity to
a wireless cable operator and the granting of options to purchase a
controlling interest in a license even before such holding period has
lapsed. The construction requirements applicable to MDS stations
licensed pursuant to the BTA Auction are substantially different. The
licensee must build stations covering two-thirds of the area within
its control in the BTA within five years.
ITFS and commercial licenses generally have terms of 10 years.
Applications for renewal of MDS and ITFS licenses must be filed within
a certain period prior to expiration of the license term, and
petitions to deny applications for renewal may be filed during certain
periods following the filing of such applications. Licenses are
subject to revocation or cancellation for violation of the
Communications Act of 1934, as amended (the "Communications Act") or
the FCC's rules and policies. Conviction of certain criminal offenses
may also render a licensee or applicant unqualified to obtain renewal
of 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 that such a
requirement reduces the likelihood that a license would be revoked,
canceled or not renewed by the FCC.
Availability of Programming
Once a wireless cable operator has obtained the right to
transmit programming over specified frequencies, the operator must
then obtain the right to use the programming to be transmitted.
General - Currently, with the exception of the retransmission
of VHF/UHF broadcast signals, the Company's programming is made
available in accordance with contracts with program suppliers under
which the Company generally pays a royalty based on the number of
customers 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 customer
bases. The likelihood that program material will be unavailable to
the Company has been significantly mitigated by the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act")
and various FCC regulations issued thereunder which, among other
things, impose limits on exclusive programming contracts and prohibit
cable programmers, in which a cable operator has an attributable
interest (a "vertically integrated cable operator"), from
discriminating against cable competitors with respect to the price,
terms and conditions of the sale of programming. The Company
historically has not had difficulty in arranging satisfactory
contracts for programming and believes that it will have access to
sufficient programming to enable it to provide full channel lineups in
its Markets for the foreseeable future and is not dependent on any one
programming distributor for its programming. The basic programming
package offered by the Company's Operating Systems is comparable to
that offered by the local hard-wire cable operators with respect to
the most widely watched channels. However, several of such local
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 the Company. Certain hard-
wire cable companies competing in the Company's Markets currently
offer a greater number of channels to their customers, compared to the
24 to 31 wireless cable channels offered by the Company in its
Operating Systems.
Copyright - Under the federal copyright laws, permission from
the copyright holder generally must be secured before a video program
subject to such copyright may be retransmitted. Under Section 111 of
the Copyright Act, certain "cable systems," including wireless cable
operators, are entitled to engage in the secondary transmission of
programming without the prior permission of the copyright holders,
provided the cable system has secured a compulsory copyright license
for such programming. The Company relies on Section 111 to retransmit
two superstations and five local off-air broadcast signals.
Retransmission Consent - Under the retransmission provisions
of the 1992 Cable Act, wireless cable and hard-wire cable operators
seeking to retransmit certain commercial broadcast signals must first
obtain the permission of the broadcast station. The FCC has exempted
wireless cable operators from the transmission 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 it is retransmitting local VHF/UHF channels. Although
there can be no assurances that the Company will be able to obtain
requisite broadcaster consents, the Company believes that in most
cases it will be able to do so for little or no additional cost.
Operations
Installation - When a potential subscriber requests service, a
signal reception survey is made at the potential subscriber's premises
to determine whether LOS transmission is possible The potential
subscriber is informed on the day of the survey whether service can be
provided at the subscriber's location. If service can be provided, an
installation is scheduled. The Company provides three installation
options. The first and primary installation method features a rooftop
antenna mount. The second option involves placing the antenna in the
upper part of a tree on the subscriber's premises, if such a tree is
available. The third and least used option is to place a "free
standing" mast on the ground supported with guy wires. Each of the
installation methods includes running a coaxial to the subscribers
dwelling and grounding the receiving antenna in accordance with
national electrical codes. The installation process is completed, and
service commences, within approximately ten days of the potential
subscriber's initial request for service.
Billing - The Company believes that its billing procedures
help minimize churn. Subscribers are billed on the first day of the
month for that month's service with payment due on the fifteenth of
the month. The Company encourages delinquent accounts to pay by
disconnecting either premium channels or additional outlets after a
period of non-payment. The Company also uses a customer retention
program to encourage delinquent accounts to pay and continue receiving
service. However, if an account becomes 60 days past due, total
service is disconnected and the Company's collection team initiates
the collection process. The local system manager from each market is
responsible for retrieving the equipment from disconnected subscribers
on a timely basis. After the canceled customer's account becomes 90
days past due, a collection "threat letter" is sent to the canceled
subscriber. If no payment is made within 15 days of the threat letter,
the account is written off the Company's books, turned over to a third
party collector and reported to the credit bureau in that region.
Equivalent Billing Units - The Company reports its subscriber
base on an equivalent billing unit ("EBU") basis to consistently
account for subscribers. In converting total subscribers in a multiple
dwelling unit ("MDU") to EBU's, the Company divides its total basic
service charge for the MDU, whether bulk or individually billed, by
the basic service rate charged to its single family units ("SFU"),
currently $19.95.
Marketing - Prior to commencing operations in a new system,
the Company develops a marketing plan designed to manage subscriber
growth and to ensure that the quality of installations and customer
service remains high. The Company prioritizes areas of the market
according to the number of unpassed homes, the relative strength of
any traditional hard-wire competitors, the existence of terrain or
obstructions that would impede LOS transmissions, the economic
demographics of the area and the percentage of single family homes.
On the basis of such analysis the market is divided into sub-markets
based on zip codes and/or mail carrier routes and the sub-markets are
prioritized on the basis of their attractiveness to the Company.
In each sub-market, the Company's marketing staff develops a
targeted marketing plan that typically includes direct mailings,
telemarketing follow-up calls and selected door-to-door sales.
Separate marketing teams focus on adding commercial subscribers (such
as restaurants, business offices and auto dealers) and MDU contracts.
The Company markets its wireless cable service by highlighting
four major competitive advantages over traditional hard-wire cable
services and other subscription television alternatives: customer
service, picture quality and reliability, programming features and
price. The ability to deliver local programming to its customers is a
major advantage over the direct broadcast satellite technology.
Customer Service - The Company has established the goal of
maintaining high levels of customer satisfaction. In furtherance of
that goal, that Company emphasizes responsive customer service and
convenient installation scheduling. The Company has established
customer retention and referral programs in an effort to retain and
attract new subscribers and build loyalty among it customers.
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 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.
Programming Features - In the Operating Systems and Future
Launch Markets, 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.
Price - The Company offers its subscribers a programming
package consisting of basic service, enhanced basic service, premium
programs and premium packages. 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 operating
costs. The rates charged by cable operators for their programming
services are regulated pursuant to 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 rural hard-wire
cable operators with respect to comparable programming.
Operating Systems and Future Launch Markets
The table below provides information regarding the Company's
Markets. "Estimated Total Households" represents the Company's
estimate of the total number of households that are within the
Company's Intended Service Area. "Intended Service Area" includes (i)
areas that are presently served, (ii) areas where systems are not
presently in operation but where the Company intends to commence
operations and (iii) areas where service may be provided by signal
repeaters or, in some cases, pursuant to FCC applications. "Estimated
LOS Households" represents the Company's estimate of the number of
households that can receive an adequate signal from the Company in its
Intended Service Area (determined by applying a discount to the
Estimated Total Households in order to account for those homes that
the Company estimates will be unable to receive service due to certain
characteristics of the particular market). The calculation of
Estimated LOS Households assumes (i) the grant of pending applications
for new licenses or for modifications of existing licenses and (ii)
the grant of applications for new licenses and license modification
applications which have not yet been filed with the FCC.
The Company holds some of its FCC channel licenses directly, but
for a majority of its channel rights, 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 Company's 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.
<TABLE>
<CAPTION>
Estimated Estimated Subscribers at
Total LOS Acquisition or December 31, Penetration
Households Households Launch Date 1996 Rate
---------- ---------- ----------- -------------- -----------
Operating Systems:
<S> <C> <C> <C> <C> <C>
Lafayette, LA 180,300 153,200 January 1994 1,458 0.95%
Lake Charles, LA 111,600 92,500 April 1994 2,716 2.94%
Wharton, TX 102,300 92,000 June 1994 2,484 2.70%
Bryan/College Station, TX 102,700 65,600 May 1995 4,269 6.51%
Pensacola, FL 217,400 157,900 July 1995 2,835 1.80%
Panama City, FL 108,300 83,300 September 1995 2,561 3.07%
Monroe, LA 114,100 89,600 October 1995 2,961 3.30%
Milano, TX 40,900 36,800 October 1995 1,958 5.32%
Tullahoma, TN 109,600 73,600 November 1995 2,233 3.03%
Bunkie, LA 94,700 81,600 December 1995 2,629 3.22%
Gainesville, FL(2) 138,700 115,200 January 1996 3,376 2.93%
Brenham, TX 39,500 32,100 February 1996 2,068 6.44%
Jeffersonville, GA 189,300 147,000 March 1996 1,427 0.97%
Bucks, AL 150,800 113,700 April 1996 1,580 1.39%
Fort Walton Beach, FL 64,200 54,600 May 1996 779 1.43%
Dothan, AL 100,500 81,200 June 1996 880 1.08%
Jackson, MS 211,500 176,900 July 1996 12,682 7.17%
Delta, MS(3) 100,800 92,800 July 1996 4,953 5.34%
Gulf Coast, MS(4) 132,300 121,700 July 1996 4,053 3.33%
Demopolis, AL 17,500 15,600 July 1996 792 5.08%
Oxford, MS 60,100 53,500 July 1996 1,640 3.07%
Natchez, MS 76,500 60,000 July 1996 1,618 2.70%
Houma, LA 81,700 69,500 July 1996 663 0.95%
Lawrenceburg, TN (5) 76,400 44,100 August 1996 656 1.49%
Huntsville, AL(5) 196,800 181,900 August 1996 4,182 2.30%
Alexandria, LA 31,700 26,900 August 1996 706 2.62%
Meridian, MS 73,300 44,800 September 1996 750 1.67%
Albany, GA 92,900 67,600 September 1996 463 0.68%
Tupelo, MS 130,900 90,600 November 1996 267 0.29%
Florence, AL 62,000 55,800 November 1996 140 0.25%
Starkville, MS 84,100 65,200 December 1996 46 0.07%
Charing, GA 41,100 38,400 December 1996 -- 0.00%
--------- --------- ------ -----
Total Operating System 3,334,500 2,675,200 69,825 2.61%
========= ========= ====== =====
</TABLE>
Estimated Estimated
Total LOS Expected
Households Households Channels (6)
---------- ---------- ------------
Future Launch Markets:
Ocala, FL(7) 275,500 186,200 24
Chattanooga, TN 276,100 200,600 31
Bedian/Huntsville, TX 89,000 50,200 31
Freeport, TX 192,700 173,400 29
Hattiesburg, MS 121,400 88,800 31
Flippin, TN 56,700 49,600 20
Jackson, TN(8) 123,900 86,400 22
Memphis, TN 433,200 382,200 23
Bankton, AL 64,800 41,300 20
Gadsden, AL(7) 198,100 133,300 29
Montgomery, AL 149,200 114,300 27
Selma, AL 35,700 26,000 31
Groveland, GA(9) 172,800 136,000 20
Hoggards Mill, GA 22,600 13,000 20
Matthews, GA 193,600 158,700 31
Tarboro, GA 81,500 65,200 20
Valdosta, GA(10) 103,200 81,300 29
Mariana, FL 56,700 44,900 24
Auburn, AL 62,200 47,700 27
Birmingham, AL 308,400 276,900 28
Mobile, AL(7)(11) 66,100 40,400 21
Six Mile, AL 32,600 27,000 20
Tuscaloosa, AL 87,100 69,600 28
Woodville, AL 29,700 25,000 17
Hot Springs, AR(8) 103,800 71,200 16
Pine Bluff, AR(12) 86,300 57,900 16
Tallahassee, FL 129,800 115,000 31
Columbus, GA 160,100 116,500 31
Vidalia, GA 50,800 34,500 24
Bowling Green, KY(13) 126,900 68,300 20
Abita Springs, LA 217,300 116,800 20
Amite, LA 50,100 34,400 20
Baton Rouge, LA(7) 261,700 235,500 20
Leesville, LA 43,500 26,700 28
Natchitoches, LA(7) 30,600 24,800 25
Ruston, LA 44,700 24,300 22
Tallulah, LA 19,500 17,600 20
Moorehead City, NC 82,700 55,900 16
--------- --------- ---
Total Future Launch Markets 4,640,600 3,517,400
--------- ---------
7,975,100 6,192,600
========= =========
(1) "Penetration Rate" equals the number of subscribers in an Operating
System divided by the Estimated LOS households in that Operating
System.
(2) Ten channels currently utilized in the Gainesville, Florida System are
operated under special temporary FCC authorization.
(3) Eight channels currently utilized in the Delta System are operated
under special temporary FCC authorization.
(4) Four channels currently utilized in the Gulf Coast System were granted
by the FCC without acting on an objection filed by a third party.
(5) The Huntsville, Alabama System and the Lawrenceburg, Tennessee System
were launched in February 1991 and January 1995, respectively, but
acquired by the Company in August 1996.
(6) Expected Channels include (i) wireless cable channels and, where
applicable, local off air VHF/UHF channels that are not retransmitted
by the Company via wireless cable frequencies and (ii) channels with
respect to which the Company has a lease with a channel license holder
or applicant for a channel license or for which the Company has the
exclusive right to apply for as a result of being the high bidder at
the BTA Auction. Certain licenses cannot be issued until interference
agreements with nearby licensees or applicants can be secured. There
can be no assurance that such interference agreements will be secured
or that applications for channel licenses will be granted.
(7) Four of the ITFS channels for the Ocala Market, four of the ITFS
channels for the Mobile Market, four of the ITFS channels for the
Gadsden Market, sixteen of the ITFS channels for the Baton Rouge
Market and twelve of the ITFS channels for the Natchitoches Market are
subject to comparative disposition with competing applications. The
outcome of these dispositions cannot be reliably projected at this
time.
(8) This Market is subject to a pending acquisition.
(9) Objections to the Company's lessors' requests for extension of time to
construct twelve channels are pending before the FCC. The outcome of
these matters cannot be determined.
(10) The Company has entered into a letter of intent to acquire rights to 9
channels in Valdosta, Georgia. There can be no assurance that the
Company will enter into a definitive agreement with respect to such
channels.
(11) An existing wireless cable operator is serving a small number of
subscribers in this market with an 11 channel MDS system.
(12) The Company believes that another entity has leased rights to 20 other
channels that are the subject of pending ITFS applications.
(13) The Company currently leases eight channels in the Bowling Green
Market, and has filed applications for 12 commercial channels pursuant
to the BTA Auction that cannot be granted until interference agreements
with unaffiliated third parties in nearby markets can be secured.
There can be no assurance that such interference agreements can be
secured or that applications for these 12 channels will be granted.
______________________
Wireless One of North Carolina, L.L.C. - In 1995, the Company entered
into a joint venture with CT Wireless Cable, Inc., a North Carolina
corporation, and O. Gene Gabbard, for the purpose of forming WONC to (i)
develop and operate wireless cable systems in the state of North Carolina and
in the Greenville and Spartanburg, South Carolina Markets, (ii) enter into
lease agreements with various educational organizations for the use of ITFS
wireless cable channels, (iii) bid for, purchase, or otherwise acquire the
use of licenses for commercial wireless cable channels, and (iv) develop and
operate wireless cable systems using the leased ITFS and acquired commercial
wireless cable channels. The Company holds a 50% interest in WONC, CT
Wireless Cable, Inc. holds a 48% interest in WONC, and O. Gene Gabbard holds
a 2% interest in WONC.
In December 1996, WONC was awarded the right to use frequencies owned
by the University of North Carolina ("UNC") to develop a statewide MMDS/ITFS
network. Specifically, the contract allows WONC to build wireless cable
systems across the state, in part using the 40 granted and numerous applied
for frequencies of UNC.
The Company estimates that WONC has aggregated a spectrum covering in
excess of one million LOS households. The Company estimates that the UNC
frequencies will enable the joint venture to reach approximately 900,000 new
LOS households in the state, bringing the total LOS households in the WONC
footprint to approximately 2.0 million. The Company is working with its
joint venture partners to evaluate the best financing plan for WONC.
Based on WONC's ITFS filings and channel acquisitions, the Company's
existing properties and BTA Auction high bids, the Company believes that WONC
will have sufficient channel capacity to launch wireless cable systems in the
following markets:
Estimated
Total Estimated LOS
Market Households Households
- ------ ---------- --------------
Asheville, NC 246,700 93,300
Fayetteville, NC 245,300 179,700
Greenville, NC 99,200 57,500
Hickory, NC 376,800 162,700
Jacksonville, NC 136,700 116,200
Rocky Mount, NC 199,100 178,900
Roanoke Rapids, NC 44,700 38,000
Wilmington, NC 136,900 123,400
Rockingham, NC 93,200 86,600
Elizabeth City, NC 63,800 35,500
Raleigh, NC 217,800 142,400
Winston-Salem, NC 546,400 357,200
Charlotte, NC 577,400 377,400
--------- ---------
Total 2,984,000 1,948,800
--------- ---------
__________________________
Operating Systems - At December 31, 1996, the Company had 32
Operating Systems. The Company generally offers 20 to 26 basic cable
channels and one to three premium channels in each Market. In 95% of its
Operating Systems, the Company also offers at least one pay-per-view channel
and expects to offer at least one pay-per-view channel in all of its Markets
during 1997. In addition, the Company retransmits five local off-air VHF/UHF
channels along with its wireless channels, which provide its subscribers with
access to local news, including weather news. The basic package ranges in
price from $15.95 to $19.95 per month, with an additional $6.95 to $19.95 per
premium channel. The Operating Systems transmit at 10 to 50 watts of power
from transmission towers and generally have signal patterns covering a radius
of 18 to 35 miles.
The following chart depicts the Company's current programming line-up
in a typical Operating System.
Company Channel Offerings
BASIC
ABC (local network affiliate) The Learning Channel (education)
AMC (classic movies) Mind Extension University
Black Entertainment Television (education)
(special interest) The Nashville Network (music)
CBS (local network affiliate) NBC (local network affiliate)
Country Music Television Nickelodeon (children's)
CNN (news) PBS (education, general interest)
C-SPAN (public affairs) SportSouth (southeast U.S. sports)
Discovery (science) TBS Superstation (sports, movies)
The Disney Channel (1) TNT (sports, movies)
ESPN (sports) USA (general interest)
The Family Channel (family The Weather Channel (weather)
entertainment)
Fox (local network affiliate)
PREMIUM PAY-PER-VIEW
Home Box Office Viewer's Choice
Showtime
The Disney Channel(1)
__________________
(1) The Disney Channel is part of the basic package in certain Markets and as
a premium channel in other Markets.
_________________________
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 Future Launch Markets. The most recent five-day
window for filing ITFS applications was completed on December 23, 1996, in
which the Company's lessors filed the majority of the applications required
to effectuate its future launch plans. The Company's currently pending ITFS
applications are expected to undergo review by FCC engineers and staff
attorneys over the next 18 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
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 number
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, 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.
EdNet Agreement - The Company contracts with Mississippi EdNet
Institute, Inc. ("EdNet") for the commercial use of 20 ITFS channels in each
of its Mississippi Markets (the "EdNet Agreement"). The EdNet Agreement
provides exclusive rights to use all excess airtime (that portion of a
channel's airtime available for commercial programming under FCC rules and
policies) for the 20 ITFS channels located in each of the Company's
Mississippi Markets. The Company believes that the EdNet Agreement presents
the Company with a number of strategic benefits. The Company's rights under
the agreement to the available commercial use of 20 of the 32 available
wireless frequencies throughout Mississippi provide it with the critical mass
of channels necessary to operate in each of its Mississippi Markets and
create a significant competitive advantage relative to other potential
wireless cable operators in such Markets. The large contiguous nature of the
cluster of Markets encompassing Mississippi will allow the Company to
centralize operations and achieve substantial economies of scale in
Mississippi and surrounding Markets. The Company believes its transmission
of programming involving job training, fire and police training, literacy
projects and other continuing education programs enjoys the support of the
Mississippi state authorities and will generate substantial goodwill in the
community and enhance the Company's identity as a local provider of
subscription television service.
System Costs
The Company estimates that the current cost per market for transmission
(or headend) equipment and build-out in a typical 31 channel system will be
approximately $1 million. The Company estimates that each additional
wireless cable subscriber will require an incremental capital expenditure of
approximately $375 to $500, consisting of, on average, $240 to $300 of
materials and $135 to $200 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 it
has a stable base of subscribers that has allowed it to maintain an average
churn rate below 2.5% per month for the year ended December 31, 1996,
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.
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 to
remain competitive.
Addressability and Pay-Per-View - "Addressability" means the ability
to implement specific orders from or send other communications to each
subscriber, such as pay-per-view channels, without having to modify a
subscriber's equipment. The Company provides all of its subscribers with
addressable converters, while only a portion of traditional hard-wire cable
operators use addressability. Without addressability, the customer must make
two trips to the cable operator's offices in order to obtain pay-per-view
programming, once to obtain the descrambling device and once to return it.
Pay-per-view is expected to become increasingly popular as additional
exclusive events become available for distribution on pay-per-view and
digital compression technology greatly expands the channel capacity available
for such programming. The Company believes its fully addressable converters
present a competitive advantage over traditional hard-wire cable operators.
Digital Compression - Several equipment manufacturers are developing
digital compression technology which would allow several programs to be
carried within the same bandwidth which presently can accommodate only one
program without digital compression technology. Manufacturers have projected
varying compression ratios for future equipment, ranging from four-to-one to
ten-to-one, which would increase the channels available to be carried on a
wireless cable system using digital compression technology from 31 to between
124 and 310 channels.
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 televisions
for two-way communications such as video games, home shopping and video-on-
demand. Extensive use of interactivity will likely require the development
and utilization of digital compression and cellularization. Wireless cable
operators may be able to utilize return paths which the FCC has made
available for interactive communications. At this time, the Company believes
that the widespread commercial availability of many interactive products is
at least several years away.
Advertising - Local and national advertising continues to grow as a
source of revenue for hard-wire and wireless cable operators. The Company
recently began generating advertising revenue and expects to increase this
amount over time as its systems mature. The Company believes its regional
cluster strategy should benefit its efforts in this regard because of its
ability to deliver advertising throughout its entire region and not just
isolated markets.
Competition
In addition to competition from traditional hard-wire cable television
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 were seven to 12 foot
dishes mounted in the yards of homes to receive television signals from
orbiting satellites. Until the implementation of encryption, these dishes
enabled reception of any and all signals without the payment of fees. Having
to purchase decoders and to pay for programming has reduced the popularity of
DTH, although the Company will compete to some degree with these systems in
marketing its services.
Direct Broadcast Satellite Programming - DBS programming involves the
transmission of an encoded signal directly from a satellite to an 18 to 36
inch dish installed at the customer's premises. DBS providers currently
have approximately five million subscribers nationwide. Currently, DBS
operators cannot, for technical and legal reasons, provide local VHF/UHF
broadcast channels as part of their service, although some customers receive
such channels from standard over-the-air antennae. DBS may provide
subscribers with access to broadcast network distant signals only when such
subscribers reside in areas unserved by any broadcast station. The cost to a
DBS subscriber for equipment and service is generally substantially higher
than the cost to wireless cable subscribers. If a subscriber is unable to
receive local network signals off-air, due to such subscriber's geographic
location, the subscriber would be able to receive the network signals through
DBS transmissions, but such transmissions would be limited to distant, rather
than local, network signals. The Company does not currently experience, and
does not anticipate in the near future that it will experience, significant
competition from DBS in its Markets due primarily to DBS' higher cost and
failure to provide local VHF/UHF broadcast channels. In August 1996, the
U.S. Copyright Office issued an advisory letter indicating that it "would not
question" copyright statements filed by DBS operators that include the
retransmission of local broadcast signals. While this development eliminates
some of the legal obstacles to the retransmission of local broadcast stations
by DBS systems, there is no indication that DBS operators have developed the
a technical means to effectively carry and transmit local broadcast stations.
Private Cable - Private cable, also known as SMATV (Satellite Master
Antenna Television), is a multichannel subscription television service where
the programming is received by satellite receiver and then transmitted via
coaxial cable through private property, often MDUs, without crossing public
rights of way. Private cable operates under an agreement with a private
landowner to service a specific MDU, commercial establishment or hotel. The
FCC permits point-to-point delivery of video programming by private cable
operators and other video delivery systems in the 18 GHz band. Private cable
operators compete with the Company for rights of entry into MDUs, commercial
establishments and hotels.
Telephone Companies - The 1996 Act permits Local Exchange Carriers
("LECs") to provide video service in their telephone service areas. Under
existing FCC rules LECs may provide "video dial tone" service, thereby
allowing LECs to make available to multiple service providers, on a
nondiscriminatory common carrier basis, a basic platform that will permit end
users to access video program services provided by others. Several large
telephone companies have announced plans to either (i) enhance their existing
distribution plant to offer video dialtone service, (ii) construct new
distribution plants in conjunction with a local cable operator to offer video
dialtone service or (iii) acquire or merge with existing franchise cable
systems outside of the telephone companies' respective telephone service
areas. While the competitive effect of the offering by telephone companies
of video dialtone and fiber optic based subscription television services is
still uncertain, the Company believes that wireless cable technology will
continue to offer a lower cost alternative to video dialtone and fiber optic
distribution technologies.
Local Off-Air VHF/UHF Broadcasts - Local off-air VHF/UHF broadcasts
(from ABC, NBC, CBS and Fox affiliates) provide free programming to the
public. In some areas, several low power television ("LPTV") stations
authorized by the FCC are used to provide multichannel subscription
television service to the public. LPTV transmits on conventional VHF/UHF
broadcast channels, but is restricted to very low power levels, which limits
the area where a high quality signal can be received.
Local Multi-Point Distribution Service ("LMDS") - In 1993, the FCC
initially proposed to redesignate a portion of 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. LMDS is a competitive technology tailored more for high
density urban areas due to the relatively small radius of its signal. At
this time, the Company does not have plans to participate in the upcoming
auction.
Regulatory Environment
General - The wireless cable industry is subject to regulation by the
FCC pursuant to the Communications Act. The Communications Act empowers the
FCC, among other things, to issue, revoke, modify and renew licenses within
the spectrum available to wireless cable; to approve the assignment and/or
transfer of control of such licenses; to approve the location of wireless
cable systems; to regulate the kind, configuration and operation of equipment
used by wireless cable systems; and to impose certain equal employment
opportunity and reporting requirements on channel license holders and
wireless cable operators.
The FCC has determined that wireless systems are not "cable systems"
for purposes of the Communications Act. Accordingly, a wireless cable system
does not require a local franchise and is subject to fewer local regulations
than a hard-wire cable system. In addition, all transmission and reception
equipment for a wireless cable system can be located on private property,
therefore eliminating the need to make use of utility poles, dedicated
easements or other public rights of way. Although wireless cable operators
typically must lease from the holders of channel licenses the right to use
wireless cable channels, unlike hard-wire cable operators they do not have to
pay local franchise fees. Recently, legislation has been introduced in
several states to authorize state and local authorities to impose on all
video program distributors (including wireless cable operators) a tax on such
distributors' gross receipts comparable to the franchise fees that hard-wire
cable operators must pay. Similar legislation might be enacted in states
where the Company does business or intends to do business. Efforts are
underway by the Wireless Cable Association International, Inc. to have
Congress preempt the imposition of such taxes by enacting new federal
legislation. In addition, the industry is opposing the state bills as they
are introduced. However, it is not possible to predict whether new state laws
will be enacted that impose new taxes on wireless cable operators.
Interference - Wireless cable transmissions are subject to FCC
regulations governing interference and transmission quality. Other than a
limited number of experimental and developmental systems, wireless cable
systems transmit in a standard analog format. The FCC has adopted interim
guidelines for the implementation of certain digital transmission formats,
which are intended to facilitate the rapid implementation of digital wireless
cable systems capable of providing more programming sources on the same
channel bandwidth and improving signal quality.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of transmitting antennae and operations with
common technical characteristics (such as power and polarity). In order to
commence the operations of certain of the Company's Markets, applications
have been filed or must be filed with the FCC to relocate and modify
authorized transmission facilities.
Under current FCC regulations, a wireless cable operator generally may
serve any location within the LOS of its transmission facility, provided that
it complies with the FCC's interference protection standards. An MDS station
generally is entitled to interference protection within a 35-mile radius
around its transmitter site. Generally, an ITFS facility is entitled to the
same 35-mile protected area during excess capacity use by a wireless cable
operator, as well as interference protection for all of its FCC-registered
receive-sites. In launching or upgrading a system, the Company may wish to
relocate its transmission facility, or increase its height or signal power in
order to serve one or more of its targeted markets. If such changes would
result in interference to any previously proposed station, the consent of
such station must be obtained before the FCC will grant the proposed
modification. There can be no assurance that any necessary consents will be
received. In addition, such modifications will be subject to the
interference protection rights of BTA Auction winners.
The 1992 Cable Act - The 1992 Cable Act imposed 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, directed 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 deregulated
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 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 - 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 hard-wire 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
multiple system cable operators ("MSOs") and serving 50,000 or fewer
subscribers. The Company believes that cable systems in many of the
Company's Markets will qualify for small system rate deregulation and that
a number of them will raise their rates, which may improve the Company's
price advantages over competing traditional hard-wire 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 hard-wire 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. It is difficult to predict the impact (if any) of final FCC
regulations with regard to local exchange telephone companies in these
respects on the Company.
FCC rules generally prohibit hard-wire cable operators from providing
wireless cable service in areas where the hard-wire cable franchise area
overlaps with the 35-mile protected service area of a wireless cable system.
In certain circumstances, the FCC may grant waivers of such restriction, or
the common ownership of hard-wire and wireless cable systems may otherwise be
exempt. Rules adopted by the FCC pursuant to the 1996 Act permit cable
operators to offer wireless cable service in such overlap areas where the
cable company is subject to "effective competition." Telephone companies are
not subject to any such cross-ownership restrictions.
The 1996 Act offers wireless cable operators and satellite programmers
relief from private and local governmentally-imposed restrictions on the
placement of receive-site antennae. 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 antennae on or near homes. In August 1996, the FCC adopted rules
prohibiting restrictions that impair installation, maintenance or use of
receive-site antennae.
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, receive-site
antennae and other facilities. There may also be restrictions imposed by
local authorities and private covenants. There can be no assurance that the
Company will not be required to incur additional costs in complying with such
regulations and restrictions.
Employees
As of December 31, 1996, the Company had a total of 777 employees.
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.
Factors That May Affect Future Results of the Company
This Annual Report contains certain statements that are not historical
facts, which are "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, that reflect management's best judgment
concerning the matters contained therein based on factors currently known.
Actual results could differ materially from these anticipated in these
"forward looking statements" as a result of a number factors, including but
not limited to those listed below. "Forward looking statements" provided by
the Company, especially in the sections entitled "Business," "Market for
Registrant's Common Equity and Related Matters" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are provided
pursuant to the safe harbor established by recent securities legislation and
should be evaluated in the context of the cautionary statements listed below.
Substantial Indebtedness of the Company - As of December 31, 1996,
the Company had approximately $303.1 million of consolidated indebtedness.
The Company expects that it and its subsidiaries will incur substantial
additional indebtedness in the future. The ability of the Company to make
payments of principal and interest on its outstanding indebtedness is largely
dependent upon its future performance. Since its inception the Company has
sustained substantial net losses and therefore has been unable to cover fixed
charges. The Company does not anticipate being able to generate net income
until after 2001, and there can be no assurance that other factors will not
result in further delays in generating positive net income. Losses may
increase as operations in additional Markets are commenced or acquired.
Limited Operating History; Lack of Profitable Operations; Negative Cash
Flow; Early Stage Company - The Company has a limited operating history and
there is limited historical financial information on the Company upon which
to base an evaluation of the Company's performance. The Company has
sustained substantial net losses, primarily due to fixed operating costs
associated with the development of its systems, interest expense and charges
for depreciation and amortization. The Company's accumulated deficit as of
December 31, 1996 was $49.8 million. Significant difficulties can be
encountered by enterprises in the early stages of development, particularly
in light of the intense competition characteristic of the subscription
television industry. There can be no assurance that realization of the
Company's business plan, including an increase in the number of subscribers
or the launch of additional wireless cable systems, will result in
profitability or positive consolidated EBITDA (as defined in "Management's
Discussion and Analysis of Financial Condition and Results of Operations")
for the Company in future years.
Need for Additional Financing; Certain Covenants - In order to
finance the capital expenditures and related expenses needed for subscriber
growth and system development, the Company will require substantial
investment on a continuing basis. The Company will need to obtain additional
financing in 1997 in order to continue to complete the launch of its Future
Launch Markets, to add subscribers in its Operating Systems and Future Launch
Markets and to cover ongoing debt service requirements. The amount and
timing of the Company's future capital requirements will depend upon a number
of factors, many of which are not within the Company's control. There can be
no assurance that the Company's future capital requirements will not increase
as a result of unexpected developments with respect to its Markets. There
can be no assurance that the Company's future capital requirements will be
met or will not increase as a result of future acquisitions, if any. Certain
of the Company's credit agreements restrict the amount of additional
indebtedness the Company may incur. Failure to obtain any required
additional financing could adversely affect the growth of the Company.
Need to Manage Growth - Successful implementation of the Company's
business plan will require management of rapid growth, which will result in
an increase in the level of responsibility for management personnel. To
manage its growth effectively, the Company will be required to continue to
implement and improve its operating and financial systems and controls and to
expand, train and manage its employee base. There can be no assurance that
the management, systems and controls currently in place, or to be
implemented, will be adequate for such growth or that any steps taken to hire
personnel or to improve such systems and controls will be sufficient.
Uncertainty of Ability to Obtain FCC Authorizations - In some of its
Markets, the Company does not currently have the right to operate a
sufficient number of channels from the same transmitter site, and in certain
other Markets, the Company contemplates relocating all of its channels to a
new transmitter site. In these Markets, the Company is dependent upon (i)
the grant of pending applications for new licenses or for modification of
existing licenses, and (ii) the grant of applications for new licenses and
license modification applications which have not yet been filed with the FCC.
Certain pending applications cannot be granted by the FCC until interference
agreements with nearby license holders are secured, and certain of the
Company's are the subject of competing applications. There can be no
assurance that any or all of these applications will be granted by the FCC.
In certain cases, FCC approval may be dependent upon the Company's
ability to engineer its use of a wireless cable channel to avoid interference
with the reception of another channel that has been licensed or for which an
application is pending. In addition, intervening license grants and/or
auctions of MDS channels may adversely affect some of the Company's planned
applications due to interference considerations. No assurance can be given
that the Company will be able to engineer all of its channels so as to avoid
interference.
Government Regulation - The wireless cable industry is extensively
regulated by the FCC. The FCC governs, among other things, the issuance,
renewal, assignment and modification of licenses necessary for wireless cable
systems to operate and the time afforded license holders to construct their
facilities. The FCC imposes fees for certain applications and licenses, and
mandates that certain amounts of educational, instructional or cultural
programming be transmitted over certain of the channels used by the Company's
existing and proposed wireless cable systems. The FCC also has the
authority, in certain circumstances, to revoke and cancel licenses and impose
monetary fines for violations of its rules. In addition, there is no limit
on the time that may elapse between the filing of an application with the FCC
for a modification or a new license and action thereon by the FCC. Delay by
the FCC in processing applications could delay or materially adversely affect
the Company's plans with respect to one or more of its Markets. No assurance
can be given that new regulations will not be imposed or that existing
regulations will not be changed in a manner that could have a material
adverse effect on the wireless cable industry as a whole and on the Company
in particular. In addition, wireless cable operators and channel license
holders are subject to regulation by the FAA with respect to construction,
marking and lighting of transmission towers and to certain local zoning
regulations affecting the construction of towers and other facilities.
There also may be restrictions imposed by local authorities, neighborhood
associations and other similar organizations limiting the use of certain
types of reception equipment used by the Company and new taxes imposed by
state and local authorities.
Interference Issues - The Company's business plan involves moving the
authorized transmitter sites of various of its MDS and ITFS licensed stations
and obtaining the grant of licenses for its ITFS and MDS stations. The FCC's
interference protection standards may make one or more of these proposed
relocations or new grants unavailable, in which event it may be necessary to
negotiate interference agreements with the licensees of the stations which
would otherwise block such relocations or grants. In the event the Company
cannot obtain interference agreements required to implement the Company's
plans for a Market, the Company may have to curtail or modify operations in
the Market, which could have a material adverse effect on the growth of the
Company. In addition, while the Company's leases with MDS and ITFS licensees
require their cooperation, it is possible that one or more of the Company's
channel lessors may hinder or delay the Company's efforts to use the channels
in accordance with the Company's plans for the particular Market.
Competition - The subscription television industry is highly
competitive. Wireless cable systems face or may face competition from
several sources, such as traditional hard-wire cable systems, DBS systems,
SMATV systems, other wireless cable systems and other alternative methods of
distributing and receiving video programming. Furthermore, premium movie
services offered by cable television systems have encountered significant
competition from the home video cassette recorder ("VCR") industry. In areas
where several local off-air VHF/UHF broadcast channels can be received
without the benefit of subscription television, hard-wire and wireless cable
systems also have experienced competition from the availability of broadcast
signals generally and have found market penetration to be more difficult. In
addition, within each market, the Company must compete with others to
acquire, from the limited number of wireless cable channel licenses issued or
issuable, rights to a minimum number of wireless cable channels needed to
establish a commercially viable system. Legislative, regulatory and
technological developments may result in additional and significant
competition, including competition from a proposed new wireless service known
as local multipoint distribution service ("LMDS"). In some areas, exchange
telephone companies offer video programming services via radio communications
without regulation of rates or services, offer hardwire or fiber optic cable
service for hire by video programmers and provide traditional cable service
subject to local franchising requirements.
In the Operating Systems, the Company initially has targeted its
marketing to households that are unpassed by traditional hard-wire cable and
that have limited access to local off-air VHF/UHF programming. Certain of
the hard-wire cable companies operating in the Company's Markets currently
offer a greater number of channels to their customers than the Company
offers. DBS providers currently offer a substantially greater number of
channels than hard-wire or wireless cable providers with a high picture
quality. In addition, the DBS industry recently signed an agreement with
VHF/UHF programmers that would allow such stations to be broadcast through
DBS systems. Aggressive price competition or the passing of a substantial
number of presently unpassed households by any existing or new subscription
television service could have a material adverse effect on the Company's
results of operations and financial condition.
New and advanced technologies for the subscription television industry,
such as DBS, LMDS, digital compression and fiber optic networks, are in
operation or are in various stages of development. As they are developed,
these new technologies could have a material adverse effect on the demand for
wireless cable services. Many actual and potential competitors have greater
financial, marketing and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully with existing
competitors or new entrants in the market for subscription television
services.
Dependence on Channel Leases; Need for License Extensions; Loss of
Licenses by Lessors - The Company is dependent on leases with unaffiliated
third parties for substantially all of its wireless cable channel rights.
The use of wireless cable channels by the license holders is subject to
regulation by the FCC, and the Company is dependent upon the continuing
compliance by channel license holders with applicable regulations, including
the requirement that ITFS license holders must meet certain educational use
requirements in order to lease transmission capacity to wireless cable
operators.
The Company's channel leases typically cover four ITFS channels and/or
one to four MDS channels each. Under a policy adopted by the FCC, the term
of the Company's ITFS channel leases cannot exceed ten years from the time
the lessee begins using the channel. The remaining initial terms of most of
the Company's ITFS channel leases are approximately five to ten years. There
is no restriction on the length of MDS channel leases, which frequently
extend beyond the term of the underlying MDS license. However, in the event
an MDS license is not renewed or is otherwise terminated, the authorization
will no longer be valid, and the Company will have no rights under its lease
to transmit on channels that are subject to such nonrenewed or terminated
license.
ITFS licenses generally are granted for a term of ten years and are
subject to renewal by the FCC. Existing MDS licenses generally will expire
on May 1, 2001 unless renewed. BTA authorizations expire ten years from the
grant thereof, unless renewed. FCC licenses also specify construction
deadlines which, if not met, could result in the loss of the license.
Requests for additional time to construct a channel may be filed and are
subject to review pursuant to FCC rules. The termination or non-renewal of a
channel lease or of a channel license, or the failure to grant an application
for an extension of the time to construct an authorized station, would result
in the Company being unable to deliver programming on the channels authorized
pursuant thereto.
The Company contracts with EdNet for the commercial use of 20 ITFS
channels in each of its Markets in the state of Mississippi. The term of the
EdNet Agreement is 10 years from the date of issuance of certain construction
permits, each of which was granted in 1992. The Company anticipates that,
pursuant to the EdNet Agreement, the lease term will terminate on or about
April 1, 2002, unless renewed prior thereto. The commercial use of these
channels represents the majority of the Company's channels in Mississippi and
the termination of, or inability to renew, the EdNet Agreement would have a
material adverse effect on the Company's operations in its Mississippi
Markets. The Company has granted EdNet a security interest in all of its
Mississippi equipment, transmitters and rights to use certain wireless cable
channels (the "EdNet System") in order to secure the Company's performance
under the EdNet Agreement, which generally requires the Company to install,
operate and maintain a system sufficient to serve 95% of the population of
the licensed geographic area of Mississippi by July 1, 1998. In the event of
a default by the Company under the EdNet Agreement, EdNet will have the right
to operate the EdNet System and derive all income from its operation. If
EdNet assumes the operation of the EdNet System, the Company will be required
to assign its interest in the EdNet Agreement and the EdNet System or to
forfeit its interests in such assets. Although the Company does not believe
that the termination of or failure to renew a single channel lease, other
than that with EdNet, would materially adversely affect the Company, several
of such terminations or failures to renew in one or more Markets that the
Company actively serves could have a material adverse effect on the Company.
In addition, the termination, forfeiture, revocation or failure to renew or
extend an authorization or license held by the Company's lessors could have a
material adverse effect on the Company.
Dependence on Program Suppliers - The Company is dependent on fixed-
term contracts with various program suppliers such as CNN, ESPN and HBO.
Although the Company has no reason to believe that any such contracts will be
canceled or will not be renewed upon expiration, if such contracts are
canceled or not renewed, the Company will have to seek program material from
other sources. There can be no assurance that other program material will be
available to the Company on acceptable terms or at all or, if so available,
that such material will be acceptable to the Company's subscribers.
Physical Limitations of Wireless Cable Transmission - Reception of
wireless cable programming generally requires a direct, unobstructed LOS from
the headend to the subscriber's receive-site antenna. Therefore, in
communities with tall trees, hilly terrain, tall buildings or other
obstructions in the transmission path, wireless cable transmission can be
difficult or impossible to receive at certain locations, and the Company may
not be able to supply service to all potential subscribers. While the
Company intends to employ low power repeaters to overcome LOS obstructions,
there can be no assurance that it will be able to secure the necessary FCC
authorizations. Based on the Company's installation and operating
experience, the Company believes that its signal can be received directly by
approximately 80% of the households within the Company's signal pattern in
the Operating Systems, and an average of approximately 70% of the households
within the Company's expected signal patterns for Future Launch Markets. In
addition to limitations resulting from terrain, in limited circumstances
extremely adverse weather can damage transmission and receive-site antennas,
as well as other transmission equipment.
Dependence on Existing Management - The Company is dependent in large
part on the experience and knowledge of existing management. The loss of the
services of one or more of the Company's current executive officers could
have a material adverse effect upon the Company. Although, the Company has
recently added new members to its management team, the Company believes that
it will require additional management personnel as it commences operations in
new Markets. The failure of the Company to attract and retain such personnel
could have a material adverse effect on the Company.
Item 2. Properties.
The Company leases approximately 15,746 square feet of office space for
its corporate headquarters in Baton Rouge, Louisiana under a lease that
expires on April 30, 2001. The Company pays approximately $131,500 per year
for such space. The Company currently leases approximately 4,440 square feet
for its administrative and regional offices in Jackson, Mississippi, which
lease expires on January 31, 2001. The Company pays approximately $56,500
per year for such space. The Company is currently in the process of moving
its administrative and regional offices to a new location in Jackson,
Mississippi, for which it leases approximately 14,200 square feet of office
space expiring on December 31, 2002. The Company pays approximately $191,500
per year for such space The Company currently does 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 each of its Markets.
The Company owns certain trademarks; however, the Company believes that
its business is not materially dependent upon its ownership of any single
trademark or group of trademarks.
Item 3. Legal Proceedings.
The Company is not a party to any litigation that would have a material
adverse effect on its business, results of operations, or financial
condition.
Item 4. Submission of Matters to a Vote of Security-Holders
Not Applicable.
<PAGE>
Item 4A. Executive Officers of the Registrant
The following table sets forth the name, age and position as of March
1, 1997 with respect to the Company's executive officers:
Name Age Position
- ------------------------ ----- -----------------------------------
Henry M. Burkhalter 48 President and Vice Chairman of
the Board
Sean E. Reilly 36 Chief Executive Officer
Henry G. Schopfer, III 50 Executive Vice President, Chief
Financial Officer and Secretary
Alton C. Rye 53 Executive Vice President-
Operations
Bill R. Byer, Jr. 39 Executive Vice President-
Operations
Michael C. Ellis 30 Vice President-Controller and
Assistant Secretary
Henry M. Burkhalter became a Director of the Company in April 1996 and
President and Vice Chairman upon the consummation of the TruVision
Transaction on July 29, 1996. Mr. Burkhalter had been Chairman of the Board
of Directors, President and Chief Executive Officer of TruVision since its
incorporation in April 1994. 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.
Sean E. Reilly has served as Chief Executive Officer and Director of
the Company since its founding in June 1995 and as Chief Executive Officer
and President of the Company's predecessor since its founding in late 1993.
Prior to joining the Company's predecessor, Mr. Reilly served as Vice-
President of Real Estate/Mergers and Acquisitions, of Lamar Advertising
Company, a publicly-traded outdoor advertising company. Mr. Reilly served
in the Louisiana Legislature as a State Representative from March 1988 to
January 1996.
Henry G. Schopfer, III became Executive Vice President and Chief
Financial Officer on December 9, 1996. He also serves as the Company's
Secretary. From 1988 to 1996, Mr. Schopfer served as an Executive Officer
with Daniel Industries, Inc., a Houston, Texas-based manufacturer of oil
field related products, most recently as Vice President and Chief Financial
Officer.
Alton C. Rye became Executive 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 was the twelfth largest cable television company in the United
States at the time it was sold. From August 1993 to August 1995, he was
responsible for Sammons' largest operating division, which serviced
approximately 350,000 subscribers. From May 1987 to August 1993, Mr. Rye
served as Vice President-Finance, Chief Financial Officer and Treasurer of
Sammons.
Bill R. Byer, Jr. became Executive Vice President-Operations of the
Company upon the consummation of the TruVision Transaction on July 29, 1996.
Mr. Byer had been Executive Vice President and Chief Operating Officer of
TruVision since 1994. From 1989 to 1994, he served as General Manager for
MultiMedia CableVision, Inc., which operated a wireless cable system serving
Oklahoma City, Oklahoma. From 1984 to 1989, he served as General Manager of
Argonox Communications/Technivision, a wireless cable company, and from 1979
to 1984, he served as General Manager of Movie Systems, Inc., a wireless
cable company serving the Milwaukee, Wisconsin, Indianapolis, Indiana,
Oklahoma City, Oklahoma and Ft. Lauderdale and West Palm Beach, Florida
markets. In total, he has over 15 years of experience in the wireless cable
industry, managing several systems with an aggregate number of subscribers in
excess of 50,000.
Michael C. Ellis has served as Vice President-Controller of the Company
since joining the Company in November of 1995 and Secretary from August 1996
to February 1997. In February 1997, Mr. Ellis was appointed Assistant
Secretary of the Company. Prior to joining the Company, he was an associate
partner in the financial reporting and consulting division of Postlethwaite
and Netterville, a regional accounting and consulting firm. He was employed
with Postlethwaite and Netterville from August 1988 to November 1995.
PART II
Item 5. Market for Registrant's Common Equity and Related Matters
The Common Stock began trading on the Nasdaq National Market in October
1995 under the symbol of "WIRL" at a price of $10.50 per share. The
following table sets forth the high and low closing bid prices of the Common
Stock as reported by the Nasdaq National Market.
Market Price
-------------------
Fiscal Period High Low
- ------------- ---- ---
1995:
Fourth Quarter (from October 18, 1995) $ 17-1/4 $ 11-3/4
1996:
First Quarter $ 16-3/4 $ 13-3/4
Second Quarter $ 20-1/4 $ 13
Third Quarter $ 18 $ 14-1/4
Fourth Quarter $ 14 $ 5-7/8
1997:
First Quarter (through March 14, 1997) $ 7 $ 2-5/8
The Company has never declared or paid any cash dividends on the
Common Stock and does not presently intend to pay cash dividends on the
Common Stock in the foreseeable future. The Company intends to retain future
earnings for reinvestment in its business. In addition, the Company's
ability to declare or pay cash dividends is affected by the ability of the
Company's present and future subsidiaries to declare and pay dividends or
otherwise transfer funds to the Company because the Company conducts its
operations entirely through its subsidiaries. Certain agreements related to
the Company's indebtedness significantly restrict the Company's ability to
pay dividends on the Common Stock. Future loan facilities, if any, obtained
by the Company or its subsidiaries may prohibit or restrict the payment of
dividends or other distributions by the Company to its stockholders and the
payment of dividends or other distributions by the Company's subsidiaries to
the Company. Subject to such limitations, the payment of cash dividends on
the Common Stock will be within the discretion of the Company's Board of
Directors and will depend upon the earnings of the Company, the Company's
capital requirements, applicable corporate law requirements and other factors
that are considered relevant by the Company's Board of Directors.
At March 1, 1997, there were approximately 130 holders of the Company's
Common Stock.
Item 6. Selected Financial Data
The selected consolidated financial data presented as of December 31,
1993, 1994, 1995 and 1996 and for the period from February 4, 1993
(inception) to December 31, 1993, and for the years ended December 31, 1994,
1995 and 1996 are 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, 1995 and 1996, and for
the years ended December 31, 1994, 1995 and 1996, and the report thereon are
included elsewhere in this Form 10-K. The financial statements for the year
ended December 31, 1995 reflect the operating results of the Company for the
period from January 1, 1995 through October 18, 1995 and the combined results
of the Company and the certain assets acquired in October 1995 from Heartland
Wireless Communications, Inc. for the period from October 19, 1995 through
December 31, 1995. The financial statements for the year ended December 31,
1996 reflect the operating results of the Company for the period from January
1, 1996 through July 28, 1996 and the combined results of the Company and
TruVision for the period from July 29, 1996 through December 31, 1996. 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 report.
<TABLE>
<CAPTION>
Period From
February 4, 1993 Year Ended December 31,
(inception) to -------------------------------------------
December 31, 1993 1994 1995 1996
----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ - $ 399,319 $ 1,410,318 $ 11,364,828
---------- ------------ ------------ -------------
Operating expenses:
Systems operations 24,429 274,886 841,819 5,316,190
Selling, general and
administrative expenses 110,281 1,800,720 4,431,839 18,659,100
Depreciation and amortization 27,489 413,824 1,783,066 11,625,507
---------- ------------ ------------ -------------
Total operating expenses 162,199 2,489,430 7,056,724 35,600,797
---------- ------------ ------------ -------------
Operating loss (162,199) (2,090,111) (5,646,406) (24,235,969)
Interest expense and
other, net (411) (171,702) (2,046,068) (20,134,426)
---------- ------------ ------------ -------------
Loss before income taxes (162,610) (2,261,813) (7,692,474) (44,370,395)
Income tax benefit - - - 4,700,000
---------- ------------ ------------ -------------
Net loss $ (162,610) $ (2,261,813) $ (7,692,474) $ (39,670,395)
Preferred stock dividends and
discount accretion - - (786,389) -
---------- ------------ ------------ -------------
Net loss applicable to
common stock $ (162,610) $ (2,261,813) $ (8,478,863) $ (39,670,395)
========== ============ ============ =============
Net loss per common share $ (0.30) $ (1.21) $ (2.02) $ (2.65)
========== ============ ============ =============
Weighted average common shares
outstanding 538,127 1,863,512 4,187,736 14,961,934
========== ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1993 1994 1995 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 57,786 $ (1,537,244) $122,084,511 $106,676,500(1)
Total assets 514,223 8,914,224 213,799,874 395,609,362
Current portion of long-term
debt 4,714 1,457,295 376,780 3,169,383
Long-term debt 14,903 2,839,602 150,871,267 299,909,221
Deferred taxes - - - 6,500,000
Total stockholders' equity 458,370 4,343,713 55,649,687 70,606,682
</TABLE>
______________________________
(1) Includes approximately $17,637,839 and $18,149,180 of funds held in
escrow at December 31, 1995 and 1996 respectively to be used to pay interest
due on the Company's 13% Senior Notes due 2003.
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
Annual Report.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations pertain solely to the historical financial statements
contained herein.
The results of operations for the years ended December 31, 1994, 1995,
and 1996, were prepared based on the historical results of the Company. On
October 18, 1995, the Company acquired certain assets of Heartland Wireless
Communications, Inc., (the "Heartland Division") in exchange for
approximately 3.5 million shares of Common Stock and $10 million in notes.
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. On July 29, 1996, the Company merged with
TruVision in exchange for approximately 3.4 million shares of the Company's
common stock. As a result, the results of operations for the year ended
December 31, 1996 includes the operating results of the Company for the
period from January 1, 1996 through July 28, 1996 and the combined operating
results of the Company and TruVision from July 29, 1996 to December 31, 1996.
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, the
TruVision Transaction and the development of the Company's business and
system launches during the periods presented.
Overview
Since its inception, the Company has significantly increased its
Operating Systems and number of subscribers. This controlled growth has been
achieved from internal expansion and through acquisitions and mergers. The
Company has sustained substantial net losses, primarily due to fixed
operating costs associated with the development of its systems, interest
expense and charges for depreciation and amortization. The Company expects
to experience positive system EBITDA in the second half of 1997 and
consolidated EBITDA (net income (loss) plus interest expense, income tax
expense, depreciation and amortization expense and all other non-cash charges
less any non-cash items which have the effect of increasing net income or
decreasing net loss) in the first half of 1998. The Company had five
Operating Systems achieve positive EBITDA for 1996 and 11 Operating Systems
positive for the month of December, 1996. None of the Company's remaining
systems had turned EBITDA positive as of December 1996, primarily as a result
of their early stages of development and number of subscribers. The Company
does not anticipate being able to generate net income until after the year
2001, and there can be no assurance that other factors, such as, but not
limited to, economic conditions, its inability to raise additional financing
or disruptions in its operations, will not result in further delays in
operating on a profitable basis. Losses may increase as operations in
additional systems are commenced or acquired.
"System EBITDA" means net income (loss) plus interest expense, income
tax expense, depreciation and amortization expense and all other non-cash
charges, less any non-cash items which have the effect of increasing net
income or decreasing net loss, for a system and includes all selling, general
and administrative expenses attributable to employees in that system. For
the periods presented there are no such non-cash items. Information with
respect to EBITDA is included herein because it is a widely accepted
financial indicator of a company's ability to service and/or incur
indebtedness. EBITDA is not intended to represent cash flows, as determined
in accordance with generally accepted accounting principles, nor has it been
presented as an alternative to operating income or as an indicator of
operating performance and should not be considered as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles.
Year 1996 Compared to the Year 1995
Revenues - The Company's revenues consist of monthly fees paid by
subscribers for the basic programming package and for premium programming
services. The Company's subscription revenues for 1996 were $11.4 million as
compared to $1.4 million for 1995, an increase of $10.0 million or 714%. This
increase in revenues was primarily due to the average number of subscribers
increasing from 5,015 to 40,420 subscribers for the years 1995 and 1996,
respectively. At December 31, 1995, the Company had 7,525 subscribers versus
69,825 at December 31, 1996. Approximately 34% of the subscriber increase
was attributable to same system growth (growth in systems in operation at the
beginning of the year and growth in systems acquired during the year from
the date of acquisition), 30% was attributable to growth from the 14 new
systems launched during 1996, and 36% was attributable to the acquisition of
eight Operating Systems.
Systems Operations Expenses - Systems operations expense includes
programming costs, channel lease payments, tower and transmitter site
rentals, cost of program guides and certain repairs and maintenance
expenditures. Programming costs, cost of program guides, and channel lease
payments (with the exception of minimum payments) are variable expenses which
increase as the number of subscribers increases. Systems operations expenses
for 1996 were $5.3 million (46% of revenue) as compared to $0.8 million (57%
of revenue) for 1995, reflecting an increase of $4.5 million or 562%. This
increase is attributable primarily to the increase in the average number of
subscribers in 1996 compared to 1995 as outlined above. As a percent of
revenues, systems operations expenses have decreased as more systems mature.
Selling, General and Administrative - Selling, general and
administrative ("SG&A") expenses for 1996 were $18.7 million (164% of
revenue) compared to $4.4 million (314% of revenue) for 1995, an increase of
$14.3 million or 325%. The Company has experienced increasing SG&A expenses
as a result of its increased wireless cable activities and associated
administrative costs including costs related to opening, acquiring and
maintaining additional offices and compensation expense. The 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. As a percent of revenues, selling general and
administrative expenses have decreased as more systems mature.
The Company believes such SG&A costs will not stabilize until 1998 when
all Markets are expected to be launched. At that time, administrative
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.
Depreciation and Amortization Expense - Depreciation and amortization
expense for 1996 was $11.6 million versus $1.8 million for 1995, an increase
of $9.8 million or 544%. The increase in depreciation expense during the
period was due to additional capital expenditures related to the launch of
new systems and acquisitions of Operating Systems. In addition, amortization
of leased license costs increased due to new launches and the acquisition of
additional channel rights.
Interest Expense - Interest expense for 1996 was $28.1 million
versus $4.1 million for 1995, an increase of $24 million or 585%. This
increase in interest expense is due to the issuance of the 1995 Senior Notes
in October 1995, and the issuance of the 1996 Senior Discount Notes in August
1996 (each as defined in "-Liquidity and Capital Resources").
Interest Income - Interest income in 1996 was $8.1 million versus
$2.0 million for 1995, an increase of $6.1 million or 305%. This increase in
interest income is due to the investment of net proceeds from the 1995 and
1996 Unit Offerings (each as defined in "-Liquidity and Capital Resources").
Year 1995 Compared to the Year 1994
Revenues - The Company's revenues for the year ended December 31,
1994 were $.4 million. Subscription revenues from new subscribers totaled
$.25 million or 67% of revenues. Equipment sales and other revenues
accounted for $.10 million and $.05 million, 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 $1.4 million. The increase in subscription
revenues of $1.15 million or 460% 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 from
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 - For the year ended December 31, 1995,
systems operations expense amounted to $.8 million as compared to $.3
million for the prior-year period. The increase was primarily attributable
to the increase in the number of subscribers and new market launches.
Selling General and Administrative Expense - SG&A increased to $4.4
million as compared to $1.8 million for the prior period. The $2.6 million
increase was due primarily to increase 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 was $1.8 million or the year ended December 31, 1995, compared to $.4
million 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 the development and implementation of the Company's
operating plan.
Interest Income - For the year ended December 31, 1995, the Company
earned $1.4 million on its cash equivalents and $.6 million from the funds
escrowed in connection with the investment of net proceeds from the 1995 Unit
Offering (as defined in "-Liquidity and Capital Resources").
Interest Expense - Interest expense in 1994 was $.17 million.
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 $.05 million of interest expense in 1994. The
outstanding balance on the facility at December 31, 1994 amounted to $1.1
million. Additionally, the Company issued two discount notes that related 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
$.1 million. The subsidiary of the Company that owns and operates the
Bryan/College Station System has outstanding a $.15 million 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.
Interest expense in 1995 was $4.0 million. 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
$.04 million was incurred in 1995 from this revolving credit facility. In
October 1995, the Company issued an aggregate principal amount of $150
million of its 1995 Senior Notes (as defined in "-Liquidity and Capital
Resources"). At December 31, 1995, interest expense of $3.7 million was
incurred on the 1995 Senior Notes. Interest expense for the two discount
notes described in the above paragraph was $.3 million for the year ended
December 31, 1995. Interest expense on the convertible debenture related to
the Bryan/College Station System was $.01 million for the year ended December
31, 1995.
Liquidity and Capital Resources
The wireless cable television business is capital intensive. The
Company's operations require substantial amounts of capital for (i) the
installation of equipment at subscribers' premises (ii) the construction of
transmission and headend facilities and related equipment purchases, (iii)
the funding of start-up losses and other working capital requirements, (iv)
the acquisition of wireless cable channel rights and systems and (v)
investments in 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 the
launch of additional markets, in October 1995, the Company completed the
initial public offering of 3,450,000 shares of its common stock. "Common
Stock Offering". The Company received approximately $32.3 million in net
proceeds from the Common Stock Offering. Concurrently, the Company issued
150,000 units (the "1995 Unit Offering") consisting of $150 million aggregate
principal amount of senior notes due 2003 (the "1995 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. 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 on the 1995 Senior Notes as required by terms of the
indenture governing the 1995 Senior Notes.
In August 1996, the Company issued 239,252 units (the "1996 Unit
Offering") consisting of $239 million aggregate principal amounts of senior
discount notes (the "1996 Senior Discount Notes") and 239,252 warrants to
purchase 544,059 shares of Common Stock at an exercise price of $16.64 per
share. The Company received $118.6 million after expenses. The proceeds are
being used to fund the business plan of the newly acquired markets from the
TruVision Transaction and to fund the launch and expansion of existing
markets.
For the year ended December 31, 1994, cash used in operating activities
was $1.7 million consisting primarily of net loss of $2.3 million and an
increase in receivables and prepaid expenses of $.2 million, offset by an
increase in accounts payable and accrued expenses of $.2 million,
depreciation and amortization of $.4 million, and non-cash expenses of $.2
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 $3.1 million
and $5.1 million, respectively. These investing activities principally
related to the acquisition of equipment in certain of the Company's Operating
Systems, as well as Future Launch Markets and certain license and
organization costs related to those Markets. For the ended December 31,
1994, cash 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 Future Launch Markets, offset by $.01 million in
repayments of long-term debt.
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 an
increase in receivables and prepaid expenses of $.6 million and $.4 million,
respectively, offset by an increase in accounts payable and accrued expenses
of $6 million, and 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 $53.2
million applied to purchase marketable investment securities to establish the
escrow account relating to the 1995 Senior Notes and capital expenditures and
payments for licenses and organizational costs of approximately $9.8 million
and $6.8 million, respectively. In addition, the Company made investments
and purchased other assets at a cost of approximately $1.5 million. The
capital expenditures and acquisition costs principally related to the
purchase of equipment in certain of the Company's Operating Systems, as well
as Future Launch Markets and certain license and organizational costs related
to those Markets. For the year ended December 31, 1995, cash flows provided
by financing activities were $182.3 million, consisting of $144.8 million in
proceeds from the issuance of long-term debt, $35 million in proceeds from
the issuance of common stock, and $14.3 million in proceeds from the issuance
of redeemable preferred stock, offset by $11.5 million in repayments of long-
term debt and $.3 million in payments for debt issue cost.
For the year ended December 31, 1996, cash used in operating activities
was $22.2 million consisting primarily of a net loss of $39.7 million offset
by an increase in accounts payable and accrued expenses of $3.3 million, an
increase in receivables and prepaids of $1.0 million, a decrease in deposits
of $.9 million, depreciation and amortization of $11.6 million, non-cash
income of $5.7 million and non-cash expenses of $8.4 million. For the year
ended December 31, 1996, cash used in investing activities was $89.8 million,
consisting primarily of capital expenditures and payments for licenses and
organization costs of approximately $60.4 million and $43.9 million,
respectively. In addition, the Company received proceeds from the maturities
of securities of $17.3 million, and made investments and purchased other
assets at a cost of approximately $2.8 million. These investing activities
were principally related to the acquisition of equipment in certain of the
Company's Operating Systems, as well as Future Launch Markets and certain
license and organization costs related to those markets. For the year ended
December 31, 1996, cash flows provided by financing activities were $106
million, consisting of $120.7 million in proceeds from the issuance of long
term debt and $.03 million in proceeds from the issuance of common stock,
offset by $13.1 million in repayments of long-term debt and $1.6 million in
payments for debt issue costs.
Historically, the Company has generated operating and net losses and
can be expected to do so for at least the foreseeable future as it continues
to develop additional operating systems. Such losses may increase as
operations in additional systems are commenced or acquired. There can be no
assurance that the Company will be able to achieve or sustain positive net
income in the future. As the Company continues to develop systems, EBITDA
from more mature systems is expected to be partially or completely offset by
negative EBITDA 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 System EBITDA) in the fourth
quarter of 1997 to generate revenues sufficient to offset these operating and
development costs. EBITDA is used to measure performance in the wireless
cable industry. However, EBITDA 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.
The Company made capital expenditures, exclusive of acquisitions of
wireless cable systems and additions to leased license acquisition costs, of
approximately $9.8 million and $60.4 million for the years ended December 31,
1995 and 1996, respectively. These expenditures primarily relate to the
purchase of equipment in the Company's Operating Systems, as well as in
Future Launch Markets. The Company estimates that $87 million in capital
expenditures will be required over the next twelve months to continue to fund
growth in its Operating Systems and Future Launch Markets.
Based on the factors and results discussed above, the Company believes
that the $105 million in unrestricted cash at December 31, 1996 is sufficient
to meet its expected capital and operating needs at least over the next nine
to twelve months.
Subject to the limitations of the indentures governing the
1995 Senior Notes and the 1996 Senior Discount 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 strategic investors, joint ventures or other
arrangements, if such financing is available to the Company on satisfactory
terms.
As a result of issuing the 1995 Senior Notes and the 1996 Senior
Discount Notes and the possible incurrence of additional indebtedness, the
Company will be required to satisfy significant 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 1995 Senior Notes. Additionally, beginning on
August 1, 2001, cash interest will begin to accrue on the 1996 Senior
Discount Notes and thereafter a substantial portion of the Company's cash
flow will be devoted to such debt service. 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 1995 Senior Notes and the 1996 Senior Discount 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 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 indentures governing the 1995 Senior Notes
and the 1996 Senior Discount Notes.
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.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 is set forth on pages F-1 through F-
21 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.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information concerning the Company's directors and officers called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 11. Executive Compensation.
Information concerning the compensation of the Company's executives
called for by this item will be included in the Company's definitive Proxy
Statement prepared in connection with the 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information concerning security ownership of certain beneficial owners
and management called for by this item will be included in the Company's
definitive Proxy Statement prepared in connection with the 1997 Annual
Meeting of Stockholders and incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions
called for by this item will be included in the Company's definitive Proxy
Statement prepared in connection with the 1997 Annual Meeting of Stockholders
and incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a)(1) Financial Statements - Reference is made to Item 8 hereof.
(a)(2) Financial Statement Schedule - The following financial
statement schedule of the Company for the years ended December
31, 1994, 1995 and 1996 is included in this Form 10-K on page
F-22.
Schedule II Valuation and Qualifying Accounts. All other
financial statement schedules have been omitted because
they are inapplicable or the required information is
included elsewhere herein.
(a)(3) Exhibits - See the Exhibit Index beginning on page E-1 hereof.
The Company will furnish to any eligible stockholder, upon
written request of such stockholder, a copy of any exhibit
listed, upon the payment of a reasonable fee equal to the
Company's expenses in furnishing such exhibit.
(b) Reports on Form 8-K - The Company filed current reports on Form 8-
K on October 17, 1996 (Item 7) and on October 30, 1996 (Items 5 and
7). As part of the October 30, 1996 report, the Company filed (i)
the Company's pro forma balance sheet as of June 30, 1996 and pro
forma statements of operations for the year ended December 31, 1995
and the six months ended June 30, 1996; (ii) TruVision's balance
sheets as of December 31, 1994 and 1995 and as of June 30, 1996,
Statement of Operations for the periods from inception (November 2,
1995) to December 31, 1993, January 1, 1994 through August 24, 1994
and August 25, 1994 through December 31, 1994 and for the year ended
December 31, 1995 and the six months ended June 30, 1995 and 1996,
Statements of Partners Capital for the periods from inception
(November 2, 1993) to December 31, 1993 and January 1, 1994 through
August 24, 1994; Statement of Changes in Stockholders Equity for the
period from August 25, 1994 through December 31, 1994 and for the
year ended December 31, 1995 and for the six months ended June 30,
1995 and 1996, and Statements of Cash Flows for the periods from
inception (November 2, 1993) to December 31, 1993, January 1, 1994
through August 24, 1994, August 25, 1994 through December 31, 1994
and for the year ended December 31, 1995 and the six months ended
June 30, 1995 and 1996; and (iii) the combined balance sheets as of
December 31, 1994, December 31, 1995 and June 30, 1996; Combined
Statements of Operations and Accumulated Deficit for the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June
30, 1995 and 1996 and Combined Statements of Cash Flows for the
years ended December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1995 and 1996 of Madison Communications, Inc. and
Beasley Communications, Inc.
Wireless One, Inc.,
and Subsidiaries
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, and 1996...................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995, and 1996.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996...................................... F-6
Notes to Consolidated Financial Statements............................... F-7
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, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three year period ended
December 31, 1996. 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, 1995 and 1996,
and the results of their operations and their cash flows for each of the
years in the three year period ended December 31, 1996, 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
February 21, 1997
WIRELESS ONE, INC.
Consolidated Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
Assets 1995 1996
------ -------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 110,380,329 $ 104,448,583
Marketable investment securities - restricted
(note 5) 17,637,839 18,149,180
Subscriber receivables, less allowance for doubtful
accounts of $73,641 and $292,619 in 1995 and 1996,
respectively 143,633 998,734
Accrued interest and other receivables 405,241 464,166
Prepaid expenses 796,389 1,149,296
-------------- --------------
Total current assets 129,363,431 125,209,959
Property and equipment, net (note 6) 14,266,755 82,636,712
License and leased license investment, net of
accumulated amortization of $548,283 and
$2,823,658 in 1995 and 1996, respectively 26,724,238 154,444,536
Marketable investment securities - restricted (note 5) 35,755,505 18,885,565
Other assets (note 7) 7,689,945 14,432,590
-------------- --------------
$ 213,799,874 $ 395,609,362
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,356,707 $ 4,105,994
Accrued expenses 862,100 6,775,218
Accrued interest 3,683,333 4,482,864
Current maturities of long-term debt (note 8) 376,780 3,169,383
------------- --------------
Total current liabilities 7,278,920 18,533,459
Long-term debt (note 8) 150,871,267 299,909,221
Deferred taxes (note 9) - 6,500,000
------------- --------------
158,150,187 324,942,680
Redeemable convertible preferred stock, $.01 par
value, 15,000 shares authorized, no shares
issued or outstanding (note 10) - -
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding - -
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,498,752 and 16,946,697 shares
issued and outstanding in 1995 and 1996, respectively 134,988 169,467
Additional paid-in capital 65,631,596 120,284,507
Accumulated deficit (10,116,897) (49,787,292)
------------- --------------
Total stockholders' equity 55,649,687 70,666,682
------------- --------------
Commitments and contingencies (note 13) - -
------------- --------------
$ 213,799,874 $ 395,609,362
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
Consolidated Statements of Operations
Years Ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------ ------------ --------------
<S> <C> <C> <C>
Revenues $ 399,319 $ 1,410,318 $ 11,364,828
Operating expenses:
Systems operations 274,886 841,819 5,316,190
Selling, general and administrative 1,800,720 4,431,839 18,659,100
Depreciation and amortization 413,824 1,783,066 11,625,507
------------ ------------ --------------
2,489,430 7,056,724 35,600,797
------------ ------------ --------------
Operating loss (2,090,111) (5,646,406) (24,235,969)
------------ ------------ --------------
Other income (expense):
Interest expense (171,702) (4,070,184) (28,087,948)
Interest income - 2,024,116 8,146,958
Equity in losses of investee (note 7) - - (193,436)
------------ ------------ --------------
Total other expense (171,702) (2,046,068) (20,134,426)
Loss before income taxes (2,261,813) (7,692,474) (44,370,395)
Income tax benefit (note 9) - - 4,700,000
------------ ------------ --------------
Net loss (2,261,813) (7,692,474) (39,670,395)
Preferred stock dividends and discount
accretion (note 10) - (786,389) -
------------ ------------ --------------
Net loss applicable to common stock $ (2,261,813) $ (8,478,863) $ (39,670,395)
============ ============ ==============
Net loss per common share $ (1.21) (2.02) (2.65)
============ ============ ==============
Weighted average common shares outstanding 1,863,512 4,187,736 14,961,934
============ ============ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1994, 1995, and 1996
<TABLE>
<CAPTION>
Additional
Common paid-in Subscriptions Accumulated
Stock capital receivable deficit Total
--------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 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
Issuance of 3,442,945
shares of common stock
in purchase transactions 34,429 48,166,801 - - 48,201,230
Issuance of stock options
in purchase transactions - 1,401,723 - - 1,401,723
Issuance of warrants to
purchase 544,059 shares
of common stock - 5,053,387 - - 5,053,387
Issuance of 5,000 shares of
common stock upon exercise
of employee stock options 50 31,000 - - 31,050
Net loss - - - (39,670,395) (39,670,395)
--------- ------------- ------------ ------------- -------------
Balance at December 31, 1996 $ 169,467 $ 120,284,507 $ - $ (49,787,292) $ 70,666,682
========= ============= ============ ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
WIRELESS ONE, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1994, 1995, and 1996
1994 1995 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,261,813) $ (7,692,474) $ (39,670,395)
Adjustments to reconcile net loss to
net cash used in operating activities:
Bad debt expense 54,608 196,281 371,349
Depreciation and amortization 413,824 1,783,066 11,625,507
Amortization of debt discount 104,767 328,301 7,845,537
Accretion of interest income - (213,230) (976,638)
Deferred income tax benefit - - (4,700,000)
Equity in losses of investee - - 193,436
Changes in assets and liabilities:
Receivables (167,277) (571,957) (868,890)
Prepaid expenses (46,515) (468,707) (145,949)
Deposits - - 917,796
Accounts payable and accrued
expenses 237,378 6,004,541 3,265,187
------------ -------------- --------------
Net cash used in operating
activities (1,665,028) (634,179) (22,143,060)
------------ -------------- --------------
Cash flows from investing activities:
Purchase of investments and other assets (102,000) (1,533,446) (2,778,012)
Capital expenditures (2,960,842) (9,805,057) (60,408,418)
Acquisition of license investment (5,156,054) (6,762,415) (43,898,328)
Purchase of marketable investment
securities - (53,180,114) -
Proceeds from maturities of securities - - 17,335,237
------------ -------------- --------------
Net cash used in investing
activities (8,218,896) (71,281,032) (89,749,521)
------------ -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt and warrants 4,275,819 144,764,902 120,624,614
Principal payments on long-term debt (103,306) (11,502,054) (13,089,874)
Debt issuance costs - (343,839) (1,604,955)
Issuance of common stock 5,647,156 35,008,396 31,050
Issuance of redeemable preferred stock - 14,343,654 -
------------ -------------- --------------
Net cash provided by financing
activities 9,819,669 182,271,059 105,960,835
------------ -------------- --------------
Net increase (decrease) in cash (64,255) 110,355,848 (5,931,746)
Cash and cash equivalents at beginning
of period 88,736 24,481 110,380,329
------------ -------------- --------------
Cash and cash equivalents at end of period $ 24,481 $ 110,380,329 $ 104,448,583
============ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
December 31, 1995 and 1996
(1) Description of Business and Summary of Significant Accounting
Policies
(a) Nature of Operations
Wireless One Inc. is engaged in the business of developing,
owning, and operating wireless cable television systems
primarily in select southern and southeastern United States
markets.
(b) Consolidation Policy
The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant
inter-company 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, overhead charges and direct commissions.
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 disconnection 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 on a first
in first out basis.
(d) License and Leased License Investment
Licenses and 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. Amortization expense for the years ended December 31,
1994, 1995 and 1996 was $191,915, $574,169 and $2,275,374
respectively. As of December 31, 1995 and 1996, approximately
$17,809,000 and $76,269,000 of channel rights were not subject
to amortization.
(e) Long Lived Assets
Effective January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles to
be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
The adoption of this statement had no impact on the financial
position or results of operations of the Company.
The Company periodically evaluates the propriety of the carrying
amounts of the license and leased license investment and
property and equipment in each market, as well as the
depreciation and amortization periods based on estimated
undiscounted future cash flows and other factors 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 license and related
property and equipment.
(f) Revenue Recognition
Revenues from subscribers are recognized in the month that the
service is provided.
(g) 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 basis. 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.
(h) 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. Shares issuable
upon exercise of stock options and warrants are antidilutive and
have been excluded from the calculation.
(i) Debt Issuance Costs
Costs incurred in connection with issuance of the Company's 1995
Senior Notes and 1996 Senior Discount Notes (see note 8) are
included in other assets and are being amortized using the
interest method over the term of the notes.
(j) 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.
(k) 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.
(l) Marketable Investment Securities
Investments in marketable securities at December 31, 1995 and
1996 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. No such
impairments have been recorded for the years ended December 31,
1994, 1995 and 1996.
(m) Reclassifications
Certain amounts in the prior year consolidated financial
statements have been reclassified to conform with the current
year presentation. These reclassifications had no effect on
previously reported net loss.
(2) Liquidity
The growth of the Company's business requires substantial
investment on a continuing basis to finance capital expenditures
and related expenses for expansion of the Company's customer
base and system development. In addition, the Company has
recorded net losses since inception and expects to continue to
experience net losses while it develops and expands its wireless
cable systems. Management expects that the Company will require
significant additional financings, through debt or equity
financings, joint ventures or other arrangements, to achieve its
targeted subscriber levels in its current business plans in its
operating systems and target markets and to cover ongoing
operating losses. Additional debt or equity also may be
required to finance future acquisitions of wireless cable
companies, wireless cable systems or channel rights. While
management believes the Company will be able to obtain
additional debt or equity capital on satisfactory terms to meet
its future financing needs, there can be no assurance that
either additional debt or equity capital will be available.
(3) Initial Public Offering and Heartland Transaction
Wireless One, Inc. was formed in June, 1995, by the shareholders of
a predecessor company ("Old Wireless One") and Heartland Wireless
Communications, Inc., ("Heartland"). Old Wireless One had been
formed in 1993.
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
(the "1995 Senior Notes") 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 1995 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:
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
============
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, are summarized below:
1994 1995
------------ ------------
Total revenues $ 1,287,312 $ 1,976,142
Net loss applicable to common stock $ (3,776,669) $ (8,863,252)
Net loss per common share $ (0.29) $ (0.68)
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. Net loss per common share is
based on the weighted average number of shares outstanding during the
year adjusted to give effect to shares issued in the transaction.
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 or of future results of operations of the
consolidated entity.
(4) Acquisitions
On July 29, 1996, the Company merged with TruVision Wireless Inc.,
("TruVision") whereby the Company issued to the then TruVision
shareholders 3,262,945 shares of common stock. The Company also paid
$1.8 million in cash and issued 180,000 shares of common stock to certain
affiliates of TruVision and issued stock options equivalent to 195,226
shares of the Company's common stock with an estimated fair value at the
date of acquisition of $1,401,723. TruVision acquires, develops, owns
and operates wireless cable television systems within the southeastern
United States primarily in Mississippi, Alabama, and Tennessee.
The following summarizes the allocation of estimated fair market value of
the net assets acquired in the transaction:
Current assets $ 1,146,604
Property and equipment 16,427,882
Other assets 2,149,155
License and leased license investment 80,645,464
Current liabilities (5,719,908)
Deferred tax liability (11,200,000)
Short term debt (32,046,244)
------------
$ 51,402,953
============
In 1996, the Company also acquired (i) Shoals Wireless, Inc., whose
principal asset was an Operating System in the Lawrenceburg,
Tennessee Market, for approximately $1.2 million (ii) an Operating
System and hard-wire cable system in the Huntsville, Alabama Market
for approximately $6 million, (iii) rights to 11 wireless cable
channels in the Macon, Georgia Market for approximately $600,000,
(iv) rights to eight wireless cable channels in the Bowling Green,
Kentucky Market for $300,000, (v) rights to 16 wireless cable
channels in the Jacksonville, North Carolina Market for
approximately $820,000 ($800,00 is being withheld pending grant of
licenses) and 12 wireless cable channels in the Chattanooga,
Tennessee Market for $517,000 and (vi) rights to 11 MDS channels and
filings for 20 ITFS licenses and related transmission tower leases
and approvals in Auburn/Opelika, Alabama for $600,000.
The foregoing transactions have been accounted for as business
combinations using the purchase method of accounting. The various
purchase prices have been allocated to the net assets acquired based
on management's estimates of fair values of assets and liabilities
acquired. Approximately $94,529,000 of the purchase prices have
been allocated to license and leased license investment and are
being amortized over 20 years.
The December 31, 1996 financial statements of Wireless One, Inc. include
the results of operations of the business interests acquired in the
various transactions discussed above from the dates of the respective
transactions. Summarized below is the unaudited pro forma information
for the years ended December 31, 1995 and 1996 as if the transactions
discussed herein and in note 3 had been consummated as of January 1,
1995.
1995 1996
------------ -------------
Revenues $ 6,387,670 $ 15,270,994
Net loss applicable to common stock $ (8,649,605) $ (53,156,071)
Net loss per common share $ (0.52) (3.14)
The unaudited pro forma results have been prepared for comparative
purposes only and include adjustments to conform financial statements of
the acquired entities to accounting policies used by the Company and to
record additional amortization of license and leased license investments
related to the excess purchase price over historical costs of these
license and leased license investments. Adjustments have also been made
to recognize income tax benefits during the periods to the extent
deferred tax assets can be realized through reversals of taxable
temporary differences. Net loss per common share is based on the
weighted average number of shares outstanding during the year adjusted to
give effect to shares issued in the transactions. The unaudited pro
forma results do not purport to be indicative of the results of
operations which actually would have resulted had the combinations been
in effect on January 1, 1995 or of the future results of operations of
the consolidated entity.
(5) Marketable Investment Securities - Restricted
Marketable investment securities - restricted at December 31, 1995
and 1996 consists of U.S. Treasury securities placed in escrow
pursuant to the bond indenture relating to the 1995 Senior Notes. 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.
A summary of the Company's restricted held to maturity securities at
December 31, 1995 and 1996 follows:
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Loss Gain Value
----------------- ------------ ---------- --------- ------------
U.S. Treasury Notes $ 22,343,879 $ (1,110) $ 113,163 $ 22,455,932
U.S. Treasury Notes
interest coupon strips 31,049,465 - 199,185 31,248,650
------------ --------- --------- ------------
$ 53,393,344 $ (1,110) $ 312,348 $ 53,704,582
============ ========= ========= ============
December 31, 1996
U.S. Treasury Notes $ 15,214,837 $ (38,659) $ - $ 15,176,178
U.S. Treasury Notes
interest coupon strips 21,332,090 (23,675) 14,596 21,323,011
Other 487,818 - 15,135 502,953
------------ --------- --------- ------------
$ 37,034,745 $ (62,334) $ 29,731 $ 37,002,142
============ ========= ========= ============
Scheduled maturities for the marketable securities held at December
31, 1996, are as follows:
Amortized Fair
Cost Value
------------ ------------
Maturing in less than 1 year $ 18,149,180 $ 18,152,471
Maturing from 1-5 years 18,885,565 18,849,671
------------ ------------
$ 37,034,745 $ 37,002,142
============ ============
(6) Property and Equipment
Major categories of property and equipment at December 31, 1995 and
1996 are as follows:
Estimated
Life 1995 1996
-------- ------------ ------------
Equipment awaiting installation - $ 2,230,144 $ 9,109,287
Subscriber premises equipment
and installation costs 5 3,561,714 43,049,807
Transmission equipment and
system construction costs 10 8,092,890 29,463,789
Office furniture and equipment 7 1,270,131 7,161,468
Buildings and leasehold
improvements 31.5 523,203 2,031,754
------------ ------------
15,678,082 90,816,105
Less accumulated depreciation (1,411,327) (8,179,393)
------------ ------------
$ 14,266,755 $ 82,636,712
============ ============
Depreciation expense for the years ended December 31, 1994, 1995
and 1996 was $221,909, $1,208,897 and $9,350,133 respectively.
(7) Other Assets
Other assets at December 31, 1995 and 1996 consist of the following:
1995 1996
--------- ----------
Debt issuance costs, net of accumulated
amortization of $163,927 and $1,068,230
in 1995 and 1996, respectively $ 6,053,898 $ 11,129,764
Deposits and other 1,410,543 492,747
Investments in unconsolidated subsidiaries 225,504 2,810,079
----------- ------------
$ 7,689,945 $ 14,432,590
=========== ============
Investments in unconsolidated subsidiaries relates to the Company's
50% investment in Wireless One North Carolina, LLC (WONC) accounted
for on the equity method and its 16.5% investment in Telecorp
Holding Corp, Inc., (Telecorp) accounted for on the cost method.
WONC is in the business of acquiring, developing and operating
wireless cable television systems in North Carolina. Telecorp is in
the business of acquiring personal communication service (PCS)
licenses for the purpose of developing and operating a PCS
network. Neither of these entities has commenced operations as of
December 31, 1996.
(8) Long-term Debt
Long-term debt consists of the following:
1995 1996
------------ ------------
13% Senior Notes due 2003; face value
of $150,000,000, net of unamortized
discount - (1995 Senior Notes) $148,149,131 $148,384,135
13.5% Senior Discount Notes due 2006;
face value of $239,252,000, net of
unamortized discount - (1996 Senior
Discount Notes) - 126,400,136
9.5% installment notes, principal and
interest due in installments through
August 31, 2006 - 22,257,207
Subordinated non-interest bearing notes
(face value outstanding at December
31, 1995 and 1996 of $3,400,000 and
$3,050,000, respectively), discounted
to an 8% effective rate, principal and
interest due in installments through
July 1997 2,939,156 2,880,672
Other 159,760 3,156,454
------------ ------------
151,248,047 303,078,604
Less current maturities (376,780) (3,169,383)
------------ ------------
Long-term debt, excluding current
maturities $150,871,267 $299,909,221
============ ============
Scheduled maturities of long term debt for the next five years and
thereafter, are as follows:
1997...........................$ 3,169,383
1998........................... 821,426
1999........................... 2,781,078
2000........................... 2,394,819
2001........................... 2,630,560
Thereafter..................... 291,281,338
Interest on the 1995 Senior Notes is payable semi-annually on April
15 and October 15 of each year. The 1995 Senior 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 1995
Senior 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 the 1995 Senior Notes may
require the Company to repurchase all or a portion of such holder's
1995 Senior Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest.
The 1996 Senior Discount Notes will accrete in value until August 1,
2001 at a rate of 13.5% per annum to an aggregate principal amount
of $239,252,000. Thereafter, cash interest on the notes will accrue
at a rate of 13.5% per annum on the face value of the notes payable
semi-annually on February 1 and August 1 of each year commencing
February 1, 2002. The Company is accreting the 1996 Senior Discount
Notes using the effective yield. Interest expense accreted to the
balance of the notes during the year ended December 31, 1996 was
$6,453,922. The 1996 Senior Discount Notes will be redeemable at
the option of the Company, in whole or in part, at any time on or
after August 1, 2001 at variable redemption prices in excess of par.
On or prior to August 1, 1999, the Company may redeem up to 30% of
the aggregate principal amount of the 1996 Senior Discount 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 the 1996 Senior Discount Notes may require
the Company to repurchase all or a portion of such holder's 1996
Senior Discount Notes at 101% of the accreted value thereof, plus
accrued and unpaid interest.
The 1995 Senior Notes and 1996 Senior Discount Notes are issued and
outstanding under indentures which contain certain restrictive
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.
The 9.5% installment notes were incurred in connection with an
auction of Basic Trading Area ("BTA") rights in which the Company
was the successful bidder. The notes require quarterly payments of
interest only through August 31, 1998. Thereafter, the notes
require equal quarterly payments of principal and interest of
$1,000,849 through August 31, 2006.
(9) Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities are
presented below:
1995 1996
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 2,955,166 $ 24,537,357
Allowance for bad debts 25,038 176,771
Accrued liabilities deductible
when paid 152,320 216,368
Other 68,000 24,796
------------ ------------
3,200,524 24,955,292
Less valuation allowance (2,136,029) (5,766,361)
------------ ------------
Deferred tax asset 1,064,495 19,188,931
------------ ------------
Deferred tax liabilities:
Fixed assets, principally due to
differences in depreciation and
underlying basis 11,700 473,997
License Investment, due to
differences in basis from
amortizable lives and purchase
accounting adjustments 1,052,795 25,214,934
----------- ------------
Deferred tax liabilities 1,064,495 25,688,931
----------- ------------
Net deferred tax liability $ - $ 6,500,000
=========== ============
The net changes in total valuation allowance for the years ended
December 31, 1995 and 1996 were increases of $1,911,619 and
$3,630,332 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 did not recognize any income tax benefit for 1994 or
1995 due to management's conclusion that a 100% valuation allowance
for the net deferred tax asset was warranted. The consummation of
the TruVision transaction resulted in deferred tax liabilities that
will be recognized during periods in which the net operating losses
may be utilized. The Company has therefore recorded a deferred tax
benefit in the year ended December 31, 1996 to the extent such
assets can be realized through future reversals of deferred tax
liabilities. Income tax benefit in 1996 consists entirely of
deferred income tax benefit resulting from the recognition of net
operating losses.
The reconciliation of income tax from continuing operations computed
at the U.S. Federal statuatory tax rate to the company's effective
income tax rate is as follows for each of the years ended December
31,:
1994 1995 1996
------- ------- -------
Tax at U.S. Federal statutory rate (34.0)% (34.0)% (34.0)%
State and local income taxes, net
of U.S. federal benefit - - (0.9)
Valuation allowance 34.0 28.3 23.5
Other - 5.7 0.8
------- ------- -------
-% -% (10.6)%
======= ======= =======
(10) 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.
(11) Stockholders' Equity
In connection with the 1995 Senior Notes, 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 1996 Senior Discount Notes, the Company issued
warrants to acquire 544,059 shares of common stock. The warrants are
exercisable at any time on or after August 12, 1997, at an exercise
price of $16.6375 per share and will expire on August 12, 2001. For
financial reporting purposes, these warrants were valued at $5,053,387.
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, and as amended in
connection with the TruVision Transaction, certain of the shareholders
of the Company 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.
(12) Stock Option Plan
In October of 1995, the Company 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 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.
On July 26, 1996, The Company adopted the 1996 Non Employees
Directors' Stock Option Plan (the "Directors' Plan"). 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.
Participants in office on July 26, 1996, received options to acquire
4,000 shares under the Directors' Plan and on January 1 of each
year, eligible participants will receive options to acquire 2,000
shares under the Directors' Plan.
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.
For the aforementioned plans, the Company has adopted the disclosure-
only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation cost has been recognized for the stock option grants.
Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the grant date for awards in
1995 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net loss applicable to common stock and net loss per common
share would have been increased to the pro forma amounts indicated
below:
1995 1996
------------- -------------
Net Loss Applicable to Common Stock -
as reported $ 8,478,863 $ 39,670,395
Net Loss Applicable to Common Stock -
pro forma 10,141,210 44,022,171
Net Loss Per Common Share - as reported 2.02 2.65
Net Loss Per Common Share - pro forma 2.42 2.94
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996: expected
volatility of 83%; expected dividend yield of 0%; risk-free interest
rate of 6.76%; and expected lives of 10 years.
Information regarding these option plans for 1994, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------
Weighted
Average
Exercise
Shares Shares Shares Price
--------- -------- --------- -------
<S> <C> <C> <C> <C>
Options Outstanding, beginning of year - 248,917 804,187 $ 7.98
Options Granted
Exercise Price = Fair Market Value 248,917 555,270 59,000 $ 11.89
Exercise Price < Fair Market Value - - 195,226 $ 6.82
Options exercised - - 5,000 $ 6.21
Options canceled - - 25,000 $ 10.50
--------- -------- --------- -------
Options outstanding, end of year 248,917 804,187 1,028,413 $ 7.93
--------- -------- --------- -------
Option price range at end of year $ 6.21 $ 4.16 - 13.83 $ 4.16 - 16.25
Option price range for exercised shares $ - - $ 6.21
Options available for grant at end of year 1,051,083 495,813 371,587
Weighted-average fair value of options,
granted during the year $ 13.10
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
- --------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 4.16 - $ 6.21 421,145 7.9 $ 5.6545 271,793 $ 5.3492
$ 6.63 - $ 7.59 310,840 9.2 $ 7.0985 195,226 $ 6.8200
$10.24 - $13.83 264,428 8.4 $11.6020 17,440 $10.7221
$15.25 - $16.25 32,000 7.6 $15.5937 0 $ 0.0000
--------- --- -------- ------- --------
1,028,413 8.4 $ 7.9295 484,459 $ 6.1353
========= === ======== ======= ========
</TABLE>
(13) 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, other than that with
EdNet, 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.
The Company is a party to a renewable long-term agreement with the
Mississippi EdNet Institute, Inc. ("EdNet"), a non-profit, quasi-
governmental body which manages the licenses designated to various
state educational entities. The agreement gives the Company
exclusive rights to utilize excess air time (that portion of a
channel's airtime available for commercial broadcasting according to
FCC regulations) on the 20 ITFS channels in Mississippi. The terms
of the channel leases are 10 years, commencing in 1992. The
contract provides for the monthly payment of $0.05 per subscriber
per channel or, beginning one year after operating the first market,
a minimum of $7,500 per month. Expense for 1996 related to this
agreement was $79,336. The agreement also required TruVision to
make advances to EdNet during the first 24 months of operations in
the amount of $6,000 per month. These advances are being recovered
as a credit against license fees owed to EdNet. The commercial use
of these channels represents the majority of the Company's channels
in Mississippi and the loss of, or inability to renew the EdNet
Agreement would have a material adverse effect on the Company's
operation.
The EdNet agreement requires the Company to install, operate, and
maintain a system sufficient to serve 95% of the population of the
licensed geographic area of Mississippi by July 1, 1998. The
agreement also requires the Company to provide installations and
equipment at no charge to EdNet at 1,100 sights EdNet may designate
and to install and equip an electronic classroom in each of its
Mississippi markets at a minimum cost of $20,000 per classroom.
The Company capitalizes the cost incurred to comply with the
facility installation and interconnection requirements of the EdNet
Agreement and depreciates such cost over the estimated life of the
related equipment.
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 $179,172, $380,346, and $1,454,898
for the years ended December 31, 1994, 1995, and 1996, 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 $79,791, $183,003, and
$1,805,083 for the years ended December 31, 1994, 1995, and 1996,
respectively.
Future minimum lease payments due under channel rights leases and
other noncancelable operating leases at December 31, 1996 are as
follows:
Channel Other
Year ending rights operating
December 31, leases leases
------------ ------------ ------------
1997...................... $ 1,588,462 $ 1,432,564
1998...................... 1,688,164 1,361,857
1999...................... 1,703,548 1,310,972
2000...................... 1,737,460 1,244,260
2001...................... 1,745,272 967,600
Thereafter................ 1,810,871 802,202
------------ ------------
$ 10,273,777 $ 7,119,455
============ ============
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.
(14) 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.
(15) Supplemental Cash Flow Information
Cash interest payments made in 1994, 1995, and 1996 totaled
$168,512, $351,178, and $19,404,454 respectively.
The Company made no Federal or state income tax payments during the
years ended December 31, 1994, 1995, and 1996.
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.
During 1995, the Company completed a public offering of the 1995
Senior Notes which had an underwriters fee treated as a non-cash
transaction in the accompanying cash flow statement of $5,250,000.
During 1996, the Company paid $1.8 million in cash, issued 3,442,945
shares of common stock and issued options valued at $1,401,723 in
connection with the TruVision acquisition. The cost of the acquisition
including property and equipment and license rights acquired was
$51,402,953 based on the then market price of the Company's stock of
$14.
In December 1996, the Company entered into a lease transaction for
computer equipment accounted for as a capital lease. The value
assigned to the equipment and the related capital lease obligation was
$924,782.
During 1996, the Company financed $22,257,207 of the bid price in the
BTA auction with the FCC representing 80% of the Company's bid in those
markets. In addition, the Company recorded other long term debts of
$1,959,252 and related license investment related to BTA's in which the
company was the successful bidder but has not been granted the licenses
as of December 31, 1996 (see note 8).
During 1996, the Company acquired all of the outstanding common stock
of Shoals Wireless, Inc., whose principal asset is a wireless cable
system in Lawrenceburg, Tennessee, for $1,068,000 in cash and a note
payable for $118,000.
During 1996, the Company completed a public offering of the 1996 Senior
Discount Notes which had an underwriters fee treated as a non-cash
transaction in the accompanying cash flow statement of $4,374,986.
(16) 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, 1996.
The fair value of a financial instrument is defined as the amount at
which the instrument could be exchanged in a current transaction
between willing parties.
At December 31, 1996
--------------------
Carrying Estimated
Amount Fair Value
-------------- --------------
Marketable investment securities $ 37,034,745 $ 37,002,142
Long-term debt 303,078,604 288,818,456
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 term nature 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 where available and by discounting future
cash flows at rates currently available to the Company for
similar instruments when quoted market rates are not available.
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.
SCHEDULE II
Wireless One, Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Deductions end of period
- -------------------------------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
1996
Deducted in balance sheet from
subscriber receivables:
Allowance for doubtful accounts 73,641 371,349 152,371 292,619
--------- ---------- --------- -----------
Deducted in balance sheet from
leased license investment:
Amortization of leased license
investment 548,283 2,275,375 - 2,833,658
--------- ---------- --------- -----------
Deducted in balance sheet from
other assets: Amortization
of debt issuance costs 163,926 904,304 - 1,068,230
--------- ---------- --------- -----------
1995
Deducted in balance sheet from
subscriber 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 assets: Amortization
of debt issuance costs - 163,926 - 163,926
--------- ---------- --------- -----------
1994
Deducted in balance sheet from
subscriber 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 - - - -
--------- ---------- --------- -----------
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 27, 1997.
WIRELESS ONE, INC.
By: /s/ Henry M. Burkhalter
--------------------------------------
Henry M. Burkhalter
President and Vice-Chairman
of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on March 27, 1997.
/s/ Hans J. Sternberg Chairman of the Board
- ----------------------------------
Hans J. Sternberg
/s/ Henry M. Burkhalter President and Vice Chairman of the
- ---------------------------------- Board
Henry M. Burkhalter
/s/ Sean E. Reilly Chief Executive Officer and Director
- ---------------------------------- (Principal Executive Officer)
Sean E. Reilly
/s/ Henry G. Schopfer, III Executive Vice President, Chief
- ---------------------------------- Financial Officer and Secretary
Henry G. Schopfer, III (Principal Financial Officer)
/s/ Michael C. Ellis Vice President, Controller and
- ---------------------------------- Assistant Secretary
Michael C. Ellis (Principal Accounting Officer)
/s/ William K. Luby Director
- ----------------------------------
William K. Luby
/s/ Arnold L. Chavkin Director
- ----------------------------------
Arnold L. Chavkin
/s/ Daniel L. Shimer Director
- ----------------------------------
Daniel L. Shimer
/s/ J. R. Holland, Jr. Director
- ----------------------------------
J. R. Holland, Jr.
/s/ William J. Van Devender Director
- ----------------------------------
William J. Van Devender
Director
- ----------------------------------
David E. Webb
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
2.1 TruVision Merger Agreement among the Registrant,
TruVision and Wireless One MergerSub, Inc., dated April
25, 1996(1)
3.1(i) Amended and Restated Certificate of Incorporation of
the Registrant(2)
3.1(ii) Bylaws of the Registrant(2)
4.1 Indenture between the Registrant and United States
Trust Company of New York, as Trustee, dated October
24, 1995(3)
4.2 Escrow and Disbursement Agreement between the
Registrant and Bankers Trust Corporation, Escrow Agent,
dated October 24, 1995(3)
4.3 Supplemental Indenture between the Registrant and
United States Trust Company of New York, as Trustee,
dated July 26, 1996(4)
4.4 Indenture between the Registrant and United States
Trust Company of New York as Trustee, dated August 12,
1996(4)
10.1 1995 Long-Term Performance Incentive Plan of the
Registrant(3) *
10.2 1996 Director's Stock Option Plan of the Registrant(4) *
10.3 Warrant Agreement between the Registrant and Gerard,
Klauer & Mattison L.L.C. (including form of warrant
certificate) dated October 18, 1995(3)
10.4 Amended and Restated Registration Rights Agreement
among the Registrant, Heartland and certain
stockholders dated July 29, 1996(4)
10.5 Amended and Restated Stockholders Agreement among the
Registrant, and certain stockholders dated July 29,
1996 ("Stockholders Agreement")(4), as amened by
Amendment No. 1 dated September 17, 1996(5)
10.6 Standard forms of MDS License Agreement of the
Registrant(2)
10.7 Standard forms of ITFS License Agreement of the
Registrant(2)
10.8 Form of Employment Agreement between the Registrant and
certain executive officers(1) *
10.9 Acquisition and Market Escrow Agreement among the
parties to Exhibit 2.1 dated July 29, 1996(1)
11.1 Statement re: Computation of Ratio of Per Share
Earnings
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
_________________________________________
(1) Incorporated herein by reference from the Registrant's Registration
Statement Form S-1 (Registration Number 333-05109 ) as declared
effective by the Commission on August 7, 1996.
(2) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-1 (Registration Number 33-94942) as declared
effective by the Commission on October 18, 1995.
(3) Incorporated herein by reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 1995.
(4) Incorporated herein by reference from the Registrant's Registration
Statement on Form S-1 (Registration Number 333-12449) as declared
effective by the Commission on October 18, 1996.
(5) Incorporated by reference from the Registrant's Post-Effective Amendment
No. 1 to Registration Statement on Form S-3 (Registration Number
333-12449) as declared effective by the Commission on October 21, 1996.
* Executive Compensation Plans and Arrangements
EXHIBIT 11
Wireless One, Inc.
Statement re: Computation of Ratio of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1994 1995 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Net loss $ (2,261,813) $ (7,692,474) $ (39,670,395)
Preferred stock dividends
and discount accretion - (786,389) -
------------- ------------- --------------
Net loss applicable to
common stock (2,261,813) (8,478,863) (39,670,395)
============= ============= ==============
Weighted average common
shares outstanding 1,863,512 4,187,736 14,961,934
============= ============= ==============
Net loss per common share (1.21) (2.02) (2.65)
============= ============= ==============
The above earnings per share (EPS) calculations are submitted in accordance
with APB Opinion No.15.
An EPS Calculation in accordance with Regulation S-K item 601 (b)(11) is not
shown above because it produces an antidilutive result.
The following information is disclosed for purposes of calculating the
antidilutive EPS.
Weighted average common
shares outstanding 1,863,512 4,187,736 14,961,934
Shares issuable upon
exercise of options
and warrants 248,917 306,815 507,407
------------- ------------- --------------
Weighted average shares
outstanding 2,112,429 4,494,551 15,469,341
============= ============= ==============
Net loss per common share (1.07) (1.71) (2.56)
============= ============= ==============
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES STATE OF ORGANIZATION
TruVision Wireless, Inc. Delaware
TruVision Wireless - Chattanooga, Inc. Delaware
TruVision Wireless - Flippin, Inc. Delaware
TruVision Wireless - Gadsden, Inc. Delaware
TruVision Wireless - Memphis, Inc. Delaware
TruVision Wireless - Jacksonville, Inc. Delaware
TruVision Wireless - Lawrenceburg, Inc. Delaware
TruVision Wireless - Huntsville, Inc. Delaware
Wireless One Operating Company, L.L.C. Texas
Wireless One Operating Company, Inc. Delaware
Wireless One of Bryan, Tx., Inc. Delaware
Gulf Coast Wireless, Inc. Texas
Wireless One of Fort Walton, Inc. Delaware
Wireless One of Gainesville, Inc. Delaware
PAN Wireless Communication, Inc. Delaware
Wireless One PCS, Inc. Delaware
Shoals Wireless, Inc. Tennessee
Phipps Wireless, Inc. Florida
SWCC, Inc. Georgia
Wireless One of Florida, Inc. Delaware
Wireless One of Georgia, Inc. Delaware
Wireless One of Louisiana, LLC Texas
Wireless One of Natchez, Inc. Delaware
Wireless One of Tennessee, Inc. Delaware
Wireless One of Texas, Inc. Delaware
Wireless One of Texas Leasing, LP Texas
Wireless One of Georgia Leasing Co., Inc. Delaware
Wireless One of Louisiana Leasing Co., LLC Texas
Wireless One of Alabama Leasing Co., Inc. Alabama
Wireless One of Florida Leasing Co., Inc. Delaware
Wireless One of Arkansas Leasing Co., Inc. Delaware
Wireless One of Kentucky Leasing Co., Inc. Delaware
Wireless One of Tennessee Leasing, LP Tennessee
Wireless One of Texas, G.P., Inc. Delaware
Wireless One of Tennessee, G.P., Inc. Delaware
EXHIBIT 23.1
The Board of Directors
Wireless One, Inc.
We consent to incorporation by reference in the registration statements on
Form S-3 (No. 333-12449), Form S-3 (No. 333-15475) and Form S-8 (No. 333-
11563) of Wireless One, Inc. of our report dated February 21, 1997,
relating to the consolidated balance sheets of Wireless One, Inc. and
subsidiaries as of December 31, 1995 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996, and related
schedule which report appears in the December 31, 1996 annual report on
Form 10-K of Wireless One, Inc.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 104,448,583
<SECURITIES> 37,034,745
<RECEIVABLES> 1,291,353
<ALLOWANCES> 292,619
<INVENTORY> 0
<CURRENT-ASSETS> 125,209,959
<PP&E> 90,816,105
<DEPRECIATION> 8,179,393
<TOTAL-ASSETS> 395,609,362
<CURRENT-LIABILITIES> 18,533,459
<BONDS> 299,909,221
0
0
<COMMON> 169,467
<OTHER-SE> 120,284,507
<TOTAL-LIABILITY-AND-EQUITY> 395,609,362
<SALES> 11,364,828
<TOTAL-REVENUES> 11,364,828
<CGS> 0
<TOTAL-COSTS> 35,600,797
<OTHER-EXPENSES> (7,953,522)
<LOSS-PROVISION> 292,619
<INTEREST-EXPENSE> 28,087,948
<INCOME-PRETAX> (44,370,395)
<INCOME-TAX> (4,700,000)
<INCOME-CONTINUING> (39,670,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,670,395)
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
