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, 1997
o 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 jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1080 River Oaks, Suite A150
Jackson, MS 39208
(Address of principal executive offices) (Zip Code)
(601) 936-1515
(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 * 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. Yes * No
--- ---
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 23, 1998 was
approximately $5.3 million.
The number of shares of the registrant's common stock, $0.01 par value
per share, outstanding at March 23, 1998 was 16,910,064.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1998 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, 1997
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business..........................................................1
Item 2. Properties.......................................................23
Item 3. Legal Proceedings................................................24
Item 4. Submission of Matters to a Vote of Security Holders..............24
Item 4A. Executive Officers of the Registrant............................24
PART II
Item 5. Market for Registrant's Common Equity and Related Matters........25
Item 6. Selected Financial Data..........................................26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.........................................27
Item 8. Financial Statements and Supplementary Data......................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................32
PART III
Item 10. Directors and Executive Officers of the Registrant..............33
Item 11. Executive Compensation..........................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management..33
Item 13. Certain Relationships and Related Transactions..................33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.33
Financial Statements.......................................................F-3
Financial Statement Schedule..............................................F-24
Signatures.................................................................S-1
Exhibit Index..............................................................E-1
PART I
ITEM 1. BUSINESS
OVERVIEW
Wireless One, Inc. (the "Company") is a broadband wireless operator that
acquires, develops, owns and operates wireless video cable systems, primarily
in small to mid-size markets in the southern and southeastern United States.
The Company is also devoting resources to the development of data services and
products to use its wireless spectrum and system infrastructure. Currently,
the Company is developing and commencing the launch of a high-speed, two-way
internet access product, its first entry into data services. Wireless cable
programming and the Company's internet access product are 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's video business targets markets with a significant
number of multi-family dwelling units ("MDU") and single family housing unit
("SFU") households that can be served by LOS transmissions and that are
unpassed by traditional hard-wire cable. The Company's data service and
products business primarily targets small to mid-size businesses and small
offices. The Company's 80 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.
Many of the MDU and SFU households in the Company's Markets, particularly
in rural areas, 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 MDU and SFU households that are passed by cable are served by cable
operators with lower quality service and more limited reception and channel
lineups than the Company's. As a result, the Company believes that its
wireless cable television service is an attractive alternative to existing
television choices for MDU's and for both passed and unpassed SFU households in
many of its Markets. With its data services products, the Company targets
commercial customers who do not have access to high-speed service from local
exchange carriers or other dedicated service providers.
At December 31, 1997, the Company's Markets included 34 markets in which
the Company has systems in operation (" Operating Systems") and 33 markets
("Future Development 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 MDU or an internet focused 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 Development Markets. Through increases in the number of subscribers in
its Operating Systems and the launch of two new systems in 1997, the Company's
aggregate number of subscribers increased from 69,825 at December 31, 1996 to
114,934 at December 31, 1997, representing a penetration rate of 4.0% of the
LOS households in the Operating Systems at December 31, 1997.
RECENT DEVELOPMENTS
In March 1997, the Company entered into an agreement with BellSouth
Wireless Cable, Inc. ("BellSouth") to acquire for $1.1 million certain
licenses in the Wireless Communications Service ("WCS") through the
partitioning, spectrum disaggregation or outright assignment of WCS licenses
currently held by BellSouth. The WCS spectrum acquired from BellSouth includes
nine major economic areas in the southern and southeastern United States, and
generally covers the Company's wireless spectrum "footprint" with the exception
of its western Louisiana and Texas Markets. The Company plans to use the WCS
licenses for the upstream transmission of data from subscriber locations in
connection with its two-way wireless internet access product. Applications
for Federal Communications Commission ("FCC") consent to the contemplated
transaction are pending. In the interim, the Company is operating under a
developmental license from the FCC and has rights to lease these channel rights
from BellSouth for a nominal fee. The Company believes that by utilizing the
WCS spectrum in the design of its two-way, high-speed internet product, it has
a competitive advantage over its hard-wire competitors and other one-way
wireless alternatives.
In September 1997, the Company and DirecTV, a digital satellite
programming provider, entered into a long-term cooperative marketing agreement
(the "DirecTV Agreement"). The DirecTV Agreement allows the Company to (i)
establish and maintain MDU reception equipment able to receive DirecTV
programming, (ii) act as a commercial sales representative to MDU properties
for DirecTV programming packages and (iii) provide supplemental programming to
its MDU subscribers through certain programming transport services. Terms of
the DirecTV Agreement include an activation commission structure and a revenue
sharing provision based on sales of DirecTV programming packages and specific
penetration goals.
The DirecTV Agreement provides the Company with the ability to offer
MDU's products combining the Company's traditional wireless video service with
DirecTV digital satellite service. The Company offers its MDU subscribers a
package generally limited to local off-air network and weather
programming and enhanced packages that also include either DirecTV digital
programming packages or wireless video programming packages at prices
competitive with traditional hard-wire cable operators. The Company intends to
market this product to the approximately 3.4 million MDU units located
throughout its 80 markets, which include apartments, colleges, and nursing
homes. The Company plans to pursue a DBS alliance to facilitate the marketing
of digital satellite programming to SFU's in its Markets. In this regard, the
Company has held discussions with DirecTV to expand the DirecTV Agreement to
include the marketing of DirecTV program offerings to SFU's located in the
Company's Markets.
During the third quarter of 1997, the Company focused its marketing
efforts on developing its DirecTV Agreement. Because of the lower capital and
operating costs per subscriber and the enhanced programming available through
its DirecTV MDU product, the Company believes that this focus will provide the
Company with the best use of its wireless spectrum, existing infrastructure,
and the opportunities provided by the marketplace. As a result, the Company
has de-emphasized the growth of its SFU business and currently does not plan to
launch new systems focused on SFU's. Accordingly, the Company has implemented
changes to its business operations to reduce personnel and other operating
expenses to the levels needed to implement these refocused business objectives,
including a reduction of approximately 45% in the number of employees as of
March 1, 1998.
In October 1997, in accordance with the terms of its purchase and sale
agreement with Skyview Wireless Cable, Inc., the Company terminated the
agreement to acquire rights to 22 wireless cable channels and a substantially
complete transmission facility in the Jackson, Tennessee Market for $2.7
million in cash and to acquire the rights to 20 wireless cable channels in the
Hot Springs, Arkansas Market for approximately $1.5 million. This event
resulted in the termination of a Stock Escrow Agreement and the return to the
Company of 36,633 of its common shares, under the terms and conditions of the
merger agreement between the Company and TruVision Wireless, Inc in July 1996.
In January 1998, the Company sold its 16.5 % interest in Telecorp
Holding Corporation, Inc., a holder of 10 MHz personal communication services
("PCS") licenses in the southeastern United States, for $2.5 million yielding a
gain of approximately $1.0 million.
DEVELOPMENT OF NEW PRODUCTS
The Company has devoted resources to the development and is commencing
the commercial launch of a high-speed, two-way wireless internet access
product. The internet product, to be marketed under the name "WarpOne" uses
existing broadband technology to deliver high-speed data services. The product
will transmit downstream data at speeds up to 10 megabytes per second (Mbps)
and upstream at speeds up to 1.44 Mbps. The design of the internet product
allows this service to be delivered over any of the Company's existing MMDS,
ITFS, MDS and WCS channels. Currently, the Company plans to use its WCS
licenses for upstream transmissions from subscribers and a MDS or ITFS channel
for downstream transmissions to subscribers. All necessary equipment required
for this product will be co-located at the Operating System's existing wireless
video headend, therefore providing virtually the same service area as the
operating wireless video system.
Marketing of the internet product will initially target small to mid-
size business customers. Other opportunities exist for home offices, large
corporations, MDU's, schools and other entities that may not have access to
high-speed services from local exchange carriers or other dedicated service
providers. The Company began providing service to customers in its Jackson,
Mississippi, Market in March 1998, and plans to introduce this product in
three additional Markets during 1998. Future markets will be launched based
on market demographics and capital resources.
BUSINESS STRATEGY
The Company's primary business objective is to develop its video and data
service products. The Company also seeks to develop new products that will
enhance revenue from its traditional video business, optimize existing and
future assets and increase the value of its wireless spectrum. The Company
intends to accomplish these objectives through implementation of the following
operating strategies:
Focused Video Marketing Strategy - Future marketing efforts of the
Company will focus on offering subscription video services to MDU's and on
maintaining its existing SFU subscriber base. Through its cooperative
marketing agreement with DirecTV, the Company intends to offer enhanced video
programming packages that include local off-air network and digital cable
programming. By focusing on the MDU market segment versus individual SFU
growth, the Company believes that it will incur lower capital costs to launch
new markets, reduced capital costs per subscriber addition, a lower churn rate
and lower operating and marketing expenses.
Rural market focus - The Company generally owns wireless cable channel
rights and locates operations in geographic clusters of small to mid-size
markets that have a significant number of MDU's and SFU households not
currently passed by hard-wire cable competitors, or are served by relatively
weak hard-wire cable competitors. 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
will allow the Company to maintain an average turnover or "churn" rate below
2.5% per month. Lower churn rates result in reduced operating, installation
and marketing expenses.
Contiguous geographic cluster - The Company believes that through its
large contiguous geographic cluster it is able to achieve significant capital
and operational cost savings through centralization of operations. The Company
further believes that its contiguous cluster simplifies its market and new
product launch program by facilitating the movement of skilled personnel from
one 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, wireless systems
do not require an extensive network of coaxial or fiber optic cable, amplifiers
and related equipment (the "Cable Plant") for the transmission of programming.
The Company estimates that each additional MDU subscriber will require a
capital expenditure of approximately $180 to $320 (calculated on an equivalent
billing unit "EBU" basis) consisting of, on average, $150 to $170 of equipment
and $30 to $150 of installation labor and overhead charges. The required
capital expenditures for each additional SFU wireless cable subscriber is
approximately $440 to $540 for materials, installation labor and overhead
charges.
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's
marketing efforts are now targeted to new and existing MDU properties,
including apartments, colleges, hotels, motels, hospitals and nursing homes.
Due to the increased opportunity provided by its DirecTV MDU product, the
Company has de-emphasized growth in its traditional SFU business segment.
Efforts to maintain the existing SFU subscriber base are focused on geographic
sub-markets characterized by a significant number of SFU households that are
unpassed by cable or are served by smaller independent hard-wire cable
operators. Marketing efforts to MDU properties and to the selected SFU sub-
markets are structured so that the time from initial inquiry to commencement of
service is held to a minimum. 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.
New Product Development - While managing its core wireless video
subscription business, the Company has devoted resources to the development of
new products to generate additional revenue streams, while providing economies
of scale for its existing wireless spectrum and system infrastructure. The
Company has developed and is commencing the commercial launch of a two-way
wireless internet access product. The Company believes that significant
opportunities exist for this product with small and mid-size commercial
customers, who typically do not have access to high-speed services from local
exchange carriers or other dedicated service providers. The Company began the
commercial launch of this product during the first quarter of 1998.
In addition, the Company plans to market a DBS product in alliance with
an existing digital satellite programming provider. The marketing of this
product will be focused on its current SFU subscribers who desire expanded
channel offerings or those SFU's that are unable to receive the Company's
wireless video signal due to LOS constraints.
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. 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 programming signals which 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 system 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 substantially reduce the transmission problems of coaxial cable
systems and will expand channel capacity, the installation of such network
requires a substantial investment.
WIRELESS CABLE DEVELOPMENT
Regulatory and other obstacles impeded the growth of the wireless cable
industry through the 1980's. During the 1990's, however, 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
competitive services, (vi) the increased availability of capital to wireless
cable operators in the public and private markets and (vii) regulatory rulings
by the FCC that clarified the ownership of inside wiring in MDU properties.
Like a traditional hard-wire cable system, a wireless cable system
receives programming at a headend. Unlike traditional hard-wire cable systems,
however, wireless systems retransmit programming 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 capital cost per installed subscriber.
WIRELESS VIDEO 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 Multipoint Distribution
Service ("MDS") and Instructional Television Fixed Service ("ITFS") Channels.
In 50 large markets in the U.S., 33 6 MHz 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 6 MHz 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), while the remaining channels can
be licensed to commercial entities ("MDS" Channels). In general, each of these
ITFS 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
Future Development 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,
although the FCC is currently considering a proposal that would permit ITFS
leases to extend fifteen years. 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.
In 1997, the FCC allocated spectrum for the WCS. That spectrum may be
used to provide any fixed, mobile, radio location or broadcast-satellite use.
Although the WCS spectrum has been channelized by the FCC in a way that makes
it more difficult to use for analog video than MDS and ITFS channels, the
Company believes that WCS can be deployed by wireless cable operators for high-
speed internet access and other non-video applications.
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. The FCC is currently
contemplating replacing the comparative criteria system with a competitive
bidding mechanism.
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 a 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. The FCC has granted approximately 95% of these authorizations.
In response to a petition for rulemaking submitted by a coalition of over
110 participants in the wireless cable industry, including the Company, in
March 1997, the FCC in October 1997 issued a notice of proposed rulemaking
proposing to adopt a broad range of new rules designed to provide MDS and ITFS
licensees greater technical flexibility in the use of their spectrum (including
rules to promote the routine licensing of MDS and ITFS channels for fixed two-
way communications services) and seeking comment of proposals to expedite the
licensing of new or modified stations, to provide wireless cable operators and
their lessor/licensees greater flexibility in crafting leasing arrangements and
to generally promote the development of competitively viable services using MDS
and ITFS spectrum. The Company currently anticipates that the FCC will adopt
rules in this proceeding in 1998. Although the Company cannot predict with
certainty when or what specific rules the FCC will ultimately adopt, and cannot
forecast with specificity the impact those rules will have on the Company, the
Company believes that the results of this proceeding will be beneficial to the
Company.
In 1997, the FCC conducted an auction to award WCS licenses. There were
initially four WCS spectrum blocks available in each area, two of 10 MHz and
two of 5 MHz bandwidth. Each WCS licensee holds the exclusive right to
construct and operate on its WCS channel, subject to compliance with FCC
interference protection, construction and other rules. The FCC permits WCS
license holders to transfer, partition and disaggregate licenses, subject to
prior FCC consent. Prior to the commencement of the auction, the Company
entered into an agreement with BellSouth pursuant to which BellSouth would
attempt to secure certain WCS licenses and, if successful, agreed to partition,
disaggregate or assign certain of those licenses to the Company in exchange for
financial consideration that has been paid by the Company. Applications are
currently pending before the FCC for consent to transactions that will result
in the Company holding WCS channel rights in all or part of nine Major Economic
Areas, which generally represent the Company's wireless spectrum "footprint",
except for its western Louisiana and Texas Markets. In the interim, the
Company has the right to lease those channel rights from BellSouth for nominal
fees.
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 and to WCS are substantially different. The
licensee must build MDS stations covering two-thirds of the area within its
control in the BTA within five years. WCS licensees have been afforded the
most liberal "build-out" requirements adopted by the FCC to date. A WCS
licensee is subject to no construction requirements other than the requirement
to construct sufficient facilities within its initial ten-year license term to
provide "substantial service".
ITFS and MDS 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
General - With the exception of the retransmission of VHF/UHF broadcast
signals, the Company's MDU programming is made available primarily through the
DirecTV Agreement. The Company's MDU product is also flexible enough, however,
to provide MDU subscribers access to wireless video programming options which
are provided through contracts with traditional program suppliers, as discussed
below.
Currently, with the exception of the retransmission of VHF/UHF broadcast
signals, the Company's wireless video 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 for its wireless video business 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 wireless video 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 to SFU households in 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, 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 to its SFU customers.
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 indefinitely for little or no additional cost.
OPERATIONS
Installation - Generally, service to MDU properties is based on a
competitive bidding process, whereby the winning provider enters into a multi-
year access contract with the property owner. Terms of the contract vary by
property based on such factors as the channel capacity offered, cost and
complexity of the installation and the length of the contract. To provide the
combined wireless video and DirecTV digital programming to individual units in
an MDU property, each installation consists of a "mini-headend", an extensive
network of coaxial cable, individual unit reception equipment, and other
related equipment.
When a potential SFU subscriber requests service, a signal reception
survey is made at the potential subscriber's premises to determine whether LOS
transmission is possible. The potential SFU 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 SFU 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 cable 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 SFU subscriber's
initial request for service.
Billing - Generally, residential MDU subscribers (i.e., apartments,
nursing homes and colleges) are individually billed monthly by the Company for
programming offered. Hospitality-based MDU's (i.e., hotel, motel and hospital
subscribers) are bulk-billed (i.e., paid by the property owner and included in
the rental rate paid by the tenant) on a monthly basis for a pre-determined
programming selection. The Company believes that the more stable customer base
provided by MDU properties will reduce the Company's overall churn rate and the
cost of customer collections and retention activities.
The Company believes that its SFU billing procedures help minimize churn.
Subscribers are billed on a monthly basis for 30 day's service with payment due
within fifteen days of billing. The Company encourages delinquent SFU accounts
to pay by disconnecting either premium channels or additional outlets after a
period of non-payment. The Company also uses a SFU customer retention program
to encourage delinquent accounts to pay and continue receiving service.
However, if an account becomes 45 days past due, all service is disconnected
and the Company's collection team initiates the collection process. The
operations manager from each market or operating cluster is responsible for
retrieving equipment from disconnected SFU subscribers on a timely basis.
After the canceled SFU customer's account becomes 60 days past due, a
collection "demand letter" is sent to the canceled subscriber. If no payment
is made within 30 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 MDU to EBUs, the Company
divides its total basic service charge for the MDU, whether bulk or
individually billed, by the basic service rate charged to its SFU subscribers,
currently $22. 95, effective January 1, 1998.
Marketing Activity - The Company's marketing plans are designed to
manage subscriber growth and to ensure that the quality of installations and
customer service remains high. The Company prioritizes areas of each market
according to the level of new MDU construction activity, the number of existing
MDU properties, the relative strength of any traditional hard-wire competitors,
the existence of terrain or obstructions that would impede LOS transmissions,
and the economic demographics of the area. Utilizing such market analysis,
separate marketing teams focus on adding commercial subscribers (such as
restaurants, business offices and auto dealers) and MDU properties (such as
apartments, colleges, hotels, motels, hospitals and nursing homes). To
maintain its existing SFU subscriber base, the Company's marketing staff also
develops a targeted SFU marketing plan focused on unpassed SFU homes, LOS
transmission coverage and other demographic considerations. This plan
typically includes direct mailings, telemarketing follow-up calls and selected
door-to-door sales to reach prospective subscribers.
The Company markets its wireless video 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 MDU and SFU customers is a major advantage over the direct
broadcast satellite technology. Utilizing the enhanced programming available
through its DirecTV MDU product, the Company believes it has a competitive
advantage over traditional hard-wire cable services providers with MDU
properties.
Customer Service - The Company has established the goal of maintaining
high levels of customer satisfaction. In furtherance of that goal, the Company
emphasizes responsive customer service and convenient installation scheduling.
The Company has established customer retention and referral programs in an
effort to retain and attract new subscribers and build loyalty among it
customers.
Picture Quality and Reliability - Wireless cable subscribers enjoy
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 to or better than 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 each of the Operating Systems and Future
Development Markets, the Company believes that it has assembled sufficient
channel rights and programming agreements, including the DirecTV Agreement, to
provide programming packages competitive with those offered by traditional
hard-wire cable operators. Additionally, the Company uses reception equipment
which (when channel availability is sufficient) enables it to offer SFU
subscribers pay-per-view programming and addressability.
Price - The Company offers its MDU subscribers a package generally
limited to local off-air network and weather programming and enhanced packages
that either include DirecTV digital programming packages or enhanced wireless
video programming packages, at prices competitive with those of hard-wire
competitors. Prices for DirecTV programming packages are determined by
DirecTV, pursuant to the DirecTV Agreement. The Company offers its SFU
subscribers a programming package consisting of basic service, enhanced basic
service, pay-per-view access and premium packages. The Company can offer a
price to its SFU 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 the Company's 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 DEVELOPMENT MARKETS
The tables below provide information regarding the Company's Markets.
"Estimated Total Households" represents the Company's estimate of the total
number of MDU (excluding hotels, motels and hospitals) and SFU 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 has the ability 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 MDU (excluding hotels,
motels and hospitals) and SFU households that can receive an adequate wireless
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.
Although the Company has recently focused its marketing efforts on
developing its DirecTV MDU product and is de-emphasizing growth in its SFU
business (See "Recent Developments"), the following information is intended to
provide basic information regarding the size of the Company's Markets and the
status of the Company's channel acquisition activity. As more fully described
elsewhere in Item 1, the Company's DirecTV MDU and internet access products
require only a limited number of MDS/ITFS channels, a result of which will be
to allow the Company to launch Future Development Markets more quickly and at a
lower capital and operating cost.
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 SFU
customers in some or all of its Operating Systems or Future Development
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 1997 Rate(1)
---------- ---------- -------------- --------------- -----------
OPERATING SYSTEMS:
<S> <C> <C> <C> <C> <C>
Lafayette, LA 180,300 153,200 January 1994 4,424 2.89%
Lake Charles, LA 111,600 92,500 April 1994 5,047 5.46%
Wharton, TX 102,300 92,000 June 1994 2,422 2.63%
Bryan/College Station, TX 102,700 65,600 May 1995 4,428 6.75%
Pensacola, FL 217,400 157,900 July 1995 2,887 1.83%
Panama City, FL(2) 108,300 83,300 September 1995 3,110 3.73%
Monroe, LA 114,100 89,600 October 1995 3,948 4.41%
Milano, TX 40,900 36,800 October 1995 2,032 5.52%
Tullahoma, TN 109,600 73,600 November 1995 2,471 3.36%
Bunkie, LA 94,700 81,600 December 1995 3,231 3.96%
Gainesville, FL(3) 138,700 115,200 January 1996 6,782 5.89%
Brenham, TX 39,500 32,100 January 1996 3,037 9.46%
Jeffersonville, GA 189,300 147,000 March 1996 2,558 1.74%
Bucks, AL 150,800 113,700 April 1996 1,793 1.58%
Fort Walton Beach, FL(4) 64,200 54,600 May 1996 843 1.54%
Dothan, AL 100,500 81,200 June 1996 2,950 3.63%
Jackson, MS 211,500 176,900 July 1996 14,723 8.32%
Delta, MS(5) 100,800 92,800 July 1996 5,718 6.16%
Gulf Coast, MS(6) 132,300 121,700 July 1996 7,075 5.81%
Demopolis, AL 17,500 15,600 July 1996 1,427 9.15%
Oxford, MS 60,100 53,500 July 1996 4,407 8.24%
Natchez, MS 76,500 60,000 July 1996 4,377 7.30%
Houma, LA 81,700 69,500 July 1996 1,293 1.86%
Lawrenceburg, TN(7) 76,400 44,100 August 1996 1,368 3.10%
Huntsville, AL(7) 196,800 181,900 August 1996 5,032 2.77%
Alexandria, LA 31,700 26,900 August 1996 2,425 9.01%
Meridian, MS 73,300 44,800 September 1996 2,605 5.81%
Albany, GA 92,900 67,600 September 1996 2,449 3.62%
Tupelo, MS 130,900 90,600 November 1996 3,143 3.47%
Florence, AL 62,000 55,800 November 1996 1,957 3.51%
Starkville, MS 84,100 65,200 December 1996 1,964 3.01%
Charing, GA 41,100 38,400 December 1996 1,569 4.09%
Tuscaloosa, AL 87,100 69,600 May 1997 717 1.03%
Tallahassee, FL(8) 129,800 115,000 June 1997 722 0.63%
---------- ---------- -------- ------
Total Operating Systems 3,551,400 2,859,800 114,934 4.02%
========== ========== ======== ======
</TABLE>
FOOTNOTES APPEAR AFTER THE FOLLOWING TABLE.
<TABLE>
<CAPTION>
Estimated Estimated
Total LOS Expected
Households Households Channels(9)
---------- ---------- -----------
<S> <C> <C> <C>
Future Development Markets:
Ocala, FL 275,500 186,200 24
Chattanooga, TN 276,100 200,600 31
Huntsville, TX 89,000 50,200 31
Freeport, TX* 192,700 173,400 31
Hattiesburg, MS* 121,400 88,800 31
Flippin, TN 56,700 49,600 20
Memphis, TN 433,200 382,200 23
Bankston, AL 64,800 41,300 20
Gadsden, AL* 198,100 133,300 31
Montgomery, AL* 149,200 114,300 31
Selma, AL 35,700 26,000 31
Groveland, GA(10) 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(11) 103,200 81,300 29
Marianna, FL 56,700 44,900 24
Auburn, AL 62,200 47,700 27
Birmingham, AL 308,400 276,900 28
Mobile, AL(12) 66,100 40,400 21
Six Mile, AL 32,600 27,000 20
Woodville, AL 29,700 25,000 17
Pine Bluff, AR(13) 86,300 57,900 16
Columbus, GA 160,100 116,500 31
Vidalia, GA 50,800 34,500 24
Bowling Green, KY(14) 126,900 68,300 20
Hussier, LA 267,400 151,200 20
Baton Rouge, LA(15) 261,700 235,500 20
Leesville, LA 43,500 26,700 28
Natchitoches, LA(15) 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 Development Markets 4,196,000 3,175,200
--------- ---------
Total Markets 7,747,400 6,035,000
========= =========
</TABLE>
_________________________________
* Scheduled for launch in 1998; Headend and office facility have been
constructed to support future SFU, MDU or internet product launch.
(1) "Penetration Rate" equals the number of subscribers in an Operating
System divided by the Estimated LOS households in that Operating System.
(2) Eight channels currently utilized in the Panama City, Florida System are
operated under Special Temporary FCC authorization.
(3) Ten channels currently utilized in the Gainesville, Florida System are
operated under special temporary FCC authorization.
(4) Eight channels currently utilized in the Fort Walton Beach, Florida
System are operated under Special Temporary FCC authorization.
(5) Eight channels currently utilized in the Delta System are operated under
special temporary FCC authorization.
(6) Four channels currently utilized in the Gulf Coast System were granted by
the FCC without acting on an objection filed by a third party.
(7) The Huntsville, Alabama System and the Lawrenceburg, Tennessee System
were launched in January 1991 and January 1995, respectively, but
acquired by the Company in August 1996.
(8) Eleven channels currently utilized in the Tallahassee, Florida system are
operated under Special Temporary FCC authorization.
(9) 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 a channel license 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.
(10) 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.
(11) The Company has entered into a binding letter of intent to acquire rights
to 9 channels in Valdosta, Georgia. The transaction is scheduled to
close in May 1998. The closing is conditioned upon securing FCC
approval. The outcome of these matters cannot be determined.
(12) An existing wireless cable operator is serving a small number of
subscribers in this market with an 11-channel MDS system.
(13) The Company believes that another entity has leased rights to 20 other
channels that are the subject of pending ITFS applications.
(14) The Company currently leases eight channels in Bowling Green, 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.
(15) 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.
______________________________________________
Wireless One of North Carolina, LLC ("WONC")- 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:
<TABLE>
<CAPTION>
ESTIMATED Estimated
TOTAL LOS
HOUSEHOLDS HOUSEHOLDS
---------- ----------
<S> <C> <C>
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
========= =========
</TABLE>
___________________________________
Operating Systems - At December 31, 1997, the Company had 34 Operating
Systems. The Company generally offers its SFU subscribers 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 its SFU subscribers at least one
pay-per-view channel. In addition, the Company retransmits five local off-air
VHF/UHF channels along with its wireless channels, which provide its SFU
subscribers with access to local news and weather. The basic package ranges in
price from $19.95 to $22.95 per month, with an additional $7.95 to $11.95 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 available
to SFU subscribers in a typical Operating System.
<TABLE>
WIRELESS VIDEO CHANNEL OFFERINGS(SELECTIONS DIFFER BY MARKET)
<S> <C>
BASIC
ABC (local network affiliate) The Learning Channel (education)
AMC (classic movies) NBC (local network affiliate)
A & E (arts & entertainment) Nickelodeon (children's)
Black Entertainment Television (special interest) PBS (education, general interest)
CBS (local network affiliate) Regional Sports Network South (southeast U.S. sports)
Country Music Television (country music) TBS Superstation (sports, movies)
CNN (news) TNT (sports, movies)
C-SPAN (public affairs) USA (general interest)
Discovery (science) The Weather Channel (weather)
The Disney Channel (1) WGN (Chicago-general interest)
ESPN (sports) VH1 (contemporary music)
The Family Channel (family entertainment)
Fox (local network affiliate) PAY-PER-VIEW
The History Channel (educational) Viewer's Choice
PREMIUM
Home Box Office
Showtime
The Disney Channel(1)
_____________________
</TABLE>
(1) The Disney Channel is part of the basic package in certain Markets and a
premium channel in other Markets.
With the exception of local off-air network and weather programming, the
Company's MDU programming selections are generally made available through the
DirecTV Agreement. The Company's DirecTV MDU product is flexible enough,
however, to provide MDU subscribers access to enhanced wireless video
programming as set forth in the table above.
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 Development Markets. The most recent five-day window
for filing ITFS applications was completed on December 23, 1996, in which the
Company filed the majority of the applications required to effectuate its
future launch plans. Some of the Company's pending ITFS applications have been
processed by FCC engineers and staff attorneys. The remaining ITFS
applications are expected to undergo review by FCC engineers and staff
attorneys over the next 6-12 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.
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
its SFU video business 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
As a part of the Company's refocused marketing strategy, all Future
Development Markets will be launched with a MDU product focus, an internet
product focus, or a combination of both. Utilizing the DirecTV Agreement, the
Company estimates that the cost per market for transmission (or headend)
equipment (if required) and build-out in a MDU subscription video services only
system will be approximately $350,000. Capital costs to modify existing video
headend equipment and launch the internet product in an existing Operating
System will be approximately $325,000. Capital costs to launch the internet
product in a Future Development Market, or a Market without an existing
wireless video transmission facility, will be approximately $550,000. The
Company estimates that each additional MDU subscriber will require an
incremental capital expenditure of approximately $180 to $320 per EBU
consisting of, on average, $150 to $170 of materials and $30 to $150 of
installation labor and overhead charges. The cost of each additional SFU
wireless cable subscriber is estimated to average $440 - $540 in material,
installation labor and overhead charges. The capital cost for each internet
subscriber is approximately $1,200, including equipment and labor, which is
expected to be totally offset by fees collected at the time of installation.
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 from
contract suppliers is generally available to traditional hard-wire and wireless
cable operators on comparable terms. The Company believes that the combination
of its new focus on MDU customers and its stable base of SFU subscribers will
allow it to maintain an average churn rate below 2.5% per month, resulting in
reduced installation, operating and marketing expenses. By locating its
operations in geographic clusters, the Company believes that it can further
minimize capital and contain operating costs per subscriber by taking advantage
of economies of scale in management, sales and customer service. For each
Operating System or geographic cluster, the Company employs an operations
manager, product specific salespersons and installation and repair personnel.
All other functions are centralized at the Company's Jackson, Mississippi
headquarters, 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. To maintain and increase its customer base in the years
ahead, the Company will need to adapt rapidly to industry trends.
Addressability and Pay-Per-View - "Addressability" means the ability to
implement specific orders from or send other communications such as pay-per-
view channels to, each subscriber 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 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") - 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. The cost to a DBS
subscriber for equipment and service is generally substantially higher than the
cost to wireless cable subscribers. DBS providers currently have over six
million subscribers and have developed the capability to deliver local
television network stations into local markets. However, for legal reasons,
DBS operators cannot deliver local network signals to any subscribers who live
in a "served area" ( i.e., where the subscriber is already able to receive
local signals via a standard over-the-air antenna). On January 26, 1998, the
U.S. Copyright Office opened a rulemaking proceeding to determine whether it is
permissible under federal law for DBS providers to deliver local network
signals into served areas. In addition, legislation is pending in Congress
that would allow DBS providers to deliver local network signals into served
areas if they comply with certain must-carry and retransmission consent
obligations.
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 dialtone" 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 1997, the FCC
allocated spectrum in the 28 GHz and 31 GHz bands for a new service, LMDS, that
can be utilized for various video, voice and data services. The LMDS channel
allocation is capable of supporting approximately 49 analog video channels or a
greater number if digital compression technology is deployed. Because signals
in the 28 GHz and 31 GHz bands travel shorter distances than signals
transmitted over MDS, ITFS and WCS channels, the Company believes that LMDS
technology is best suited for high density urban areas. The Company did not
participate in the LMDS auction, which concluded on March 25, 1998.
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 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. In addition, the Company's two-way internet product will operate
utilizing digital modulation.
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.
Proposals are pending before the FCC to afford all ITFS licensees a 35-mile
protected service area, regardless of whether they lease excess capacity. 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 Company plans to launch a two-way internet product in certain of its
markets utilizing WCS Channels for upstream transmissions from subscribers and
MDS or ITFS Channels for downstream transmissions to subscribers. Downstream
internet transmissions will require the use of digital modulation, and the FCC
requires that it give its prior consent to the use of digital modulation by any
MDS or ITFS station. Applications for FCC consent to the partitioning,
disaggregation and assignment of BellSouth WCS rights to the Company are
pending before the FCC. In the interim, the Company has the right to lease
those channel rights from BellSouth for nominal fees. Although the Company has
acquired WCS rights for most of its Markets, in some markets it will need to
acquire WCS spectrum or utilize its MDS or ITFS spectrum for upstream
transmission. Because the FCC has not yet adopted final rules to govern the
conversion of MDS and ITFS Channels for upstream use, the Company cannot
predict whether in any given situation it will be able to comply with FCC
requirements for such conversion. While the FCC has adopted streamlined
policies to expedite the granting of MDS and ITFS digital authorizations and
the Company has taken advantage of those policies to secure digital
authorizations for some of its markets, there can be no assurance that the
necessary digital authority will be granted in each case.
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 hard-wire 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 under certain circumstances.
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 ("FAA") 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 March 1, 1998, the Company had a total of 503 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. To meet certain operational requirements, the
Company also utilizes the services of unaffiliated independent contractors to
install new customers in its wireless cable systems.
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 those 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, 1997, the
Company had approximately $318.4 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, in
the short-term, upon the ability of the Company to raise additional capital,
obtain concessions from holders of its debt and its lenders, or both; and in
the long-term, upon its future financial performance. The Company is obligated
to begin making principal payments on its BTA notes in November 1998 and the
initial cash interest payments on its 1995 Senior Notes in April 1999. 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 for at least the foreseeable future 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.
Lack of Profitable Operations; Negative Cash Flow; Early Stage Company -
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, 1997 was $138.9 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 and internet access industries. There can be no
assurance that realization of the Company's business plan, including an
increase in the number of subscribers, its experience with its new DirecTV MDU
product, the successful development and commercial launch of its internet
product or the launch of additional Operating Systems, will result in
profitability or positive consolidated operating cash flow for the Company in
future years.
Need for Additional Financing; Certain Covenants - The Company
forecasts that it will need to raise approximately $7 - 10 million in
additional funding to meet the capital expenditure and operating needs
included in its business plans for 1998. The Company is actively seeking to
raise these additional funds. Certain of the Company's credit agreements and
indentures contain restrictions on the amount and nature of additional capital
available to the Company. There can be no assurance that additional capital
will be available to the Company on terms that comply with the Company's credit
agreements and indentures or on terms that management finds acceptable. In
addition to its 1998 cash requirements, the Company must raise additional
capital or generate sufficient operating cash flow to satisfy its debt service
obligations beginning in April 1999. Failure to obtain the capital required in
1998 will likely have a material adverse effect on the Company and its
prospects.
Need to Manage Change in Business Strategy - Successful implementation of
the Company's business plan will require the refocus of the Company's efforts
to developing its DirecTV MDU product, a high-speed, two-way internet access
product and the management of rapid growth, all of which will result in an
increase in the responsibility for management personnel. To manage this change
in business strategy effectively, the Company will be required to continue to
implement and improve its operating and financial systems and controls and to
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 or that any steps taken to hire personnel or to improve such
systems and controls will be sufficient.
NASDAQ Listing Issues - Based upon the financial statements of the
Company at December 31, 1997, the Company does not meet all of the financial
standards of the listing requirements of the NASDAQ National Market. If the
Company's common stock were to be delisted, the Company's common shareholders
may experience a substantial reduction in the liquidity of their shares.
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 hard-wire 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 targets its marketing to
new and existing MDU properties and individual SFU 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, although the
FCC is currently considering a proposal that would permit ITFS leases to extend
fifteen 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. While there can be no
assurance that the Company will satisfy all aspects of this performance
requirement, substantial progress has been made to-date and the Company expects
to meet the requirements 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. In
addition, the success of the Company's strategy to focus on MDU subscriber
growth is highly dependent on the enhanced programming offerings available
through its cooperative marketing agreement with DirecTV. 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 and internet access
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 Development
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 develops new products and
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
In August 1997, the Company completed the consolidation and relocation
of its corporate, administrative and regional offices in Jackson, Mississippi.
The Company currently leases approximately 25,000 square feet for its
administrative and regional offices in Jackson, Mississippi, which leases
expire between March 1, 2001 and January 1, 2002. The Company pays
approximately $320,000 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
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position as of March 1,
1998 with respect to the Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Henry M. Burkhalter 50 President and Chief Executive Officer
Henry G. Schopfer, III 51 Executive Vice President, Chief Financial Officer
and Secretary
Ernest D.Yates 53 Executive Vice President and Chief Operating
Officer
</TABLE>
HENRY M. BURKHALTER became the President and Chief Executive Officer of
the Company in May 1997. Mr. 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, the largest local certified public
accounting and consulting firm in Mississippi. The firm's primary focus
was in the telecommunications industry.
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.
From 1982 to 1988, Mr. Schopfer held accounting management positions with
Cooper Industries, Inc., a Houston, Texas-based Fortune 100 manufacturer.
Prior experience includes nine years with Big Six accounting firms in Houston,
Texas, and New Orleans, Louisiana. Mr. Schopfer has been a certified public
accountant since 1972.
ERNEST D. YATES joined the company on December 31, 1997, as Executive
Vice President and Chief Operating Officer. Mr. Yates' entire career has been
in the telecommunication industry, where he has extensive experience in
telecommunications technology in traditional switching and networks, video,
wireless, fiber optics and advanced data networks and services. Mr. Yates
most recently served as Executive Vice President of Operations for Electric
Lightwave, a Competitive Local Exchange Carrier (CLEC) located in Vancouver,
Washington. Mr. Yates has held executive management positions with
Southwestern Bell Corporation, a Texas-based Regional Bell Operating Company
(RBOC), where he developed start up businesses and acquired companies and
negotiated strategic international telecommunications business relationships.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The following table sets forth the high and low closing bid prices of the
common stock as reported by the NASDAQ National Market.
<TABLE>
<CAPTION>
Market
Price
<S> <C> <C>
FISCAL PERIOD High Low
- ------------- ----------------------------
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 $ 7 $ 2-5/8
Second Quarter $ 4 $ 2 1/2
Third Quarter $ 3 7/8 $ 2 1/16
Fourth Quarter $ 3 7/8 $ 2
1998:
First Quarter (through March 23, 1998) $ 2 1/8 $ 5/8
</TABLE>
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 23 , 1998, there were approximately 178 record holders of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived from
the consolidated financial statements of the Company and its subsidiaries. The
consolidated financial statements as of December 31, 1996 and 1997 and for the
years ended December 31, 1995, 1996 and 1997, 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
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>
Year Ended December 31,
--------------------------------------------------------------------------------
1993(1) 1994 1995 1996 1997
--------------- --------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Total revenues $ - $ 399,319 $ 1,410,318 $ 11,364,828 $ 34,580,464
Operating expenses:
Systems operations 24,429 274,886 841,819 8,416,134 23,398,304
Selling, general and
administrative expenses 110,281 1,800,720 4,431,839 15,559,156 28,317,852
Depreciation and amortization 27,489 413,824 1,783,066 11,625,507 35,741,301
--------------------------------------------------------------------------------
Total operating expenses 162,199 2,489,430 7,056,724 35,600,797 87,457,457
--------------------------------------------------------------------------------
Operating loss (162,199) (2,090,111) (5,646,406) (24,235,969) (52,876,993)
Interest expense and other, net (411) (171,702) (2,046,068) (20,134,426) (37,562,848)
--------------------------------------------------------------------------------
Loss before income taxes (162,610) (2,261,813) (7,692,474) (44,370,395) (90,439,841)
Income tax benefit - - - 4,700,000 1,300,000
--------------------------------------------------------------------------------
Net loss $ (162,610) $ (2,261,813) $ (7,692,474) (39,670,395) (89,139,841)
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) $ (89,139,841)
================================================================================
Basic and diluted loss per common
share $ (0.30) $ (1.21) $ (2.02) $ (2.65) $ (5.26)
================================================================================
Basic and diluted weighted average
common shares outstanding 538,127 1,863,512 4,187,736 14,961,934 16,940,374
================================================================================
Year Ended December 31,
--------------------------------------------------------------------------------
1993(1) 1994 1995 1996 1997
--------------- --------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Working capital $ 57,786 $ (1,537,244) $ 122,084,511(2) $ 106,676,500(2)$ 24,880,046(2)
Total assets 514,223 8,914,224 213,799,874 395,609,362 317,587,198
Current portion of long-term debt 4,714 1,457,295 376,780 3,169,383 871,408
Long-term debt 14,903 2,839,602 150,871,267 299,909,221 317,529,032
Deferred taxes - - - 6,500,000 5,200,000
Total stockholders' equity 458,370 4,343,713 55,649,687 70,666,682 (18,986,021)
</TABLE>
(1) Period from January 4, 1993 (inception) to December 31, 1993.
(2) Includes approximately $17,637,839, $18,149,180 and $19,258,789 of funds
held in escrow at December 31, 1995, 1996 and 1997, 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 and pertain solely to the historical financial statements contained
herein.
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.
During the third quarter of 1997, the Company focused its marketing
efforts on developing its new contract with DirecTV, which offers subscription
video services to MDU's and has devoted resources to the development of a high-
speed, two-way internet access product. Because of the lower capital and
operating costs per subscriber and the enhanced programming available through
its DirecTV MDU product, the Company believes that this focus will provide the
Company with the best use of its wireless spectrum, existing infrastructure,
and the opportunities provided by the marketplace. Because of the increased
opportunity provided by its DirecTV MDU product, the Company has determined to
de-emphasize the growth of its SFU business and currently does not plan to
launch new systems focused on SFUs. Accordingly, the Company has implemented
changes to its business operations to reduce personnel and other operating
expenses to the levels needed to implement these refocused business objectives,
including the elimination of over 400 (45%) of 900 employees as of March 1,
1998.
The Company does not anticipate being able to generate net income for at
least the foreseeable future 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. Net losses are expected to
continue as the Company focuses its resources on the marketing of its DirecTV
MDU product and development of its internet product and as additional systems
are commenced or acquired. The Company's business plan for the year 1998
reflects a net cash requirement of approximately $25 - 28 million to finance
the launch and buildout of additional video and internet systems in 1998.
Sources of funds to meet these requirements include the $15.5 million in
unrestricted cash on hand at December 31, 1997, $2.5 million in net cash
proceeds from the sale of its investment in Telecorp in January 1998, and
additional capital funding of $7 - 10 million. Although, the Company is
actively seeking sources of these additional capital funds, there can be no
assurance that such efforts will be successful. If additional funds are not
available, the Company may not be able to continue to launch new systems or to
further develop its internet product, and its DirecTV MDU product may be
curtailed. In addition to its 1998 cash requirements, the Company must raise
additional capital or generate sufficient operating cash flow to satisfy its
debt service obligations on its 1995 Senior Notes, which require semi-annual
interest payments of $9.8 million beginning in April 1999.
YEAR 1997 COMPARED TO THE YEAR 1996
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 1997 were $34.6 million as
compared to $11.4 million for 1996, an increase of $23.2 million or 204%. This
increase in revenues was primarily due to the average number of subscribers
increasing from 40,420 to 98,720 subscribers for the years 1996 and 1997,
respectively. At December 31, 1996, the Company had 69,825 subscribers versus
114,934 at December 31, 1997. The increase in the subscriber base was
primarily attributable to same system growth during 1997 and the acquisition of
TruVision in August 1996.
Systems Operations Expenses - Systems operations expense includes
programming costs, channel lease payments, tower and transmitter site rentals,
and certain repairs and maintenance expenditures. Programming costs 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 1997 were $23.4 million (68% of revenue) as compared to
$8.4 million (74% of revenue) for 1996, reflecting an increase of $15.0 million
or 178%. This increase is attributable primarily to the increase in the
average number of subscribers in 1997 compared to 1996 as outlined above. As a
percent of revenues, systems operations expenses have decreased as more systems
mature.
Selling, General and Administrative Expenses - Selling, general and
administrative ("SG&A") expenses for 1997 were $28.3 million (82% of revenue)
compared to $15.6 million (137% of revenue) for 1996, an increase of $12.7
million or 82%. 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, SG&A expenses have decreased as more systems mature.
The Company believes such SG&A costs will not stabilize until all planned
video and internet markets are 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, the Company's anticipated schedule of system and product launches
needs to be met and desired penetration rates need to be achieved. The
Company's ability to meet its currently anticipated launch schedule is
dependent on numerous factors, including the ability of the Company to achieve
the necessary regulatory approvals for such systems in a timely manner and its
ability to finance the launch of such systems. Although management currently
expects to meet the anticipated systems and product launch schedule, there can
be no assurance that such schedule will be met or the necessary penetration
rates will be achieved in such markets to provide for the stabilization of SG&A
costs.
Depreciation and Amortization Expense - Depreciation and amortization
expense for 1997 was $35.7 million versus $11.6 million for 1996, an increase
of $24.1 million or 207%. The increase in depreciation expense during the
period was due to additional capital expenditures related to the launch of new
systems, the acquisition of additional Operating Systems in August 1996 and
increased depreciation of subscriber equipment due to the changing of the
estimated useful life from five to four years, effective January 1, 1997. The
impact of this change resulted in increased net loss and net loss per share of
$3,493,000 and $0.21, respectively, for the year ended December 31, 1997. In
addition, amortization of leased license costs increased due to new launches
and the acquisition of additional channel rights.
Interest Expense - Interest expense for 1997 was $41.8 million versus
$28.1 million for 1996, an increase of $13.7 million or 49%. This increase in
interest expense is due primarily to the issuance of the 1996 Senior Discount
Notes in August 1996 (as defined in " Liquidity and Capital Resources").
Interest Income - Interest income in 1997 was $4.7 million versus $8.1
million for 1996, a decrease of $3.4 million or 42%. This decrease in interest
income was due to a decrease in the amounts of funds available for investment
that resulted from the net proceeds from the 1995 and 1996 Unit Offerings (each
as defined in "Liquidity and Capital Resources") and the utilization of cash
balances to build and develop new markets.
YEAR 1996 COMPARED TO THE YEAR 1995
Revenues - 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
706%. 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,
and certain repairs and maintenance expenditures. Programming costs and channel
lease payments (with the exception of minimum payments) are variable expenses
which increase as the number of subscribers increase. Systems operations
expenses for 1996 were $8.4 million (74% of revenue) as compared to $0.8
million (60% of revenue) for 1995, reflecting an increase of $7.6 million or
900%. 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 Expenses - SG&A expenses for 1996
were $15.6 million (137% of revenue) compared to $4.4 million (314% of revenue)
for 1995, an increase of $11.2 million or 251%. 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, SG&A expenses
have decreased as more systems mature.
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 552%. 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 $24.0 million or 590%. 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 302%. 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").
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television and internet access product businesses are
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, (v) investments in vehicles and administrative offices, and (vi) the
development, testing and launch of new products, such as the internet access
product. 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 (the "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 amount 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 marketing of the Company's new DirecTV MDU product,
development of the Company's internet product, the launch of new systems and
expansion of the Company's existing markets.
For the year ended December 31, 1995, cash used in operating activities
was $.6 million, consisting primarily of a net loss of $7.7 million and an
increase in receivables and prepaid expenses of $.6 million and $4.5 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 Development
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, $35.0 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 $22.1 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 $89.7 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 Development 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 $106.0 million,
consisting of $120.6 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.
For the year ended December 31, 1997, cash used in operating activities
was $38.4 million consisting primarily of a net loss of $89.1 million, in
addition to an increase in receivables and prepaid expenses of $2.9 million, a
decrease in accounts payable and accrued expenses of $1.9 million, an increase
in deposits of $.3 million, partially offset by depreciation and amortization
of $35.7 million, and net non-cash expenses of $20.1 million. For the year
ended December 31, 1997, cash used in investing activities was $47.3 million,
consisting primarily of capital expenditures and payments for licenses and
organization costs of approximately $58.1 million and $3.3 million,
respectively. In addition, the Company received proceeds from the maturities
of securities of $18.3 million and made investments and purchased other assets
at a cost of approximately $4.2 million. These investing activities were
principally related to the acquisition of equipment in certain of the Company's
Operating Systems, as well as in Future Development Markets, and certain
license and organization costs related to those Markets. For the year ended
December 31, 1997, cash flows used in financing activities were $3.2 million
consisting of repayments of long-term debt.
The Company made capital expenditures, exclusive of acquisitions of
wireless cable systems and additions to leased license acquisition costs, of
approximately $60.4 million and $58.1 million for the years ended December 31,
1996 and 1997, respectively. These expenditures primarily relate to the
purchase of equipment in the Company's Operating Systems as well as in Future
Development Markets. Based on its current business plans, the Company
estimates that $20 - 25 million in capital expenditures will be required over
the next twelve months to continue to fund growth in its Operating Systems, to
develop and launch its internet product and to develop additional Operating
Systems.
Historically, the Company has generated operating and net losses and is
expected to do so for at least the foreseeable future as it continues to market
its new DirecTV MDU product, develop its internet product and develop
additional Operating Systems. Such losses may increase as these products are
implemented and 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, operating cash flow from more mature systems is expected to be
partially or completely offset by negative operating cash flow from less
developed systems and from development costs associated with establishing its
new products and its Operating 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. The
Company's ability to meet its currently anticipated video and internet launch
schedules and achieve its targeted penetration rates and subscriber levels is
dependent on numerous factors, including the Company's ability to finance new
launches and expansion of existing systems, its experience with its DirecTV MDU
product (which remains a new product for the Company), the acceptance and
performance of its internet access product (a new product for the Company), the
ability of the Company to achieve the necessary regulatory approvals for
anticipated video/internet product launches in a timely manner, and general
economic and competitive factors with respect to the wireless cable business,
many of which are beyond the Company's control. There can be no assurance that
the Company will be able to achieve the necessary subscriber or revenue levels
to attain such operating cash flow levels at any time.
Based on the factors and results discussed above, the Company believes
that the $15.5 million in unrestricted cash at December 31, 1997 plus the $2.5
in million cash proceeds from the sale of its interest in Telecorp will not be
sufficient to meet its forecasted capital and operating requirements for
1998. The Company will need to raise approximately $7 - 10 million in
additional funding in order to finance the launch and build-out of additional
video and internet systems included in the Company's business plans for 1998.
The Company is actively seeking to raise these additional funds through
financing arrangements at the Operating System level, additional borrowings,
the sale of additional debt or equity securities, joint ventures or other
arrangements, if such financing is available to the Company on satisfactory
terms. There is no assurance that the Company will be able to raise additional
capital within the limitations of the indentures governing the 1995 Senior
Notes or the 1996 Senior Discount Notes or on terms the Company considers
acceptable. If additional funds are not available, the Company may not be
able to continue to launch new systems or to further develop its internet
product and its DirecTV MDU product may be curtailed. In addition to its 1998
cash requirements, the Company must raise additional capital or generate
sufficient positive operating cash flow to satisfy its debt service obligations
on its 1995 Senior Notes, which require semi-annual interest payments of $9.9
million beginning in April 1999.
As a result of the issuance of the 1995 Senior Notes and the 1996 Senior
Discount Notes the Company is required to satisfy significant debt service
requirements. Beginning in April 1999, the Company will be obligated to devote
a substantial portion of the Company's cash flow to debt service on the 1995
Senior Notes, and after August 1, 2001, on the 1996 Senior Discount Notes. The
ability of the Company to make payments of principal and interest on these
notes will be largely dependent in the short term upon the ability of the
Company to raise additional capital, or obtain concessions from holders of the
1995 Senior Notes, the 1996 Senior Discount Notes and/or its lenders, and in
the long-term upon its future financial performance. The Company is exploring
various alternatives to address its short- and long-term capital needs. These
alternatives may include raising additional funds through various financing
arrangements (as described above), restructuring its existing indebtedness,
modifying its business plan, or a combination of the foregoing. Many factors,
some of which may be beyond the Company's control, may effect the Company's
ability to resolve its long-term capital needs. These factors include the
availability of sufficient financing on terms acceptable to the Company; the
willingness of the holders of the Company's debt securities to agree to any
restructuring of the Company's indebtedness that the Company may seek;
prevailing and perceived economic conditions, both in general and with respect
to the Company's industry; and other factors that could affect the Company's
performance, such as competition or regulatory restrictions. While no debt
service is required on the Company's existing Senior Notes until April 1999,
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 the other indebtedness
of the Company or that the Company will otherwise be able to resolve its long-
term capital needs.
Based upon the financial statements of the Company at December 31, 1997,
the Company does not meet all of the financial standards of the listing
requirements of the NASDAQ National Market. While the Company may endeavor to
maintain its listing, or may seek listing on an alternative exchange or market,
there can be no assurance that the Company's common stock will not be delisted
or that the Company will be accepted for listing on any alternative exchange or
market. If the Company's common stock were to be delisted and such shares were
not listed on an alternative exchange or market, the Company's common
shareholders may experience a substantial reduction in the liquidity of their
shares.
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.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." These statements are effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements, and SFAS No.
131 requires disclosures about operating segments and enterprise-wide
disclosures about products and services, geographic area and major customers.
The Company is currently evaluating the effect of these statements on the
presentation of and disclosures within its consolidated financial statements.
YEAR 2000
In January 1998, the Company developed a plan to address the Year 2000
problem and began converting its computer systems to be Year 2000 compliant.
The plan provides for the conversion efforts to be completed by the end of
1999. The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The cost of
the project is anticipated to be approximately $250,000. The Company is
expensing all costs associated with these systems changes as the costs are
incurred. As of December 31, 1997 no expenses had been directly incurred as
part of this effort.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth on pages F-1 through F-23
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 1998 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 1998 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 1998 Annual Meeting
of Stockholders and is 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 1998 Annual Meeting of Stockholders
and is 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, 1995, 1996
and 1997 is included in this Form 10-K on page F-24. 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 no reports on Form 8-K
during the quarter ended December 31, 1997.
WIRELESS ONE, INC.,
AND SUBSIDIARIES
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996, and 1997..................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1995, 1996, and 1997......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996, and 1997..................................... 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, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1997.
In connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wireless One, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Jackson, Mississippi
February 13, 1998
WIRELESS ONE, INC.
CONSOLIDATED
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS
------ 1996 1997
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 104,448,583 $ 15,528,215
Marketable investment securities- restricted (note 5) 18,149,180 19,258,789
Subscriber receivables, less allowance for doubtful accounts of
$292,619 and $486,820 in 1996 and 1997, respectively 998,734 2,071,689
Accrued interest and other receivables 464,166 729,237
Prepaid expenses 1,149,296 1,136,303
-------------- --------------
Total current assets 125,209,959 38,724,233
Property and equipment, net (note 6) 82,636,712 110,099,016
License and leased license investment, net of accumulated
amortization of $2,823,658 and $7,896,648 in 1996
and 1997, respectively 154,444,536 151,386,399
Marketable investment securities - restricted (note 5) 18,885,565 -
Other assets (note 7) 14,432,590 17,377,550
-------------- --------------
$ 395,609,362 $ 317,587,198
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 4,105,994 $ 2,913,209
Accrued expenses 6,775,218 5,117,451
Accrued interest 4,482,864 4,942,119
Current maturities of long-term debt (note 8) 3,169,383 871,408
-------------- --------------
Total current liabilities 18,533,459 13,844,187
Long-term debt (note 8) 299,909,221 317,529,032
Deferred taxes (note 9) 6,500,000 5,200,000
-------------- --------------
324,942,680 336,573,219
Redeemable convertible preferred stock, $.01 par value, 15,000
shares authorized, no shares issued or outstanding (note 10) - -
Stockholders' equity (deficit)
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, 16,946,697 and 16,910,064 shares
issued and outstanding in 1996 and 1997, respectively 169,467 169,101
Additional paid-in capital 120, 284,507 119,772,011
Accumulated deficit (49,787,292) (138,927,133)
-------------- --------------
Total stockholders' equity (deficit) 70,666,682 (18,986,021)
Commitments and contingencies (note 13) - -
$ 395,609,362 $ 317,587,198
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
Consolidated Statements of Operations
Years Ended December 31, 1995, 1996, and 1997
1995 1996 1997
------------ ------------- -------------
[S] [C] [C] [C]
Revenues $ 1,410,318 $ 11,364,828 $ 34,580,464
Operating expenses:
Systems operations 841,819 8,416,134 23,398,304
Selling, general and
administrative 4,431,839 15,559,156 28,317,852
Depreciation and
amortization 1,783,066 11,625,507 35,741,301
------------ ------------- -------------
7,056,724 35,600,797 87,457,457
------------ ------------- -------------
Operating loss (5,646,406) (24,235,969) (52,876,993)
------------ ------------- -------------
Interest expense (4,070,184) (28,087,948) (41,828,876)
Interest income 2,024,116 8,146,958 4,711,185
Equity in losses of
investee (note 7) --- (193,436) (445,157)
------------ ------------- -------------
Total other expense (2,046,068) (20,134,426) (37,562,848)
------------ ------------- -------------
Loss before income taxes (7,692,474) (44,370,395) (90,439,841)
Income tax benefit (note 9) --- 4,700,000 1,300,000
------------ ------------- -------------
Net loss (7,692,474) (39,670,395) (89,139,841)
Preferred stock dividends and
discount accretion (note 10) (786,389) --- ---
------------ ------------- -------------
Net loss applicable to common
stock $(8,478,863) $(39,670,395) $(89,139,841)
============ ============= =============
Basic and diluted loss per
common share $ (2.02) $ (2.65) $ (5.26)
============ ============= =============
Basic and diluted weighted
average common shares
outstanding 4,187,736 14,961,934 16,940,374
============ ============= =============
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Additional Subscriptions Accumulated
Common Stock Paid-In Capital Receivable Deficit Total
------------ --------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 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
Return of escrow shares (366) (512,496) - - (512,862)
Net loss - - - (89,139,841) (89,139,841)
------------ --------------- -------------- --------------- --------------
Balance at December 31, 1997 $ 169,101 $ 119,772,011 $ - $ (138,927,133) $ (18,986,021)
============ =============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,692,474) $ (39,670,395) $ (89,139,841)
Adjustments to reconcile net loss to net cash
used in operating activities:
Bad debt expense 196,281 371,349 1,535,943
Depreciation and amortization 1,783,066 11,625,507 35,741,301
Amortization of debt discount 328,301 7,845,537 19,933,049
Accretion of interest income (213,230) (976,638) (502,044)
Deferred income tax benefit - (4,700,000) (1,300,000)
Equity in losses of investee - 193,436 445,157
Changes in assets and liabilities:
Receivables (571,957) (868,890) (2,873,969)
Prepaid expenses (468,707) (145,949) 12,993
Deposits - 917,796 (328,286)
Accounts payable and accrued
expenses 6,004,541 3,265,187 (1,935,297)
-------------- -------------- --------------
Net cash used in operating
activities (634,179) (22,143,060) (38,410,994)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of investments and other assets (1,533,446) (2,778,012) (4,167,500)
Capital expenditures (9,805,057) (60,408,418) (58,130,615)
Acquisition of license investment (6,762,415) (43,898,328) (3,307,913)
Purchase of marketable investment securities (53,180,114) - -
Proceeds from maturities of securities - 17,335,237 18,278,000
-------------- -------------- --------------
Net cash used in investing
activities (71,281,032) (89,749,521) (47,328,028)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and
warrants 144,764,902 120,624,614 -
Principal payments on long-term debt (11,502,054) (13,089,874) (3,181,346)
Debt issuance costs (343,839) (1,604,955) -
Issuance of common stock 35,008,396 31,050 -
Issuance of redeemable preferred stock 14,343,654 - -
-------------- -------------- --------------
Net cash provided by (used in)
financing activities 182,271,059 105,960,835 (3,181,346)
-------------- -------------- --------------
Net increase (decrease) in cash 110,355,848 (5,931,746) (88,920,368)
Cash and cash equivalents at beginning of period 24,481 110,380,329 104,448,583
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 110,380,329 $ 104,448,583 $ 15,528,215
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
WIRELESS ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(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 and developing a high-
speed, two-way internet access product, 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 equipment and
installations. The Company capitalizes the excess of direct costs of
subscriber installations over installation fees. These direct costs
include reception materials on subscriber premises, installation
labor, overhead charges and direct selling costs.
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.
Based on management's periodic review of the assumptions used in
determining the estimated useful lives of the Company's depreciable
assets, the Company changed its estimated useful life for subscriber
equipment and installations from five years to four years effective
January 1, 1997. The impact of this change resulted in increased net
loss and net loss per share of $3,493,000 and $0.21, respectively, for
the year ended December 31, 1997.
(d) LICENSE AND LEASED LICENSE INVESTMENT
License 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, 1995, 1996 and 1997 was $574,169, $2,275,375 and
$5,072,990, respectively. As of December 31, 1996 and 1997,
approximately $76,296,000 and $71,412,000 of license and leased
license investment was 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 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, 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 licenses and related property and equipment.
(f) REVENUE RECOGNITION
Revenues from subscribers are recognized in income over the period
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) EARNINGS PER SHARE
Earnings per share are computed in accordance with SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires the replacement of
previously reported primary and fully diluted earnings per share under
Accounting Principles Board Opinion No. 15 with basic earnings per
share and diluted earnings per share. The calculation of basic
earnings per share excludes any dilutive effect of potential issuances
of common stock, while diluted earnings per share includes the
dilutive effect of such potential issuances. Shares issuable upon
exercise of the Company's stock options and warrants are anti-dilutive
and have been excluded from the calculation of diluted earnings per
share. Per share amounts for all periods presented have been restated
to conform to the requirements of SFAS No. 128.
(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 terms of the notes.
(j) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include 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. The significant estimates
impacting the preparation of the Company's consolidated financial
statements include the allowance for doubtful accounts on subscriber
receivables, the valuation allowances on deferred tax assets and
estimated useful lives of property and equipment and intangible
assets. Actual results could differ from those estimates.
(l) MARKETABLE INVESTMENT SECURITIES
Investments in marketable securities at December 31, 1996 and 1997
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 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, 1995, 1996 and 1997.
(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 Company's business requires substantial amounts of capital and
liquidity, principally for the acquisition and installation of equipment,
the development and launch of new products and markets, debt service and
working capital requirements. To date, the Company has funded operating
losses and capital expenditures principally with funds raised during 1995
and 1996 through its initial public offering of common stock and the
issuance of debt securities. Management projects that the Company will
require significant additional funds for the continued implementation of
its business plan, including capital expenditures and debt service
requirements in 1998 and beyond.
The Company forecasts that it will need to raise approximately $7 - 10
million in additional funding to meet the capital expenditures and
operating needs included in its business plans for 1998. The Company is
actively seeking to raise these additional funds and is exploring various
alternatives to address, its short and long-term capital needs. These
alternatives may include raising additional funds through various
financing arrangements, restructuring its existing indebtedness, modifying
its business plan, or a combination of the foregoing. While management
believes it will obtain additional funds, there can be no assurance that
additional capital will be available to the Company on terms that comply
with the Company's credit agreements and indebtedness or on terms that
management finds acceptable. If additional funds are not available, the
Company may not be able to continue to launch new systems or to further
develop its internet product, and its DIRECTV MDU product may by
curtailed. In addition to its estimated 1998 cash requirements, the
Company must raise additional capital or generate sufficient operating
cash flow to satisfy its debt service obligations on its 1995 Senior
Notes, which require semi-annual interest payments of $9,750,000 beginning
in April 1999.
(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 was 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
were 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 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
==========
(4) TRUVISION AND OTHER 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 also engaged in the wireless
cable television business within the southeastern United States primarily
in Mississippi, Alabama, and Tennessee.
The following table summarizes the allocation of the acquisition cost
based upon the 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 2,177,003
License and leased license investment 80,736,479
Current liabilities (5,838,771)
Deferred tax liability (11,200,000)
Short term debt (32,046,244)
-----------
$ 51,402,953
===========
In connection with the TruVision transaction, the Company entered into an
agreement whereby it placed 202,800 shares, of the total shares issued, in
escrow for issuance to former TruVision shareholders upon consummation of
certain pending acquisitions. In October 1997, in accordance with the
terms of its purchase and sale agreement with Skyview Wireless Cable,
Inc., the Company terminated the agreement to acquire rights to 22
wireless cable channels and a substantially complete transmission facility
in Jackson, Tennessee, for $2.7 million in cash and to acquire the rights
to 20 wireless cable channels in Hot Springs, Arkansas, for approximately
$1.5 million. This event resulted in the termination of a stock escrow
agreement and the return to the Company of 36,633 of its common shares,
under the terms and conditions of the merger agreement between the Company
and TruVision in July 1996.
In 1996, the Company also acquired (i) Shoals Wireless, Inc., whose
principal asset was an Operating System in Lawrenceburg, Tennessee, for
approximately $1.2 million, (ii) an Operating System and hard-wire cable
system in Huntsville, Alabama, for approximately $6 million, (iii) rights
to 11 wireless cable channels in Macon, Georgia, for approximately
$600,000, (iv) rights to 8 wireless cable channels in Bowling Green,
Kentucky, for $300,000, (v) rights to 16 wireless cable channels in
Jacksonville, North Carolina, for approximately $820,000 ($800,000 is
being withheld pending grant of licenses) and 12 wireless cable channels
in Chattanooga, Tennessee, 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 price has been allocated to
license and leased license investment and is being amortized over 20
years.
The December 31, 1996 consolidated financial statements of the Company
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)
Basic and diluted 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, 1996 and
1997 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 marketable securities at
December 31, 1996 and 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 Amortized Cost Unrealized Loss Unrealized Gain Fair Value
----------------- -------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
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
============== =============== =============== ==============
DECEMBER 31, 1997
-----------------
U. S. Treasury Notes $ 10,047,454 $ --- $ 53,560 $ 10,101,014
U. S. Treasury Notes
interest coupon strips 8,683,337 --- 8,051 8,691,388
Other 527,998 --- --- 527,998
-------------- --------------- --------------- --------------
$ 19,258,789 $ --- $ 61,611 $ 19,320,400
============== =============== =============== ==============
</TABLE>
Scheduled maturities for the marketable securities held at December
31, 1997 are as follows:
AMORTIZED FAIR
COST VALUE
---- -----
Maturing in less than 1 year $ 19,258,789 $ 19,320,400
(6) PROPERTY AND EQUIPMENT
Major categories of property and equipment at December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
LIFE 1996 1997
--------- ---- ----
<S> <C> <C> <C>
Equipment awaiting installation - $ 9,109,287 $ 7,168,094
Subscriber equipment and installation 4 43,049,807 81,128,043
costs
Transmission equipment and system 10 29,463,789 36,233,338
construction costs
Office furniture and equipment 7 7,161,468 9,891,684
Buildings and leasehold improvements 31.5 2,031,754 3,260,432
---------- -----------
90,816,105 137,681,591
Less accumulated depreciation (8,179,393) (27,582,575)
---------- -----------
$ 82,636,712 $110,099,016
========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996 and 1997
was $1,208,897, $9,350,133, and $30,668,311, respectively.
(7) OTHER ASSETS
Other assets at December 31, 1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------------- --------------
<S> <C> <C>
Debt issuance costs, net of accumulated
amortization of $1,068,230 and $2,273,891 $ 11,129,764 $ 9,924,103
in 1996 and 1997, respectively
Deposits and other 491,914 860,191
Investments in unconsolidated subsidiaries:
Wireless One North Carolina, LLC 1,310,912 4,093,256
Telecorp Holding Corp., Inc. 1,500,000 1,500,000
Wireless Ventures, LLC --- 1,000,000
-------------- -------------
$ 14,432,590 $ 17,377,550
============== =============
</TABLE>
Investments in unconsolidated subsidiaries relate to the Company's 50%
investment in Wireless One North Carolina, LLC ("WONC") accounted for on
the equity method, its 16.5% investment in Telecorp Holding Corp., Inc.
("Telecorp") accounted for on the cost method and its 50% investment in
Wireless Ventures, LLC ("Ventures") accounted for on the equity 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. In January 1998, the
Company completed the sale of its interest in Telecorp for $2.5 million
for a gain of approximately $1.0 million. Ventures owns certain BTA
rights in several markets in Georgia. None of these entities has
commenced operations as of December 31, 1997.
By the terms of the Ventures purchase agreement, upon securing FCC
approval, the Company will assume the debt of Ventures and purchase the
remaining 50% interest for 50,000 shares of the Company's common stock.
The transaction is scheduled to close by May 1998.
(8) LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1996 1997
---- ----
<S> <C> <C>
13% Senior Notes due 2003; face value of
$150,000,000, net of unamortized discount
(1995 Senior Notes) $ 148,384,135 $ 148,619,511
13.5% Senior Discount Notes due 2006; face
value of $239,252,000 net of unamortized discount 126,400,136 144,748,632
(1996 Senior Discount Notes)
9.5% installment notes, principal and interest due in
installments through August 31, 2006 22,257,207 23,321,127
Subordinated non-interest bearing notes (face value
outstanding at December 31, 1996 of $3,050,000)
discounted to an 8% effective rate 2,880,672 -
Other 3,156,454 1,711,170
------------ ------------
303,078,604 318,400,440
Less current maturities (3,169,383) (871,408)
------------ ------------
Long-term debt, excluding current maturities $ 299,909,221 $ 317,529,032
============ ============
</TABLE>
Scheduled maturities of long-term debt for the next five years and
thereafter, are as follows:
1998 871,408
1999 2,663,078
2000 2,394,819
2001 2,630,560
2002 2,889,508
Thereafter 306,951,067
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 method. Interest expense accreted to the balance of the
notes during the years ended December 31, 1996 and 1997 was $6,453,922 and
$18,348,496, respectively. 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 $1,093,766 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:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 24,537,357 $ 56,344,197
Allowance for bad debts 176,771 189,860
Accrued liabilities deductible when paid 216,368 219,430
Other 24,796 7,230
---------- ----------
24,955,292 56,760,717
Less valuation allowance (5,766,361) (46,564,711)
---------- ----------
Deferred tax asset 19,188,931 10,196,006
---------- ----------
Deferred tax liabilities:
Fixed assets, principally due to
differences in depreciation and
underlying basis 473,997 716,260
License investment, due to differences in
amortizable lives and underlying basis 25,214,934 14,679,746
---------- ----------
Deferred tax liabilities 25,688,931 15,396,006
---------- ----------
Net deferred tax liability $ 6,500,000 $ 5,200,000
========== ==========
</TABLE>
The net changes in total valuation allowance for the years ended December
31, 1996 and 1997 were increases of $3,630,332 and $40,798,350,
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 in 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 years ended
December 31, 1996 and 1997 to the extent such assets can be realized
through future reversals of deferred tax liabilities.
The reconciliation of income tax benefit computed at the U.S. Federal
statutory tax rate to the Company's effective income tax rate is as
follows for each of the years ended December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
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) -
Effect of net operating loss carryforwards
not utilized 28.3 23.5 32.6
Other 5.7 .8 -
------- ------- -------
-% (10.6%) (1.4%)
======= ======= =======
</TABLE>
The Company had net operating loss carryforwards for Federal and state
income tax purposes of $144,472,302 as of December 31, 1997. The
carryforwards expire in years 2008-2012.
(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 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.
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.
(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.
Information regarding these option plans for 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
WEIGHTED
AVERAGE
EXERCISE
Shares Shares Shares PRICE
------------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Options outstanding beginning of year 248,917 804,187 1,028,413 $7.93
Options granted
Exercise Price=Fair Market Value 555,270 59,000 1,000 $6.38
Exercise Price>Fair Market Value - - 12,000 $6.63
Exercise Price<Fair Market Value - 195,226 464,500 $2.59
Options exercised - 5,000 - $ -
Options cancelled - 25,000 212,353 $8.89
------------- ------------ ------------- --------
Options outstanding, end of year 804,187 1,028,413 1,293,560 $5.84
============= ============ ============= =========
Option price range at end of year $4.16 - 13.83 $4.16 -16.25 $2.59 - 15.50
Option price range for exercised shares $ - $ 6.21 -
Options available for grant at end of
year 495,813 371,587 106,440
Weighted-average fair value of options,
granted during the year $ 13.10 $ 2.57
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Number Remaining Weighted- Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise Price at 12/31/97 Life Exercise Price at 12/31/97 Exercise Price
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.59 464,500 9.90 $ 2.5900 --- ---
$ 4.16 - $ 6.38 388,404 6.96 $ 5.6629 342,146 $ 5.711
$ 6.63 - $ 7.59 246,540 8.16 $ 7.1399 216,940 $ 7.1425
$10.24 - $13.83 176,116 7.33 $ 12.0143 6,000 $ 11.8624
$15.25 - $15.50 18,000 6.74 $ 15.4167 4,200 $ 15.4294
----------- ----------- -------------- ----------- --------------
1,293,560 8.49 $ 5.8414 569,286 $ 6.6138
</TABLE>
For the aforementioned plans, the Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized related to such
options. Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's net loss applicable to common stock
and basic and diluted loss per common share would have been increased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
Net Loss Applicable to Common stock - as reported $8,478,863 $ 39,670,395 $ 89,139,841
Net Loss Applicable to Common stock - pro forma 10,141,210 44,022,171 90,256,557
Net Loss Per Common Share - as reported
(basic and diluted) 2.02 2.65 5.26
Net Loss Per Common Share - pro forma
(basic and diluted) 2.42 2.94 5.33
</TABLE>
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. Weighted-average assumptions used for grants in 1997
include: expected volatility of 86%; expected dividend yield of 0%; risk-
free interest rate of 5.57%; and expected lives of 8.5 years.
(13) COMMITMENTS AND CONTINGENCIES
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 and
1997 related to this agreement was $79,336 and $338,578, respectively.
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 were 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.
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.
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 $380,346, $1,454,898 and $2,267,808 for the years
ended December 31, 1995, 1996 and 1997, respectively.
The Company also has certain operating leases for office space, service
vehicles, equipment and transmission tower space. Rent expense incurred
in connection with other operating leases was $183,003, $1,805,083 and
$3,533,441 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Future minimum lease payments due under channel rights leases and other
noncancelable operating leases at December 31, 1997 are as follows:
Channel Other
Year ending rights operating
December 31 leases leases
----------- ------------ ------------
1998 $ 2,288,415 $ 1,795,031
1999 2,330,795 1,678,329
2000 2,357,561 1,503,988
2001 2,352,580 1,014,605
2002 2,358,580 633,590
Thereafter 2,360,595 217,511
------------ ------------
$14,048,526 $ 6,843,054
============ ============
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, tax assessments 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. 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 1995, 1996 and 1997 totaled $351,178,
$19,404,454 and $21,436,570, respectively.
The Company made no Federal or state income tax payments during the years
ended December 31, 1995, 1996 and 1997.
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.
Underwriters fees incurred in conjunction with the public offerings of
debt securities in 1995 and 1996 in the amounts of $5,250,000 and
$4,374,986, respectively, are considered non-cash transactions.
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, in 1996 the Company incurred long-term obligations
in the amount of $1,959,252 for licenses related to BTA's in which the
Company was the successful bidder but had not been granted the licenses.
During 1997, the Company received notice that additional BTA licenses had
been granted with associated debt of $1,063,919.
(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 and
1997. The fair value of a financial instrument is defined as the amount
at which the instrument could be exchanged in a current transaction
between willing parties.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
Carrying Estimated Carrying Estimated
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Marketable investment
securities $ 37,034,745 $ 37,002,142 $ 19,258,789 $ 19,320,400
Long-term debt 303,078,604 288,818,456 318,400,440 96,920,097
</TABLE>
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
receivables, 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. Since the long-term debt of the Company
is not heavily traded, market quotes used to calculate
their value at December 31, 1997 were based on several
discrete trades made on or around that date.
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, involve
uncertainties and matters of significant judgment that cannot be
determined with precision and are not intended to represent amounts at
which the instruments could be exchanged in a forced or liquidation sale.
Changes in assumptions could significantly affect the estimates.
(17) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." These statements are
effective for fiscal years beginning after December 15, 1997. SFAS No.
130 establishes standards for reporting and disclosure of comprehensive
income and its components in a full set of general-purpose financial
statements, and SFAS No. 131 requires disclosures about operating segments
and enterprise-wide disclosures about products and services, geographic
area and major customers. The Company is currently evaluating the effect
of these statements on the presentation of and disclosures within its
consolidated financial statements.
SCHEDULE II
WIRELESS ONE, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Deductions End of Period
- ------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
1997
Deducted in balance sheet from
subscriber receivables:
Allowance for doubtful accounts 292,619 1,535,943 1,341,742 486,820
============ ========== =========== =============
Deducted in balance sheet from leased
license investment:
Amortization of leased license
investment 2,823,658 5,072,990 --- 7,896,648
============ ========== =========== =============
Deducted in balance sheet from other
assets: Amortization of debt
issuance costs 1,068,230 1,205,661 --- 2,273,891
============ ========== =========== =============
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 --- 2,823,658
============ ========== =========== =============
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
============ ========== =========== =============
</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 30, 1998.
WIRELESS ONE, INC.
By: /s/ Henry M. Burkhalter
----------------------------------------
Henry M. Burkhalter
President and Chief Executive Officer
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 30, 1998.
<TABLE>
<CAPTION>
<S> <C>
/S/ HANS J. STERNBERG Chairman of the Board
---------------------------
Hans J. Sternberg
/S/SEAN E. REILLY Vice Chairman
---------------------------
Sean E. Reilly
/S/ HENRY M. BURKHALTER President and Chief Executive Officer
---------------------------
Henry M. Burkhalter
/S/ HENRY G. SCHOPFER, III Executive Vice President, Chief Financial
--------------------------- Officer and Secretary (Principal Financial
Henry G. Schopfer, III Officer)
/S/LAURENCE O. WOOLHISER, JR. Vice President, Controller
---------------------------
Laurence O. Woolhiser, Jr. (Principal Accounting Officer)
/S/ ARNOLD L. CHAVKIN Director
---------------------------
Arnold L. Chavkin
Director
---------------------------
William K. Luby
/S/ CARROLL D. MCHENRY Director
---------------------------
Carroll D. McHenry
/S/DANIEL L. SHIMER Director
---------------------------
Daniel L. Shimer
Director
---------------------------
William J. Van Devender
/S/L. ALLEN WHEELER Director
---------------------------
L. Allen Wheeler
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
EXHIBIT NO. DESCRIPTION Numbered Page
<S> <C> <C>
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)
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)
10.10 DirecTV--Wireless One Cooperative Marketing Agreement between DIRECTV,
Inc. and Wireless One, Inc. dated August1997 *
10.11 Transport Rights Agreement between DIRECTV, Inc. and Wireless One, Inc.
dated August 1997 *
10.12 Subscriber Service Payment Agreement between DIRECTV, Inc. and Wireless
One, Inc. dated August 1997 *
10.13 DSS Receiver Support Agreement between DIRECTV, Inc. and Wireless One,
Inc. dated August 1997 *
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 Finanical Data Schedule
</TABLE>
_______________________________
(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 herein 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.
* Certain information contained in this exhibit has been omitted and
confidentially filed with the Commission.
Exhibit 10.10
[Confidential information has
been designated with the
phrase: Confidential infor-
mation has been omitted and
filed separately with the
Commission.]
DIRECTV--WIRELESS ONE
COOPERATIVE MARKETING AGREEMENT
This Cooperative Marketing Agreement ("Agreement") is
made and entered into as of this ___ day of August, 1997
("Execution Date"), between DIRECTV, Inc., a California
corporation ("DIRECTV"), and Wireless One, Inc., a Mississippi
corporation ("System Operator").
RECITALS
A. DIRECTV operates a direct broadcast satellite ("DBS")
service through which subscribers are able to receive video,
audio, data and other commercial programming distributed by
DIRECTV via a direct broadcast satellite system.
B. System Operator operates a wireless cable service
through which subscribers in single family homes and multiple
dwelling units ("MDUs"s are able to receive video, audio, data
and other commercial programming distributed via terrestrial
microwave and broadcast facilities.
C. DIRECTV and System Operator desire to establish a
business relationship whereby System Operator will (i) establish
and maintain in certain MDU Properties Signal Distribution
Systems, to enable MDU residents to receive DIRECTV Satellite
Television Programming via such systems, and (ii) act as a
commissioned sales representative for DIRECTV to solicit and take
orders for DIRECTV Commissionable Programming Packages from
residents of MDU within the states of Alabama, Arkansas, Florida,
Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South
Carolina, Tennessee and Texas (the "Territory"), and (iii)
DIRECTV will provide certain transport services to enable System
Operator to increase the amount of commercial programming
distributed by System Operator to its subscribers in certain MDU
Properties designated by System Operator, all according to this
Agreement, the Terms and Conditions attached hereto as Exhibit A,
that certain Transport Agreement, dated the Execution Date, by
and between DIRECTV and System Operator (the "Transport
Agreement"), that certain Subscriber Service Payment Agreement,
and that certain DSS Receiver Support Agreement, dated the
Execution Date, by and between DIRECTV and System Operator.
ARTICLE I
DEFINITIONS
1.1 The following capitalized terms shall have the meanings
assigned them. Certain other capitalized terms shall have the
meanings given them elsewhere in this Agreement.
"Commission" shall have the meaning assigned such term in
Section 2.4(a) hereof.
"Commissionable Programming Packages" shall mean the
DIRECTV Programming on Exhibit B hereto, which may be amended
upon the mutual agreement of the parties, for which System
Operator is authorized to solicit orders on behalf of DIRECTV and
is entitled to an Aggregate Commission thereon.
"Components" shall mean such equipment, whether pre-existing
or newly installed within the MDU Property which is used to
create the Signal Distribution System, including, but not limited
to, a satellite receiving dish sold under the tradename "DSSr",
cables, splitters, taps, connectors, filters, amplifiers,
switches, wiring and any other materials or equipment.
"DIRECTV Programming" shall mean those programming services
distributed by DIRECTV, including, but not limited to
Commissionable Programming Packages, which services and the
prices therefor shall be provided to System Operator by DIRECTV,
from time to time.
"DSS Receiver" shall mean the integrated receiver and
decoder unit (IRD) sold under the tradename "DSS" necessary to
receive DIRECTV Programming which is manufactured by a DIRECTV
authorized manufacturer.
"Independent SO Subscriber" shall mean a DIRECTV subscriber
who currently resides in a SO Property whose original DIRECTV
Programming order was submitted directly by the subscriber to
DIRECTV or by an entity other than System Operator.
"Marketing Supplement" shall have the meaning assigned such
term in Section 2.4(a) hereof.
"MDU Property" shall mean a condominium complex, apartment
building (including both rental and cooperative apartments), or
townhouse community, located in the Territory, comprised of
multiple dwelling units, which units in each case are occupied by
single family households and are not generally accessible to the
public or otherwise share a common area to which there is
unrestricted access by two or more persons, and which units may
receive DIRECTV Programming from a common DSS dish and separate
DSS Receivers in each individual dwelling unit.
"Net Receipts" shall mean gross receipts actually received
by DIRECTV from the sale of Commissionable Programming Packages
during the Term, net of any discounts, refunds, fees, credits,
taxes or applicable governmental charges (other than income or
franchise taxes) related to the sale or the order or use of such
DIRECTV Programming.
"NRTC Area" shall mean those areas in which DIRECTV has
granted the National Rural Telecommunications Cooperative
distribution rights and which, as of the Execution Date, are
identified on the map attached hereto on Exhibit C, which may be
amended from time to time by DIRECTV.
"Previous SO Subscriber" shall mean a DIRECTV subscriber who
was previously an SO Subscriber who no longer resides in a SO
Property.
"Right of Entry" shall mean that certain written agreement
between System Operator and the owner or manager of an MDU
Property or, in the case of a cooperative apartment complex, the
homeowners' association, which authorizes System Operator to
install and maintain a Signal Distribution System in such MDU
Property and solicit orders for Commissionable Programming
Packages therein.
"Signal Distribution System" shall mean the integrated
signal delivery system including the DSS dish and DSS Receiver
and any necessary Components by which DIRECTV Programming is
distributed throughout a SO Property, which may also include off-
air, wireless cable and/or cable distribution systems.
"SO Property" shall mean any of the MDU Properties for which
System Operator has obtained and continues to maintain throughout
the term of the Agreement a valid Right of Entry and (i) in which
System Operator has installed a Signal Distribution System, (ii)
the initial orders from residents of such property for DIRECTV
Programming are submitted by the System Operator and transmitted
to DIRECTV by System Operator in accordance with the terms of
this Agreement, (iii) is not located in an NRTC Area, and (iv)
all occupiable units in such property are capable of receiving
DIRECTV Programming within five (5) business days of ordering
such programming.
"SO Subscriber" shall mean a DIRECTV subscriber residing in
a SO Property, who receives one of the DIRECTV Commissionable
Programming Packages, the initial order for which was submitted
by the System Operator and/or DIRECTV, and who was not a DIRECTV
subscriber prior to becoming a SO Subscriber.
"Technical Specifications" shall mean the requirements in
Exhibit D hereto or any other document(s) supplied by DIRECTV to
System Operator during the Term, which reasonably specify the
minimum parameters any and all Signal Distribution Systems must
meet under this Agreement.
"Term" shall have the meaning assigned such term in Section
3.1 hereof.
"USSB Programming" shall mean programming distributed by
United States Satellite Broadcasting Company, Inc. or its
successor via the direct broadcast satellite(s) positioned at a
101 west longitude orbit.
ARTICLE II
GENERAL RIGHTS AND OBLIGATIONS
2.1 Solicitation of DIRECTV Programming Services.
(a) Subject to the Terms and Conditions attached
hereto as Exhibit A, DIRECTV hereby grants to System Operator the
right to (i) market DIRECTV Programming to SO Properties and (ii)
solicit and take orders for DIRECTV Programming from residents of
SO Properties.
(b) Nothing in this Agreement shall prevent DIRECTV
(or those DIRECTV's agents that are not system operators) from
marketing, soliciting and taking orders from residents of MDU
Properties.
(c) System Operator understands that it shall not have
any right, unless specifically provided by DIRECTV under separate
written agreement, to: (i) solicit or take orders for DIRECTV
Programming from any person or entity that is not a resident of
an MDU Property, including, without limitation, commercial
establishments, as such may be defined by DIRECTV in its
reasonable discretion; or (ii) use any person or entity other
than its employees in soliciting or taking orders for DIRECTV
Programming without the prior written consent of DIRECTV, which
shall not be unreasonably withheld
(d) [Confidential information has been omitted and
filed separately with the Commission.]
(e) [Confidential information has been omitted and
filed separately with the Commission.] Notwithstanding the
foregoing, nothing in this Agreement is intended to limit any
agreement between System Operator and any owner of an SO Property
with respect to the installation and maintenance of the Signal
Distribution System.
(f) Only after receiving, approving and accepting
an order from System Operator shall DIRECTV be obligated to
establish a customer account for the subscriber and arrange for
activation of DIRECTV Programming. DIRECTV shall not be
obligated to pay System Operator any Commission or Marketing
Supplements for incomplete order(s), regardless of whether
DIRECTV ultimately provides any DIRECTV Programming to the
customer(s) to which such order(s) pertained and regardless of
whether DIRECTV receives any payments as consideration for such
DIRECTV Programming, unless and until DIRECTV receives the
Subscriber Information and, then, only for periods of time
following such receipt by DIRECTV. DIRECTV shall promptly notify
System Operator of any deficiencies with respect to particular
subscriber information. "Subscriber Information" shall mean that
customer identification, location, and billing information which
DIRECTV requires, as described in the DIRECTV Policy Manual.
(g) [Confidential information has been omitted and
filed separately with the Commission.]
2.2 SO Properties; Right of Entry. Prior to any
solicitation of orders for DIRECTV Programming by System
Operator, System Operator shall submit to DIRECTV the complete
address (including county and zip code) of any MDU Property for
which System Operator has or is seeking a Right of Entry, in
order to confirm that (i) such MDU Property is not already being
serviced by another system operator authorized by DIRECTV and
(ii) such MDU Property is not located in an NRTC Area. In the
event an MDU Property is being serviced by another system
operator, DIRECTV will provide System Operator with the name and,
to the extent not prohibited by a confidentiality agreement,
telephone number of the system operator. System Operator shall
use commercially reasonable efforts to maintain a valid Right of
Entry for SO Properties for the entire Term of the Agreement.
Such Right of Entry will grant System Operator access to the MDU,
authorizing System Operator to install and maintain the Signal
Distribution System and Components, and granting System Operator
permission to solicit orders for DIRECTV Programming from MDU
residents. System Operator shall promptly forward to DIRECTV a
fully executed Right of Entry for all SO Properties in the
Territory. In no event shall System Operator install a Signal
Distribution System in any MDU for which System Operator does not
have a valid Right of Entry and no compensation shall be paid or
reimbursed by DIRECTV to System Operator for any DIRECTV
Programming sold to subscribers in a MDU property unless and
until DIRECTV has received a copy of the applicable Right of
Entry for such property. In no event shall System Operator
continue to service an MDU Property without a valid Right of
Entry and, in the event System Operator no longer has a valid
Right of Entry with respect to a particular SO Property, this
Agreement shall terminate with respect to such property. System
Operator shall provide written notice to DIRECTV within ten (10)
days of any loss, suspension, or expiration of a Right of Entry.
2.3. Implementation of Signal Distribution System.
(a) Installation of Signal Distribution System and
Components.
(i) System Operator shall design, develop,
install, and maintain a Signal Distribution System for each SO
Property which must materially comply with the DIRECTV Technical
Specifications as provided by DIRECTV to System Operator, the
current version of which is set forth in Exhibit D hereto.
DIRECTV reserves the right, in its sole discretion, to amend or
revise and reissue the Technical Specifications, which
amendments or revisions shall be promptly communicated by
DIRECTV to System Operator. Upon any such amendment or revision
by DIRECTV to the Technical Specifications, DIRECTV and System
Operator shall discuss in good faith the extent to which existing
Signal Distribution Systems in SO Properties shall comply with
such amended or revised Technical Specifications, it being
understood and agreed by the parties that (i) System Operator
shall be under no obligation to modify the Design (as defined
below) of any Signal Distribution System in an SO Property that
has been submitted to DIRECTV pursuant to Section 2.3(a)(ii); and
(ii) the Design for any Signal Distribution Systems submitted to
DIRECTV pursuant to Section 2.3(a)(ii) after receipt of the
revised or amended Technical Specifications shall comply with
such revised or amended Technical Specifications.
(ii) System Operator shall provide to DIRECTV a
design for the installation and integration of each Signal
Distribution System ("Design") for each SO Property subject to
this Agreement, together with a time schedule for installation.
In creating, installing and maintaining any Signal Distribution
System, System Operator shall materially comply with all DSS
equipment manufacturers' or Component manufacturers' policies
as may be in effect from time to time. DIRECTV shall provide to
System Operator written notice as soon as commercially
practicable, but in any event prior to the construction start
date (as long as System Operator has provided DIRECTV such
Designs at least five business days prior to such construction
start date), after receipt and review of Design(s) if DIRECTV
reasonably believes that any Design will not produce a Signal
Distribution System meeting the Technical Specifications. System
Operator shall provide installation progress reports to DIRECTV
periodically or as DIRECTV may reasonably request, and shall
promptly notify DIRECTV of any material changes to the
installation schedule or Design.
(iii) Upon completion of installation, System
Operator shall promptly forward to DIRECTV an updated copy of the
Design and completed Technical Registration Form, included in the
Technical Specifications attached hereto as Exhibit D, which
shall include, among other things, various measurements of the
signal from the Signal Distribution System. DIRECTV shall
provide to System Operator written notice as soon as commercially
practicable after receipt and review of the Technical
Registration Form if DIRECTV reasonably believes that such
Technical Registration Form indicates that the Signal
Distribution System does not meet the Technical Specifications,
and where possible, DIRECTV shall recommend corrective actions.
Unless and until the Signal Distribution System materially
complies with the Technical Specifications, such MDU Property
shall not be considered a SO Property.
(b) Technical Compliance. [Confidential information
has been omitted and filed separately with the Commission.]
(c) Provision of Signal Distribution System and IRDs.
Except as otherwise provided in the Receiver Support Agreement,
System Operator shall, at its sole cost: (i) acquire and supply
Signal Distribution Systems and individual IRDs (if applicable)
to SO Properties at commercially reasonable prices (unless
otherwise agreed to between System Operator and DIRECTV); (ii)
install at a commercially reasonable price and in a timely manner
the Signal Distribution System and any necessary Components which
System Operator supplies to any SO Property; (iii) maintain at
commercially reasonable prices the Signal Distribution System for
any SO Properties; and (iv) provide, at a commercially reasonable
price and in a manner satisfactory to DIRECTV, customer service
to all SO Properties, subscribers and potential subscribers
related to the supply, installation and maintenance of the Signal
Distribution System. System Operator agrees to allow all
authorized DSS equipment to be used by the SO Subscribers and the
Independent SO Subscribers and agrees to provide the same level
of Signal Distribution System installation and maintenance, and
customer service support, for the Independent SO Subscribers as
System Operator does for the SO Subscribers.
(d) Disclaimer of Warranties. SYSTEM OPERATOR
UNDERSTANDS AND AGREES THAT DIRECTV SHALL HAVE NO RESPONSIBILITY
WHATSOEVER FOR ANY SIGNAL DISTRIBUTION SYSTEM, INCLUDING THE DSS
RECEIVER AND COMPONENTS CONTAINED THEREIN. DIRECTV HEREBY
DISCLAIMS ALL WARRANTIES, EXPRESS AND IMPLIED, IN CONNECTION WITH
ANY SIGNAL DISTRIBUTION SYSTEM, INCLUDING THE DSS RECEIVER AND
COMPONENTS CONTAINED THEREIN, THE INSTALLATION AND FUNCTIONING OF
SUCH SYSTEM IN ANY MDU PROPERTY, INCLUDING, WITHOUT LIMITATION,
ANY WARRANTIES UNDER THE UNIFORM COMMERCIAL CODE OR OTHERWISE
IMPLIED IN LAW.
(e) New Technology; End-Use Testing. System Operator
understands and acknowledges that the technology (including some
or all of the Components) for providing DIRECTV Programming to
multiple-dwelling units is currently being developed and has
not been tested in the MDU environment by DIRECTV. DIRECTV makes
no representation or warranty as to how any commercially
available Components will perform with the DSS system in any
particular MDU Property or how the DSS system itself will perform
in certain MDU environments. System Operator shall be solely
responsible for procuring and testing any and all Components in
the end-use environment prior to the design, development and
installation of the Signal Distribution System and for
maintenance of any such Components that fail to perform
adequately in the end-use environment in order that the Signal
Distribution System will, at all times during the Term of this
Agreement, materially meet or exceed the Technical
Specifications. Any material failure of the Signal Distribution
System to meet the Technical Specifications shall be the sole
responsibility of System Operator and System Operator agrees to
indemnify and hold DIRECTV harmless from any and all Claims (as
such term is defined in the Indemnification section of the Terms
and Conditions attached hereto as Exhibit A) from SO Subscribers
arising from the failure of the Signal Distribution System to
deliver the necessary signal to such subscribers and from failure
of the Signal Distribution System to meet the Technical
Specifications. In the event of signal failure due to DIRECTV's
error or negligence, DIRECTV agrees to use its best efforts to
treat the SO Subscribers equally with other DIRECTV residential
subscribers with respect to restoring service.
2.4 Commission and Payment Structure. The Subscriber
Service Payment Agreement, the DSS Receiver Support Agreement and
the following set forth all payments and commissions to be made
by DIRECTV to System Operator as full consideration for its
fulfilling its obligations hereunder.
(a) Payment of Commissions and Marketing Supplements.
DIRECTV will pay System Operator a commission ("Commission")
equal to [confidential information has been omitted and filed
separately with the Commission] of all Net Receipts received by
DIRECTV from each active SO Subscriber per month for
Commissionable Programming Packages, solely with respect to those
Net Receipts received by DIRECTV while this Agreement is in
effect. DIRECTV will further pay System Operator a marketing
supplement (the "Marketing Supplement") equal to [confidential
information has been omitted and filed separately with the
Commission] of all Net Receipts received by DIRECTV from each
active SO Subscriber per month for Commissionable Programming
Packages, solely with respect to those Net Receipts received by
DIRECTV while this Agreement is in effect. The Commissions and
Marketing Supplements shall collectively be referred to herein as
"Aggregate Commissions." System Operator agrees that the
Marketing Supplement will be applied by System Operator
throughout the Term of the Agreement toward the marketing of the
Commissionable Programming Packages to MDU Properties. In
addition, DIRECTV will pay System Operator a commission equal to
[confidential information has been omitted and filed separately
with the Commission] of all Net Receipts received by DIRECTV from
each active Previous SO Subscriber per month for Commissionable
Programming Packages, solely with respect to those Net Receipts
received by DIRECTV while this Agreement is in effect.
Commissions and Marketing Supplements will be paid within
[confidential information has been omitted and filed separately
with the Commission] days after the accounting month in which
DIRECTV receives the Net Receipts.
(b) Commission Exclusion. [Confidential information
has been omitted and filed separately with the Commission.]
2.5 DIRECTV Programming.
(a) [Confidential information has been omitted and
filed separately with the Commission.] System Operator agrees
that all DIRECTV Programming (including any commercial insertion)
shall be exhibited in its entirety, in original form, as
provided by DIRECTV, without any modifications, additions or
deletions except that System Operator may package the programming
secured under the Transport Agreement with the other programming
available to the wireless cable subscribers.. In no event shall
System Operator repackage any other programming or services with
DIRECTV Programming. In addition to the DIRECTV Programming
packages DIRECTV currently offers, DIRECTV may create packages of
programming specially targeted for MDU subscribers.
[Confidential information has been omitted and filed separately
with the Commission.]
(b) System Operator shall not, and shall ensure that
each SO Subscriber or resident or agent of an SO Property does
not, (i) resell, retransmit or rebroadcast or otherwise
redistribute in any manner or form whatsoever any DIRECTV
Programming, or (ii) make any modification, addition, or deletion
to any of the DIRECTV Programming (including any commercial
insertions).
2.6 Exclusivity. [Confidential information has been
omitted and filed separately with the Commission.]
2.7 Customer Service. System Operator shall undertake
certain customer service functions as described herein and in the
DIRECTV Policy Manual to all SO Subscribers and Independent SO
Subscribers with respect to the installation and maintenance of
the Signal Distribution System and acceptance and transmission of
orders for DIRECTV Programming. System Operator agrees to
provide the same level of installation and maintenance support
for the Independent SO Subscribers.
2.8 Policies and Procedures. Attached hereto in Exhibit F
is a copy of DIRECTV's System Operator Policies and Procedures
Manual, which may be amended, from time to time upon 30 days
prior written notice from DIRECTV (such Manual, as amended from
time to time, the "DIRECTV Policy Manual"). As DIRECTV's
commissioned sales representative, System Operator hereby agrees
that it will materially follow and abide by the policies and
procedures related to soliciting and transmitting subscription
orders for and the promotion of DIRECTV Programming as specified
in the DIRECTV Policy Manual. The DIRECTV Policy Manual includes,
among other things, customer authorization procedures, DIRECTV
receivables payment, and various requirements related to taking
subscription orders.
ARTICLE III
TERM AND TERMINATION
3.1 Term and Termination. The term of this Agreement
("Term") shall commence on the Execution Date and continue until
the earlier to occur of (i) the seventh anniversary of the
Execution Date, and (ii) termination by either party pursuant to
the terms of this Agreement. Either party may terminate this
Agreement, effective immediately (i) upon [confidential
information has been omitted and filed separately with the
Commission] days written notice to the other party following a
material breach of this Agreement by the other party, unless such
material breach is cured within such period; provided, however,
DIRECTV shall not cease providing programming or customer service
to SO Subscribers; (ii) upon the filing of a petition in
bankruptcy or for reorganization by or against the other party
for the benefit of its creditors, or the appointment of a
receiver, trustee, liquidator or custodian for all or a
substantial part of the other party's property, if such order of
appointment is not vacated within [confidential information has
been omitted and filed separately with the Commission] days; and
(iii) upon the assignment by the other party of this Agreement
contrary to the terms hereof.
3.2 Obligations of the Parties Upon Termination or
Expiration.
(a) System Operator's Obligations with Respect to
Installations and Activations. System Operator shall cooperate
with DIRECTV to enable DIRECTV or a substitute system operator to
promptly perform and complete all DSS Receiver installations and
activations ordered by SO Subscribers and Independent SO
Subscribers prior to the termination of this Agreement according
to the regular installation and activation schedule System
Operator used during the Term of this Agreement; provided,
however, and only to the extent that DIRECTV or such substitute
system operator has obtained or been assigned the Right of Entry
for an SO Property. System Operator shall direct all customer
inquiries it receives after the termination of this Agreement to
DIRECTV (or such other party as specified by DIRECTV).
(b) DIRECTV's and System Operator's Obligations with
Respect to SO Properties. [Confidential information has been
omitted and filed separately with the Commission.]
ARTICLE IV
MISCELLANEOUS
4.1 Applicable Law; Entire Agreement; Modification. This
Agreement shall be construed in accordance with and be governed
by the laws of the State of California, applicable to contracts
made and to be performed entirely therein, by residents of the
State of California. This Agreement, together with all Exhibits
hereto, the Terms and Conditions, the Transport Agreement, the
Subscriber Service Payment Agreement and the DSS Receiver Support
Agreement, constitute the entire agreement between the parties,
and supersedes all previous understandings, commitments or
representations concerning the subject matter. Each party
acknowledges that the other party has not made any
representations other than those that are contained herein.
This Agreement may not be amended or modified, and none of its
provisions may be waived, except by a writing signed by an
authorized officer of the party against whom the amendment,
modification or waiver is sought to be enforced.
4.2 Review Of Agreement By Counsel; Interpretation. By
executing this Agreement, each of the parties hereto is
warranting and representing to the other that he/she/it has had
the opportunity to review this Agreement with independent legal,
financial, and tax counsel with respect to the effect of each of
the terms and conditions contained herein and has either reviewed
this Agreement with such counsel or has independently elected not
to proceed with such a review. Each of the parties further
warrants and covenants that he/she/it is satisfied with the
results of such consultation or opportunity to review and is
signing this Agreement as his/her/its free act and deed and not
under any force or coercion. EACH PARTY ACKNOWLEDGES AND AGREES
THAT ANY RULE OF LAW, INCLUDING BUT NOT LIMITED TO SECTION 1654
OF THE CALIFORNIA CIVIL CODE, OR ANY LEGAL DECISION THAT WOULD
REQUIRE INTERPRETATION OF ANY CLAIMED AMBIGUITIES IN THIS
AGREEMENT AGAINST THE PARTY THAT DRAFTED IT, HAS NO APPLICATION
AND ANY SUCH RIGHT IS EXPRESSLY WAIVED. The provisions of this
Agreement shall be interpreted in a reasonable manner to effect
the intent of the parties.
4.3 Counterparts. This Agreement may be executed by the
parties in counterparts, each of which shall be deemed an
original and all such counterparts together shall constitute but
one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed by their duly authorized representatives as of the
date first written above.
DIRECTV, INC. WIRELESS ONE, INC.
By: /s/ Gene Gonzalez By: /s/ Henry Burkhalter, Sr.
------------------------- ---------------------------
Name: Gene Gonzalez Name:
Title: Director Title:
Federal Tax ID Number: [Confidential
information has been omitted and filed
separately with the Commission.]
System Operator Address:
If By Mail:
[Confidential information has been omitted
and filed separately with the Commission.]
If By Personal Delivery:
[Confidential information has been omitted
and filed separately with the Commission.]
If by FAX:
[Confidential information has been omitted
and filed separately with the Commission.]
EXHIBIT A
DIRECTV MDU SYSTEM OPERATOR AGREEMENT TERMS AND CONDITIONS
[Attached hereto]
EXHIBIT B
COMMISSIONABLE PROGRAMMING PACKAGES
[Confidential information has been omitted and filed separately
with the Commission.]
EXHIBIT C
NRTC MAP
[Confidential information has been omitted and filed separately
with the Commission.]
EXHIBIT D
TECHNICAL SPECIFICATIONS
[Confidential information has been omitted and filed separately
with the Commission.]
EXHIBIT E
ADVERTISING GUIDELINES
[Confidential information has been omitted and filed separately
with the Commission.]
EXHIBIT F
DIRECTV SYSTEM OPERATOR POLICIES & PROCEDURES
[Confidential information has been omitted and filed separately
with the Commission.]
EXHIBIT A
DIRECTV MDU SYSTEM OPERATOR AGREEMENT
TERMS AND CONDITIONS
These Terms and Conditions refer to, and form additional terms of, the DIRECTV
MDU System Operator Agreement. The Agreement, all exhibits thereto, including
these Terms and Conditions, are hereinafter referred to as (the "Agreement").
All capitalized terms used herein and not defined herein shall have the
meanings described such terms in the Agreement.
1. DIRECTV Logo and Trademark Usage. System Operator shall not use any
DIRECTV trademark, service name or logo, including, without limitation,
"DIRECTV{<reg-trade-mark>}", "DSS{<reg-trade-mark>}",
and "Total Choice{<reg-trade-mark>}", as well as
those marks and tradenames in the Advertising Guidelines provided by
DIRECTV to System Operator (collectively, the "DIRECTV Trademarks")
without receiving DIRECTV's prior written consent, which may be granted
or withheld or withdrawn in DIRECTV's sole discretion. The Advertising
Guidelines include a trademark and logo usage guidelines manual (which
manual may be amended by DIRECTV from time to time) that specifies the
proper use and placement of the DIRECTV Trademarks (the "Logo
Guidelines"). If System Operator receives DIRECTV's consent to use the
DIRECTV Trademarks, System Operator shall use DIRECTV Trademarks only in
accordance with the provisions of the DIRECTV Advertising Guidelines,
including the Logo Guidelines. System Operator shall not use any logo,
trademark, service mark or name of any supplier of DIRECTV (including,
without limitation, entities providing programming to DIRECTV or
manufacturers of DSS equipment or Components) for any purpose without
the prior written approval of DIRECTV or such other entities.
2. System Operator Representations and Warranties. System Operator hereby
represents, warrants and covenants that it:
(a) Shall, throughout the Term, comply with and abide by (i) any and
all applicable federal, state and local laws, rules, regulations and
ordinances, including, without limitation, those set forth in Section
6 hereof; and (ii) upon notice thereof, any and all agreements and/or
requirements as may be requested by providers of programming services
to DIRECTV, each as applicable to System Operator and its employees
and agents in connection with the performance of its obligations
pursuant to the Agreement;
(b) Shall, at its sole expense, provide and maintain all facilities,
vehicles, tools and equipment ("System Operator Equipment") as may be
necessary and proper for performing its obligations pursuant to the
Agreement, and keep all System Operator Equipment in good working
order and repair at all times;
(c) Shall, at its sole expense, obtain all permits and licenses which
may be required under any applicable federal, state or local law,
rule, regulation or ordinance to perform its obligations pursuant to
the Agreement, including, without limitation, installing and
maintaining the Signal Distribution System in any SO Property;
(d) Shall pay and discharge all license fees and business, use,
sales, gross receipts, income, property or other taxes or which may
be charged or levied upon System Operator by reason of the
performance of its obligations pursuant to the Agreement;
(e) Shall, at all times throughout the Term, present a professional
business appearance and attitude;
(f) Shall not engage in any financial transactions with subscribers
residing in SO Properties which elicit or seek to elicit from
subscribers a fee, license, or other payment incident to receipt of
DIRECTV Programming by such subscriber, other than the fees charged
by DIRECTV, fees assessed any such subscriber by the SO Property's
owner, manager, or homeowners' association, or commercially
reasonable fees assessed any such subscriber by System Operator for
installation, maintenance, upgrade, or other such services as
outlined in DIRECTV Policy Manual;
(g) Shall not engage in any activity or business transaction which
could be considered unethical, as determined by DIRECTV its sole
discretion, or damaging to the image, goodwill or business of
DIRECTV;
(h) Shall maintain throughout the Term, at System Operator's sole
expense, any and all insurance and/or bonds that may be required
under the laws, ordinances and regulations of any governmental
authority with respect to System. Operator's performance of its
obligations hereunder, including installation of the Signal
Distribution System and Components in MDU Properties and sale or
solicitation of orders for DIRECTV Programming. Such insurance
coverage shall include, but not be limited to, (i) workers
compensation insurance as required by applicable laws; (ii)
employer's liability insurance with limits of not less than
$1,000,000 per occurrence; (iii) commercial general liability
insurance, including contractual liability and personal injury
liability with limits of not less than $2,000,000 combined single
limit per occurrence, to provide protection against claims and/or
liabilities including, but not limited to, claims for bodily injury
or property damage, which may arise or result from performance of
System Operator's obligations under the Agreement, whether the
services are performed by System Operator or System Operator's
subcontractors or by an agent and/or by anyone directly or indirectly
employed by System Operator or System Operator's subcontractors or
agents. Simultaneous with the execution of the Agreement, System
Operator shall deposit with DIRECTV evidence of the required
insurance protection in the form of certificates of insurance for the
insurance coverage described above. The amounts shall not be less
than the amounts specified above, or such other amounts as specified
in advance in writing by DIRECTV's Insurance Office. These
certificates must include DIRECTV as an additional insured. All
certificates shall provide that the insurer give thirty (30) days
written notice to DIRECTV prior to the effective date of expiration,
any material change or cancellation; and
(i) shall, throughout the Term, maintain a valid Right of Entry for
each SO Property.
3. DIRECTV Representations and Warranties. DIRECTV hereby represents,
warrants and covenants that it shall:
(a) Comply with any and all applicable federal, state and local laws,
rules, regulations and ordinances applicable to DIRECTV, its
employees and agents relating to DIRECTV's obligations pursuant to
the Agreement; and
(b) At its sole expense, obtain all permits and licenses which may be
required under any applicable federal, state or local law, rule,
regulation or ordinance to perform its obligations pursuant to the
Agreement.
4. Proprietary Information; Confidentiality.
(a) Except as otherwise provided for in the Agreement, without the
express written consent of a party (the "Providing Party"), which may
be granted or withheld in the Providing Party's sole discretion, the
other party (the "Receiving Party") shall not use, other than as
necessary to comply with the terms of the Agreement, and shall not
provide or sell to any third party, any Confidential Information,
other than as set forth in Section 4(b) below. "Confidential
Information" shall mean any information, in whatever form (paper,
computer files, oral statements, etc.) of the Providing Party's
intellectual property, customer information, or any other information
obtained by the Receiving Party in connection with the Agreement or
the actions contemplated thereby, whether provided by the Providing
Party, or derived independently or otherwise, including, without
limitation: (i) all customer lists and other information related to
customer's ordering any DIRECTV services; (ii) all market information
and studies and marketing information; (iii) all information
pertaining to purchasers, renters or lessees of Signal Distribution
Systems from System Operator; and (iv) all of the written data,
summaries, reports, other proprietary information, trade secrets and
information of all kinds, acquired, devised or developed in any
manner from the other party's personnel or files or pursuant to the
Agreement. Immediately upon the Providing Party's written request
(which request the Providing Party may make, as a specific or general
request, in its sole discretion at any time up to one year after the
last day of the Term), the Receiving Party shall provide to the
Providing Party (or destroy if the Providing Party so requests) all
requested Confidential Information. Notwithstanding the foregoing,
DIRECTV shall be entitled to use for any purpose and shall not be
required to provide to System Operator, or destroy, any records or
information pertaining to SO Properties, (except Designs), SO
Subscribers or potential SO Subscribers.
(b) In addition, the parties agree that, except as otherwise provided
for in the Agreement, they and their employees have and will maintain
in confidence the terms and provisions of the Agreement, as well as
all of the Confidential Information of the other party and that they
have not and will not reveal the same to any persons not employed by
the other party except: (I) at the written direction of the other
party; (ii) to the extent necessary to comply with the law or the
valid order of a court of competent jurisdiction, in which event the
disclosing party shall so notify the other party as promptly as
practicable (and, if possible, prior to making any disclosure) and
shall seek confidential treatment of such information, or in
connection with any arbitration proceeding; (iii) as part of its
normal reporting or review procedure to its parent company, its
auditors and its attorneys, and such parent company, auditors and
attorneys agree to be bound by the provisions of this Section 4; (iv)
in order to enforce any of its rights pursuant to the Agreement; (v)
to current or potential investors, insurers or financing entities;
provided, however, that such person described above agrees to be
bound by the provisions of this Section 4; (vi) if, prior to the time
of disclosure, the Confidential Information is in the public domain
or is otherwise validly known to the intended recipient; or (vii)
after the Confidential Information becomes part of the public domain
by written publication through no fault of the party revealing such
Confidential Information. The parties agree to maintain as any oral
Confidential Information in accordance with standard industry
practice (subject to the foregoing exceptions for Confidential
Information).
5. Press Release. During the term of the Agreement, neither party shall
issue an independent press release with respect to the Agreement or
the transactions contemplated hereby without the prior written
consent of the other party.
6. Compliance with Law. Each party shall comply with all applicable
governmental statutes, laws, rules, regulations, ordinances, codes,
directives, and orders (whether federal, state, municipal or
otherwise) and is solely responsible for the compliance with all such
laws arising out of or relating to its obligations under the
Agreement, including, without limitation, all federal and state laws
governing direct sales, and any rules and regulations of any
homeowners' associations governing MDU Properties solicited by System
Operator.
7. Power and Authority; No Breach. Each of the parties represents and
warrants that it has full power and authority to enter into the
Agreement and perform its obligations hereunder and that its
execution of the Agreement and performance of its obligations
hereunder does not and will not violate any law or result in a breach
of or default under the terms of any contractor agreement by which
such party is bound.
8. Indemnification. Each party shall indemnify, defend and hold
harmless the other, and their respective employees, officers and
directors from and against any and all any losses, damages, claims,
demands, suits, liabilities and expenses (including reasonable
attorneys' fees and other costs of investigation and defense)
(collectively, "Claims") caused by or arising out of, directly or
indirectly, a breach of the indemnifying party's obligations under
the Agreement or negligence in the performance thereof. In addition,
System Operator shall indemnify DIRECTV, and its employees, officers
and directors from and against any and all Claims arising out of
System Operator's construction, installation and/or maintenance of
the Signal Distribution System or any other equipment utilized in
connection with the provision of DIRECTV services to SO Properties,
including, without limitation, any Claims that arise out of or result
from any infringement, suit, claim or allegation of infringement of
any patent, trademark, copyright, trade secret or other proprietary
interest based on the Signal Distribution System, or any Claims with
respect to the Signal Distribution System or any Component thereof
being defective or not suitable for the purpose intended or used.
Notwithstanding anything to the contrary contained herein, System
Operator expressly waives any right to indemnification from DIRECTV
arising from the content of any programming (including, without
limitation, claims relating to trademark, copyright, music,
performance and other proprietary interests), or (ii) the
construction, use and/or operation of any satellites of DIRECTV or an
affiliated company from which DIRECTV Programming originates.
9. No Unauthorized Warranties or Representations. System Operator shall
not make any warranty or representation inconsistent with or in
addition to any warranty or representation stated in writing by
DIRECTV or a manufacturer of Signal Distribution Systems or
Components. If System Operator makes any such inconsistent or
additional warranty or representation, System Operator shall, at its
own expense, indemnify, defend and hold DIRECTV harmless from any
claim relating thereto.
10. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING TO THE CONTRARY
CONTAINED IN THE AGREEMENT, IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OF THE OTHER PARTY OR ANY
THIRD PARTY, WHETHER FORESEEABLE OR NOT AND REGARDLESS OF THE FORM,
LEGAL THEORY OR BASIS OF RECOVERY OF ANY SUCH CLAIM.
11. Assignment. System Operator shall not transfer any of its rights or
obligations under the Agreement without the prior written consent of
DIRECTV, which consent shall not be unreasonably withheld. DIRECTV
may assign the Agreement to a successor of all or substantially all
of its assets or in connection with a public offering, a merger or
the sale of all or substantially all of its assets, and to any sales
management agent appointed by DIRECTV in its sole discretion and who
is responsible for managing a defined territory of dealers of DIRECTV
Programming, upon written notice to System Operator.
12. Taxes. Any taxes (including, without limitation, any property,
employee, service, franchise, customs, import/export duties, excise
and any other related taxes) asserted against System Operator or
DIRECTV by any local, state, national or international entity as a
result of or arising under the performance of its obligations under
the Agreement shall be the responsibility of the party against which
such taxes are asserted. Each party shall be responsible for any
taxes related to its income hereunder.
13. Arbitration. Any dispute or disagreement arising between DIRECTV and
System Operator shall be resolved according to binding arbitration
conducted in Los Angeles, California in accordance with the Expedited
Procedures of the Commercial Arbitration Rules of the American
Arbitration Association then in effect; provided, however, that the
parties may seek Injunctive relief in any court of competent
jurisdiction and may enforce the provisions of any arbitration award
in any court of competent jurisdiction. Arbitration shall be by a
single arbitrator chosen by the parties, provided that, if the
parties fail to agree and to appoint a single arbitrator within
thirty (30) calendar days from the date a party has made a demand for
arbitration, then the arbitrator shall be chosen in accordance with
the Rules. The decision of the arbitrator shall be final and binding
on the parties and any award of the arbitrator may be entered in any
court of competent jurisdiction. Notwithstanding the foregoing, the
arbitrator shall not be authorized to award punitive damages with
respect to any such controversy, claim or dispute, nor shall any
party seek punitive damages relating to any matter arising out of, or
relating to, the Agreement in any other forum. The cost of any
arbitration hereunder, including the cost of the record or
transcripts thereof, if any, administrative fees, attorneys' fees and
all other fees involved, shall be paid by the party determined by the
arbitrator to not be the prevailing party, or otherwise allocated in
an equitable manner as determined by the arbitrator. All rights and
remedies of either party are cumulative of each other and of every
other right or remedy such party may otherwise have at law or in
equity, and the exercise of one or more rights or remedies shall not
prejudice or impair the concurrent or subsequent exercise of other
rights or remedies.
14. Independent Contractor, No Agents; Relationship; No Third Party
Beneficiaries. The parties agree that System Operator is an
independent contractor in performing the construction and
installation of Signal Distribution Systems, the marketing DIRECTV
Programming and other services described in the Agreement. No party
(nor any of its officers, directors, agents or employees) shall act
or hold itself out as an agent of the other party hereto. The
parties do not intend the Agreement or the relationship hereunder to
constitute a joint venture, partnership or franchise of any type.
The provisions of the Agreement are for the benefit only of the
parties hereto, and no third party may seek to enforce, or benefit
from, these provisions.
15. Audit Rights. DIRECTV and/or its representatives shall have the
right, exercisable no more than once per year (and once following
termination of the Term), at its sole cost and expense (unless a
discrepancy of five percent [5%] or more is revealed, in which case
System Operator shall bear all such costs and expenses), to audit
System Operator's books and other records relating to its obligations
under the Agreement. In addition, DIRECTV shall have reasonable
access to System Operator's personnel, the SO Properties and System
Operator's facilities, but only upon reasonable notice and during
regular business hours at System Operator's place of business and
without unreasonable disruption to System Operator's business.
16. Force Majeure. Notwithstanding any other provision in the Agreement,
neither System Operator nor DIRECTV shall have any liability to the
other or any other person or entity with respect to any failure of
System Operator or DIRECTV to perform its obligations under the terms
of the Agreement if such failure is due to a Force Majeure. "Force
Majeure" shall mean any labor dispute; fire; flood; earthquake; riot;
legal enactment; government regulation; Act of God; any problem
associated with the construction, use and/or operation of DIRECTV's
satellite(s) or related systems; any problem associated with any
scrambling/descrambling equipment or any other equipment owned or
maintained by others; or any cause beyond the reasonable control of
both parties.
17. Notices. All notices and other communications from either party to
the other hereunder shall be in writing and shall be deemed received
upon actual receipt when personally delivered, upon acknowledgment of
receipt if sent by facsimile, or upon the expiration of the third
business day after being deposited in the United States mails,
postage prepaid, certified or registered mail, addressed to the other
party at a location specified in writing by such party. Until notice
in accordance with this Section 17 is given to the contrary, the
addresses, phone numbers and facsimile number for purposes of giving
notice are as follows:
System Operator: Refer to the information set forth on the execution
page of the Agreement.
DIRECTV:
(a) If by mail:
DIRECTV, Inc.
P.O. Box 915
El Segundo, California 90245-0915
Attention: Vice President, MDU Sales
cc: Business Affairs
(b) If by personal delivery:
DIRECTV, Inc.
2230 East Imperial Highway
El Segundo, California 90245
Attention: Vice President, MDU Sales
cc: Business Affairs
(c) If by FAX:
(310) 726-4550
Attention: Vice President, MDU Sales
cc: Business Affairs
18. Severability. Nothing contained in the Agreement shall be construed
to require commission of any act contrary to law and, whenever there
is any conflict between any provision of the Agreement and any law,
such law shall prevail; provided, however, that in such event, the
affected provisions of the Agreement shall be modified to the minimum
extent necessary to permit compliance with such law and all other
provisions shall continue in full force and effect.
/s/ Henry Burkhalter
--------------------------
Henry Burkhalter
Exhibit 10.11
[Confidential information has
been designated with the
phrase: Confidential infor-
mation has been omitted and
filed separately with the
Commission.]
August ___, 1997
Wireless One, Inc.
1080 River Oaks Drive
Suite A150
Jackson, MS 39208
Attn: Henry Burkhalter, President
Re: Transport Rights
Dear Mr. Burkhalter:
Reference is made to that certain DIRECTV MDU System Operator
Agreement ("Agreement'), dated the 25th day of August, 1997, by and between
Wireless One, Inc. ("System Operator") and DIRECTV, Inc. ("DIRECTV").
Capitalized terms not defined herein shall have the meaning ascribed to
them in the Agreement. All terms and conditions set forth in the Agreement
and the exhibits thereto are hereby incorporated by reference and shall
also apply to the transactions contemplated by this letter agreement (this
"Transport Agreement").
In connection with System Operator's program to establish and maintain
Signal Distribution Systems in MDU Properties and to act as DIRECTV's
commissioned sales representative therein, DIRECTV is willing to provide
certain transport rights to System Operator under the terms and conditions
set forth herein. SUCH RIGHTS ARE INTENDED TO ALLOW SYSTEM OPERATOR TO
UTILIZE THE SATELLITE FEED OF PROGRAMMING PROVIDED BY DIRECTV TO DELIVER
DIRECTV PROGRAMMING TO RESIDENTS OF WIRELESS CABLE PROPERTIES ("RESIDENTS")
WHO RECEIVE SYSTEM OPERATOR'S WIRELESS CABLE SERVICE.
ARTICLE I
DEFINITIONS
1.1 DEFINED TERMS. The following capitalized terms shall have the
following definitions. Certain other capitalized terms shall have the
meanings given them elsewhere in this Transport Agreement or in the
Agreement.
"Authorized Service" shall mean each DIRECTV Programming Service (as
defined below) as to which System Operator has executed an agreement with
the provider thereof (an "Affiliation Agreement"), satisfactory to DIRECTV,
stating that (a) System Operator possesses all of the necessary rights
(including music performance rights) to distribute such service as received
from the DBS Distribution System (as defined below) under and pursuant to
such provider's agreement with System Operator regarding distribution of
the programming service, (b) the distribution of such programming service
by System Operator shall not implicate in any way DIRECTV's agreements with
the provider of programming service and (c) in no event shall System
Operator or any party to whom System Operator distributes programming from
the DBS Distribution System pursuant to this Transport Agreement be counted
or considered, as a subscriber or customer of DIRECTV under DIRECTV's
agreements with such programming provider. DIRECTV may revoke the status of
any DIRECTV Programming as an Authorized Service for failure to meet the
definition set forth above, and as directed by the programming provider for
failure to comply with the terms of the Affiliation Agreement.
"DBS Distribution System" shall mean the distribution system for
video, audio, data and other programming services (including without
limitation, cable programming services) whereby the cable programming
satellite signal or feed is received from DIRECTV's transponder source by a
DIRECTV turnaround earth-station facility which compresses and encrypts the
signal or feed and then uplinks it at one of the DIRECTV Frequencies on a
DBS communications satellite located at or about 101( West Longitude
orbital location for transmission to those parties authorized by DIRECTV.
"DIRECTV Frequencies" shall mean the DBS operating frequencies
associated with the 101( West Longitude orbital location for which DIRECTV
Enterprises, Inc. is the Federal Communications Commission-authorized
permitee.
"DIRECTV Programming Services" shall mean the programming services
described on Exhibit A hereto (as amended from time to time by DIRECTV in
its sole discretion).
"Wireless Cable Property" shall mean a condominium complex, apartment
building (including both rental and cooperative apartments), or townhouse
community, located in the Territory, comprised of multiple dwelling units,
which in each case is occupied by a single family household and is not
generally accessible to the public or otherwise shares a common area to
which there is unrestricted access by two or more persons, and which unit
may receive System Operator's wireless cable service.
ARTICLE II
GENERAL RIGHTS AND OBLIGATIONS
2.1 GRANT OF RIGHTS.
(a) DIRECTV hereby grants to System Operator the non-exclusive
right to, and System Operator may, at its own cost, access the Authorized
Services provided via the DBS Distribution System for purposes of
distributing such Authorized Services to Wireless Cable Properties in
compliance with the terms of this Transport Agreement.
2.2 SATELLITE FEED TRANSMISSION. The parties acknowledge and agree
that System Operator shall distribute the satellite feed of Authorized
Services provided by DIRECTV to Residents via System Operator's
Distribution Equipment (as defined herein) pursuant to the terms of System
Operator's agreements with the providers of such Authorized Services. The
parties further agree that each such agreement with the providers of the
Authorized Services is solely between System Operator and the relevant
provider of Authorized Services and that DIRECTV bears no responsibility or
liability whatsoever to any provider of DIRECTV Programming Services or to
any Wireless Cable Property relating to the distribution to Residents.
System Operator shall be responsible for all fees and charges required to
be paid by or on behalf of each Resident in connection with the provision
of the Authorized Services, including, but not limited to, any copyright
royalty fees.
2.3 PERFORMANCE REQUIREMENTS. [Confidential information has been
omitted and filed separately with the Commission.]
2.4 ACTIVATION INFORMATION. System Operator shall forward to DIRECTV
a notice when a Wireless Cable Property is ready for activation, which
notice shall contain such information regarding the Wireless Cable Property
as may be reasonably requested by DIRECTV (the "Activation Request"). Only
after receiving and approving the Activation Request from System Operator
shall DIRECTV be obligated to arrange for the necessary authorization
messages to the Distribution Equipment.
2.5 DIRECTV PROGRAMMING. System Operator shall distribute the
Authorized Services in their entirety, in the original format and as
provided by DIRECTV. System Operator shall not modify, add to, delete or
in any way alter the satellite feed provided by DIRECTV, or insert any
commercial announcement or other materials in such feed.
2.6 PROVISION, INSTALLATION AND MAINTENANCE OF HARDWARE; DISCLAIMER
OF WARRANTY. [Confidential information has been omitted and filed
separately with the Commission.] SYSTEM OPERATOR UNDERSTANDS AND AGREES
THAT DIRECTV HAS NO RESPONSIBILITY WHATSOEVER FOR THE DISTRIBUTION
EQUIPMENT OR FOR THE PROVISION OF THE SERVICES BY SYSTEM OPERATOR TO ITS
RESIDENTS AND THAT DIRECTV HEREBY DISCLAIMS ALL WARRANTIES, EXPRESS AND
IMPLIED, IN CONNECTION WITH THE DISTRIBUTION EQUIPMENT. ALL SUCH
WARRANTIES ARE EXPRESSLY EXCLUDED. DIRECTV IS NOT RESPONSIBLE FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION,
RELATING TO THE DISTRIBUTION EQUIPMENT.
ARTICLE III
TERM AND TERMINATION
3.1 TERM. The term of this Transport Agreement (the "Term")
shall commence on the date first written above and terminate on the earlier
of (i) the termination of the Agreement for any reason, or (ii) any date on
which this Transport Agreement is terminated pursuant to the terms of this
Transport Agreement or at law.
3.2 TERMINATION. Either party may terminate this Transport
Agreement, at any time upon any of the following occurrences: (a) upon the
failure by the other party, its successors or assignees to perform any
material obligation hereunder which is not cured or as to which reasonable
steps to cure have not been commenced (or are not thereafter diligently
pursued) within [confidential information has been omitted and filed
separately with the Commission] days after receipt of written notice
thereof from the affected party; or (b) upon the assignment by the other
party of this Transport Agreement contrary to the terms hereof.
Termination of this Transport Agreement pursuant to this Section 3.2 shall
not relieve either party of any of its liabilities or obligations under
this Transport Agreement which shall have accrued on or prior to the date
of such termination.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 SYSTEM OPERATOR. System Operator hereby represents,
warrants and covenants that:
(a) System Operator shall comply with and abide by any and
all agreements and/or requirements as may be requested by providers of
Authorized Services, each as applicable to System Operator and its
employees and agents in connection with the performance of its obligations
pursuant to this Transport Agreement;
(b) System Operator has in effect as of the date of this
Transport Agreement, and shall maintain in full force and effect throughout
the Term or shall immediately notify DIRECTV if not in full force and
effect, (i) agreements with the providers of Authorized Services granting
to System Operator those rights necessary to permit System Operator to
distribute the Authorized Services to SO Properties and (ii) agreements
with such providers containing provisions necessary to qualify such
programming provided as Authorized Services (true and complete copies of
such agreements qualifying such programming are attached hereto as Exhibit
B). System Operator shall, from time to time as agreements are signed with
additional program providers, provide to DIRECTV, for its approval in
granting additional Authorized Services, true and complete copies of those
agreements containing provisions necessary to qualify such programming as
Authorized Services; and
(c) System Operator shall, at its sole expense, obtain all
permits and licenses which may be required under any applicable federal,
state or local law, rule, regulation or ordinance to perform its
obligations pursuant to this Transport Agreement.
4.2 DIRECTV. DIRECTV hereby represents, warrants and covenants
that DIRECTV shall, at its sole expense, obtain all permits and licenses
which may be required under any applicable federal, state or local law,
rule, regulation or ordinance to perform its obligations pursuant to this
Transport Agreement.
4.3 NO WARRANTY. System Operator understands and agrees that DIRECTV
makes no warranty whatsoever concerning the rights of any provider of
programming, or any other person or entity, to offer, provide or utilize
the DBS Distribution System, including without limitation, the Authorized
Services, or any programming contained therein.
ARTICLE V
ADDITIONAL RIGHTS AND OBLIGATIONS
5.1 INDEMNIFICATION.
(a) In addition to those indemnification obligations contained
in the Agreement, System Operator shall indemnify and hold harmless each of
DIRECTV, its Affiliated Companies (as defined below), and their respective
employees, officers, directors, contractors, subcontractors and authorized
distributors (the "DIRECTV Indemnitees") from and against any and all
claims, damages, costs, expenses and other liabilities (including
attorneys' fees and other costs of investigation and defense)
(collectively, "Claims") arising out of, directly or indirectly, (i) any
breach or alleged breach of System Operator's obligations under this
Transport Agreement, (ii) any negligence in the performance of System
Operator's obligations under this Transport Agreement, (iii) any failure or
alleged failure by System Operator to obtain any necessary trademarks,
copyrights, licenses and any other intellectual property or use rights
required in connection with System Operator or the Residents' use of, or
for DIRECTV's distribution to System Operator of, the Authorized Services
(including without limitation, the right to use any of its programs, or the
names, voices, photographs, music, likenesses or biographies of any
individual participant or performer in, or contributor to, any program or
any variations thereof), (iv) System Operator's installation and/or
maintenance of the Distribution Equipment or any other equipment utilized
in connection with the provision of services to Residents, or (v) DIRECTV's
feed transmission via the DBS Distribution System, System Operator's
distribution, or the cessation of either such feed transmission or
distribution of Authorized Services, to Residents (including, without
limitation, Claims for license fees by any person or entity and all Claims
by any programmer or any rights holder). As used in this Transport
Agreement, "Affiliated Companies" shall mean, with respect to any person or
entity, any other person or entity directly or indirectly controlling,
controlled by or under common control (i.e., the power to direct affairs by
reason of ownership of voting stock, by contract or otherwise) with such
person or entity and any member, director, officer or employee of such
person or entity.
(b) DIRECTV shall indemnify and hold harmless each of System
Operator, its Affiliated Companies, and their respective employees,
officers, directors, contractors, subcontractors and authorized
distributors (the "System Operator Indemnitees") from and against any and
all Claims arising out of, directly or indirectly, any breach or alleged
breach of DIRECTV's obligations under this Transport Agreement.
(c) Notwithstanding anything to the contrary contained herein,
System Operator expressly waives any right to indemnification arising
primarily out of (i) the content of any programming (including without
limitation claims relating to trademark, copyright, music, performance and
other proprietary interests), or (ii) the construction, use and/or
operation of DIRECTV's satellite(s) and related systems.
(d) Termination of this Transport Agreement shall not affect the
continuing obligations of the parties hereto as indemnitors hereunder.
5.2 NO UNAUTHORIZED WARRANTIES OR REPRESENTATIONS.. System Operator
shall not make any warranty or representation inconsistent with or in
addition to any warranty or representation stated in writing by DIRECTV.
If System Operator makes any such inconsistent or additional warranty or
representation, System Operator shall, at its own expense, indemnify,
defend and hold DIRECTV harmless from any claim relating thereto.
5.3 CESSATION OF DISTRIBUTION/TERMINATION OF TRANSPORT AGREEMENT.
[Confidential information has been omitted and filed separately with the
Commission.]
5.4 FORCE MAJEURE. Notwithstanding any other provision in this
Transport Agreement, neither System Operator nor DIRECTV shall have any
liability to the other or any other person or entity with respect to any
failure of System Operator or DIRECTV to perform its obligations under the
terms of this Transport Agreement if such failure is due to a Force
Majeure. "Force Majeure" shall mean any labor dispute; fire; flood;
earthquake; riot; legal enactment; government regulation; Act of God; any
problem associated with the construction, use and/or operation of DIRECTV's
satellite(s) or related systems; any problem associated with any
scrambling/descrambling equipment or any other equipment owned or
maintained by others; or any cause beyond the reasonable control of both
parties.
IN WITNESS WHEREOF, the parties have caused this Transport
Agreement to be executed as of the date first above written.
DIRECTV, INC. WIRELESS ONE, INC.
BY: /s/ Gene Gonzalez BY: /s/ Henry Burkhalter
--------------------------- --------------------------
Name: Gene Gonzalez Name:
Title: Director Title:
Exhibit 10.12
[Confidential information has
been designated with the
phrase: Confidential infor-
mation has been omitted and
filed separately with the
Commission.]
August __ , 1997
Wireless One, Inc.
1080 River Oaks Drive
Suite A150
Jackson, MS 39208
Attn: Henry Burkhalter, President
RE: Subscriber Service Payment
Dear Mr. Burkhalter:
Reference is made to that certain DIRECTV MDU System Operator
Agreement ("Agreement") dated the 25th day of August, 1997 between Wireless
One, Inc. ("System Operator") and DIRECTV, Inc. ("DIRECTV"). Capitalized
terms not defined herein shall have the meaning ascribed to them in the
Agreement. All terms and conditions set forth in the Agreement (including
the exhibits thereto) are hereby incorporated by reference and shall also
apply to the transactions contemplated by this letter agreement (the
"Subscriber Service Payment Agreement").
In support of DIRECTV's program to introduce DIRECTV programming
services to residents of MDU Properties, DIRECTV agrees to help offset
System Operator's future expenses associated with the maintenance and
servicing of SO Subscribers.
DIRECTV will pay, on a one-time basis, [confidential information has
been omitted and filed separately with the Commission] to System Operator
for each activation of Commissionable Programming Packages for SO
Subscribers ("Subscriber Service Payment") provided the following
conditions and requirements are met:
1. System Operator shall have submitted all required Subscriber
Information for each SO Subscriber in accordance with the Agreement.
2. System Operator must install and activate the SO Subscriber prior to
the third anniversary of the execution of this Subscriber Service
Payment Agreement.
3. The SO Subscriber must subscribe to and pay for a Commissionable
Programming Package for a minimum of [confidential information has
been omitted and filed separately with the Commission] months for
System Operator to be eligible to receive the entire Subscriber
Service Payment; if an SO Subscriber cancels, is disconnected or
downgrades to a DIRECTV programming package which is not a
Commissionable Programming Package prior to such time, System Operator
shall be entitled to receive only a prorated portion of the Subscriber
Service Payment based on the number of months the SO Subscriber
subscribed to and paid for a Commissionable Programming Package (the
"Prorated Subscription Period").
4. System Operator must be in compliance with all material terms and
conditions of the Agreement.
DIRECTV shall pay to System Operator the Subscriber Service Payment
within [confidential information has been omitted and filed separately
with the Commission] days after the accounting month, as such
accounting month is determined by DIRECTV, of such SO Subscriber
activation.
[Confidential information has been omitted and filed separately with
the Commission.]
Kindly acknowledge your agreement to the foregoing terms by signing in
the space provided below.
Good selling.
DIRECTV, INC.
By: /s/ Gene Gonzalez
---------------------------------
Gene Gonzalez
Director
Special Markets & Distribution
Agreed and Accepted:
By: /s/ Wireless One, Inc.
------------------------------
System Operator Name
/s/ Henry Burkhalter, Sr.
---------------------------
Signature
Henry Burkhalter, Sr.
---------------------------
Print Name
President & CEO
---------------------------
Title
8-25-97
---------------------------
Date
Exhibit 10.13
[Confidential information has
been designated with the
phrase: Confidential infor-
mation has been omitted and
filed separately with the
Commission.]
Re: DSS Receiver Support
Dear :
Reference is made to that certain DIRECTV MDU System Operator Agreement
("Agreement'), dated the 25th day of August, 1997, by and between Wireless One,
Inc. ("System Operator") and DIRECTV, Inc. ("DIRECTV"). Capitalized terms not
defined herein shall have the meaning ascribed to them in the Agreement. All
terms and conditions set forth in the Agreement and the exhibits thereto are
hereby incorporated by reference and shall also apply to the transactions
contemplated by this letter agreement.
[Confidential information has been omitted and filed separately with the
Commission.]
The provision of DSS Receivers hereunder is subject to the following
conditions:
1. System Operator must be in compliance with all material terms and
conditions of the Agreement.
2. System Operator must submit all required Subscriber Information for
each SO Subscriber in accordance with the Agreement. System Operator must
further maintain, and submit upon the request of DIRECTV, inventory records
reflecting the receipt of DSS Receivers from DIRECTV as well as the placement
of such DSS Receivers in Units.
3. [Confidential information has been omitted and filed separately with
the Commission.]
4. System Operator shall be responsible for all taxes and shipping
charges in connection with the DSS Receivers.
5. [Confidential information has been omitted and filed separately with
the Commission.]
6. [Confidential information has been omitted and filed separately with
the Commission.]
7. [Confidential information has been omitted and filed separately with
the Commission.]
8. EXCEPT AS EXPRESSLY PROVIDED HEREIN, DIRECTV MAKES NO WARRANTY,
EITHER EXPRESS OR IMPLIED (INCLUDING, WITHOUT LIMITATION, THE IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), REGARDING
THE DSS RECEIVERS. ALL SUCH WARRANTIES ARE EXPRESSLY EXCLUDED. DIRECTV IS NOT
RESPONSIBLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT
LIMITATION, LOST PROFITS, RELATING TO THE DSS RECEIVERS, WHETHER BASED IN
NEGLIGENCE OR OTHERWISE.
9. System operator agrees to indemnify, defend and hold DIRECTV, its
officers, employees, agents and representatives harmless from and against any
and all claims, damages, liabilities, expenses (including reasonable attorneys'
fees and costs of litigation), losses, judgments and assessments of any kind
whatsoever directly or indirectly resulting from or in connection with system
operator's use of the dss receivers. SYSTEM OPERATOR ACKNOWLEDGES AND AGREES
THAT, EXCEPT FOR THE LIMITED REMEDY PROVIDED IN THE PRECEDING PARAGRAPH, ANY
RIGHTS AND REMEDIES WITH RESPECT TO THE DSS RECEIVERS MUST BE HANDLED DIRECTLY
WITH THE MANUFACTURER OF SUCH SYSTEMS, NOT WITH DIRECTV.
10. [Confidential information has been omitted and filed separately with
the Commission.]
11. [Confidential information has been omitted and filed separately with
the Commission.]
12. [Confidential information has been omitted and filed separately with
the Commission.]
* * * *
[Confidential information has been omitted and filed separately with the
Commission.]
Except as supplemented and modified hereby, the terms of the Agreement
continue unmodified and in full force and effect.
Please sign in the space provided below to indicate your agreement to the
foregoing terms and conditions.
Good selling.
DIRECTV, INC.
By: /s/ Gene Gonzalez
-------------------------------
Gene Gonzalez
Director
Special Markets & Distribution
Agreed and Accepted:
By: /s/ Wireless One, Inc.
--------------------------
System Operator name
/s/ Henry Burkhalter, Sr.
--------------------------
Signature
Henry Burkhalter, Sr.
--------------------------
Print name
President & CEO
--------------------------
Title
8-25-97
--------------------------
Date
EXHIBIT 11-.1
WIRELESS ONE, INC.
EARNINGS PER SHARE COMPUTATION INFORMATION
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ---------------- ---------------
<S> <C> <C> <C>
Net loss $ (7,692,474) $ (39,670,395) $ (89,139,841)
Preferred stock dividend and
discount accretion (786,389) - -
-------------- ---------------- ---------------
Net loss applicable to common stock (8,478,863) (39,670,395) (89,139,841)
============== ================ ===============
Basic and diluted weighted average common
shares outstanding 4,187,736 14,961,934 16,940,374
============== ================ ===============
Basic and diluted loss per common share $ (2.02) $ (2.65) $ (5.26)
============== ================ ===============
</TABLE>
The above earnings per share (EPS) calculations are submitted in accordance
with SFAS No. 128.. 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic and diluted weighted average common
shares outstanding 4,187,736 14,961,934 16,940,374
Shares issuable upon exercise
of options and warrants 306,815 507,407 8,036,231
-------------- -------------- ---------------
Weighted average shares
outstanding 4,494,551 15,469,341 24,976,605
============== ============== ===============
Net loss per common share $ (1.71) $ (2.56) $ (3.57)
============== ============== ===============
</TABLE>
EXHIBIT 21
SUBSIDIARIES STATE OF ORGANIZATION
Applied Video Technologies, Inc. Delaware
Bartel, Inc. Alabama
TruVision Wireless, Inc. Delaware
TruVision Wireless - Chattanooga, Inc. Delaware
TruVision Wireless - Flippin, Inc. Delaware
TruVision Wireless - Gedsden, 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, Inc. Delaware
Wireless One of Bryan, TX., Inc. Delaware
Gulf Coast Wireless, Inc. Texas
PAN Wireless Communication, Inc. Delaware
Wireless One PCS, Inc. Delaware
Shoals Wireless, Inc. Tennessee
Phipps Wireless, Inc. Florida
Phipps Wireless Cable Partnership Florida
SWCC, Inc. Georgia
Wireless Media Services, Inc. Delaware
Wireless One of Alabama, Inc. Alabama
Wireless One of Arkansas, Inc. Delaware
Wireless One of Florida, Inc. Delaware
Wireless One of Georgia, Inc. Delaware
Wireless One of Kentucky, Inc. Delaware
Wireless One of Louisiana, LLC Texas
Wireless One of Natchez, Inc. Delaware
Wireless One of North Carolina, LLC (50%) 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 Mississippi Leasing Company, Inc. Delaware
Wireless One of Tallahassee, 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
Independent Auditors' Consent
-----------------------------
The Board of Directors
Wireless One, Inc.:
We consent to incorporation by reference in the registration statements
on Form S-3 (No. 333-12449 and No. 333-15475) and Form S-8 (No. 333-11563)
of Wireless One, Inc., of our report dated February 13, 1998, relating to
the consolidated balance sheets of Wireless One, Inc. and subsidiaries as
of December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1997, and related
schedule, which report appears in the December 31, 1997 annual report on
Form 10-K of Wireless One, Inc.
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Jackson, Mississippi
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,528,215
<SECURITIES> 19,258,789
<RECEIVABLES> 2,558,509
<ALLOWANCES> 486,820
<INVENTORY> 0
<CURRENT-ASSETS> 38,724,233
<PP&E> 137,681,591
<DEPRECIATION> 27,582,575
<TOTAL-ASSETS> 317,587,198
<CURRENT-LIABILITIES> 13,844,187
<BONDS> 317,529,032
0
0
<COMMON> 169,101
<OTHER-SE> 119,772,011
<TOTAL-LIABILITY-AND-EQUITY> 317,587,198
<SALES> 34,580,464
<TOTAL-REVENUES> 34,580,464
<CGS> 0
<TOTAL-COSTS> 87,457,457
<OTHER-EXPENSES> (4,266,028)
<LOSS-PROVISION> 486,820
<INTEREST-EXPENSE> 41,828,876
<INCOME-PRETAX> (90,439,841)
<INCOME-TAX> (1,300,000)
<INCOME-CONTINUING> (89,139,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (89,139,841)
<EPS-PRIMARY> (5.26)
<EPS-DILUTED> (5.26)
</TABLE>
