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, 1998
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
2506 Lakeland Drive
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.
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, 1999 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, 1999 was 16,940,064.
WIRELESS ONE, INC.
ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 30
PART II
Item 5. Market for Registrant's Common Equity and Related Matters 30
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 31
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 38
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management 46
Item 13. Certain Relationships and Related Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 48
Financial Statements F-3
Financial Statement Schedule
Signatures S-1
Exhibit Index E-1
PART I
Item 1. Business
Overview
Wireless One, Inc. (the "Company") provides digital broadband
(i.e., high-capacity) wireless access (commonly known as "BWA")
services and analog wireless multichannel subscription television
programming (commonly known as "wireless cable") services primarily
in small to mid-size markets in the southern and southeastern
United States. The Company's initial BWA product, developed and
engineered over the past approximately two and one-half years, is a
high-speed, two-way Internet access and data transmission product
which it is marketing under the name "WarpOneSM".
Historically, the Company's principal business has been the
operation of wireless cable systems which provide, as of December
31, 1998, television programming service to approximately 101,000
subscribers in 39 operating markets ("Operating Markets"). These
markets have an average of 27 cable television programming
channels, including local broadcast programming. The Company also
offers up to 185 channels of digital direct broadcast satellite
("DBS") programming from DIRECTV, Inc. ("DIRECTV") in most of its
Operating Markets under cooperative marketing agreements with
DIRECTV and its distributors. As of December 31, 1998, the Company
had approximately 3,700 DBS subscribers. See "- Wireless Cable and
DIRECTV Business." In addition to its 39 operating markets, the
Company owns the BTA authorization (see "- Wireless Channels and
Channel Licensing -- Licensing Procedures") from the Federal
Communications Commission ("FCC"), or otherwise has aggregated
wireless cable channel rights, in 41 non-operating markets ("Non-
Operating Markets"), also located primarily throughout the
southeastern United States (including 13 such markets located in
North Carolina and held by an entity in which the company has a 50%
interest).
While the Company is continuing its business as a wireless
cable operator and will continue to exploit its DIRECTV agreements,
the Company's primary long-term business strategy is to expand the
use of its spectrum through the delivery of BWA services such as
two-way high-speed Internet access, data transmission and Internet
Protocol (IP) telephony services.
WarpOneSM, the Company's two-way, high-speed Internet access
and data transmission product, was the first such product to
utilize the relatively unregulated (see "-Wireless Channels and
Channel Licensing -- Licensing Procedures") Wireless Communications
Service ("WCS") radio spectrum (as opposed to the use of telephone
wires or fiber optic cables) for high-speed, wireless "upstream"
transmissions (i.e., transmissions sent by the subscriber). During
1996 and 1997, the Company conducted research and engineering
relative to utilization of the WCS radio spectrum for "upstream"
transmissions. As a result, in 1997, the Company acquired, in
conjunction with another entity, exclusive rights to WCS spectrum
licenses covering approximately 11,000,000 households in the
southeastern United States. Thus, in addition to being capable of
delivering data "downstream" at speeds up to 10,000 kilobytes per
second ("Kbps"), WarpOneSM is capable of transmitting data
"upstream" at speeds up to 1,500 Kbps. For comparison,
conventional (telephonic) Internet access products deliver data at
up to 56 Kbps (both upstream and downstream) and wired high-speed
Internet access providers generally operate at speeds up to 1,500
Kbps (both upstream and downstream). In connection with its high-
speed Internet access business, the Company also offers technical
support, e-mail, Web hosting, domain name registration and
maintenance and, through independent contractors, Web design.
In 1998 the Company introduced Warp OneSM in Jackson,
Mississippi, Baton Rouge, Louisiana, and Memphis, Tennessee as test
markets. The Company initially offered the WarpOneSM product to
small and medium sized businesses that are currently not served by
other high-speed Internet access and data transmission services.
The Company believes, however, that home offices, large
corporations, educational institutions and its traditional wireless
cable customers may also represent significant markets for the
WarpOneSM product. In late 1998, the Company also introduced a
wholesale BWA service which allows customers of Internet service
providers ("ISPs") to utilize the Company's two-way high-speed
Internet access.
The Company's BWA and wireless cable products rely upon radio
signals which are transmitted through the air via microwave
frequencies in the 2.1 GHz to 2.7 GHz range from a transmission
facility to a small receiving antenna at each subscriber's location
(and in the case of BWA products, low power signals are transmitted
from a transmission facility at each subscriber's location to a
Company receiving antenna), which generally requires a direct,
unobstructed line-of-sight ("LOS") from the transmission facility
to the receiving antenna. The Company utilizes up to 206 megahertz
("MHz") of radio spectrum in each market allocated by the FCC as
Multichannel Multipoint Distribution Service ("MMDS"), Multipoint
Distribution Service (together with MMDS, "MDS"), Instructional
Television Fixed Service ("ITFS") and WCS.
Chapter 11 Bankruptcy Proceeding
Background. The wireless cable television industry is
extremely capital intensive. To obtain the capital necessary to
acquire channel rights, to construct or acquire its Operating
Systems, and to finance operating losses, the Company completed the
initial public offering of its common stock in October 1995 and
issued debt securities and warrants in October 1995 and August
1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources." The Company has generated operating and net losses
since its inception, and as early as the third quarter of 1997
began refocusing its business on marketing the DIRECTV product, de-
emphasizing the growth of its single family unit ("SFU") wireless
cable business, emphasizing the growth of its multiple dwelling
unit ("MDU") wireless cable business and implementing changes to
its business operations to reduce personnel and 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 the first quarter of 1998.
In March 1998, the Company retained BT Alex. Brown as
financial advisors to review its business operations, including its
immediate working capital needs. With the assistance of BT Alex.
Brown and other professionals, the Company began a number of
initiatives to improve cash flow and liquidity, including
curtailing or delaying its plans to expand into Non-Operating
Markets, instead concentrating on the maintenance of its existing
39 Markets. During January 1999, the Company also consolidated 10
field offices and further reduced its workforce by approximately
20%.
In September 1998, the Company entered into a Senior Secured
Facility (the "Senior Secured Facility") with Merrill Lynch Global
Allocation Fund, Inc. ("MLGAF") to fund ongoing operations. As of
February 11, 1999, the Company had borrowed $13.5 million in
aggregate principal amount under such facility.
In January 1999 the Company began intensive negotiations with
several of the largest holders (the "Unofficial Noteholders'
Committee") of the $150 million aggregate principal amount of
senior notes due 2003 (the "1995 Senior Notes") and with the 1995
Senior Notes, the $239 million aggregate principal amount of senior
discount notes (the "1996 Senior Discount Notes, and collectively
with the 1995 Senior Notes, the "Old Senior Notes") regarding
restructuring such indebtedness through a prenegotiated plan of
reorganization.
After extensive negotiations with the Unofficial Noteholders'
Committee and other holders of the Old Senior Notes, the parties
reached an agreement (the "Bondholders Agreement") on the material
terms of a restructuring of the Company, and on February 11, 1999
the Company filed a voluntary case (the "Bankruptcy Case") with the
United States Bankruptcy Court for the District of Delaware ("the
Bankruptcy Court") under Chapter 11 of Title 11 of the United
States Code ("the Bankruptcy Code.")
Events During the Chapter 11 Case. Following commencement of
the Bankruptcy Case, the Company has continued to operate its
business as a debtor in possession with the protection and
supervision of the Bankruptcy Court. In addition, the Company has
sought and received authority from the Bankruptcy Court to pay the
prepetition amounts owed to trade creditors in the ordinary course
of its business. An immediate effect of the filing of the
Bankruptcy Case was the imposition of the automatic stay under the
Bankruptcy Code which, with limited exceptions, enjoins the
commencement or continuation of all litigation against the Company
during pendency of the Bankruptcy Case.
On February 12, 1999, the Company entered into a financing
facility with MLGAF (the "Postpetition Financing") providing the
Company with an aggregate principal amount of financing of
approximately $18.9 million. The Postpetition Financing includes
(i) $13.5 million, representing the outstanding principal amount
under the Senior Secured Facility, (ii) accrued interest under the
Senior Secured Facility, (iii) a facility fee of $625,000 due to
MLGAF in connection with the Senior Secured Facility and (iv) $4
million in additional financing provided by MLGAF. Amounts
outstanding under the Postpetition Financing bear interest at 15%
per annum, and the Postpetition Financing will terminate on the
earliest to occur of (i) August 12, 1999 (the date which is the six-
month anniversary of the date of the entry of an interim order),
(ii) the date the Postpetition Financing note has become or is
declared to be immediately due and payable as a result of an Event
of Default (as defined in the Postpetition Financing), (iii) the
date of the redemption of the Postpetition Financing note by the
Company or (iv) the effective date of the Plan (defined below) (the
"Effective Date").
By means of the Postpetition Financing, the Company's cash
needs under its business plan are expected to be met through mid-
May 1999. During the pendency of its Chapter 11 case, the Company
and/or its subsidiaries expect (with such Bankruptcy Court approval
as may be required) to sell certain assets which are not a part of
its core business or are no longer necessary to the operation of
its business (the "Planned Asset Dispositions"). The Company
anticipates that certain of these asset dispositions will occur
prior to mid-May 1999 and provide the Company with sufficient cash
until the Effective Date. The Company does not anticipate that
such sales will result in any losses.
In particular, the Company expects to sell a hard-wire cable
system in Huntsville, Alabama. The terms of this sale have not
been finalized, although the Company has entered into a letter of
intent with a prospective purchaser of this asset. The Company
also is actively seeking to sell certain transmission towers used
by the Company to transmit its signals and will arrange with any
proposed purchaser to lease only the space that the Company needs
on these towers. In addition, the Company will be seeking to sell
excess inventory of customer premises equipment ("CPE"), including
reception antennas and decoding boxes. In addition, Wireless One
of North Carolina, LLC ("WONC"), a limited liability company 50%
owned by the Company, will receive from a subsidiary of the Company
certain FCC licenses and assume certain debt obligations associated
therewith and the Company, through its subsidiary, will receive
cash of approximately $660,000.
The Company expects to identify and seek to sell other assets
in certain markets during the Bankruptcy Case. In that regard, the
Company is investigating whether to sell some or all of its 50%
interest in WONC. To the extent required by the terms of the
Postpetition Financing, all or a portion of the proceeds of the
Planned Asset Dispositions will be used to pay down amounts due
thereunder.
Plan of Reorganization. On March 15, 1999, the Company filed
a plan of reorganization under the Bankruptcy Code (the "Plan") and
a proposed disclosure statement (the "Disclosure Statement"), which
reflect the terms of the Bondholders Agreement. The Plan provides
that creditor claims, other than certain officer and director
indemnity claims and the claims of holders of the Old Senior Notes,
will be unimpaired. Pursuant to the Plan, on the Effective Date,
the Old Senior Notes and equity interests of stockholders, and
others, such as option and warrant holders, will be cancelled and
on the Effective Date or as soon as practicable thereafter, holders
of common stock on a record date to be determined (the "Record
Date") will receive their ratable proportion of approximately 4% of
(i) 9,950,000 of the 10,000,000 shares of common stock of the
Company (as it is expected to be reorganized as of the Effective
Date, hereinafter "Reorganized Wireless") to be issued and
outstanding as of the Effective Date (the "New Common Stock"), and
(ii) the New Warrants, which are 5-year warrants to purchase an
aggregate of 1,235,000 shares of New Common Stock at an exercise
price of $29.57 per share, subject to adjustment under certain
circumstances. All other equity interests will be cancelled and
the holders thereof will not receive any distribution.
Accordingly, under the Plan holders of common stock will
receive one share of New Common Stock for every 42.56 shares of
common stock held on the Record Date and a New Warrant to purchase
1 share of New Common Stock for every 13.72 shares of common stock
held on the Record Date. No fractional shares will be issued.
The remaining approximately 96% of the New Common Stock will
be distributed to holders of Old Senior Notes (9,552,000 shares)
and to BT Alex. Brown (50,000 shares). The distributions proposed
to be made to BT Alex. Brown is the subject of a separate motion
and will be subject to separate Bankruptcy Court approval. Holders
of 1995 Senior Notes will receive 30.27 shares of New Common Stock
for every $1000 principal amount of 1995 Senior Notes, and holders
of 1996 Senior Discount Notes will receive 20.94 shares of New
Common Stock for every $1000 principal amount of 1996 Senior
Discount Notes. Reorganized Wireless intends to grant registration
rights to holders of New Common Stock who may be deemed to be
statutory underwriters as such term is used in section 1145(b) of
the Bankruptcy Code and intends to enter into a registration rights
agreement with such holders containing customary registration
rights provisions.
Holders of the New Common Stock will be entitled to one vote
per share on all matters to be voted upon by the stockholders.
Holders of a plurality of the shares voting for the election of
directors can elect all of the directors since the holders of the
New Common Stock will not have cumulative voting rights.
The New Warrants will be exercisable until 5:00 p.m., New York
City time, on the date that is five years after the Effective Date.
The New Warrants will have no voting rights, will not be entitled
to receive dividends or other distributions declared on the New
Common Stock and will not be entitled to share in any of the assets
of Reorganized Wireless upon any liquidation, dissolution or
winding-up of Reorganized Wireless.
The number of shares of New Common Stock for which a New
Warrant will be exercisable and the exercise price of the New
Warrants will be subject to adjustment upon the occurrence of
certain events, including (i) stock dividends, subdivisions and
combinations affecting the New Common Stock, (ii) reclassifications
and recapitalizations involving Reorganized Wireless, (iii) if
Reorganized Wireless (A) fixes a record date for issuance of
rights, options or warrants to all holders of New Common Stock
entitling them to subscribe for or purchase New Common Stock, (B)
issues shares of New Common Stock or (C) issues any securities
convertible into or exchangeable or exercisable for New Common
Stock, in the case of (A), (B), (C) above at a price per share of
New Common Stock less than the then current market price per share
of New Common Stock and (iv) if Reorganized Wireless fixes a record
date for the making of a distribution to all holders of New Common
Stock of assets, debt securities, preferred stock or rights or
warrants. In the event of a merger or consolidation of Reorganized
Wireless with or into one or more persons or the transfer or lease
of all or substantially all of the assets of Reorganized Wireless
to another person (a "Transaction") in which New Common Stock is
exchanged for securities, cash or other assets or a combination
thereof (collectively, "Transaction Consideration"), then the New
Warrants will automatically become exercisable for the Transaction
Consideration which the holder of the New Warrants would have owned
or been entitled to receive immediately after the Transaction if
the holder had exercised the New Warrants before the effective date
of the Transaction.
In the event of a "change of control" (as defined in the
Warrant Agreement) of Reorganized Wireless within one year of the
Effective Date, the exercise price of the New Warrants will be
reduced to $23.22 per share of New Common Stock, subject to
adjustment as described above.
Upon the Effective Date, Reorganized Wireless will be
authorized under the Plan to issue incentive options to management
of Reorganized Wireless to purchase 444,000 shares of New Common
Stock at an exercise price of $13.51 pursuant to a newly adopted
Stock Option Plan (the "New Stock Option Plan"). New additional
incentive options to purchase 666,000 shares of New Common Stock at
a yet-to-be-determined exercise price will also be available for
issuance to management pursuant to the New Stock Option Plan.
Board of Directors of Reorganized Wireless. Upon the
Effective Date, the operation of Reorganized Wireless will become
the general responsibility of its Board of Directors, subject to,
and in accordance with, its Restated Certificate of Incorporation
(the "Charter") and by-laws. The Charter and by-laws provide for,
among other things, removal of directors with or without cause, by
the affirmative vote of the holders of a majority of the voting
power of the then outstanding voting capital stock of Reorganized
Wireless. The initial Board of Directors of Reorganized Wireless
will consist of seven members, one of whom will be Henry
Burkhalter, the current President and Chief Executive Officer of
the Company. Subject to the immediately preceding sentence, the
initial members and the manner of selection of the Board of
Directors of Reorganized Wireless will in all respects be subject
to the approval of the Unofficial Noteholders' Committee and MLGAF
and will be disclosed on or prior to the hearing on confirmation of
the Plan. The directors of the Company immediately prior to the
Effective Date will resign as of the Effective Date and will be
replaced by the Board of Directors of Reorganized Wireless.
Officers of Reorganized Wireless. The initial officers of
Reorganized Wireless are expected to remain the officers set forth
in Part III, Item 10 of this Form 10-K. The selection of officers
of Reorganized Wireless after the Effective Date will be as
provided in its Charter and by-laws.
No Stockholder Action Required. On the Effective Date, the
Charter will automatically become effective, and all other matters
provided under the Plan involving the corporate structure of
Reorganized Wireless, or corporate action by it, will be deemed to
have occurred and will be in effect from and after the Effective
Date without any requirement of further action by the stockholders,
the directors of Reorganized Wireless or Reorganized Wireless.
Alternative Plan of Reorganization. By a letter to the
Company dated February 25, 1999 (the "Heartland Letter"), Heartland
Wireless Communications, Inc. ("Heartland"), a holder of
approximately 20% of the common stock of the Company, requested
consideration of an alternate plan of reorganization for the
Company. The principal features of the plan proposed in the
Heartland Letter are (i) the merger of the Company into Heartland,
(ii) receipt by holders of the Old Senior Notes of 27% of the
common stock of the entity created by such merger ("Newco") and
(iii) receipt by the holders of the Company's common stock of 1.08%
of the common stock of Newco and five-year warrants to purchase
2.7% of the outstanding shares of Newco common stock at an exercise
price that is consistent with the proposed exercise price in the
Plan (adjusted to reflect the merger of the Company and Heartland).
The Company has considered the plan proposed in the Heartland
Letter and believes that the Company's Plan is, on the whole, more
favorable to the creditors and stockholders of the Company. The
Company bases this conclusion in part upon its belief that the plan
proposed in the Heartland Letter ascribes less value to the Company
and its business, relative to that value of Heartland and its
business set forth in bankruptcy court filings in Heartland's
Chapter 11 case, than is warranted based upon the valuation
described in the Company's Plan. Accordingly, management believes
that the recoveries made available to creditors and stockholders
under the plan proposed in the Heartland Letter would be less
favorable than those provided for in the Company's Plan.
Approval of the Disclosure Statement and Confirmation of the
Plan. Prior to the solicitation of votes on the Plan, the
Bankruptcy Court must approve the Disclosure Statement as
containing adequate information of a kind and in sufficient detail
to enable hypothetical, reasonable investors typical of the
Company's creditors and equity interest holders to make an informed
judgment whether to accept or reject the Plan. Approval of the
Disclosure Statement does not, however, constitute a determination
by the Bankruptcy Court as to the fairness or merits of the Plan.
The hearing regarding approval of the Disclosure Statement is
currently scheduled for May 25, 1999.
If the Bankruptcy Court approves the Disclosure Statement, the
Company will solicit votes from certain creditors and equity
security holders. After such solicitation, the Bankruptcy Court
would then hold a confirmation hearing (the "Confirmation
Hearing"). At the Confirmation Hearing, the Bankruptcy Court will
confirm the Plan only if all of the requirements of section 1129 of
the Bankruptcy Code are met. Among the requirements for
confirmation of a plan are that the plan is (i) accepted by all
impaired classes of claims and equity interests or, if rejected by
an impaired class, that the plan "does not discriminate unfairly"
and is "fair and equitable" as to such class, (ii) feasible and
(iii) in the "best interests" of creditors and stockholders which
are impaired under the plan. As of the date of this filing, a
Confirmation Hearing has not yet been scheduled by the Bankruptcy
Court. There can be no assurance, however, that the Bankruptcy
Court will approve the Disclosure Statement or confirm the Plan or
that the Disclosure Statement and the Plan will not be modified
prior to approval or confirmation.
The Disclosure Statement has not been approved by the
Bankruptcy Court for use in the solicitation of acceptances of the
Plan disclosed pursuant to Section 1125(b) of the Bankruptcy Code.
Accordingly, the incorporation by reference of the Disclosure
Statement and any deemed dissemination herewith is not intended,
nor should it be construed, as such a solicitation, nor should the
information contained therein be relied upon for any purpose prior
to a determination by the Bankruptcy Court that the Disclosure
Statement contains adequate information. Dissemination of the
Disclosure Statement is controlled by Bankruptcy Rule 3017.
Business Strategy
While the Company is continuing its business as a wireless
cable operator and will continue to exploit its DIRECTV agreements,
the Company's primary long-term business strategy is to expand the
use of its spectrum through the delivery of BWA services such as
two-way high-speed Internet access, data transmission and IP
telephony services. Currently, most Company revenues are derived
from the sale of subscription-based television programming to SFU
and MDU customers. Reorganized Wireless will continue to shift its
overall sales and marketing focus to its DIRECTV and BWA products
and the focus of its subscription video products to emphasize sales
to MDU customers and away from its traditional SFU wireless cable
market. This change is motivated by the lower operating costs and
capital expenditures per subscriber associated with DIRECTV and
MDUs. The Company currently has operating systems in place for
this business in 39 Markets. The Company does not currently plan
to build out any new markets for delivery of wireless cable video
services (although it may sell DIRECTV service in areas outside its
currently serviced markets). The Company intends to launch its
WarpOneSM product in an additional 18 markets through 2002, 14 of
which currently have video operations. The Company holds FCC
licenses that cover 28 Non-Operating Markets, 24 of which the
Company is evaluating to determine whether return on these assets
can be maximized either by using them to deliver its WarpOneSM
product or by a sale of some or all of its license rights for these
Markets.
The business plan of Wireless assumes that Reorganized
Wireless will require one or more substantial investments to
finance its projected subscriber growth and the launch and
development of its BWA products after emergence from bankruptcy.
Reorganized Wireless may finance projected capital expenditures and
operating expenses for system development in whole or in part
through debt or equity financing, secured or unsecured credit
facilities, joint ventures, sale of non-strategic assets or other
arrangements. There can be no assurance that Reorganized Wireless
will be able to access this additional capital in a timely manner
or on satisfactory terms and conditions.
Wireless Cable and DIRECTV Business
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 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 an unobstructed LOS from the headend to a
subscriber's receiving antenna. 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.
The Company also offers DIRECTV's 185 channel DBS service to
the subscribers of the Company. The Company is thus able to offer
its subscribers both its traditional wireless cable product and
enhanced packages that offer DirectTV's DBS programming. Under the
terms of its agreement with DIRECTV, the Company receives
activation fees and marketing incentives and also shares in
subscriber revenues. DIRECTV also bears a portion of the costs
associated with installing the service in a subscriber's residence.
The DIRECTV product requires fewer repairs, as the DIRECTV
satellites and reception equipment are less susceptible to weather
conditions than the Company's transmission and reception equipment,
thus resulting in further cost savings. In addition, a "transport
agreement" with DIRECTV permits the Company to enhance its MDS
channel line-up in apartment and condominium complexes. Pursuant
to this agreement, DIRECTV programming not carried on the MDS
service may be distributed throughout such complexes without the
need for DIRECTV equipment in individual living units, thus
facilitating an expanded channel line-up and additional premium
services.
The Company's wireless cable business has traditionally
targeted SFUs and MDUs such as apartments, colleges, hotels,
hospitals and nursing homes, that can be served by LOS
transmissions and that are unpassed by traditional hard-wire cable.
The Company's 78 wireless cable markets (including 13 held by a
limited liability company of which the Company owns 50%) and two
WarpOneSM-only markets are located in Texas, Louisiana,
Mississippi, Tennessee, Kentucky, Alabama, Georgia, Arkansas, North
Carolina, South Carolina and Florida.
At December 31, 1998, the Company's Markets included 39
markets in which the Company has systems in operation ("Operating
Systems"), of which two are WarpOneSM only markets ("WarpOneSM-only
Markets"), and 28 markets without existing operations ("Non-
Operating 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
wireless cable or WarpOneSM focused system or leases with or
options from applicants for channel licenses that the Company
expects to be granted by the FCC. In addition, the Company owns a
50% interest in a limited liability company that holds channel
rights to serve 13 markets in North Carolina, all of which are Non-
Operating Markets. See "-Markets," below. As of December 31,
1998, the Company had approximately 105,000 subscribers to its
wireless cable and DBS services, of which approximately 101,000
were wireless cable and 3,700 were DBS subscribers.
WarpOneSM Business
WarpOneSM, the Company's two-way, high-speed Internet access
and data transmission product, was the first such product to
utilize the relatively unregulated (see "-Wireless Channels and
Channel Licensing -- Licensing Procedures") WCS radio spectrum (as
opposed to the use of telephone wires or fiber optic cables) for
high-speed, wireless "upstream" transmissions (i.e., transmissions
sent by the subscriber). During 1996 and 1997, the Company
conducted research and engineering relative to utilization of the
WCS radio spectrum for "upstream" transmissions. As a result, in
1997, the Company acquired, in conjunction with another entity,
exclusive rights to WCS spectrum licenses covering approximately
11,000,000 households in the southeastern United States. Thus, in
addition to being capable of delivering data "downstream" at speeds
up to 10,000 Kbps, WarpOneSM is capable of transmitting data
upstream at speeds up to 1,500 Kbps. For comparison, conventional
(telephonic) Internet access products deliver data at up to 56 Kbps
(both upstream and downstream) and wired high-speed Internet access
providers generally operate at speeds up to 1,500 Kbps (both
upstream and downstream).
In 1998 the Company introduced Warp OneSM in Jackson,
Mississippi, Baton Rouge, Louisiana, and Memphis, Tennessee as test
markets. The Company initially offered the WarpOneSM product to
small and medium sized businesses that are currently not served by
other high-speed Internet access and data transmission services.
The Company believes, however, that home offices, large
corporations, educational institutions and its traditional wireless
cable customers may also represent significant markets for the
WarpOneSM product. In late 1998, the Company also introduced a
wholesale BWA service which allows customers of ISPs to utilize the
Company's two-way high-speed Internet access.
Wireless Channels and Channel Licensing
Available Channels - The FCC licenses and regulates the use
of MDS and ITFS channels to transmit video programming and other
services. In 50 large markets in the U.S., 33 6 MHz MDS and ITFS
channels are available (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 MDS and ITFS channels
are available (in addition to any local off-air VHF/UHF broadcast
channels that are not retransmitted over wireless cable channels).
The actual number of MDS and ITFS channels available for licensing
in any market is determined by the FCC's interference protection
and channel allocation rules. Because the Company utilizes analog
modulation for its video transmissions, it provides subscribers one
video programming service for each MDS and ITFS channel actually
available to the Company in a market. Except in limited
circumstances, 20 of these channels in each geographic area are
allocated to the ITFS and are generally licensed to qualified
educational organizations who lease capacity to the Company. The
remaining channels are allocated to the MDS and can be licensed to
the Company or to other commercial entities who lease capacity to
the Company. The entire channel capacity of an MDS channel is
available for commercial use. However, an ITFS licensee must
transmit an average of at least 20 hours per week of educational or
instructional programming for each channel it is licensed to
operate. This minimum programming requirement may be satisfied by
such programming as the Discovery Channel, PBS and C-SPAN or, in
the case of ITFS channels used to transmit using digital
modulation, by Internet access. The remaining air time on each
ITFS channel may be leased for commercial use, although generally
(i) the licensee of an ITFS channel using analog modulation must
preserve the right to recapture an additional 20 hours of air time
per channel per week for educational or instructional programming,
and (ii) the licensee of an ITFS channel using digital modulation
may not lease more than 95% of the capacity of its channels. The
Company generally has the right to transmit to its customers at no
incremental cost the educational programming provided by the
lessors of its ITFS channels. Under certain circumstances, the FCC
permits an ITFS licensee to satisfy its programming requirements
utilizing channels in markets other than its own, allowing the ITFS
licensee to provide the full capacity of ITFS channels to the
Company. The FCC's ITFS programming and capacity reservation rules
were substantially liberalized in September 1998, and there are
currently several petitions for reconsideration of the new rules
pending before the FCC. The Company cannot predict whether the FCC
will make any further changes to those rules. 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. A similar FCC effective control requirement
applies to ITFS licensees. In addition, ITFS excess capacity
leases cannot exceed a term of 15 years. The remaining initial
terms of most of these leases are approximately five to ten 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 30 MHz of spectrum for the WCS and
awarded two 10 MHz licenses and two 5 MHz licenses per market area.
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 is
using WCS for its WarpOneSM product in its Baton Rouge, Louisiana
and Memphis, Tennessee Markets.
Licensing Procedures - MDS, ITFS and WCS services are subject
to regulation by the FCC pursuant to the Communications Act of
1934, and amended (the "Communications Act"). The Communications
Act authorizes the FCC, among other things, to issue, revoke,
modify and renew licenses, approve the assignment or transfer of
control of such licenses, impose restriction on the use of spectrum
and regulate the configuration and operation of the facilities used
by licensees. The FCC awards MDS, ITFS and WCS licenses based upon
applications demonstrating that the applicant is legally,
technically and financially qualified to hold the license. Each
MDS and ITFS facility utilized to transmit to subscribers or to
receive transmissions from subscribers must be individually
licensed on demonstration or, in some cases a certification, that
the proposed facility will comply with the FCC's rules, including
its interference protection rules. In addition, MDS and ITFS
licensees must comply with rules prohibiting operations that result
in impermissible interference. A WCS license generally authorizes
the holder to construct and operate whatever facilities it desires
within its authorized service area without specific FCC approval of
those facilities, subject to compliance with rules prohibiting
operations that result in impermissible interference.
In 1996, the FCC adopted a competitive bidding mechanism under
which initial MDS licenses for 493 designated basic trading areas
("BTAs") were auctioned to the highest bidder. Auction winners
obtained the exclusive right to apply for new MDS facilities 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. Applications for new MDS stations may be filed by BTA
auction winners at any time, and applications for modifications to
licensed MDS facilities generally may be filed at any time.
The FCC only accepts applications for new ITFS stations in
designated "filing windows," the most recent of which was in
October 1995. Where two or more applications submitted during a
given filing window propose new facilities that are predicted to
either cause impermissible interference one to the other, or to
suffer impermissible interference one from the other, those
applications are considered to be "mutually exclusive." Until
1998, the FCC chose from among mutually exclusive applications by
utilizing comparative criteria that resulted in a somewhat
predictable selection process, depending upon the particular
factual circumstances. However, the FCC in 1998 amended its rules
to require the use of auctions to select from among competing
applicants. Efforts are currently underway to further amend the
Communications Act to eliminate the use of auctions to select from
among mutually exclusive ITFS applications. However, the Company
is unable to predict whether those efforts will prove successful
and, if so, what system the FCC will then use to select from among
mutually exclusive ITFS applicants.
On September 17, 1998, the FCC issued a Report and Order
adopting a broad range of new rules designed to provide MDS and
ITFS licensees greater technical flexibility in the use of their
spectrum. Among other things, the new rules promote the routine
licensing of MDS and ITFS facilities for use in the provision of
fixed, digital two-way communications services and allow the use of
new digital modulation techniques that may allow more efficient
provision of data transmission and Internet access service. In
addition, the Report and Order introduced a streamlined application
processing system designed to expedite the issuance of
authorizations for transmissions from subscribers to operators and
for booster stations by altering the interference protection rules
to eliminate the potential for mutually exclusive applications and
by reducing FCC review of applications. The FCC currently has
before it proposals filed by, among others, an industry-wide
coalition that includes the Company, to extend the new streamlined
application processing system to all applications proposing major
modifications to ITFS facilities. At present, such applications
can only be submitted during designated filing windows (the last of
which occurred in December 1996), and have been subject to
significant delays in FCC processing. The Report and Order also
adopted a variety of rules intended to reduce the potential for
interference from facilities licensed under the streamlined system
and to eliminate any interference that does occur. This industry-
wide coalition has sought modification of certain of those rules
because they may slow installation of two-way, high speed Internet
access services such as WarpOneSM at certain subscriber locations.
In addition, petitions seeking reconsideration of other aspects of
the Report and Order have been filed. Although the Company
believes that the FCC will generally retain the flexibility
afforded MDS and ITFS licensees in the use of their spectrum, the
Company is unable to predict how the FCC will rule upon the
proposals before it. The Company believes that the reconsideration
phase of the proceeding will be completed by summer 1999, and that
the FCC will begin accepting applications under the new streamlined
system later in 1999, although there can be no assurance against
further delays.
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 Wireless Cable, Inc.
("BellSouth") pursuant to which BellSouth secured certain WCS
licenses and 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 was required 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. The construction requirements applicable to MDS
stations licensed pursuant to the BTA Auction and to WCS are
substantially different. The MDS and BTA licensee must build
stations covering two-thirds of the area within its control in the
BTA within five years of the BTA authorization. If the BTA holder
fails to meet its build-out requirement, the FCC will partition the
unserved area using county lines and make it available through re-
auction. The original BTA authorization holder is not eligible to
participate in the re-auction. 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." If
a WCS licensee fails to satisfy this requirement, the license will
be forfeited and the FCC will conduct a re-auction in which the
initial WCS licensee will not be eligible to participate. 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. However, an
MDS BTA or WCS authorization may be assigned, and control over the
licensee of such an authorization may be transferred, at any time,
subject to: (i) FCC consent; (ii) in the case of an MDS BTA
authorization, the payment of any outstanding debt to the FCC if
the new licensee or controlling entity is not a "designated entity"
eligible to participate in the FCC's installment financing program;
and (iii) the payment of certain unjust enrichment penalties,
depending upon when the assignment or transfer occurs in
relationship to the issuance of the authorizations.
Licenses for individual MDS stations authorized prior to the
BTA auction expire on May 1, 2001. A BTA authorization and all
licenses for individual stations authorized pursuant to that BTA
authorization expire on March 28, 2006. WCS and ITFS licenses are
issued for a term of ten years from grant. Last year the FCC
amended its rules so that at the time ITFS licenses are renewed or
at such time as new ITFS licenses are issued, their term will be
fifteen years. This rule does not affect the expiration date of
any ITFS license that was issued prior to the effective date of the
new rule. Applications for renewal 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
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.
Wireless Cable Programming
General - 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 any cable programmer, 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, 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 20 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 broadcast 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 - 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
retransmission consent rules, if the broadcast signal is received
at the subscriber's premises by a VHF/UHF antenna that 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 provide 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 requisite broadcaster consents will continue
in effect, the Company believes that such consents will continue in
effect indefinitely for little or no additional cost.
Wireless Cable Operations
Installation - 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 Company is taking action to greatly reduce
the number of tree installations due to the relatively high service
costs associated with such installations. 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.
Generally, service to MDU properties is a competitive 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.
Billing - The Company believes that its 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 accounts to pay by disconnecting
premium channels and additional outlets after a period of non-
payment. The Company also uses a customer retention program to
encourage delinquent accounts to pay and continue receiving
service. However, if an account becomes 45-90 days past due, all
service is disconnected and the Company's collection team initiates
the collection process. After the canceled customer's account
becomes 60-90 days past due, a collection call is made to the
canceled subscriber. If no payment is made, the account is written
off the Company's books and turned over to a third party collector
after approximately 105 days.
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.
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 sales areas of each market according to 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 and telemarketing follow-up
calls.
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 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 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
Non-Operating 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 subscribers multiple wireless
video packages at prices comparable 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, pay-per-view access and premium packages. The
Company can offer a price to its SFU subscribers for basic service
that is typically comparable with prices for the same services
offered by traditional rural hard-wire cable operators because of
the Company's lower operating costs.
Markets
The following tables provide selected information regarding
the Company's Markets as of December 31, 1998.
Estimated
Total SFU/MDU
Households(1) Subscribers
---------- -----------
Video Operating Systems:
Lafayette, LA 180,300 3,193
Lake Charles, LA 111,600 4,139
Wharton, TX 102,300 1,786
Bryan/College Station, TX 102,700 3,496
Pensacola, FL 217,400 2,300
Panama City, FL 108,300 2,290
Milano, TX 40,900 1,543
Monroe, LA 114,100 2,916
Tullahoma, TN 109,600 3,676
Bunkie, LA 94,700 2,677
Brenham, TX 39,500 2,277
Gainesville, FL 138,700 7,025
Jeffersonville, GA 189,300 2,025
Bucks, AL 150,800 1,090
Fort Walton Beach, FL 64,200 411
Dothan, AL 100,500 2,371
Delta, MS 100,800 4,791
Demopolis, AL 17,500 1,057
Gulf Coast, MS(2) 132,300 5,649
Houma, LA 81,700 1,035
Jackson, MS 211,500 15,163
Natchez, MS 76,500 4,217
Oxford, MS 60,100 4,825
Alexandria, LA 31,700 2,082
Huntsville, AL(3) 196,800 3,770
Lawrenceburg, TN(3) 76,400 1,002
Albany, GA 92,900 1,457
Meridian, MS 73,300 2,571
Florence, AL 62,000 1,845
Tupelo, MS 130,900 2,795
Charing, GA 41,100 1,226
Starkville, MS 84,100 2,316
Tuscaloosa, AL 87,100 785
Tallahassee, FL 129,800 1,171
Freeport, TX 192,700 33
Hattiesburg, MS 121,400 146
Gadsden, AL 198,100 38
-------- -------
Totals 4,063,600 101,189
Total DBS Subscribers 3,696
-------
Total Wireless and DBS
Subscribers 104,885
=======
Estimated
Total
Households(1)
------------
Data-only Operating Systems:
Baton Rouge, LA 261,700
Memphis, TN 433,200
-------
Totals 694,900
=======
Estimated
Total
Households(1)
-----------
Non-Operating Markets:
Ocala, FL 275,500
Chattanooga, TN 276,100
Huntsville, TX 89,000
Flippin, TN 56,700
Bankston, AL 64,800
Montgomery, AL 149,200
Selma, AL 35,700
Groveland, GA(4) 172,800
Hoggards Mill, GA 22,600
Matthews, GA 193,600
Tarboro, GA 81,500
Valdosta, GA 103,200
Marianna, FL 56,700
Auburn, AL 62,200
Birmingham, AL 308,400
Mobile, AL(5) 66,100
Six Mile, AL 32,600
Woodville, AL 29,700
Pine Bluff, AR(6) 86,300
Columbus, GA 160,100
Vidalia, GA 50,800
Bowling Green, KY(7) 126,900
Hussier, LA 267,400
Leesville, LA 43,500
Natchitoches, LA(8) 30,600
Ruston, LA 44,700
Tallulah, LA 19,500
Moorehead City, NC 82,700
---------
Totals 2,988,000
=========
Estimated
Total
Households(1)
(10)
-------------
Wireless One of North
Carolina Markets(9):
Asheville, NC 246,700
Fayetteville, NC 245,300
Greenville, NC 99,200
Hickory, NC 376,800
Jacksonville, NC 136,700
Rocky Mount, NC 199,100
Roanoke Rapids, NC 44,700
Wilmington, NC 136,900
Rockingham, NC 93,200
Elizabeth City, NC 63,800
Raleigh, NC 217,800
Winston-Salem, NC 546,400
Charlotte, NC 577,400
---------
Totals 2,984,000
=========
Estimated
Total
Households(1)
--------------
Summary:
Video Operating Systems 4,063,600
Data Operating Systems 694,900
Non-Operating Markets 2,988,000
Wireless One of North
Carolina Markets(11) 1,492,000
---------
Totals - MDS 9,238,500
=========
WCS Spectrum 11,000,000(12)
==========
_________________________
(1) "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.
(2) Four channels currently utilized in the Gulf Coast System were
granted by the FCC without acting on an objection filed by a
third party.
(3) 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.
(4) 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.
(5) An existing wireless cable operator is serving a small number
of subscribers in this market with an 11-channel MDS system.
(6) The Company believes that another entity has leased rights to
20 other channels that are the subject of pending ITFS
applications.
(7) 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.
(8) 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.
(9) The Company holds a 50% interest in Wireless One of North
Carolina, LLC ("WONC"), which holds a number of MDS licenses
and the right to use frequencies owned by the University of
North Carolina ("UNC") to develop a statewide MMDS/ITFS
network. WONC's contract with UNC allows it to build wireless
video and data systems across the state using the frequencies
of UNC. 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 data and video products in the markets set
forth in this table. The Company continues to evaluate
financing plans for WONC as well as the potential sale of its
interest in WONC.
(10) Amounts in this table reflect 100% of WONC's estimated total
and LOS households. The Company owns a 50% interest in WONC.
(11) Amounts represent the Company's 50% interest in WONC's total
and LOS households.
(12) A portion of the 11 million total households attributable to
the Company's WCS Spectrum are included in estimated total
households in other tables above.
_________________________
Programming - The Company generally offers its SFU
subscribers 20 to 26 basic cable channels and one to four premium
channels in each Market. In 84% of its Operating Systems, the
Company also offers its SFU subscribers 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 in all but two of
its Markets. The price of the SFU basic packages is $25.95 per
month, with an additional $9.95 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 sets forth the Company's current
programming line-up available to SFU subscribers in a typical
Operating System (selections differ by market).
BASIC
ABC (local network affiliate) The Learning Channel (education)
AMC (classic movies) Lifetime (special interest)
A & E (arts & entertainment) NBC (local network affiliate)
Black Entertainment Television Nickelodeon (children's)
(special interest)
CBS (local network affiliate) PBS (education, general interest)
Country Music Television Regional Sports Network South
(country music) (southeast U.S. sports)
CNN (news) TBS Superstation (sports, movies)
C-SPAN (public affairs) TNN/QVC (special interest)
Discovery (science) TNT (sports, movies)
The Disney Channel (1) USA (general interest)
ESPN (sports) The Weather Channel (weather)
The Family Channel (family WGN (Chicago-general interest)
entertainment)
Fox (local network affiliate) VH1 (contemporary music)
The History Channel
(educational)
PREMIUM PAY-PER-VIEW
Home Box Office Viewer's Choice
Showtime
The Disney Channel*
Cinemax
* The Disney Channel is part of the basic package in certain
Markets and a premium channel in other Markets.
Channels - 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 certain of those leases may require amendment
before the underlying channels can be utilized by the Company in
connection with its WarpOneSM product. 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 and the DIRECTV MDU and Internet access
products 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 its wireless cable customers or its DIRECTV or WarpOneSM
products in some or all of its Operating Systems or Non-Operating
Markets. In addition, before the Company can deploy certain of the
facilities it requires, certain of its channel lessors will have to
successfully apply to the FCC for authority to modify their
existing or proposed facilities or consent to the modification of
facilities of other licensees in the region. 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, the Company may require
consents to interference or waivers of the FCC's interference
protection rules from one or more licensees with which it does not
currently have a relationship in order to implement its plans, and
may require one or more licensees to modify their facilities in
order to avoid interference to the Company's planned facilities.
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 Non-Operating 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 applications filed
during the same window or suffer signal interference from
facilities proposed by other applications submitted during the same
window. If so, the applications are considered to be "mutually
exclusive." Until 1998, the FCC chose from among mutually
exclusive applications by utilizing comparative criteria that
resulted in a somewhat predictable selection process, depending
upon the particular factual circumstances. However, responding to
Congressional amendment of the Communications Act, the FCC amended
its rules to require the use of auctions to select from among
competing applicants. Efforts are currently underway to further
amend the Communications Act to eliminate the use of auctions to
select from among mutually exclusive ITFS applications. However,
the Company is unable to predict whether those efforts will prove
successful and, if so, what system the FCC will then use to select
from among mutually exclusive ITFS applicants.
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. EdNet recently notified the
Company that it intends to reclaim three of these channels in
December 1999 (EdNet currently broadcasts on one of these channels
in the Company's Jackson, Mississippi Market). The Company has
initiated discussions with EdNet regarding this notice, but cannot
now predict the results of these discussions, whether EdNet will
exercise its option to reclaim the channels, or if it does, the
effect of these actions on the Company.
System Costs
As a part of the Company's refocused marketing strategy, all
Non-Operating Markets launched in the future are expected to be
WarpOneSM-only markets. Capital costs to modify existing video
headend equipment and launch the WarpOneSM product in an existing
Operating System will be approximately $325,000. Capital costs to
launch the Internet product in a Non-Operating Market will be
approximately $550,000. The Company estimates that each additional
MDU wireless cable subscriber will require an incremental capital
expenditure of approximately $50 to $285 in material, installation
labor and overhead charges. By comparison, the cost of each
additional SFU wireless cable subscriber is estimated to average
$360 to $560. The capital cost for each Internet subscriber is
approximately $1,300, 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, as a
result of 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.
Competition
In addition to competition from traditional hard-wire cable
television systems and other DBS providers, the Company faces
competition from a number of other sources, 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.
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 - Local Exchange Carriers ("LECs") may
provide video service in their telephone service areas either
through traditional cable television systems, through the marketing
of DBS services, or through the provision of "video dialtone."
Under the FCC's video dialtone rules, a LEC that provides video
dialtone must 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, or (ii) construct new distribution plants in
conjunction with a local cable operator to offer video dialtone
service. BellSouth Corporation and Ameritech, among others, have
developed traditional cable television systems within their local
exchange areas. In March 1999, AT&T Corp. merged with Tele-
Communications, Inc. ("TCI"), the largest cable television system
operator in the United States. AT&T has announced its intention to
provide high-speed Internet access services and telephony services
over TCI's cable systems. In addition, AT&T has signed an
agreement with Time Warner, Inc. ("TW") pursuant to which it will
offer telephony services over TW's cable systems. While the
competitive effect of the offering by telephone companies of video
dialtone and subscription television services is still uncertain,
the Company believes that wireless cable technology will continue
to offer a lower cost alternative.
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.
High-Speed Data/Internet - In the Internet access/high-speed
data market for business and/or MDU customers, the Company
experiences competition from numerous types of service providers,
including traditional ISPs, inter-exchange carriers, local
telephone companies and hard-wire cable television companies.
The competition for Internet access and high-speed data
transmission services to small to mid-size businesses generally
falls into three categories: national, regional and local
competitors. National competitors include inter-exchange carriers
such as AT&T, MCI and Sprint, and national ISPs such as America
Online, Digex, PSINet and UUNet. The services offered by national
competitors generally range from dial-up- 14.4 Kbps to a dedicated
DS-3 (45 mbps) connection. Some competitors have added
Asynchronous Digital Subscriber Lines ("ADSL") to their service
offerings. ADSL can achieve higher data speeds (1.5 mbps to 8.4
mbps) than previously possible over the existing copper wire
infrastructure found in most local telephone lines. Regional
competitors include RBOCs and regional ISPs that generally offer
services that range from dial-up- 14.4 Kbps to dedicated T-1 (1.5
mbps) connections. Local competitors include local exchange
carriers, multi-system hard-wire cable operators and local ISPs.
The services offered by local competitors generally range from dial-
up 14.4 Kbps to a dedicated T-1 connection. Local providers
generally aggregate or over-subscribe local traffic onto access
lines which are connected to a regional or national provider.
Accordingly, these local providers typically target consumers, as
opposed to businesses.
The Company also faces intense competition from other
providers of data transmission services, and will face competition
if it implements telephony transmission services on a commercial
basis. Because the MMDS spectrum has not traditionally been
utilized to deliver such alternative services, consumer acceptance
of such services delivered via MMDS technology is unknown at this
time. Many of the existing providers of data transmission and
telephony services, such as long distance and regional telephone
companies, have long-standing relationships with their customers,
have significantly greater financial and other resources than the
Company and have the ability to subsidize competitive services with
revenues from a variety of other services. Accordingly, there can
be no assurance that the Company will be able to compete
successfully against other providers of such services, or that the
Company will be able to achieve profitability from such services in
future years.
Regulatory Environment
General - The wireless communications 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; to approve the assignment and/or
transfer of control of such licenses; to approve the location of
systems; to regulate the kind, configuration and operation of
equipment used by systems; and to impose certain equal employment
opportunity and reporting requirements on channel license holders
and 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 cable 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 lease cable licenses and
occasionally must lease MDS licenses, 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 Communication
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.
Technical Rules - Wireless communications transmissions are
subject to FCC regulations governing interference and transmission
quality. Most of the Company's systems operate in a standard
analog format. The FCC has adopted 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 operates utilizing digital
modulation.
The FCC also regulates MDS and ITFS 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, as well as interference protection for
all of its FCC-registered receive-sites. In launching or upgrading
a system, the Company may wish to relocate its transmission
facility, or increase its height or signal power in order to serve
one or more of its targeted markets. If such changes would result
in interference to any previously proposed station, the consent of
such station must be obtained before the FCC will grant the
proposed modification. There can be no assurance that any
necessary consents will be received. In addition, such
modifications will be subject to the interference protection rights
of BTA Auction winners.
Availability of Equipment. The FCC has adopted rules
providing for the commercial availability of set top boxes and
other consumer equipment to allow subscribers to obtain set top
boxes, remote control units, etc., from commercial sources such as
electronic retailers, rather than only from the wireless
communications operator. However, wireless operators are still
permitted to take steps necessary to guarantee system security.
There can be no assurance that the Company will not be required to
incur additional costs in complying with such regulations and
restrictions.
Cable Rate Regulation. The rates charged by the Company for
its services are not currently regulated by the government.
Although the FCC has regulated the rates charged by cable
television systems since 1992, as of April 1, 1999, only the rates
charged by a cable television system for its basic programming tier
and equipment required to receive that programming are subject to
regulation. However, a cable operator that is not subject to
"effective competition" is still required to maintain uniform rates
for all programming tiers, although the FCC has allowed promotional
or introductory discounts and has recently ruled that the rates
charged to individual subscribers in MDUs can be discounted
compared to the rates charged SFUs, so long as the rates within a
given MDU are uniform. The Company is unable to predict what
impact the recent changes to the regulation of cable rates will
have upon its business.
Equal Employment Opportunities. In 1998, the D.C. Circuit
Court of Appeals ruled that the FCC's broadcast equal employment
opportunity rules were unconstitutional. In response to that
decision, the FCC has proposed to amend its EEO rules to eliminate
the requirement that the wireless communications operator's
employee group reflects the racial or minority composition of the
local community labor force and instead to require recruitment for
every job opening except for internal promotion and some possible
lower level positions. This would require active, public
recruitment for each non-exempt position to be filled. The operator
would be required to make an effort to inform all potential job
candidates of openings. The FCC is currently considering several
alternative approaches to specific recruitment requirements.
Emergency Alert System. The Commission has determined that
wireless cable systems must participate in the Emergency Alert
System ("EAS") on the same basis as cable systems and must install
EAS equipment by October 1, 2002. For systems with 5,000 or more
customers, emergency alerts and warnings must be presented to
subscribers both visually and aurally on all programmed channels
(channels carrying video programming). For small systems (fewer
than 5,000 customers), alerts and warnings must be presented to
customers aurally on all programmed channels and visually on at
least one programmed channel with video interrupt on all channels
that do not carry the EAS message.
Internet and Telecommunications Regulatory Matters. As the
Company becomes increasingly focused upon the provision of Internet
access and other telecommunications services, it may become subject
to regulations or fees imposed by the FCC or other regulatory
agencies on ISPs or providers of basic telecommunications services.
The law relating to the liability of Internet access and data
communications services for information carried on or transmitted
through their networks is unsettled. As the law in this area
develops, the potential imposition of liability upon the Company
for information carried on and transmitted through its network
could require the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain products or
service offerings. Congress has recently enacted the Online
Copyright Infringement Liability Limitation Act. This Act limits
the liability of ISPs for copyright infringement claims for
infringing material carried on and transmitted through its network,
provided that the service provider complies with certain
requirements. In general, the Act requires that in order to
benefit from its protections, the infringing material must be
transmitted through the provider's network via an automatic
process, the provider must not be aware that the infringing
material is on the provider's network, and the provider must
expeditiously remove such material upon notification from the
copyright holder. In addition, the service provider may not
initiate placement of the infringing work on its network.
In the future, it is possible that additional laws and
regulations may be adopted with respect to the Internet and
providers of telecommunications services, covering issues such as
content, indecency and obscenity, defamation, privacy, and pricing.
The Company cannot predict the impact, if any, that any future
regulatory changes or developments may have on its business,
financial condition, and results of operations.
Cross Ownership Rules - 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 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.
Cable operators may 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.
Antenna 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 preempting restrictions that unreasonably
impair installation, maintenance or use of receive-site antennae.
The FCC has ruled that its preemption does not apply to antennae
used solely to receive data transmission services or to provide
Internet access.
The Company has recently launched a two-way Internet product
in three Markets utilizing WCS channels for upstream transmissions
from subscribers and MDS or ITFS channels for downstream
transmissions to subscribers. Downstream Internet transmissions
require the use of digital modulation, and the FCC requires that it
give its prior approval 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. In September 1998, the FCC promulgated new rules
which permit the use of MDS and ITFS Channels for upstream use. In
addition to establishing technical parameters for such use, the FCC
also amended "educational use" requirements to give ITFS licensees
and wireless cable operators more flexibility when digital
compression is employed by the wireless cable operator or where the
channels are used for high-speed data transmission or Internet
access. Specifically the rules require the wireless cable operator
to provide the greater of 20 hours per channel or 5% of the
existing broadcast capacity when digital technology is employed,
but permits this obligation to be satisfied by providing high-speed
data transmission or Internet access services to the ITFS licensee
in lieu of video programming. These rules will enhance the
Company's ability to use its existing channel rights to provide its
WarpOneSM product in new markets. However, the Company may need to
amend some of its existing ITFS lease agreements to permit it to
take advantage of these more flexible use requirements and there
can be no certainty that any or all of the ITFS licensees will
agree to make such amendments to their existing lease agreements.
Additionally, although 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.
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, 1999, the Company had approximately 389
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 Exchange Act of 1934, as amended,
that reflect management's best judgment concerning the matters
contained therein based on factors currently known. Such
statements include, without limitation, statements regarding future
liquidity, cash needs and alternatives to address capital needs,
and the Company's expectations regarding positive operating cash
flow, net losses, subscriber and revenue levels, profitability and
SG&A costs, the expected results of the Company's business
strategy, and other plans and objectives of management of the
Company for future operations and activities and are indicated by
words or phrases such as "anticipate," "estimate," "plans,"
"projects," "continuing," "ongoing," "expects," "management
believes," "the Company believes," "the Company intends," "we
believe," "we intend" and similar words or phrases.
Actual results could differ materially from those anticipated
in these "forward looking statements" as a result of a number of
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 this
cautionary statement.
Risks Associated with the Company's Operations
Dependence of Internet Product on Hardware Supplier - The
Company's business plan assumes substantial growth and development
of its WarpOneSM product. The current supplier of the modems used
by WarpOneSM customers has notified its customers, including the
Company, that, due to excess demand and cash flow difficulties of
the supplier, the modems have been "placed on allocation" and would
be shipped only for cash or an irrevocable letter of credit. The
Company has made arrangements with the supplier for the shipment of
sufficient modems to meet the Company's projected needs through
August 1999. The Company intends to work with the supplier or to
pursue other ways to resolve long-term supply needs and believes
that comparable alternative modems are available or will be
available in the near-term. No assurance can be made, however,
that the supplier will be able to continue meeting the Company's
demand for modems or provide technical support for the modems
already purchased by the Company, that the Company will be able to
meet the terms of the supplier, or that the Company will be able to
find comparable alternative suppliers. The inability of the
Company to maintain an adequate supply of these modems could have a
material adverse effect on the Company's business and results of
operations.
Competition - Subscription Television Industry - The
subscription television industry is highly competitive. The
Company's wireless cable and DIRECTV products face or may face
competition from several sources, such as traditional hard-wire
cable systems, other direct broadcast satellite ("DBS") systems,
satellite master antenna television ("SMATV") systems and other
alternative methods of distributing and receiving video
programming. Furthermore, premium movie services offered by the
Company's wireless cable and DIRECTV products encounter significant
competition from the sale and rental of video cassettes and similar
products. In areas where several local off-air VHF/UHF broadcast
channels can be received without the benefit of subscription
television, the Company also experiences competition from the
availability of broadcast signals generally and has found market
penetration to be more difficult. Legislative, regulatory and
technological developments may result in additional and significant
competition, including competition from proposed new wireless
services such as local multipoint distribution service ("LMDS") in
the 28 GHz band and WCS in the 2.3 GHz band. Local Exchange
Carriers ("LECs") are authorized to provide video services in their
telephone service areas either directly to customers as a hard-wire
cable operator or wireless cable operator, or as a "video dialtone"
provider that makes 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. 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.
Competition - High-Speed Data/Internet - In the Internet
access/high-speed data market for business and/or MDU customers,
the Company experiences or may experience competition from numerous
types of service providers, including traditional ISPs, inter-
exchange carriers, local telephone companies and hard-wire cable
television companies and other wireless service providers.
The competition for Internet access and high-speed data
transmission services to small to mid-size businesses generally
falls into three categories: national, regional and local
competitors. National competitors include inter-exchange carriers
such as AT&T, MCI WorldCom and Sprint, and national ISPs such as
America Online, Digex, PSINet and UUNet. The services offered by
national competitors generally range from dial-up- 14.4 Kbps to a
dedicated DS-3 (45 mbps) connection. Some competitors have added
Asynchronous Digital Subscriber Lines ("ADSL") to their service
offering. ADSL can achieve higher data speeds (1.5 mbps to 8.4
mbps) than previously possible over the existing copper wire
infrastructure found in most local telephone lines. Regional
competitors include RBOCs and regional ISPs that generally offer
services that range from dial-up- 14.4 Kbps to dedicated T-1 (1.5
mbps) connections. Local competitors include local exchange
carriers, multi-system hard-wire cable operators and local ISPs.
The services offered by local competitors generally range from dial-
up 14.4 Kbps to a dedicated T-1 connection. Local providers
generally aggregate or over-subscribe local traffic onto access
lines which are connected to a regional or national provider.
Accordingly, these local providers typically target consumers, as
opposed to businesses.
The Company also faces intense competition from other
providers of data transmission services, and will face competition
if it implements telephony transmission services on a commercial
basis. Because the MMDS spectrum has not traditionally been
utilized to deliver such alternative services, consumer acceptance
of such services delivered via MMDS technology is unknown at this
time. Many of the existing providers of data transmission and
telephony services, such as long distance and regional telephone
companies, have long-standing relationships with their customers,
have significantly greater financial and other resources than the
Company and have the ability to subsidize competitive services with
revenues from a variety of other services. Accordingly, there can
be no assurance that the Company will be able to compete
successfully against other providers of such services, or that the
Company will be able to achieve profitability from such services in
future years.
Government Regulations - General - The wireless communications
industry is extensively regulated by the FCC. The FCC regulates,
among other things, the issuance, assignment and modification of
licenses necessary for the Company to operate wireless cable
systems and its WarpOneSM product, certain commercial terms of the
Company's ITFS capacity lease agreements, the technical parameters
of the Company's WarpOneSM product and the time afforded license
holders to construct their facilities. The FCC imposes fees for
certain applications and licenses and has the authority, in certain
circumstances, to revoke and cancel licenses and impose monetary
fines for violations of its rules. In addition, FCC licenses must
be renewed periodically and, while such renewals generally have
been granted on a routine basis in the past, there is no assurance
that licenses will continue to be renewed routinely in the future.
The failure of the Company's channel lessors to renew their
respective licenses or of the FCC to grant such extensions could
have a material adverse effect on the Company.
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 industry as
a whole and on the Company in particular. In addition, wireless
communications operators and channel 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 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. Future
changes in the foregoing regulations or other regulations
applicable to the Company could have a material adverse effect on
the Company's results of operations and financial condition.
Interference Issues - In each market in which the Company
provides wireless cable service and/or Internet access and high-
speed data transmission services the Company uses some or all of
the 33 MDS and ITFS channels that are licensed for that market by
the FCC. Under current FCC regulations, a wireless cable operator
may install receive-site equipment and serve any point where its
signal can be received. Interference from other wireless cable
systems can limit the ability of a wireless cable system to serve
any particular point. Moreover, where the Company utilizes MDS or
ITFS channels for upstream transmissions from customers, customer
locations may be restricted to the protected service area of the
current downstream license. In licensing ITFS and MDS stations a
primary concern of the FCC is avoiding situations where proposed
station signals are predicted to cause interference to the
reception of previously-licensed station signals. The Company's
business plan involves modifying various of its MDS and ITFS
licensed stations and obtaining the grant of licenses for new
facilities that the Company will use. The FCC's interference
protection standards may make one or more of these facilities
impossible to license, in which event it may be necessary to
negotiate interference agreements with the licensees of the
stations which would otherwise block such facilities. Moreover, it
may be necessary to secure the consent of certain licensees to
modify their facilities in order to avoid interference to
facilities that the Company intends to deploy. There can be no
assurance that the Company will be able to obtain necessary
interference agreements with terms acceptable to the Company, in
which event the Company may have to curtail or modify operations in
one or more of its markets, which could have a material adverse
effect on the Company.
Dependence on Channel Leases; Need for License Extensions;
Loss of Licenses by Lessors - The Company is dependent on leases
with unaffiliated third parties for a substantial portion of its
wireless cable channel rights. The Company's channel leases
typically cover four ITFS channels and/or one to four MDS channels
each. FCC rules and policies require that each of these channels
must be used an average of at least twenty hours per week for
educational programming. Each of the Company's ITFS leases also
provide that the ITFS license holder may, at its option, require
that an additional twenty hours of air time per week for be used
for educational programming. While certain recent changes to the
FCC's rules have liberalized these requirements, these changes
cannot be implemented unilaterally by the wireless cable operator
and therefore substantially all of the ITFS leases to which the
Company is a party continue to contain these programming
requirements. (See "- Government Regulation"). The Company cannot
guarantee that any or all of the ITFS licensees who lease capacity
to the Company will not exercise their rights to recapture airtime
under their lease agreements or, if requested by the Company, will
agree to amend their ITFS leases to permit the Company to take
advantage of the more liberal programming requirements.
The remaining initial terms of most of the Company's channel
leases are approximately five to ten years. Certain of the
Company's channel leases may require amendment to provide the
Company the ability to utilize the underlying channel for its
WarpOneSM product. However, in the event an ITFS or MDS license is
not renewed or is otherwise terminated prior to the end of the
lease term, 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.
Existing ITFS licenses have varying expiration dates depending on
the date of the initial grant of such licenses by the FCC and will
expire at the end of the current license term unless renewed. MDS
licenses generally will expire on May 1, 2001, unless renewed.
The Company has a lease with Mississippi EdNet Institute, Inc.
("EdNet") for the commercial use of 20 ITFS channels in each of its
markets in the state of Mississippi (the "EdNet Agreement"). 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. By letter dated December 15, 1998, EdNet
notified the Company that it wishes to recapture three of these
channels (EdNet currently broadcasts on one of these channels in
the Company's Jackson, Mississippi Market) for academic purposes
effective December 20, 1999. The Company has initiated discussions
with EdNet regarding this notice, but cannot now predict the
results of these discussions, whether EdNet will exercise its
option to reclaim the channels, or if it does, the effect of these
actions on the Company.
As noted above (see "- Interference Issues"), before the
Company can deploy certain of the facilities it requires, certain
of its channel lessors will have to successfully apply to the FCC
for authority to modify their existing or proposed facilities. In
other cases, certain of the Company's channel lessors or
unaffiliated third parties will be required to consent to the
modification of facilities of other lessors in the region or to
modify their own facilities in order to avoid interference to the
Company's facilities. There can be no assurance that the Company's
lessors and third parties will agree to submit and prosecute
applications for the necessary modifications or consent to the
necessary modifications of other lessors.
The FCC's rules require that the Company's ITFS lessors
maintain the right to recapture additional transmission capacity
for their transmission of educational or instructional material.
Although the Company believes that it can continue to provide a
viable service in the event its ITFS lessors exercise their
recapture rights, there can be no assurance that such recapture
will not have a material adverse impact on the Company and its
business.
Dependence on Program Suppliers - The Company is dependent on
fixed-term contracts with various program suppliers such as CNN,
ESPN and HBO. Although the Company has no reason to believe that
any such contracts will be cancelled or will not be renewed upon
expiration, if such contracts are cancelled 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.
Dependence on DIRECTV Contracts - Due to the lower costs
associated with offering the DIRECTV product relative to the
Company's traditional wireless cable product, in its revised
business plan the Company has shifted the focus of its sales and
marketing efforts to emphasize sales of DIRECTV service. In order
to provide such service, the Company is dependent on contracts with
DIRECTV that give the Company the right to market DIRECTV to
certain SFU and MDU customers. 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, such cancellation or nonrenewal could have a material
adverse effect on the Company.
Physical Limitations of Signal Transmission - Reception of
wireless cable programming or the use of the Company's channel
authorizations to provide Internet and high-speed data transmission
service requires a direct, unobstructed LOS from the transmission
facility to the subscriber's receive-site antenna. Therefore, in
communities with tall trees, hilly terrain, tall buildings or other
obstructions in the transmission path, signal transmission can be
difficult or impossible to receive at certain locations, and the
Company is not able to supply service to all potential cable
subscribers or Internet or high-speed data transmission customers.
While in certain instances the Company can employ boosters, also
known as repeaters, to overcome LOS obstructions, there can be no
assurance that it will be able to secure the necessary FCC
authorizations for such additional repeaters as may be necessary to
achieve the desired signal coverage. In addition to limitations
resulting from terrain, in limited circumstances extremely adverse
weather can damage transmission and receive-site antennae, as well
as other transmission equipment.
Difficulties and Uncertainties of a New Industry - Wireless
cable is a new industry with a short operating history. Potential
investors should be aware of the difficulties and uncertainties
that are normally associated with new industries, such as lack of
consumer acceptance, difficulty in obtaining financing, increasing
competition, advances in technology and changes in laws and
regulations. There can be no assurance that the wireless cable
industry will develop or continue as a viable or profitable
industry.
Changes in Technology - The subscription television and
telecommunications services industries in general are subject to
rapid and significant changes in technology such as LMDS, digital
compression, ADSL and fiber optic networks. These changes may
increase competitive pressures on Reorganized Wireless or require
capital investments by Reorganized Wireless (to remain competitive)
in excess of its available resources. Because of the rapid and
high level of technological change in the industry, the effect of
technological changes on the businesses of Reorganized Wireless
cannot be predicted with any certainty.
Significant Holders - Upon the consummation of the Plan,
certain holders of Old Senior Notes are expected to receive
distributions of shares of the New Common Stock representing in
excess of five percent of the outstanding shares of the New Common
Stock. If holders of significant numbers of shares of New Common
Stock were to act as a group, such holders may be in a position to
control the outcome of actions requiring stockholder approval,
including the election of directors. This concentration of
ownership could also facilitate or hinder a negotiated change of
control of Reorganized Wireless and, consequently, impact upon the
value of the New Common Stock.
Further, the possibility that one or more of the holders of
significant numbers of shares of New Common Stock may determine to
sell all or a large portion of their shares of New Common Stock in
a short period of time may adversely affect the market price of the
New Common Stock.
Year 2000 Compliance - The year 2000 computer issue concerns
the ability of computer systems and other equipment containing
embedded microchip technology to distinguish the year 2000 from the
year 1900. Many experts fear that this programming problem could
render computer systems and such other equipment around the globe
inoperable. The potential year 2000 risks to the Company include
disruptions or failures within the Company's operations and
products, as well as within the operations and products of its
suppliers and other key business partners. Because of the indirect
effect of third parties, an accurate assessment and prediction of
the impact of the year 2000 issue on the Company is difficult.
Risks Associated with the Company's Chapter 11 Proceeding
General - The Company's ability to emerge from bankruptcy is
subject to a number of risks, certain of which are described below.
There can be no assurance that the Company will emerge from the
Chapter 11 proceeding pursuant to the Plan or otherwise. Before
the Company can emerge from its Chapter 11 proceeding in accordance
with the Plan among other things, the Bankruptcy Court must approve
the Disclosure Statement, the Company must solicit votes from
certain creditors and equity security holders and the Bankruptcy
Court must confirm the Plan, which it may do only if a number of
statutory requirements have been met. See "- Chapter 11 Bankruptcy
Proceeding - Approval of the Disclosure Statement and Confirmation
of the Plan." There can be no assurance that the Bankruptcy Court
will approve the Disclosure Statement or confirm the Plan or that
the Disclosure Statement and the Plan will not be modified prior to
approval or confirmation.
Dependence on Future Asset Sales and/or Additional Financing
- - The Plan assumes that, in order to repay the Postpetition
Financing and successfully emerge from bankruptcy, the Company will
require additional cash that will be obtained through asset sales
or additional financing. Although the Company is actively pursuing
certain asset sales and financing transactions and has entered into
a letter of intent with a prospective purchaser of its hard-wire
cable system in Huntsville, Alabama, the Company has no binding
agreements providing for such sales or financing. Any such sales
or financings must be on terms reasonably acceptable to the
Unofficial Noteholders' Committee and MLGAF to the extent required
by the terms of the Postpetition Financing and would be subject to
Bankruptcy Court approval. There can be no assurance that the
Company will be able to find additional financing or dispose of its
assets at a fair price or raise sufficient funds through such asset
dispositions to permit it to pay off the Postpetition Financing and
to fund ongoing working capital requirements upon emerging from
bankruptcy.
In addition to the repayment of the Postpetition Financing and
funding the Company's current working capital requirements, the
Company's business plan assumes that, after emergence from
bankruptcy, Reorganized Wireless will require one or more
substantial investments to finance projected capital expenditures
and operating expenses for system development. These activities
may be financed in whole or in part by Reorganized Wireless through
debt or equity financing, secured or unsecured credit facilities,
joint ventures, or other arrangements. There are no assurances,
however, that the financing necessary to fund the business plan
will be available on satisfactory terms and conditions, if at all.
Additional debt could result in a substantial portion of the cash
flow of Reorganized Wireless from operations being dedicated to the
payment of principal and interest on such indebtedness and may
render Reorganized Wireless more vulnerable to competitive
pressures and economic downturns. The failure to obtain additional
financing could adversely effect the growth of Reorganized Wireless
and its ability to compete successfully in the subscription
television and Internet service industries.
Going Concern Qualification of Independent Auditors' Report -
The Independent Auditors' Report of KPMG Peat Marwick on the
financial statements included in this Annual Report, contains the
following statement: "The accompanying consolidated financial
statements and financial statement schedule have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the Consolidated Financial Statements, the
Company commenced a voluntary proceeding under Chapter 11 of the
United States Bankruptcy Code which raises substantial doubt about
its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The
Consolidated Financial Statements and Financial Statements schedule
do not include any adjustments that might result on the outcome of
these uncertainties." If the Company is unable to continue as a
going concern and is forced to liquidate assets to meet its
obligations, the Company may not be able to recover the recorded
amount of such assets.
FCC Approval; Transfer of Control Applications - The FCC is
required to grant prior approval of any assignment or transfer of
control involving an entity that holds an FCC license. As a result
of the Plan, the Company will be required to obtain FCC approval of
the transfer of control of the BTA authorizations and channel
licenses held directly or indirectly by Wireless to the holders of
the New Common Stock.
The Company shortly will file the applications for the FCC's
consent to such transfer of control (the "FCC Applications"). Once
the FCC Applications have been accepted for filing by the FCC and
notice of the proposed transfer has been published in the FCC's
public notices, there is a 30-day period, during which time
interested parties may file comments on or petitions to deny the
FCC Applications. During the approval process, the FCC will
examine the FCC Applications to determine, among other things,
whether the prospective owners of five percent (5%) or more of the
voting securities of Reorganized Wireless are qualified to hold an
attributable interest in, or control, the authorizations at issue.
During this process, the FCC will place particular emphasis on
determining the existence of any issues relating to alien ownership
and cable cross-ownership by any person or entity holding an
attributable interest. Generally, transfer of control applications
are granted within two to three months of filing. Because of the
inherent uncertainties in the application process (e.g. a challenge
to the FCC Applications and composition of ownership of voting
securities), there can be no assurance that the FCC Applications
will be granted within two to three months of their filing or at
all.
BTA Authorizations; Repayment of Bidding Credit and BTA Notes
- - The Company and its subsidiaries acquired, or have obligations to
acquire, authorizations for 70 BTAs in the FCC's auction that
concluded in March 1996 at a cost of approximately $37.2 million,
including the Bidding Credit discussed below. (The Company was
also the winning bidder in auctions for two additional BTAs, the
authorizations for which have not yet been issued. The aggregate
bid amount was approximately $640,000 for such additional BTAs and
the Company received a Bidding Credit equal to $96,400.) In the
auction, the Company qualified as a "designated entity" because it
was a "small business" under the FCC's regulations. As a
designated entity, the Company was entitled to (a) receive a
bidding credit ("Bidding Credit") of 15% of the total cost of the
BTAs, and (b) finance the payment for the BTAs under 10-year
installment promissory notes with 8.6% to 9.5% annual interest
rates (the "BTA Notes"). The total Bidding Credit was
approximately $5.6 million. In the event that Reorganized Wireless
ceases to qualify as a small business, the FCC may require that one
or more of the subsidiaries of Reorganized Wireless (a) reimburse
the FCC for up to 75% of the Bidding Credit plus interest, and (b)
make full payment of all unpaid principal and interest accrued
under the BTA Notes as of the date of the transfer of control.
Applicable FCC regulations define a small business as an
entity that together with its affiliates has average annual gross
revenues that are not more than $40 million for the preceding three
calendar years, excluding increases in gross revenues that result
from operations, business development and expanded service.
Pursuant to the regulations, an entity would be considered an
"affiliate" of Reorganized Wireless if it (a) directly or
indirectly controls or has the power to control Reorganized
Wireless, (b) is directly or indirectly controlled by Reorganized
Wireless, (c) is directly or indirectly controlled by a third party
or parties that also controls or has the power to control
Reorganized Wireless, or (d) has an identity of interest with
Reorganized Wireless that is sufficient to constitute affirmative
or negative control. In determining the issue of control, the FCC
will examine, among other things, the ownership of voting stock and
other securities (50% of voting securities is deemed to constitute
control), occupancy of director, officer or key employee positions,
contractual relationships such as voting trusts or voting
agreements and the identity of interests between and among persons,
such as members of the same family and persons with common
investments. If an entity is deemed to be an "affiliate" of
Reorganized Wireless, the average annual gross revenues of such
entity will be aggregated with those of the Company in determining
whether the $40 million threshold is exceeded.
The Company currently expects that ownership of the New Common
Stock will be dispersed among a sufficient number of separate and
independent entities to prevent any one or more entities from being
deemed to "control" Reorganized Wireless under FCC regulations.
Additionally, although the Plan contemplates that the initial Board
of Directors of Reorganized Wireless will be subject to the
approval of the Unofficial Noteholders' Committee and MLGAF, such
persons are expected to be unaffiliated with one another.
Subsequent members of the Board of Directors will be elected by all
stockholders at annual meetings and day to day operations of the
business will be run by the existing management of the Company.
Accordingly, the Company does not believe that it will be required
to aggregate the revenues of any purported "affiliate." However,
the Company is unable to predict with absolute certainty the
composition of the ownership of the New Common Stock at the time of
filing the FCC Applications or thereafter and accordingly, there
can be no assurance that one or more subsidiaries of Reorganized
Wireless will not be required to refund a significant amount of its
Bidding Credit and pay in full the BTA Notes.
Lack of Established Market for New Common Stock - Pursuant to
the Plan, approximately 96% of the New Common Stock will be issued
to holders of Old Senior Notes, some of whom may prefer to
liquidate their investment rather than to hold it on a long-term
basis. There is currently no trading market for the New Common
Stock (such as the Nasdaq Stock Market or a national or regional
stock exchange) nor is it known whether or when one would develop.
Further, there can be no assurance to the degree of price
volatility in any such particular market. While the Plan as filed
was based on an assumed reorganization value of $12.84 per share of
New Common Stock, such valuation is not an estimate of the price at
which the New Common Stock may trade in the market. The Company
has not attempted to make any such estimate in connection with the
development of the Plan. No assurance can be given as to the
market prices that will prevail following Confirmation.
Dividend Policies - Reorganized Wireless does not anticipate
paying any dividends on the New Common Stock in the foreseeable
future. In addition, the covenants in any future financing
facility to which Reorganized Wireless may be a party may limit the
ability of Reorganized Wireless to pay dividends. Certain
institutional investors may only invest in dividend-paying equity
securities or may operate under other restrictions which may
prohibit or limit their ability to invest in New Common Stock.
Preferred Stock; Certain Provisions of the Charter and By-laws
and the DGCL - The Charter of Reorganized Wireless will provide for
"blank check" authorization for the issuance of Preferred Stock.
Until such time (if any) as the Board of Directors of Reorganized
Wireless determines that Reorganized Wireless should issue
Preferred Stock and establishes the respective rights of the
holders of one or more series thereof, it is not possible to state
the actual effect of authorization of the Preferred Stock upon the
right of holders of New Common Stock. The effects of such issuance
could include, however: (i) reduction of the amount of cash
otherwise available for payment of dividends on New Common Stock if
dividends are also payable on the Preferred Stock, (ii)
restrictions on dividends on New Common Stock if dividends on the
Preferred Stock are in arrears, (iii) dilution of the voting power
of New Common Stock (if the Preferred Stock has voting rights
(including, without limitation, votes pertaining to the removal of
directors) and (iv) restriction of the rights of holders of New
Common Stock to share in the assets of Reorganized Wireless upon
liquidation until satisfaction of any liquidation preference
granted to the holders of Preferred Stock. In addition, so called
"blank check" preferred stock may be viewed as having possible anti-
takeover effects, if it were used to make a third party's attempt
to gain control of Reorganized Wireless more difficult, time
consuming or costly.
The Charter and by-laws of Reorganized Wireless and the DGCL
contain provisions which may have the effect of delaying, deterring
or preventing a future takeover or change in control of Reorganized
Wireless unless such takeover or change in control is approved by
the Board of Directors of Reorganized Wireless. Such provisions
may also render the removal of directors and management more
difficult. The Charter and by-laws provide for, among other
things, removal of directors with or without cause by the
affirmative vote of the holders of a majority of the voting power
of the then outstanding voting capital stock of Reorganized
Wireless, voting together as a single class, exclusive authority of
the Board of Directors to fill vacancies on the Board of Directors
(other than in certain limited circumstances), certain advance
notice requirements for stockholder nominations of candidates for
election to the Board of Directors and certain other stockholder
proposals, restrictions on who may call a special meeting of
stockholders and a prohibition on stockholder action by written
consent. Amendments to certain provisions in the Charter require
the affirmative vote of the holders of at least 80% of the total
votes eligible to be cast in the election of directors, voting
together as a single class. The DGCL also contains provisions
preventing certain stockholders from engaging in business
combinations with the Reorganized Wireless, subject to certain
exceptions.
Item 2. Properties
The Company leases approximately 32,000 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 $435,000 per year for such space. The
Company may purchase or lease additional office space in other
locations when it launches additional Internet-focused 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
On February 11, 1999, the Company commenced a voluntary
proceeding under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court. On March 15, 1999, the Company filed its Plan
and Disclosure Statement. A hearing is currently scheduled to be
held on May 25, 1999 to consider the adequacy of the information
contained in the Disclosure Statement. See Item 1. "Chapter 11
Bankruptcy Proceeding," for a more complete description of this
proceeding and the Plan.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
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 through October 21, 1998 and by the OTC Bulletin Board from
and after October 22, 1998.
MARKET PRICE
FISCAL PERIOD HIGH LOW
------------- ---------------
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 $ 2 1/8 $ 2/3
Second Quarter $ 1 5/8 $ 1
Third Quarter $ 1 1/8 $ 1/2
Fourth Quarter $ 4/7 $ 1/8
1999:
First Quarter $ 15/16 $ 1/6
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 31, 1999, there were approximately 238 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 for
the years ended December 31, 1996, 1997 and 1998, 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, the related notes and the independent
auditors' report, which contains an explanatory paragraph that
states that the Company's commencement of a voluntary proceeding
under Chapter 11 of the Bankruptcy Code raises substantial doubt
about the Company's ability to continue as a going concern,
appearing elsewhere in this document. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 399,319 $ 1,410,318 $ 11,364,828 $ 34,580,464 $ 38,737,367
Operating expenses:
Systems operations 274,886 841,819 8,416,134 23,398,304 25,489,657
Selling, general and administrative expenses 1,800,720 4,431,839 15,559,156 28,317,852 25,405,295
Depreciation and amortization 413,824 1,783,066 11,625,507 35,741,301 40,377,539
Impairment of long-lived assets --- --- --- --- 26,270,196
----------- ------------ ------------- ------------- -------------
Total operating expenses 2,489,430 7,056,724 35,600,797 87,457,457 117,542,687
--------------------------------------------------------------------------
Operating loss (2,090,111) (5,646,406) (24,235,969) (52,876,993) (78,805,320)
Interest expense and other, net (171,702) (2,046,068) (20,134,426) (37,562,848) (44,660,182)
--------------------------------------------------------------------------
Loss before income taxes (2,261,813) (7,692,474) (44,370,395) (90,439,841) (123,465,502)
Income tax benefit - - 4,700,000 1,300,000 5,200,000
--------------------------------------------------------------------------
Net loss $(2,261,813) $ (7,692,474) $ (39,670,395) $ (89,139,841) $(118,265,502)
Preferred stock dividends and discount accretion - (786,389) - - -
--------------------------------------------------------------------------
Net loss applicable to common stock $(2,261,813) $ (8,478,863) $ (39,670,395) $ (89,139,841) $(118,265,502)
==========================================================================
Basic and diluted loss per common share $ (1.21) $ (2.02) $ (2.65) $ (5.26) $ (6.99)
==========================================================================
Basic and diluted weighted average common
shares outstanding 1,863,512 4,187,736 14,961,934 16,940,374 16,910,064
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ (1,537,244) $122,084,511(1) $106,676,500(1) $ 24,880,046(1) $ (23,513,679)
Total assets 8,914,224 213,799,874 395,609,362 317,587,198 227,193,588
Current portion of long-term debt 1,457,295 376,780 3,169,383 871,408 2,542,956
Senior secured notes payable --- --- --- --- 12,500,000
Long-term debt 2,839,602 150,871,267 299,909,221 317,529,032 336,287,418
Deferred taxes - - 6,500,000 5,200,000 -
Total stockholders' equity (deficit) 4,343,713 55,649,687 70,666,682 (18,986,021) (137,251,523)
</TABLE>
(1) 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 Company is not exposed to material future earnings or cash
flow fluctuations from changes in interest rates on long-term debt.
The majority of the Company's long-term debt bears fixed interest
rates. To date, the Company has not entered into any derivative
financial instruments to manage interest rate risk and is currently
not evaluating the future use of any such financial instruments.
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 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 TruVision 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 and products, interest expense and
charges for depreciation and amortization.
Historically, the Company's principal business has been the
operation of wireless cable systems which provide, as of December
31, 1998, television programming service to approximately 101,000
subscribers in 39 Operating Markets. These markets have an average
of 27 cable television programming channels, including local
broadcast programming. The Company also offers up to 185 channels
of DBS programming from DIRECTV in many of its Operating Markets
under cooperative marketing agreements with DIRECTV and its
distributors. As of December 31, 1998, the Company had
approximately 3,700 DBS subscribers. In addition to its 39
Operating Markets, the Company owns the BTA authorization from the
FCC, or otherwise has aggregated wireless cable channel rights, in
41 Non-Operating Markets, also located primarily throughout the
southeastern United States (including 13 such Markets located in
North Carolina and held by an entity in which the company has a 50%
interest).
While the Company is continuing its business as a wireless
cable operator and will continue to exploit its DIRECTV agreements,
during 1998 the Company redirected its primary long-term business
strategy to expand the use of its spectrum through the delivery of
BWA services such as two-way high-speed Internet access, data
transmission and IP telephony services, and the Company has devoted
substantial resources in 1997 and 1998 to the development of these
services and products. The Company's initial BWA product, developed
and engineered over the past approximately two and one-half years,
is a high-speed, two-way Internet access and data transmission
product which it is marketing under the name "WarpOneSM". In 1998
the Company introduced Warp OneSM in Jackson, Mississippi, Baton
Rouge, Louisiana, and Memphis, Tennessee as test markets.
In March 1998, the Company retained BT Alex. Brown as
financial advisors to review its business operations, including its
immediate working capital needs. With the assistance of BT Alex.
Brown and other professionals, the Company began a number of
initiatives to improve cash flow and liquidity, including
curtailing or delaying its plans to expand into new Non-Operating
Markets, instead concentrating on the maintenance of its existing
39 Markets. During January 1999, the Company also consolidated 10
field offices and further reduced its workforce by approximately
20%.
In September 1998, the Company entered into the Senior Secured
Facility with MLGAF to fund ongoing operations. As of February 11,
1999, the Company had borrowed $13.5 million in aggregate principal
amount under such facility.
In January 1999 the Company began negotiations with the
Unofficial Noteholders Committee regarding restructuring the Old
Senior Notes through a prenegotiated plan of reorganization. After
extensive negotiations with the Unofficial Noteholders Committee
and other holders of the Old Senior Notes, the parties entered into
the Bondholders Agreement, which provides for the material terms of
a restructuring of the Company. On February 11, 1999 the Company
filed the Bankruptcy Case.
Following commencement of the Bankruptcy Case, the Company has
continued to operate its business as a debtor in possession with
the protection and supervision of the Bankruptcy Court in a manner
intended to minimize the impact of the Bankruptcy Case on the
Company's day-to-day activities. See "- Liquidity and Capital
Resources" for a description of certain financing obtained by the
Company since the filing of the Bankruptcy Case and a summary of
the terms of the Plan.
The Company does not anticipate being able to generate net
income for the foreseeable future and there can be no assurance
that other factors, such as, but not limited to, general economic
conditions and economic conditions prevailing in the Company's
industry, 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 and SFU products, development of its Internet
access product and as additional systems are commenced or acquired.
See "- Liquidity and Capital Resources."
Year 1998 Compared to the Year 1997
Revenues - The Company's revenues consist of monthly fees
paid by subscribers for the basic and premium programming services
and box rental and commissions from the DIRECTV agreements. The
Company's revenues for 1998 were $38.7 million as compared to $34.6
million for 1997, an increase of $4.1 million or 12%. The increase
in revenue was primarily due to a 15% increase in the monthly rate
for basic programming implemented in March 1998, as well as
installation charges, commissions and box rental, pursuant to the
DIRECTV agreements. These increases in revenue were offset by a
decrease in the number of subscribers.
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 1998 were $25.5 million (66% of revenue) as
compared to $23.4 million (68% of revenue) for 1997, reflecting an
increase of $2.1 million or 9%. This increase is attributable
primarily to the launching of the new Internet systems in Memphis,
Jackson, and Baton Rouge.
Selling, General and Administrative Expenses - Selling,
general and administrative ("SG&A") expenses for 1998 were $25.4
million (66% of revenue) compared to $28.3 million (82% of revenue)
for 1997, a decrease of $2.9 million or 10%. The Company has
experienced decreasing SG&A expenses as a result of its de-emphasis
of SFU markets and a refocusing on growth in the MDU and DTV
markets.
The Company believes such SG&A costs will not stabilize until
all planned DIRECTV 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 1998 was $40.4 million versus $35.7
million for 1997, an increase of $4.7 million or 13%. The increase
in depreciation expense during the period was due to additional
capital expenditures related to the launch of new systems in the
third and fourth quarter of 1998. In addition, amortization of
leased license costs increased due to new launches.
Interest Expense - Interest expense for 1998 was $46.0
million versus $41.8 million for 1997, an increase of $4.2 million
or 10%. This increase in interest expense is due primarily to the
borrowings under the Senior Secured Facility.
Impairment of Long-Lived Assets - Upon completion of its new
business plan, the Company reevaluated the carrying value of its
licenses and property and equipment in each of its markets and
determined that the undiscounted future cash flows of certain
markets were not sufficient to support the carrying amounts. As a
result, the Company estimated the fair value of these assets by
discounting future cash flows considering other factors such as the
number of channels held in each market, recent comparable
transactions, the number of households and estimated line-of-sight
coverage, and specific market conditions. Based on this analysis,
the Company recognized a loss in the amount of $26.3 million due to
impairment of its license and leased license investment in twenty-
two of the Company's undeveloped markets.
Although at December 31, 1998, management does not believe
that additional impairments under SFAS 121 are necessary, upon
emergence from bankruptcy, under SOP90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," the Company
will adjust the carrying value of its assets and liabilities based
upon the final determination of its reorganization value (a fair
value concept) by a third party. The amount of such additional
write-down is not currently estimable.
Interest Income - Interest income in 1998 was $1.1 million
versus $4.7 million for 1997, a decrease of $3.6 million or 77%.
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 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.
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.
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 WarpOneSM, the Company's 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 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 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 were 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.
In August 1996, the Company was the high bidder for the BTA
rights in certain of its Markets. The Company paid $29.7 million
for these rights, of which $5.9 million was paid in cash and the
balance was financed with the FCC.
On September 4, 1998, the Company entered into the Senior
Secured Facility with MLGAF. Prior to the commencement of the
Bankruptcy Case, the Company issued $13.5 million in aggregate
principal amount of notes (the "Senior Secured Notes") under that
facility to MLGAF. The Senior Secured Facility bore interest at
13% per annum and would have matured on April 15, 1999. The Senior
Secured Facility was secured by substantially all of the Company's
assets, as well as pledges of the stock of all of the Company's
direct and indirect subsidiaries. In connection with the issuance
of the Senior Secured Notes, the Company also issued to MLGAF seven-
year detachable warrants to purchase up to 6% of the fully-diluted
common stock at an exercise price of $0.72 per share. In order to
obtain the Postpetition Financing (as discussed below), the Company
restated the Senior Secured Notes as postpetition obligations.
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 Non-Operating 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 Non-Operating
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.
For the year ended December 31, 1998, cash used in operating
activities was $33.1 million consisting primarily of a net loss of
$118.3 million partially offset by bad debt expenses of $1.6
million, depreciation and amortization (including impairment of
long-lived assets of $26.3 million) of $66.6 million, net change in
current assets and liabilities of $0.4 million and other net non-
cash expenses of $23.6 million, plus non-cash deferred income tax
benefit of $5.2 million, and a gain on sale of investment of $1.0
million. For the year ended December 31, 1998, cash provided by
investing activities was $9.0 million consisting of the maturity of
securities of $19.7 million, sale of the Company's interest in
Telecorp Holding, Corp., Inc. of $2.5 million, less $13.2 million
for capital expenditures and purchase of licenses and other
investments. For the year ending December 31, 1998, cash provided
by financing activities was $9.7 million consisting of proceeds of
$12.5 million from the Senior Secured Notes less $2.8 million used
for principal payments on long-term debt and debt issuance costs.
As described above (see "- Overview"), on February 11, 1999,
the Company announced that it had reached an agreement with the
Unofficial Noteholders Committee and other holders of the Old
Senior Notes regarding the financial reorganization of the Company.
Pursuant to the Bondholders Agreement, the Company filed a
voluntary petition for reorganization under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court (In re Wireless One, Inc.,
Case No. 99-295 (PJW)) on February 11, 1999. Following
commencement of the Bankruptcy Case, the Company has continued to
operate its business as a debtor in possession with the protection
and supervision of the Bankruptcy Court in a manner intended to
minimize the impact of the Bankruptcy Case on the Company's day-to-
day activities. An immediate effect of the filing of the Bankruptcy
Case was the imposition of the automatic stay under the Bankruptcy
Code which, with limited exceptions, enjoins the commencement or
continuation of all litigation against the Company during pendency
of the Bankruptcy Case.
On February 12, 1999, the Company entered into the
Postpetition Financing with MLGAF providing the Company with an
aggregate principal amount of financing of approximately $18.9
million. The Postpetition Financing includes (i) $13.5 million,
representing the outstanding principal amount under the Senior
Secured Facility, (ii) accrued interest under the Senior Secured
Facility, (iii) a facility fee of $625,000 due to MLGAF in
connection with the Senior Secured Facility and (iv) $4 million in
additional financing provided by MLGAF. Amounts outstanding under
the Postpetition Financing bear interest at 15% per annum, and the
Postpetition Financing will terminate on the earliest to occur of
(i) August 12, 1999 (the date which is the six-month anniversary of
the date of the entry of an interim order), (ii) the date the
Postpetition Financing note has become or is declared to be
immediately due and payable as a result of an Event of Default (as
defined in the Postpetition Financing), (iii) the date of the
redemption of the Postpetition Financing note by the Company or
(iv) the Effective Date. By means of the Postpetition Financing,
the Company's cash needs under its business plan are expected to be
met through mid-May 1999.
On March 15, 1999, the Company filed the Plan and the
Disclosure Statement, both of which reflect the terms of the
Bondholders Agreement. The Plan provides that creditor claims,
other than certain officer and director indemnity claims and the
claims of holders of the Old Senior Notes, will be unimpaired.
Pursuant to the Plan, on the Effective Date, the Old Senior Notes
and equity interests of stockholders, and others, such as option
and warrant holders, will be cancelled and on the Effective Date or
as soon as practicable thereafter, holders of common stock on the
Record Date will receive their ratable proportion of approximately
4% of (i) 9,950,000 of the 10,000,000 shares of the New Common
Stock of Reorganized Wireless to be issued and outstanding as of
the Effective Date, and (ii) the New Warrants, which are 5-year
warrants to purchase an aggregate of 1,235,000 shares of New Common
Stock at an exercise price of $29.57 per share, subject to
adjustment under certain circumstances. All other equity interests
will be cancelled and the holders thereof will not receive any
distribution in respect thereof.
The Company is expected to continue to generate operating and
net losses for at least the foreseeable future. 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
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 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.
There can be no assurance that the Company will emerge from
the Chapter 11 proceeding, that the Company will be able to obtain
financing upon emergence from bankruptcy, or that the Company will
generate positive operating cash flow upon emergence from
bankruptcy. These factors raise substantial doubt about the
Company's ability to continue as a going concern. If the Company
is unable to continue as a going concern and is forced to liquidate
assets to meet its obligations, the Company may not be able to
recover the recorded amount of such assets. The Company's
consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
On October 21, 1998, a hearing panel authorized by the
National Association of Securities Dealers, Inc. issued a ruling
that the Company does not meet all of the financial standards of
the listing requirements of the Nasdaq National Market and that the
Company's common stock would therefore be delisted from the Nasdaq
National Market as of the close of business that day. The
Company's common stock has traded on the OTC Bulletin Board under
its existing symbol "WIRL," effective October 22, 1998.
Year 2000 Compliance
The Year 2000 computer issue concerns the ability of computer
systems and other equipment containing embedded microchip
technology to distinguish the year 2000 from the year 1900. Many
experts fear that this programming problem could render computer
systems and such other equipment around the globe inoperable. The
potential Year 2000 risks to the Company include disruptions or
failures within the Company's operations and products, as well as
within the operations and products of its suppliers and other key
business partners. Because of the indirect effect of third
parties, an accurate assessment and prediction of the impact of the
Year 2000 issue on the Company is difficult.
The Company is currently implementing plans to address both
the internal and external Year 2000 issues. Internally, these
plans encompass an assessment of all major computer systems in use
by the Company. The Company has already completed a significant
upgrade to Year 2000 compliant software and hardware in conjunction
with its 1996 merger. The Company currently anticipates it will
have assessed and remedied all critical areas of its own operations
by June 30, 1999, and that it will internally certify the readiness
of these critical areas by June 30, 1999. The Company's risk
assessment processes associated with critical suppliers and other
key business partners, include analyzing responses to
questionnaires previously solicited and, if necessary, performing
onsite interviews. The Company is dependent upon the internal self-
assessments of key business partners regarding their own Year 2000
issues. The Company intends to develop contingency plans based
primarily on these assessment results. Despite the Company's
efforts to identify and remedy its own internal Year 2000 problems
as well as those of critical third parties, no assurance can be
given that all such problems will be identified or adequately
remedied, or that Year 2000 problems within its own systems and
products or within those of third parties will not have a material
adverse effect on the financial condition and results of operations
of the Company.
The following table is an estimate of timing for assessment
and correction of Year 2000 issues:
<TABLE>
<CAPTION>
Est. Completion Date Est. Certification Date
------------------- ------------------------
<S> <C> <C>
Internal Assessment Completed N/A
Internal Corrections June 30, 1999 June 30, 1999
Internal Assessment June 30, 1999 June 30, 1999
</TABLE>
Costs incurred to date in addressing Year 2000 issues are
approximately $.1 million. Based on current assessment and
correction projects the Company expects to spend approximately $.3
million in both incremental spending and re-deployed resources to
resolve Year 2000 issues. As the Company's assessment and
correction of Year 2000 issues continues these costs may change.
This estimate relates to internal issues and does not include
potential costs from claims resulting from the Company's failure to
effect timely implementation of corrective action on Year 2000
issues. The Company's estimate is irrespective of the impact on
operations that may result from third party deficiencies.
The Company does not expect any significant disruption to its
operations as a result of Year 2000 issues. The Company is taking
actions it believes are necessary and appropriate to identify and
resolve any, and all of these issues. Because of the complexity of
Year 2000 issues, and management's reliance on performance by
third parties, the Company is not able to guarantee that all issues
will be assessed, identified or corrected in a timely or successful
manner.
The foregoing statements regarding the Company's Year 2000
plans and related estimates of costs are forward looking statements
and actual results will vary. The Company's success in addressing
Year 2000 issues could be impacted by the severity of the problems
to be resolved within the Company, by problems affecting its
suppliers and other key business partners, and by the associated
costs.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risks
The Company is not exposed to material future earnings or cash
flow fluctuations from changes in interest rates on long-term debt.
The majority of the Company's long-term debt bears fixed interest
rates. To date, the Company has not entered into any derivative
financial instruments to manage interest rate risk and is currently
not evaluating the future use of any such financial statements.
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
Identification of Directors
Certain of the Company's major stockholders, including Chase
Manhattan Capital Corporation ("CMCC"), Chase Venture Capital
Associates, L.P. ("CVCA"), Baseball Partners and Heartland Wireless
Communications, Inc. ("Heartland"), are parties to a stockholders'
agreement with respect to their shares of Common Stock (the
"Agreement"). Pursuant to the Agreement, these shareholders agreed
to vote their shares of Common Stock so that the Board will have up
to nine members, up to three of whom will be designated by
Heartland (at least one of whom must be independent of Heartland
and the Company), up to two of whom will be designated by CMCC,
Baseball Partners and CVCA (collectively, "Chase"), and one of whom
will be designated by certain former stockholders of TruVision
Wireless, Inc. ("TruVision") (collectively, the "TruVision
Stockholders"). The Board has traditionally nominated for election
to the Board those persons nominated by these stockholders. The
remaining directors are designated by the full Board. Of the
current directors, Mr. Burkhalter serves as the nominee of the
TruVision Stockholders, Mr. McHenry and Ms. Henderson serve as the
nominees of Heartland and Mr. Chavkin serves as the nominee of
Chase. Mr. Sternberg was originally nominated by certain other
stockholders of the Company, including Mr. Sternberg, who was a
party to the Agreement prior to September 1996. Messrs. Sternberg
and Yates now serve as nominees of the full Board.
If the Company emerges from its bankruptcy proceeding pursuant
to the Plan, the current directors will resign as of the Effective
Date and will be replaced by the Board of Directors of Reorganized
Wireless. Pursuant to the Plan, the Board of Reorganized Wireless
will consist of seven members, one of which will be Mr. Burkhalter.
Selection of the remaining members will be subject to the approval
of the Unofficial Noteholders Committee and MLGAF.
The following paragraphs set forth certain information
concerning the Company's directors as of April 1, 1999.
<TABLE>
<CAPTION>
Directors Age Position
- --------- --- --------
<S> <C> <C>
Hans J. Sternberg 63 Chairman of the Board
Henry M. Burkhalter 51 President and Chief Executive Officer
of the Company and Director
Ernest D. Yates, Jr. 54 Executive Vice President and Chief
Operations Officer and Director
Arnold J. Chavkin 47 Director
Marjean Henderson 48 Director
Carroll D. McHenry 55 Director
</TABLE>
Hans J. Sternberg has served as Chairman of the Board since
the Company's founding in June 1995 and as Chairman of the Board of
Old Wireless One since its founding in late 1993. He has also
served as the Chairman and Chief Executive Officer of Starmount
Life Insurance Company since 1983. He is a former owner and
President and Chief Executive Officer of Maison Blanche Department
Stores, a department store chain.
Henry M. Burkhalter became a director of the Company in April
1996 and President of the Company and Vice Chairman of the Board
upon consummation of the Company's merger with TruVision in July
1996. Mr. Burkhalter stepped down as Vice Chairman of the board in
connection with his appointment as Chief Executive Officer of the
Company in May 1997. 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 also served as the
Chairman of Pacific Coast Paging, Inc. since 1990.
Ernest D. Yates joined the Company on January 5, 1998, as
Executive Vice President and Chief Operations Officer and Director.
Mr. Yates's 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 located in
Vancouver, Washington. Mr. Yates has held executive management
positions with Southwestern Bell Corporation, a Texas-based
Regional Bell Operating Company.
Arnold L. Chavkin became a director of the Company in April
1996. He has been a General Partner of Chase Capital Partners
("CCP") since January 1992 and has served as the President of
Chemical Investments, Inc. since March 1991. Mr. Chavkin is a
director of American Tower Corporation, Encore Acquisition
Partners, Inc., Centennial Security, R&B Falcon Corporation, SMG,
Inc., Triton Communications and U.S. Silica Company.
Marjean Henderson became a director of the Company in October
1998. She has been Senior Vice President and Chief Financial
Officer of Heartland since August 1997. From April 1996 to April
1997, Ms. Henderson served as Senior Vice President and Chief
Financial Officer for Panda Energy International, Inc., a global
energy concern. From December 1993 to October 1995, Ms. Henderson
served as Senior Vice President and Chief Financial Officer for
Nest Entertainment, Inc., a home video and movies concern. From
October 1987 to December 1993, Ms. Henderson served as Vice
President, Chief Financial Officer and Treasurer for RCL
Enterprises, the Lyons Group, Lyrick Studios and Big Feet
Productions.
Carroll D. McHenry became a director of the Company in July
1997. Mr. McHenry is the Chairman of the Board, President and
Chief Executive Officer of Heartland. Mr. McHenry was formerly a
senior executive at Alltel, Inc., a national communications holding
company ("Alltel"), most recently serving as President of Alltel's
Communications Service Group, and serving as President of Alltel
Mobile Communications, Inc. from July 1992 to May 1995. Mr.
McHenry also serves as a director of CS Wireless Systems, Inc.
On December 4, 1998 Heartland filed a voluntary pre-negotiated
Plan of Reorganization and Disclosure Statement under Chapter 11 of
the Bankruptcy Code. On January 19, 1999 the Bankruptcy Court
approved its Disclosure Statement and on March 15, 1999, the
Bankruptcy Court confirmed Heartland's Plan of Reorganization,
effective April 1, 1999. Ms. Henderson and Mr. McHenry are
executive officers of Heartland.
_________________
During 1998, the Board held 12 meetings. Each director
attended at least 75% of the aggregate number of meetings held
during 1998 of the Board and committees of which he was a member.
The Board maintains standing Audit and Compensation
Committees. The Audit Committee, which met twice in 1998, oversees
the activities of the Company's independent auditors, including
approving the scope of the annual audit activities of the
independent auditors, and reviews audit results and the internal
audit controls of the Company. The current members of the Audit
Committee are Ms. Henderson and Mr. Chavkin. The Compensation
Committee, which met once in 1998 is authorized to make
recommendations to the Board with respect to general employee
benefit levels, determine the compensation and benefits of the
Company's executive officers and administer the Company's stock
option plans. Mr. McHenry is currently the sole member of the
Compensation Committee. The Company does not have a nominating
committee.
Compensation of Directors
Each non-employee director receives an annual fee of $5,000,
plus $500 for each Board meeting attended. All directors are
reimbursed for reasonable out-of-pocket expenses incurred in
attending Board and committee meetings. In addition, each non-
employee Director (an "Eligible Director") is eligible to receive
stock options under the Company's 1996 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"). Pursuant to the
Directors' Plan, each director who is an Eligible Director on each
November 15 will also be granted on the following January 1 options
to purchase an additional 2,000 shares of Common Stock. The
Company granted options to purchase 4,000 shares of Common Stock
(excluding options that were granted but subsequently forfeited) to
non-employee directors under the Directors' Plan during 1998.
Identification of Executive Officers
The following table sets forth the names, ages, and positions
as of April 1, 1999 with respect to the Company's executive
officers. For a description of the business experience of Messrs.
Burkhalter and Yates, see "- Identification of Directors."
Name Age Position
Henry M. Burkhalter 51 President and Chief Executive
Officer
Ernest D. Yates, Jr. 54 Executive Vice President
and Chief Operations Officer
Henry G. Schopfer, III 52 Executive Vice President,
Chief Executive Financial Officer
and Secretary
Thomas G. Noulles 52 Senior Vice President and General
Counsel
______________________
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.
Thomas G. Noulles joined the Company on August 10, 1998, as
Senior Vice President and General Counsel. Mr. Noulles came to the
Company from National Data Corporation ("NDC"), where he served as
Outside Corporate Counsel to NDC and Vice President, General
Counsel and Secretary to C.I.S. Technologies, Inc., a subsidiary of
NDC. Mr. Noulles also has 22 years of law firm experience in
transactions, mergers and acquisitions, structured transactions
under the United States securities laws and business negotiations.
_________________
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors, executive officers and 10% stockholders to
file with the SEC reports of ownership and changes in ownership of
equity securities of the Company. In 1998, six such reports were
inadvertently not filed to report the stock option repricing of
Messrs. Sternberg, Burkhalter, Yates, Schopfer, Noulles, Senior
Vice President and General Counsel, and Woolhiser, Vice President
and Treasurer. See "Stock Option Repricing," below. In addition,
two reports unrelated to the repricing were inadvertently filed
late: a Form 4 reporting four transactions by Mr. Sternberg and a
Form 3 reporting the appointment of Mr. Noulles, and a related
stock option grant.
Item 11. Executive Compensation
Annual Compensation
The following table sets forth all cash compensation and
options granted for the three years ended December 31, 1998 to the
Company's Chief Executive Officer and its other most highly
compensated executive officers (collectively, the "Named Executive
Officers"). In 1998, no other executive officer of the Company
received more than $100,000 in salary and bonus.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
-------------------------------- -------------------------------
Restricted Securities All
Stock Underlying Other
Name and Principal Position Year Salary Bonus Awards Options(1) Compensation(2)
- --------------------------- ------ -------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry M. Burkhalter, 1998 $272,218 $ --- --- 229,627(3) $ 9,000
President and Chief 1997 $181,620 $175,000 --- 200,000(4) $ 8,566
Executive Officer 1996 $ 80,500 $ --- --- 78,015(4) $ 2,772
Ernest D. Yates, Jr., 1998 $193,846 $ 50,000(6) $ 138,450(7) 200,000 $78,008
Executive Vice President
and Chief Operating
Officer (5)
Henry G. Schopfer, III, 1998 $131,167 $ --- --- 19,324(3) $29,328
Executive Vice President 1997 $129,400 $ 20,000 --- 10,000(4) $17,464
and Chief Financial 1996 $ 4,615 $ --- --- 27,000(4) $ ---
Officer
</TABLE>
(1) For additional information, please refer to the following
tables.
(2) All amounts shown are amounts paid in automobile allowances
except in the case of Mr. Yates whose 1998 compensation included
$71,016 in moving and temporary living expenses and Mr. Schopfer,
whose compensation in 1997 and 1998 included moving and temporary
living expenses of $8,118 and $20,328, respectively. Amounts in
this column also include additional cash compensation in amounts
necessary to reimburse each person for federal and state income
taxes due on such automobile allowances and moving and living
expenses.
(3) Options reported as granted to Messrs. Burkhalter and Schopfer
in 1998 represent options repriced in 1998, which were originally
granted in 1996 and 1997 and reported in this column, and which
are no longer outstanding. See "Stock Option Repricing," below.
(4) These options have been replaced by the options reported in
this column as granted to Messrs. Burkhalter and Schopfer in
1998. See footnote (3) and "Stock Option Repricing," below.
(5) Mr. Yates joined the Company on January 5, 1998.
(6) Represents the amount paid to Mr. Yates upon commencement of
his employment with the Company.
(7) Represents the right to receive 65,000 shares of common stock.
These shares are scheduled to be granted to Mr. Yates as
follows: 30,000 on December 31, 1998 and 17,500 on each of
December 31, 1999 and 17,500 on December 31, 2000. As of
December 31, 1998, Mr. Yates held the right to receive all
65,000 shares of restricted stock having a value of $11,050.
Mr. Yates will not have the right to receive dividends on the
shares until they are granted.
1998 Stock Option Grants
The following table sets forth certain information concerning
the grant of stock options to the Named Executive Officers during
1998.
<TABLE>
<CAPTION>
Potential Realizable
No. of % of Value at Assumed
Shares Total Annual Rates of
Underlying Options Granted Stock Price
Options To Employees Exercise Expiration Appreciation for
Name Granted in 1998 Price Date Option Term(1)
- ------------------------------------------------------------------------------------------------------------------------
5% 10%
------------------
<S> <C> <C> <C> <C> <C> <C>
Henry M. Burkhalter 229,627(2) 16.4% $ .656 7/29/06 / 11/26/07 $ 94,733 $240,074
Ernest D. Yates, Jr. 200,000(3) 14.3% $ .656 11/26/07 $ 82,511 $209,099
Henry G. Schopfer, III 19,243(4) 1.4% $ .656 12/9/96 / 11/26/07 $ 7,939 $ 20,119
</TABLE>
_____________________
(1) Amounts reflect certain assumed rates of appreciation set
forth in the Securities and Exchange Commission's executive
compensation disclosure rules. Actual gains, if any, on stock
option exercises depend on future performance of the common
stock and overall market conditions. The fair market value of
the Common Stock on the date of grant was $.656 per share.
(2) The options are not original grants, but are repriced options
that replace the following original grants: (i) fully vested
options to purchase 29,627 shares originally granted on July
29, 1996 and (ii) options to purchase 200,000 shares that vest
in five equal installments on the first through the fifth
anniversaries of original date of grant, November 26, 1997.
(3) The options shown vest in five equal installments on the first
through fifth anniversaries of the original date of grant,
November 26, 1997, with accelerated vesting in the event of a
change in control of the Company. The options became effective
on the date Mr. Yates commenced his employment with the
Company, January 5, 1998. The original exercise price of $2.59
was reduced to $.656 in connection with the Company-wide stock
option repricing in 1998. See "Stock Option Repricing," below.
(4) These options are not original grants, but are repriced
options that replace the following original grants: (i)
options to purchase 9,324 shares that were orignially granted
on December 9, 1996 and (ii) options to purchase 10,000
shares that were originally granted on N ovember 26, 1997.
These options vest in five equal installments on the first
through the fifth anniversaries of their dates of grant. See
"Stock Option Repricing," below.
Stock Option Holdings
The following table sets forth information, as of December 31,
1998, with respect to stock options held by the Named Executive
Officers. The Named Executive Officers did not exercise any
options to purchase the Company's common stock in 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 1998 at December 31, 1998(4)
-------------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Henry M. Burkhalter(1) 69,627 160,000 $ 0 $ 0
Ernest D. Yates, Jr.(2) 40,000 160,000 $ 0 $ 0
Henry G. Schopfer, III(3) 5,730 13,594 $ 0 $ 0
</TABLE>
(1) Mr. Burkhalter has options to purchase 29,627 shares at an
exercise price of $.656 per share. Mr. Burkhalter also has
options to purchase 200,000 shares at an exercise price of
$.656 per share, 40,000 of which are currently exercisable.
These options vest in five equal installments on the first
through fifth anniversaries of the date of grant, November 26,
1997.
(2) Mr. Yates has options to purchase 200,000 shares at an
exercise price of $.656, 40,000 of which are currently
exercisable. These options vest on the first through the
fifth anniversaries of November 26, 1997.
(3) Mr. Schopfer has options to purchase 9,324 shares at an
exercise price of $.656 per share, 3,730 of which are
currently exercisable. These options vest in five equal
installments on the first through fifth anniversaries of the
date of grant, December 9, 1996. Mr. Schopfer also has
options to purchase 10,000 shares at an exercise price of
$.656 per share, 2,000 of which are currently exercisable.
These options will vest in five equal installments on the
first through the fifth anniversaries of the date of grant,
November 26, 1997.
(4) The closing sale price of the Common Stock on December 31,
1998 was $.17 as reported by the OTC Bulletin Board.
Stock Option Repricing
The following table sets forth information with respect to
stock options held by the executive officers of the Company that
were repriced by the Board of Directors on September 4, 1998 to
reflect the then current market value of the common stock. The
Company has never repriced any other options or SARs.
<TABLE>
<CAPTION>
Securities
Market price underlying Length of original
of stock at number of Exercise price Securities option term
time of options at time of underlying New remaining at
repricing or repriced or repricing or number of exercise date of repricing or
Name Date amendment amended amendment new options price amendment
- ------------------- ------ ------------ ------------ ---------------- ------------ --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Henry M. Burkhalter 9/4/98 $.656 200,000 $2.59 200,000 $.656 9.2 years
President and 9/4/98 $.656 78,015 $6.82 29.627 $.656 7.9 years
Chief Executive
Officer
Ernest D. Yates, Jr. 9/4/98 $.656 200,000 $2.59 200,000 $.656 9.3 years
Executive Vice
President and Chief
Operations Officer
Henry G. Schopfer, III 9/4/98 $.656 27,000 $7.50 9,324 $.656 8.2 years
Executive Vice 9/4/98 $.656 10,000 $2.59 10,000 $.656 9.3 years
President and
Chief Financial Officer
Thomas G. Noulles 9/4/98 $.656 20,000 $.843 20,000 $.656 10 years
Senior Vice
President and
General Counsel
</TABLE>
Report on Repricing of Stock Options - On September 4, 1998,
the Board of Directors of the Company proposed amendments to all
employee stock option agreements reducing the exercise prices under
such agreements and in certain cases reducing the number of shares
of common stock receivable upon exercise of such options.
All outstanding options were amended to reduce the exercise
price thereunder to $.656, the market price of the common stock on
September 4, 1998. All stock options with an exercise price
greater than $2.59 were proposed to be amended, subject to the
option holder's consent, to reduce the number of shares receivable
upon exercise of such new options by the same percentage amount as
the then current exercise price bore to $2.59. The table set forth
above summarizes the effect of this repricing on the executive
officers of the Company.
On the date of the Board's action, options were outstanding
with exercise prices ranging from $13.83 to $.843 per share. The
Board's proposal was designed to replace the incentives previously
provided to members of management, which had been eliminated over
time by the decline in the price of the Company's common stock.
The Board believed that the stock price decline, which was
generally experienced by all companies in the Company's industry,
was unrelated to management's performance and continued to believe
that equity incentives remained the most appropriate method to
compensate key members of management.
By reducing the number of shares issuable upon exercise of
such options, the Board's proposal was also designed to make
available additional shares under the Company's 1995 Long-Term
Performance Incentive Plan for use in attracting and retaining
qualified management.
Hans J. Sternberg Arnold J. Chavkin
Henry M. Burkhalter Marjean Henderson
Ernest D. Yates, Jr. Carroll D. McHenry
Employment Agreements
The Company has entered into employment agreements with
certain of its executive officers, including Messrs. Burkhalter,
Yates and Schopfer. The employment agreements provide for payment
of a base salary indexed to inflation and bonuses awarded at the
sole discretion of the Committee and based upon the executive's
performance and the Company's operating results. The agreements of
Messrs. Burkhalter and Schopfer have two-year terms and are subject
to automatic annual renewal for a period of seven years thereafter
so that the officer, until the end of the seven year period, never
has more than two years or less than one year remaining on the
current term. Mr. Yates's employment agreement has a three-year
term. Each employment agreement provides that each executive may
be terminated with or without cause, and provides that the
executive will not compete with the Company or its subsidiaries
within a specified area during the period of employment and for the
two years thereafter (one year in the case of Mr. Yates). Each
executive is entitled to receive a severance payment in the event
of a resignation caused by the relocation of the Company's office
at which the executive is employed to a location more than 60 miles
from its present location.
Compensation Committee Interlocks and Insider Participation
The sole current member of the Compensation Committee is Mr.
McHenry. No current officer or employee of the Company serves on
the Committee. During 1997, no executive officer of the Company
served as a member of the compensation committee or a director of
an entity, one of whose executive officers served on the Committee
or as a director of the Company.
Mr. McHenry is a director of Heartland. In connection with
the acquisition of certain assets from Heartland in October 1995
(the "Heartland Transaction"), the Company entered into certain non-
competition and registration rights agreements with Heartland. See
Item 13 "Certain Relationships and Related Transactions."
Compensation Committee's Report on Executive Compensation
The Committee is authorized to make recommendations to the
Board of Directors with respect to general employee benefit levels,
determine the compensation and benefits of the Company's officers
and key employees and administer the Company's 1995 Long-Term
Performance Incentive Plan. The sole member of the Committee is Mr
McHenry. None of the members of the Committee is currently an
officer or employee of the Company.
Upon consummation of its merger with TruVision in July, 1996
(the "TruVision Transaction"), the Company entered into an
employment agreement with Mr. Burkhalter, the terms of which were
approved by the Committee. Messrs. Schopfer and Yates entered into
similar contracts upon their hiring by the Company in 1996 and
1997, respectively (see "Employment Agreements," above). The
compensation arrangements for such executives were approved by the
full Board upon the recommendation of the Committee. Salaries of
such executives were determined by the Committee based upon a
review of salaries for similar positions at comparable companies
and over-all competitive and market conditions. The compensation
arrangements for such executives will be reviewed annually by the
Committee.
In general, these employment agreements establish the base
salary for each executive during the term of the agreement, which
is subject to adjustment based upon increases in the Consumer Price
Index. Further, the agreements establish that such executives are
eligible to receive performance bonuses to be granted by the
Committee based upon the operating performance of the Company. In
determining whether to grant bonuses to these executives, the
Committee considers the financial condition and operational
performance of the Company during the last completed fiscal year
and the specific contributions of the individual executive officer
to the Company's performance and the achievement of strategic
business objectives.
In August 1998, the Company hired Thomas G. Noulles as its
Senior Vice President and General Counsel. The Company entered
into a two-year employment contract with Mr. Noulles providing for
an annual salary of $139,000 which will be indexed to inflation
over the life of the contract and an annual bonus of up to 20% of
Mr. Noulles' annual salary based on his performance and the
Company's operating results. The contract was negotiated between
representatives of the Company and Mr. Noulles, and its terms
approved by the Committee. The Committee took into account Mr.
Noulles' experience and the potential he offered to the Company's
operations when approving the terms of the employment agreement.
In addition, the Committee granted to Mr. Noulles 20,000
options under the Plan with an exercise price of $.843 per share
and a five-year vesting period. These equity incentives were
granted in an effort to align the interests of Mr. Noulles with
those of the Company's stockholders as discussed below. These
options were repriced in 1998. See "Stock Option Repricing,"
above.
For the immediate future, the Committee intends to rely
primarily on equity incentives granted under the Plan as a means to
compensate key members of management while the Company uses its
cash reserves for other operating purposes. The Committee believes
that such incentives are a cost-effective method of providing
management with long-term compensation. In addition, the Committee
believes that equity incentives are a particularly appropriate long-
term incentive since they align the interests of the optionee with
those of the stockholders by providing value to the optionee tied
directly to stock price increases.
Position Regarding Compliance with Section 162(m) of the
Internal Revenue Code - Section 162(m) of the Code limits the
deduction allowable to the Company for compensation paid to each of
the Named Executive Officers in any year to $1 million. Qualified
performance-based compensation is excluded from this deduction
limitation if certain requirements are met. Incentives granted by
the Company have been structured to qualify as performance-based.
Although no executive officer of the company reached the
deductibility cap in 1998, the Committee plans to continue to
evaluate the Company's cash and stock incentive programs as to the
advisability of future compliance with Section 162(m).
The Compensation Committee
Carroll D. McHenry
Performance Graph
The graph below compares the Company's cumulative total
stockholder return since the Common Stock became publicly traded on
October 19, 1995 with the Nasdaq Total Return Index and an index of
comparable companies selected by the Company. This index includes
American Telecasting Development, Inc., CAI Wireless Systems, Inc.,
Heartland Wireless Communications, Inc. and People's Choice TV
Corp. The graph assumes that the value of the investment in the
Company's Common Stock at its initial public offering price of
$10.50 per share and each index was $100.00 on October 19, 1995.
<TABLE>
<CAPTION>
Total Return*
--------------------------------
December 31,
--------------------------------
October 19, 1995 1995 1996 1997 1998
---------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Wireless One, Inc. 100 157 63 19 2
Nasdaq Total Return Index 100 102 125 154 216
Peer Group Index 100 106 42 8 .5
</TABLE>
_______________________
* Total Return assumes the reinvestment of dividends.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information as of April
1, 1999 with respect to the beneficial ownership of common stock of
(i) each director of the Company, (ii) each Named Executive Officer
(as hereinafter defined), (iii) all directors and executive
officers of the Company as a group and (iv) persons owning of
record or known to the Company to be the beneficial owner of more
than five percent of the Company's Common Stock determined in
accordance with Rule 13d-3 under the Securities Exchange Act of
1934. Unless otherwise indicated, the securities are held with
sole voting and investment power.
Common Stock(1)
---------------
Number Percent
of of
Name Shares Class
- ---- --------- -------
Heartland Wireless Communications, Inc. (2) 3,459,508 20.4%
Chase Manhattan Capital, L.P. (3) 1,991,690 11.8%
Chase Venture Capital Associates, L.P. (3) 1,482,132 8.7%
Baseball Partners (3) 393,226 2.3%
Henry M. Burkhalter (4) 883,103 5.2%
Hans J. Sternberg (5) 313,139 1.8%
Arnold L. Chavkin (6) 3,870,548 22.8%
Carroll McHenry (7) 3,460,008 20.4%
Marjean Henderson (8) 3,459,508 20.4%
Ernest D. Yates (9) 70,000 *
Henry G. Schopfer, III (10) 5,730 *
All Directors and executive officers as a
group ( 8 persons) (11) 8,602,528 50.8%
____________________
* Less than one percent.
(1) Heartland and certain of its subsidiaries, CMCC, CVCA,
Baseball Partners, Mr. Burkhalter and certain other
stockholders of the Company own their common stock subject to
the terms of the Agreement, as amended. See Item 10 Directors
and Executive Officers of the Registrant -- Identification of
Directors. Each of the parties to the Agreement disclaims
beneficial ownership of the shares of common stock owned by
the other parties to the Agreement.
(2) Heartland reported on a Schedule 13D filed with the SEC on
March 8, 1999, sole power to vote and dispose of 2,897,135
shares of common stock, and shared with a wholly-owned
subsidiary the power to vote and dispose of 580,373 shares of
common stock. The address for Heartland is 200 Chisholm
Place, Suite 200, Plano, Texas 75075.
(3) Chase Manhattan Capital, L.P. ("CMC, L.P.") reported on a
Schedule 13D filed with the SEC on February 16, 1999, shared
voting and dispositive power with respect to 1,991,690 shares
of common stock together with The Chase Manhattan Bank and The
Chase Manhattan Corporation, the indirect parent of CMC, L.P.
In the same filing, CVCA reported sole voting and dispositive
power with respect to 1,482,132 shares of common stock, and
Baseball Partners reported shared voting and dispositive power
as of December 31, 1998, with respect to 393,226 shares of
common stock. The address for CMC, L.P., CVCA and Baseball
Partners is 380 Madison Avenue, 12th Floor, New York, New York
10017.
(4) Includes 78,160 owned by Mr. Burkhalter's wife and 69,627
shares issuable upon the exercise of presently exercisable
options. The address for Mr. Burkhalter is c/o Wireless One,
Inc. 2506 Lakeland Drive, Jackson, Mississippi 39208.
(5) Includes 114,762 shares issuable upon the exercise of
presently exercisable options.
(6) Includes 3,867,048 shares owned by CMC, L.P., CVCA and
Baseball Partners. Mr. Chavkin is a general partner of CCP,
the general partner of CVCA. CCP has investment and voting
discretion with respect to the shares held by CMC, L.P.
Baseball Partners has granted a proxy with respect to the
shares of Common Stock held by it to CCP. Mr. Chavkin
disclaims beneficial ownership of the shares held by CVCA,
CMC, L.P. and Baseball Partners. Also includes 3,500 shares
issuable upon the exercise of currently exercisable options.
The address for Mr. Chavkin is 380 Madison Avenue, 12th Floor,
New York, NY 10017.
(7) Includes 3,459,508 shares beneficially owned by Heartland.
Mr. McHenry is President, Chief Executive Officer and Chairman
of the Board of Heartland. Mr. McHenry disclaims beneficial
ownership of shares owned by Heartland. Also includes 500
shares issuable upon the exercise of currently exercisable
options. The address for Mr. McHenry is 200 Chisholm Place,
Suite 200, Plano, Texas 75075.
(8) Reflects 3,459,508 shares beneficially owned by Heartland.
Ms. Henderson is Senior Vice President and Chief Financial Officer
of Heartland and disclaims beneficial ownership of shares owned by
Heartland. The address for Ms. Henderson is 200 Chisholm Place,
Suite 200, Plano, Texas 75075.
(9) Includes 40,000 shares issuable upon exercise of currently
exercisable options.
(10) Consists of 5,730 shares issuable upon the exercise of
currently exercisable options.
(11) Includes 234,119 shares issuable upon the exercise of
currently exercisable options held by directors and executive
officers.
Item 13. Certain Relationships and Related Transactions
In connection with the Heartland Transaction, Heartland and
the Company entered into an agreement whereby (i) the Company
agreed not to compete with Heartland or any of Heartland's
subsidiaries in the wireless cable television business in specified
markets in which Heartland and its subsidiaries operate or have
significant channel rights, (ii) Heartland agreed not to compete
with the Company in the wireless cable television business in
specified markets and (iii) if at any time a wireless cable
television system operated by the Company interferes with the
signal transmission of a wireless cable television system operated
by Heartland or one of Heartland's subsidiaries (or vice versa),
then the Company, Heartland and their respective subsidiaries will
use their best efforts to negotiate and enter into an appropriate
non-interference agreement. The Company also entered into a
registration rights agreement with Heartland and all of the former
stockholders of Old Wireless One, which was amended and restated in
connection with the TruVision Transaction, to include the former
stockholders of TruVision as parties thereto, pursuant to which the
Company granted to the parties thereto certain demand and "piggy-
back" registration rights with respect to shares of common stock
held by such parties.
During 1998, Mr. Reilly, Vice Chairman of the Board, was paid
approximately $184,000 in salary and automobile allowance pursuant
to the terms of his employment agreement with the Company.
Effective December 31, 1998, Mr. Reilly forgave the Company's
further obligations to him under his employment agreement.
Mr. Sternberg, Chairman of the Board, was paid approximately
$131,085 during 1998 pursuant to his employment agreement with the
Company.
During 1998, the Company advanced funds to Mr. Burkhalter from
time to time. Of these amounts, $100,000 was an advance of the
bonus expected to be paid to Mr. Burkhalter in 1998. No bonuses
were paid to Named Executive Officers in 1998, other than Mr.
Yates' signing bonus; accordingly, as of March 31, 1999 $100,000
remained outstanding. The largest amount of such indebtedness
outstanding at any time during 1998 was $112,000. This
indebtedness bears interest at 1% above prime.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on
Form 8-K
(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 a current report on Form 8-K dated
October 22, 1998 reporting under "Item 5, Other Events"
that the Company's common stock began trading on the OTC
Bulletin Board commencing October 22, 1998 under the
symbol "WIRL." No financial statements were filed with
this Form 8-K.
Wireless One, Inc.,
and Subsidiaries
Independent Auditors'Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditors' Report
The Board of Directors
Wireless One, Inc.
We have audited the accompanying consolidated financial statements
of Wireless One, Inc. and subsidiaries as of December 31, 1997 and
1998, 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, 1998. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule.
The 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,
1997 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1998, 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.
The accompanying consolidated financial statements and financial
statement schedule have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred
substantial operating and net losses and cash flow deficits, and in
February 1999, commenced a voluntary proceeding under Chapter 11 of
the United States Bankruptcy Code. These matters raise substantial
doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements and financial
statement schedule do not include any adjustments that might result
from the outcome of these uncertainties.
KPMG Peat Marwick LLP
Jackson, Mississippi
March 18, 1999
F-2
WIRELESS ONE, INC.
Consolidated Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,528,215 $ 1,163,716
Marketable investment securities - restricted
(note 5) 19,258,789 -
Subscriber receivables, less allowance for
doubtful accounts of $486,820 and $243,626
in 1997 and 1998, respectively 2,071,689 1,344,803
Accrued interest and other receivables 729,237 1,022,409
Prepaid expenses 1,136,303 1,113,086
------------- -------------
Total current assets 38,724,233 4,644,014
Property and equipment, net (note 6) 110,099,016 85,429,662
License and leased license investment, net of
accumulated amortization of $7,896,648 and $13,252,332
in 1997 and 1998, respectively 151,386,399 121,764,630
Other assets (note 7) 17,377,550 15,355,282
------------- -------------
$ 317,587,198 $ 227,193,588
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,913,209 $ 1,646,290
Accrued expenses 5,117,451 6,532,544
Accrued interest 4,942,119 4,935,903
Current maturities of long-term debt (note 8) 871,408 2,542,956
Senior secured notes payable (note 9) - 12,500,000
------------- -------------
Total current liabilities 13,844,187 28,157,693
Long-term debt (note 8) 317,529,032 336,287,418
Deferred taxes (note 10) 5,200,000 -
------------- -------------
336,573,219 364,445,111
Stockholders' equity (deficit) (notes 11 and 12):
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 and 16,910,064 shares issued and
outstanding in 1997 and 1998 169,101 169,101
Additional paid-in capital 119,772,011 119,772,011
Accumulated deficit (138,927,133) (257,192,635)
------------- -------------
Total stockholders' deficit (18,986,021) (137,251,523)
------------- -------------
Commitments and contingencies (note 13) - -
$ 317,587,198 $ 227,193,588
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
WIRELESS ONE, INC.
Consolidated Statements of Operations
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 11,364,828 $ 34,580,464 $ 38,737,367
Operating expenses:
Systems operations 8,416,134 23,398,304 25,489,657
Selling, general and administrative 15,559,156 28,317,852 25,405,295
Depreciation and amortization 11,625,507 35,741,301 40,377,539
Impairment of long-lived assets (note 3) --- --- 26,270,196
------------- ------------ ------------
35,600,797 87,457,457 117,542,687
------------- ------------ ------------
Operating loss (24,235,969) (52,876,993) (78,805,320)
------------- ------------ ------------
Other income (expense):
Interest expense (28,087,948) (41,828,876) (46,014,583)
Interest income 8,146,958 4,711,185 1,124,579
Equity in losses of investee(note 7) (193,436) (445,157) (540,406)
Gain on sale of investment --- --- 1,000,000
Other --- --- (229,772)
------------- ------------ -------------
Total other expense (20,134,426) (37,562,848) (44,660,182)
------------- ------------ -------------
Loss before income taxes (44,370,395) (90,439,841) (123,465,502)
Income tax benefit (note 10) 4,700,000 1,300,000 5,200,000
------------- ------------ -------------
Net loss $ (39,670,395) $(89,139,841) $(118,265,502)
============= ============ =============
Basic and diluted loss per common share $ (2.65) $ (5.26) $ (6.99)
============= ============ ============
Basic and diluted weighted
average common shares outstanding 14,961,934 16,940,374 16,910,064
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
WIRELESS ONE, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Additional Accumulated
Common Stock Paid-In Capital Deficit Total
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 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)
Net loss - - (118,265,502) (118,265,502)
------------ ------------- ------------- -------------
Balance at December 31, 1998 $ 169,101 $ 119,772,011 $(257,192,635) $(137,251,523)
============ ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
WIRELESS ONE, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (39,670,395) $ (89,139,841) $(118,265,502)
Adjustments to reconcile net loss to net
cash used in operating activities:
Bad debt expense 371,349 1,535,943 1,576,216
Impairment of long-lived assets - - 26,270,196
Depreciation and amortization 11,625,507 35,741,301 40,377,539
Amortization of debt discount 7,845,537 19,933,049 23,533,821
Accretion of interest income (976,638) (502,044) (457,041)
Deferred income tax benefit (4,700,000) (1,300,000) (5,200,000)
Equity in losses of investee 193,436 445,157 540,406
Gain on sale of investment - - (1,000,000)
Changes in assets and liabilities:
Receivables (868,890) (2,873,969) (1,142,502)
Prepaid expenses (145,949) 12,993 23,217
Deposits 917,796 (328,286) 272,773
Accounts payable and accrued expenses 3,265,187 (1,935,297) 400,470
------------- ------------- -------------
Net cash used in operating activities (22,143,060) (38,410,994) (33,070,407)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of investments and other assets (2,778,012) (4,167,500) (795,000)
Capital expenditures (60,408,418) (58,130,615) (10,352,501)
Acquisition of license investment (43,898,328) (3,307,913) (2,054,093)
Proceeds from sale of investment - - 2,500,000
Proceeds from maturities of securities 17,335,237 18,278,000 19,712,703
------------- ------------- -------------
Net cash provided by (used in)
investing activities (89,749,521) (47,328,028) 9,011,109
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and
warrants 120,624,614 - -
Proceeds from issuance of senior
secured notes payable - - 12,500,000
Principal payments on long-term debt (13,089,874) (3,181,346) (735,077)
Debt issuance costs (1,604,955) - (2,070,124)
Issuance of common stock 31,050 - -
------------- ------------- -------------
Net cash provided by (used in)
financing activities 105,960,835 (3,181,346) 9,694,799
------------- ------------- -------------
Net decrease in cash (5,931,746) (88,920,368) (14,364,499)
Cash and cash equivalents at beginning of year 110,380,329 104,448,583 15,528,215
------------- ------------- -------------
Cash and cash equivalents at end of year $ 104,448,583 $ 15,528,215 $ 1,163,716
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(1) Description of Business and Summary of Significant Accounting
Policies
(a)Proceedings under Chapter 11 and Nature of Operations
On February 11, 1999, Wireless One, Inc. filed a voluntary
petition for reorganization under Chapter 11 of the U. S.
Bankruptcy Code. The Company is operating its business as a
debtor-in-possession, subject to the approval of the
Bankruptcy Court for certain of its proposed actions
subsequent to filing.
The Company is engaged in the business of developing,
owning, and operating wireless cable television systems and
high-speed, two-way Internet access systems, primarily in
select southern and southeastern United States markets.
(b)Consolidation Policy
The consolidated financial statements include the accounts
of the Company and its majority-owned subsidiaries. All
significant intercompany balances and transactions are
eliminated in consolidation.
(c)Property and Equipment
Property and equipment are stated at cost and include the
cost of transmission equipment as well as subscriber
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, 1996, 1997 and 1998 was $2,275,375,
$5,072,990 and $5,355,684, respectively. As of December 31,
1997 and 1998, approximately $71,412,000 and $13,411,593 of
license and leased license investment was not subject to
amortization.
(Continued)
F-7
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(e)Impairment of Long-lived Assets
The Company accounts for long-lived assets in accordance
with 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 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 is
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. Assets to be
disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
(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." 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. Anti-
dilutive shares of 507,407, 381,922 and 269,577 for the
years ended December 31, 1996, 1997 and 1998 have been
excluded from the calculation of diluted earnings per share.
(i) Debt Issuance Costs
Costs incurred in connection with issuance of the Company's
1995 Senior Notes, 1996 Senior Discount Notes and the
Senior Secured Notes (see notes 8 and 9) are included in
other assets and are being amortized using the interest
method over the terms of the notes.
(Continued)
F-8
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(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 estimates of
undiscounted future cash flows and fair values used in
evaluating the carrying value of long-lived assets (see note
3), 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, 1997
consist of U.S. Treasury securities which matured in 1998.
The Company had the ability and intent to hold these
investments until maturity and, accordingly, 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, 1996, 1997 and 1998.
(m)Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which establishes standards for
reporting and display of comprehensive income in a full set
of general-purpose financial statements. Comprehensive
income includes net income and other comprehensive income
which is generally comprised of changes in the fair value of
available-for-sale marketable securities, foreign currency
translation adjustments and adjustments to recognize
additional minimum pension liabilities. For each period
presented in the accompanying consolidated statements of
operations, comprehensive income and net income are the same
amount.
(n) Segment Reporting
In January 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131").
SFAS 131 requires that public companies report operating
segments based upon how management allocates resources and
assesses performance. Based on the criteria outlined in
SFAS No. 131, the Company is comprised of a single
reportable segment -- distribution of wireless video
and Internet access. No additional disclosure is required
by the Company to conform to the requirements of SFAS No.
131.
(o) 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.
F-9 (Continued)
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(2) Liquidity, Proceedings under Chapter 11 and Going Concern
The Company has incurred significant operating and net losses
since inception, and has been unable to generate sufficient
cash flow from operating activities to meet projected debt
service and other obligations when due. 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.
In March 1998, the Company retained BT Alex. Brown as financial
advisors to review its business operations. With BT Alex.
Brown and other professionals, the Company began a number of
initiatives to improve cash flow and liquidity, including the
curtailing or delaying of its plans to expand into new markets.
In September 1998, the Company entered into a $20 million
Senior Secured Discretionary Note Facility (the "Senior
Facility") (see note 9) with Merrill Lynch Global Allocation
Fund, Inc. ("MLGAF") to fund ongoing operations. During the
fourth quarter, MLGAF informed the Company of its decision to
withhold the remaining $7.5 million under the Senior Facility.
During the fourth quarter of 1998, management concluded that it
was unlikely that the Company would be able to continue to
execute its then existing business plan, including continued
development of new markets. See note 3 for a discussion
regarding management's revisions to its strategy and business
plan and the resulting impairment of certain long-lived assets.
In January 1999, the Company began negotiations with several of
the largest holders (the "Unofficial Noteholders' Committee")
of the 1995 Senior Notes and the 1996 Senior Discount Notes
(collectively, the "Old Senior Notes") regarding restructuring
such indebtedness through a prenegotiated plan of
reorganization (the "Bondholders' Agreement"). Pursuant to
these negotiations, on February 11, 1999, the Company filed a
voluntary case with the Bankruptcy Court under Chapter 11 of
the Bankruptcy Code. Following commencement of the bankruptcy
case, the Company has continued to operate its business as a
debtor in possession under the protection and supervision of
the Bankruptcy Court.
On February 12, 1999, the Company entered into a financing
facility with MLGAF (the "Postpetition Financing") providing
the Company with an aggregate principal amount of financing of
approximately $18.9 million. The Postpetition Financing
includes (i) $13.5 million, representing the outstanding
principal amount under the Senior Facility (see note 9), (ii)
accrued interest under the Senior Facility, (iii) a facility
fee of $625,000 due to the MLGAF in connection with the Senior
Facility and (iv) $4 million in additional financing for
working capital needs. Amounts outstanding under the
Postpetition Financing bear interest at 15% per annum, and the
Postpetition Financing will terminate on the earliest to occur
of (i) August 12, 1999 (the date which is the six-month
anniversary of the date of the entry of an interim order), (ii)
the date the Postpetition Financing note has become or is
declared to be immediately due and payable as a result of an
Event of Default (as defined in the Postpetition Financing),
(iii) the date of the redemption of the Postpetition Financing
note by the Company or (iv) the effective date of the Plan.
On March 15, 1999, the Company filed a Plan of Reorganization
under the Bankruptcy Code (the "Plan") and a proposed
disclosure statement, which reflect the terms of the
Bondholders Agreement. Pursuant to the Plan, on the effective
date of the Plan (the "Effective Date"), the Old Senior Notes
and equity interests of stockholders, and others, such as
option and warrant holders, will be cancelled and on the
Effective Date or as soon as practicable thereafter, holders of
common stock on a record date to be determined (the "Record
Date") will receive their pro-rata share of approximately 4% of
the common stock of the Company (as it is expected to be
reorganized as of the Effective Date, hereinafter "Reorganized
Wireless") to be issued and outstanding as of the Effective
Date (the "New Common Stock"), and (ii) the New Warrants, which
are 5-year warrants to
(Continued)
F-10
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
purchase an aggregate of 1,235,000 shares of New Common Stock
at an exercise price of $29.57 per share, subject to adjustment
under certain circumstances. All other equity interests will
be cancelled and the holders thereof will not receive any
distribution. The remaining approximately 96% of the New Common
Stock will be distributed to holders of Old Senior Notes
(9,552,000 shares) and to BT Alex. Brown (50,000 shares).
Accordingly, under the Plan holders of common stock will
receive one share of New Common Stock for every 42.56 shares of
common stock held on the Record Date and a New Warrant to
purchase 1 share of New Common Stock for every 13.72 shares of
common stock held on the Record Date. Upon the Effective Date,
Reorganized Wireless will be authorized under the Plan to issue
incentive options to management of Reorganized Wireless to
purchase 444,000 shares of New Common Stock at an exercise
price of $13.51 pursuant to a newly adopted Stock Option Plan
(the "New Stock Option Plan"). New additional incentive
options to purchase 666,000 shares of New Common Stock at a yet-
to-be-determined exercise price will also be available for
issuance to management pursuant to the New Stock Option Plan.
By a letter to the Company dated February 25, 1999 (the
"Heartland Letter"), Heartland Wireless Communications, Inc.
("Heartland"), a holder of approximately 20% of the common
stock, requested consideration of an alternate plan of
reorganization for the Company. The Company has considered the
plan proposed in the Heartland Letter and believes that the
Company's Plan is more favorable to the creditors and
stockholders of the Company.
There can be no assurance that the Company will emerge from the
Chapter 11 proceeding, that the Company will be able to obtain
financing upon emergence from bankruptcy, or that the Company
will generate positive operating cash flow upon emergence from
bankruptcy. These factors raise substantial doubt about the
Company's ability to continue as a going concern. If the
Company is unable to continue as a going concern and is forced
to liquidate assets to meet its obligations, the Company may
not be able to recover the recorded amounts of such assets. The
Company's consolidated financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.
(3) Impairment of Long-Lived Assets
As a result of continued limitation on the Company's ability to
obtain additional financing, during the fourth quarter of 1998,
the Company substantially revised its business plan to reflect
the limitations on its ability to obtain additional financing.
The significant changes to its business plan included: 1)
elimination of future launches of additional video markets, 2)
consolidation of ten existing video markets, 3) revision of its
video growth strategy to emphasize the digital segment only, 4)
delaying future market launches in the Internet business
segment until 2000, 5) and delaying additional development of
the MDU business segment until 2000. The Company's revised plan
reflects management's current view of the best use and timing
of the Company's resources and the difficulties in obtaining
financing, thereby restricting the Company's ability to launch
certain undeveloped and inactive systems.
Upon completion of its new business plan, the Company
reevaluated the carrying value of its licenses and property and
equipment in each of its markets and determined that the
undiscounted future cash flows of certain markets were not
sufficient to support the carrying amounts. As a result, the
Company estimated the fair value of these assets by discounting
estimated future cash flows considering other factors such as
the number of channels held in each market, recent comparable
transactions, the number of households and estimated line-of-
sight coverage, and specific market conditions. Based on this
analysis, the Company recognized a loss in the amount of $26.3
million due to impairment of its license and leased license
investment in twenty-two of the Company's undeveloped markets.
Although at December 31, 1998, management does not believe that
additional impairments under SFAS 121 are necessary, upon
emergence from bankruptcy, under SOP 90-7, "Financial Reporting
by Entities in
(Continued)
F-11
WIRELESS ONE, INC.
Notes to Consolidated
Financial Statements
Reorganization Under the Bankruptcy Code", the Company will
adjust the carrying value of its assets and liabilities based
upon the final determination of its reorganization value (a
fair value concept) by a third party. The amount of such
additional write-down is not currently estimable.
(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 values 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
($600,000 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 acquired and liabilities assumed. Approximately
$94,529,000 of the purchase price has been allocated to license
and leased license investment and is being amortized over 20
years.
(Continued)
F-12
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
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 year ended
December 31, 1996 as if the transactions discussed herein had
been consummated as of January 1, 1996.
Revenues $ 15,270,994
Net loss applicable to common stock $(53,156,071)
Basic and diluted net loss per common share $ (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, 1996 or of the future results of
operations of the consolidated entity.
(5) Marketable Investment Securities - Restricted
Marketable investment securities - restricted at December 31,
1997 consist of U.S. Treasury securities placed in escrow
pursuant to the bond indenture relating to the 1995 Senior
Notes. The investments were deposited into an escrow account
and, prior to disbursement, the collateral agent had a first
priority lien on the escrow account for the benefit of the
holders of the notes. Such funds were disbursed from the escrow
account only to pay interest on the notes. The maturities of
the securities purchased were matched to the interest payment
dates of the notes.
A summary of the Company's restricted held-to-maturity
marketable securities at December 31, 1997 follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 AMORTIZED COST UNREALIZED GAIN FAIR VALUE
<S> <C> <C> <C>
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>
(Continued)
F-13
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(6) Property and Equipment
Major categories of property and equipment at December
31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Estimated
Life 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Equipment awaiting installation - $ 7,168,094 $ 6,599,222
Subscriber equipment and installation costs 4 81,128,043 79,440,688
Transmission equipment and system
construction costs 10 36,233,338 38,643,833
Office furniture and equipment 7 9,891,684 10,939,866
Buildings and leasehold improvements 5 to 31.5 3,260,432 3,182,686
--------- ------------ ------------
137,681,591 138,806,295
Less accumulated depreciation (27,582,575) (53,376,633)
------------ ------------
$110,099,016 $ 85,429,662
============ ============
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997
and 1998 was $9,350,133, $30,668,311, and $35,021,855, respectively.
(7) Other Assets
Other assets at December 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Debt issuance costs, net of accumulated
amortization of $2,273,891 and $4,592,718
in 1997 and 1998, respectively $ 9,924,103 $ 9,416,888
Deposits and other 860,191 587,427
Investments in unconsolidated subsidiaries:
Wireless One North Carolina, LLC 4,093,256 4,350,967
Telecorp Holding Corp., Inc. 1,500,000 -
Wireless Ventures, LLC 1,000,000 1,000,000
------------- ------------
$ 17,377,550 $ 15,355,282
============= ============
</TABLE>
Investments in unconsolidated subsidiaries relate to the
Company's 50% investments in Wireless One North Carolina, LLC
("WONC") and 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. Ventures owns certain BTA rights in several
markets in Georgia. By the terms of the Ventures purchase
agreement, upon securing FCC approval, which is pending
as of December 31, 1998, the Company will assume the
debt related to the Georgia BTA rights. The principal balance
of this debt as of December 31, 1998 was $1,542,512. The
potential impact of the Company's Chapter 11 filing on its
ability to complete this transaction is not presently
determinable. None of these entities has commenced operations
as of December 31, 1998.
In January 1998, the Company completed the sale of its interest
in Telecorp Holding Corp., Inc. for $2.5 million for a gain of
approximately $1.0 million.
(Continued)
F-14
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(8) Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
1997 1998
------------ -----------
<S> <C> <C>
13% Senior Notes due 2003; face value of $150,000,000,
net of unamortized discount (1995 Senior Notes) $148,619,511 $148,855,254
13.5% Senior Discount Notes due 2006; face value of
$239,252,000 net of unamortized discount (1996 Senior
Discount Notes) 144,748,632 165,727,883
9.5% installment notes, principal and interest
due in installments through August 31, 2006 23,321,127 23,331,518
Other
1,711,170 915,719
------------ ------------
318,400,440 338,830,374
Less current maturities (871,408) (2,542,956)
------------ ------------
Long-term debt, excluding current maturities $317,529,032 $336,287,418
============ ============
</TABLE>
Scheduled maturities of long-term debt for the next five years
and thereafter, are as follows:
1999 2,542,956
2000 2,332,099
2001 2,569,249
2002 2,819,892
2003 151,950,251
Thereafter 176,615,927
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. 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, 1997 and 1998
was $6,453,922, $18,348,496 and $20,979,251, respectively. The
1996 Senior Discount Notes are 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.
(Continued)
F-15
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
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, including initiating proceedings under the
Bankruptcy Laws, 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 $1,066,086 through August 31, 2006.
(9) Senior Secured Notes Payable
The Senior Secured Notes were issued in September 1998 pursuant
to a $20 million Senior Secured Discretionary Note Facility
(the "Senior Facility"). The Senior Secured Notes (i) mature
April 15, 1999, (ii) pay 13% per annum interest, (iii) require
the Company to pay a facility fee at maturity of 5% of the
aggregate principal amount of the Senior Secured Notes issued
in September 1998, plus up to 10% of the aggregate principal
amount of any additional notes issued pursuant to the Senior
Facility and (iv) are secured by substantially all of the
Company's assets. In February 1999, additional notes were
issued in the amount of $1,000,000. The Senior Secured Notes
were repaid in February 1999 with proceeds from the
Postpetition Financing (see note 2).
(10) Income Taxes
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
are presented below:
1997 1998
------------- -------------
[C] [C]
Deferred tax assets:
Net operating loss carryforwards $ 56,344,197 $ 83,550,179
Allowance for bad debts 189,860 95,014
Accrued liabilities deductible
when paid 219,430 167,411
Other 7,230 10,850
------------- -------------
56,760,717 83,823,454
Less valuation allowance (46,564,711) (79,084,714)
------------- -------------
Deferred tax asset 10,196,006 4,738,740
------------- -------------
Deferred tax liabilities:
Fixed assets, principally due to
differences in depreciation and
underlying basis 716,260 1,045,229
License investment, due to
differences in amortizable lives
and underlying basis 14,679,746 3,693,511
------------- -------------
Deferred tax liabilities 15,396,006 4,738,740
------------- -------------
Net deferred tax liability $ 5,200,000 $ -
============= =============
(Continued)
F-16
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
The net changes in total valuation allowance for the years
ended December 31, 1996, 1997 and 1998 were increases of
$3,630,332, $40,798,350 and $32,520,003, 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 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, 1997 and 1998 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:
1996 1997 1998
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 23.5 32.6 29.6
Other .8 - -
------ ------ ------
(10.6%) (1.4%) (4.4%)
====== ====== ======
The Company has net operating loss carryforwards for Federal
and state income tax purposes of approximately $214 million as
of December 31, 1998. The carryforwards expire in years 2008-
2018. The impact of the bankruptcy reorganization on various
Federal tax attributes has not been fully determined; however,
some portion of the Company's net operating loss carryforwards
likely will be reduced and may be completely eliminated
pursuant to its bankruptcy discharge. Furthermore, the
deductibility of net operating loss carryforwards arising prior
to discharge in bankruptcy may be limited by the product of the
long-term tax exempt rate times the fair market value of the
Company after discharge of debt and, if realized, will not
reduce future income tax expense.
(11) Stockholders' Equity
During October 1995, the Company completed the acquisition of
certain wireless cable television assets and related
liabilities of certain subsidiaries of Heartland Wireless
Communications, Inc. for common stock of the Company and notes
(the "Heartland Transaction"). 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 at the time of
issuance.
(Continued)
F-17
WIRELESS ONE, INC.
Notes to
Consolidated Financial Statements
(12) Stock Option Plan
The Company's 1995 Long-Term Performance Incentive Plan (the
"Incentive Plan"), 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 1,700,000. 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 September 4, 1998, the Company proposed amendments to
all outstanding options issued under the Incentive Plan
to reduce the exercise price to $0.656, the average market
price of the Company's common stock on that date. Additionally,
all stock options with an exercise price greater than $2.59
were proposed to be amended, subject to the option holder's
consent, to reduce the number of shares receivable upon
exercise by the same percentage amount as the existing exercise
price bore to $2.59. The effect of the repricing was to reduce
the average exercise price of outstanding options from $4.57
to $0.656 and to reduce the number of outstanding options by
294,916.
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.
(Continued)
F-18
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
Information regarding these option plans for 1996, 1997 and 1998
is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Options outstanding, January 1, 1996 804,187 $ 7.98
Options granted
Exercise Price=Fair Market Value 59,000 $ 11.89
Exercise Price<Fair Market Value 195,226 $ 6.82
Options exercised 5,000 $ 6.21
Options cancelled 25,000 $ 10.50
---------
Options outstanding, December 31, 1996 1,028,413 $ 7.93
Options granted 477,500 $ 2.70
Options cancelled 212,353 $ 8.89
---------
Options outstanding, December 31, 1997 1,293,560 $ 5.84
Options granted 147,000 $ 1.11
Options cancelled 377,539 $ 7.48
Repricing effect 294,916 $ 7.37
---------
Options outstanding, December 31, 1998 768,105 $ .76
=========
Option price range at December 31, 1998 $0.66 - 15.50
Option price range at December 31, 1997 $2.59 - 15.50
Option price range at December 31, 1996 $4.16 - 16.25
Options available for grant at December
31, 1998 1,031,895
Options available for grant at December
31, 1997 106,440
Options available for grant at December
31, 1996 371,587
</TABLE>
The following table summarizes information about options
outstanding at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------- -------------------------------
Average
Number Remaining Weighted- Number Weighted-
Range of Outstanding Contractual Average Exercisable Average
Exercise Price at 12/31/98 Life Exercise Price at 12/31/98 Exercise Price
-------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.66 758,105 7.90 $0.66 249,636 $0.66
$2.06 - 15.50 10,000 8.20 $8.35 2,500 $13.73
----------- ----------- -------------- ----------- --------------
768,105 7.90 $0.76 252,136 $0.79
=========== =========== ============== =========== ==============
Options Exercisable at December 31, 1997 569,286 $6.61
Options Exercisable at December 31, 1996 484,459 $6.14
</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:
(Continued)
F-19
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss Applicable to Common
stock - as reported $ 39,670,395 $ 89,139,841 $118,265,502
Net Loss Applicable to Common
stock - pro forma $ 44,022,171 $ 90,256,557 $118,716,160
Net Loss Per Common Share - as
reported (basic and diluted) $ 2.65 $ 5.26 $ 6.99
Net Loss Per Common Share - pro
forma (basic and diluted) $ 2.94 $ 5.33 $ 7.02
Weighted Average Fair Value of
Options Granted $ 13.10 $ 2.57 $ 1.11
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. Weighted-
average assumptions used for grants in 1996 include: 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.
Weighted-average assumptions used for grants in 1998 include:
expected volatility of 147%; expected dividend yield of 0%;
risk-free interest rate of 5.11%; and expected lives of 7.9
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 1993. 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, 1997 and 1998 related
to this agreement was $79,336, $338,578 and $361,594,
respectively. 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
an adverse material effect on the Company's operations. By
letter dated December 15, 1998, EdNet notified the Company
that it w ishes to recapture three channels for academic
purposes effective December 20, 1999 EdNet currently broadcasts
on one of these channels in the Company's Jackson, Mississippi
Market . The Company has initiated discussions with EdNet
regarding this notice, but cannot now predict the results
of these discussions, whether EdNet will exercise its option
to reclaim the channels, or if it does, the effect of these
actions on the Company.
As part of the EdNet Agreement the Company completed, before
the July 1, 1998 deadline, the installation of a system
sufficient to serve 95% of the population of the licensed
geographic area of Mississippi. This agreement also requires
that, along with operations and maintenance responsibilities
for this system, the Company will provide at no charge the
installation and equipment for up to 1,100 sites as designated
by EdNet. As of December 31, 1998, approximately 550 of these
school installations were completed. The Company has also
agreed to reimburse EdNet for up to $220,000 toward the
installation and equipping of eleven electronic classrooms and
up to a maximum of $1.5 million for the transmission equipment
required to connect these classrooms to its broadcast systems.
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
(Continued)
F-20
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
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 $1,454,898, $2,267,808 and
$2,509,810 for the years ended December 31, 1996, 1997 and
1998, 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
$1,805,083, $3,533,441 and $3,713,509 for the years ended
December 31, 1996, 1997 and 1998, respectively.
Future minimum lease payments due under channel rights leases
and other noncancelable operating leases at December 31, 1998
are as follows:
Year Channel Other
ending rights operating
December 31 leases leases
------------- ----------- -----------
1999 $ 2,001,522 $ 1,755,961
2000 2,215,136 1,916,247
2001 2,040,966 1,440,636
2002 1,567,987 1,019,448
2003 1,007,604 307,009
Thereafter 1,401,277 611,056
----------- -----------
$10,234,492 $ 7,050,357
=========== ===========
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.
(Continued)
F-21
WIRELESS ONE, INC.
Notes to Consolidated Financial Statements
(15) Supplemental Cash Flow Information
Cash interest payments made in 1996, 1997 and 1998 totaled
$19,404,454, $21,436,570 and $22,486,978, respectively.
The Company made no Federal or state income tax payments during
the years ended December 31, 1996, 1997 and 1998. Underwriters
fees incurred in conjunction with the public offerings of debt
securities in 1996 in the amount of $4,374,986 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 and 1998, the Company received notice
that additional BTA licenses had been granted with associated
debt of $1,063,919 and $458,021, respectively.
(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, 1997 and 1998. 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, 1997 December 31, 1998
-------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ------------
<S> <C> <C> <C> <C>
Marketable investment securities $ 19,258,789 $ 19,320,400 --- ---
Long-term debt $318,400,440 $ 96,920,097 $338,830,374 $ 56,887,397
</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 and 1998 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.
F-22
SCHEDULE II
WIRELESS ONE, INC.
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at
Description Period Expenses Deductions End of Period
------------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
1998
Deducted in balance sheet from subscriber
receivables:
Allowance for doubtful accounts 486,820 1,576,216 1,819,410 243,626
============= ============ ============ ==============
Deducted in balance sheet from leased
license investment: Amortization of
leased license investment 7,896,648 5,355,684 --- 13,252,332
============= ============ ============ ==============
Deducted in balance sheet from other
assets: Amortization of debt issuance
costs 2,273,891 2,318,827 --- 4,592,718
============= ============ ============ ==============
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
============= ============ ============ ==============
</TABLE>
F-23
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 April 14, 1999.
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 April
14, 1999.
/s/Hans J. Sternberg Chairman of the Board
- --------------------------
Hans J. Sternberg
/s/ Henry M. Burkhalter President and Chief Executive
- --------------------------- Officer and Director
Henry M. Burkhalter
/s/ Ernest D. Yates, Jr. Executive Vice President and
- ---------------------------- Chief Operating Officer
Ernest D. Yates, Jr. and Director
/s/ Henry G. Schopfer, III Executive Vice President,
- ----------------------------- Chief Financial Officer and
Henry G. Schopfer, III Secretary (Principal Financial
Officer)
/s/William D. Gray Controller
- ------------------------------ (Principal Accounting Officer)
William D. Gray
/s/ Arnold L. Chavkin Director
- ------------------------------
Arnold L. Chavkin
Director
Marjean Henderson
Director
Carroll D. McHenry
EXHIBIT INDEX
2.1 TruVision Merger Agreement among the Registrant,
TruVision and Wireless One MergerSub, Inc., dated
April 25, 1996(1)
2.2 Debtor's Plan of Reorganization under Chapter 11
of the Bankruptcy Code dated March 15, 1999(2)
2.3 Debtor's Disclosure Statement pursuant to Section
1125 of the Bankruptcy Code dated March 15,
1999(2)
3.1(i) Amended and Restated Certificate of Incorporation
of the Registrant(3)
3.1(ii) Bylaws of the Registrant(3)
4.1 Indenture between the Registrant and United
States Trust Company of New York, as Trustee,
dated October 24, 1995(4)
4.2 Warrant Agreement between Registrant and United
States Trust Company of New York, as Warrant
Agent, dated October 24, 1995(4)
4.3 Escrow and Disbursement Agreement between the
Registrant and Bankers Trust Corporation, Escrow
Agent, dated October 24, 1995(4)
4.4 Supplemental Indenture between the Registrant and
United States Trust Company of New York, as
Trustee, dated July 26, 1996(5)
4.5 Indenture between the Registrant and United
States Trust Company of New York as Trustee,
dated August 12, 1996(5)
4.6 Warrant Agreement between the Registrant and
United States Trust Company of New York, as
Warrant Agent, dated August 12, 1996(5)
4.7 Second Supplemental Indenture between the
Registrant and United States Trust Company of New
York, as trustee, dated August 24, 1998,
pertaining to the Registrant's 13% Senior Notes
due October 15, 2003(6)
4.8 First Supplemental Indenture between the
Registrant and the United States Trust Company of
New York, as trustee, dated August 24, 1998,
pertaining to the Registrant's 13 1/2% Senior
Discount Notes due August 1, 2006(6)
10.1 Discretionary Note Purchase Agreement between the
Company and the Purchasers listed in Schedule I
thereto, dated as of September 4, 1998 (see table
of contents for list of omitted exhibits and
schedules)(7)
10.2 Form of 13.00% Senior Secured Discretionary
Note(7)
10.3 Warrant Agreement between the Company and First
Chicago Trust Company of New York, as warrant
agent, dated as of September 4, 1998(7)
10.4 Form of Warrant Certificate(7)
10.5 Paying Agency Agreement between the Company,
Merrill Lynch Global Allocation Fund and
PriceWaterhouseCoopers LLP, as paying agent and
collateral agent, dated as of September 4,
1998(7)
10.6 1995 Long-Term Performance Incentive Plan of the
Registrant(4)
10.7 1996 Director's Stock Option Plan of the
Registrant(5)
10.8 Amended and Restated Registration Rights
Agreement among the Registrant, Heartland and
certain stockholders dated July 29, 1996(5)
10.9 Amended and Restated Stockholders Agreement among
the Registrant, and certain stockholders dated
July 29, 1996 ("Stockholders Agreement"),(5)
10.10 Standard forms of MDS License Agreement of the
Registrant(3)
10.11 Standard forms of ITFS License Agreement of the
Registrant(3)
10.12 Form of Employment Agreement between the
Registrant and certain executive officers(1)
10.13 Acquisition and Market Escrow Agreement among the
parties to Exhibit 2.1 dated July 29, 1996(1)
10.14 DIRECTV-Wireless One Cooperative Marketing
Agreement between DIRECTV, Inc. and Wireless One,
Inc. dated August 1997(8)*
10.15 Transport Rights Agreement between DIRECTV, Inc.
and Wireless One, Inc. dated August 1997(8)*
10.16 Subscriber Service Payment Agreement between
DIRECTV, Inc. and Wireless One, Inc. dated August
1997(8)*
10.17 DSS Receiver Support Agreement between DIRECTV,
Inc. and Wireless One, Inc. dated August 1997(8)*
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
_______________________________
(1) Incorporated herein by reference from the Registrant's
Registration Statement Form S-1 (Registration Number 333-
05109 ) as declared effective by the Commission on August 7,
1996.
(2) Incorporated herein by reference from the Registrant's
Current Report on Form 8-K dated March 16, 1999
(3) 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.
(4) Incorporated herein by reference from the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1995.
(5) 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.
(6) Incorporated herein by reference from the Registrant's
Current Report on Form 8-K dated August 25, 1998.
(7) Incorporated herein by reference from the Registrant's
Current Report on form 8-K dated September 4, 1998.
(8) Incorporated herein by reference from the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
* Certain information contained in this exhibit has been
omitted and confidentially filed with the Commission.
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. 333-15475) and Form S-8 (No. 333-
11563) of Wireless One, Inc., of our report dated March 18, 1999,
relating to the consolidated balance sheets of Wireless One, Inc.
and subsidiaries as of December 31, 1997 and 1998 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, 1998, and related schedule, which
report appears in the December 31, 1998 annual report on Form 10-
K of Wireless One, Inc.
Our report dated March 18, 1999, contains an explanatory
paragraph that states that the Company has incurred substantial
operating and net losses and cash flow deficits, and in February
1999, commenced a voluntary proceeding under Chapter 11 of the
United States Bankruptcy Code. These matters raise substantial
doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Jackson, Mississippi
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,163,716
<SECURITIES> 0
<RECEIVABLES> 1,588,429
<ALLOWANCES> 243,626
<INVENTORY> 0
<CURRENT-ASSETS> 4,644,014
<PP&E> 140,169,540
<DEPRECIATION> 54,739,878
<TOTAL-ASSETS> 227,193,588
<CURRENT-LIABILITIES> 28,157,693
<BONDS> 336,287,418
<COMMON> 169,101
0
0
<OTHER-SE> 119,772,011
<TOTAL-LIABILITY-AND-EQUITY> 227,193,588
<SALES> 38,737,367
<TOTAL-REVENUES> 38,737,367
<CGS> 0
<TOTAL-COSTS> 117,542,687
<OTHER-EXPENSES> (1,354,401)
<LOSS-PROVISION> 1,576,216
<INTEREST-EXPENSE> 46,014,583
<INCOME-PRETAX> (123,465,502)
<INCOME-TAX> 5,200,000
<INCOME-CONTINUING> (118,265,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (118,265,502)
<EPS-PRIMARY> (6.99)
<EPS-DILUTED> (6.99)
</TABLE>
