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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 0-23694
NUCENTRIX BROADBAND NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 73-1435149
(State of Incorporation) (I.R.S. Employer
Identification No.)
200 CHISHOLM PLACE, SUITE 200
PLANO, TEXAS 75075
(Address of principal executive offices) (Zip Code)
(972) 423-9494
(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, Par Value $.001 Per Share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Parts I, II, III, and IV of this Form
10-K or any amendment to this Form 10-K. [ ]
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Aggregate market value of outstanding common stock held by non-affiliates of the
registrant as of March 27, 2001.............................................................. $ 55,156,152
Number of shares of common stock outstanding as of March 27, 2001.............................. $ 10,228,935
DOCUMENTS INCORPORATED BY REFERENCE
Part III -- Registrant's definitive proxy statement to be filed
pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held May
10, 2001.
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NUCENTRIX BROADBAND NETWORKS, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 27
Item 3. Legal Proceedings......................................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders....................................... 31
PART II
Item 5. Market for Registrant's Common Equity and Related Matters................................. 32
Item 6. Selected Financial Data................................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................ 35
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................................. 45
Item 8. Financial Statements and Supplementary Data............................................... 46
Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................................ 46
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 46
Item 11. Executive Compensation.................................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 46
Item 13. Certain Relationships and Related Transactions............................................ 46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 47
Note: The responses to Items 10 through 13 are included in the registrant's
definitive proxy statement to be filed pursuant to Regulation 14A for
the Annual Meeting of Stockholders to be held May 10, 2001. The required
information is incorporated into this Form 10-K by reference to that
document and is not repeated herein.
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FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements with respect
to our financial condition, results of operations, business strategy, and
financial needs. The words "may," "will," "expect," "believe," "plan," "intend,"
"anticipate," "estimate," "continue," and similar expressions, as they relate to
us, as well as discussions of our strategy and pending transactions, are
intended to identify forward-looking statements. Such statements reflect our
current view of future events and are based on our assessment of, and are
subject to, a variety of factors, contingencies, risks, assumptions, and
uncertainties deemed relevant by management, including:
o business and economic conditions in our existing markets,
o competitive technologies, products and services,
o regulatory and interference issues, including the ability to
obtain and maintain Multipoint Distribution Service ("MDS") and
Multichannel Multipoint Distribution Service ("MMDS") licenses
and MDS/MMDS and Instructional Television Fixed Service ("ITFS")
spectrum leases,
o the outcome of regulatory proceedings relating to the allocation
of additional spectrum in the United States for third generation,
or "3G," mobile wireless services, as described in Item 1.,
o the outcome of our ongoing technology trial with Cisco Systems,
Inc. ("Cisco"), and the capabilities of Cisco's and other
technology platforms available for deployment of broadband
wireless services,
o our ability to successfully and timely fund and build out our
broadband wireless network,
o with respect to pending transactions, satisfying our due
diligence efforts and obtaining required third party consents,
including consent of the Federal Communications Commission
("FCC"), and
o those matters discussed under Item 1., "Business - Risk Factors"
and elsewhere in this document.
We cannot assure you that any of our expectations will be realized, and
actual results and occurrences may differ materially from our expectations as
stated in this document. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
In this Annual Report on Form 10-K, we will refer to Nucentrix
Broadband Networks, Inc., a Delaware corporation, as "Nucentrix," "we," "us,"
and "our."
ITEM 1. BUSINESS
We provide fixed broadband wireless Internet and wireless subscription
television services using up to approximately 200 megahertz ("MHz") of radio
spectrum licensed by the FCC in the 2.1 gigahertz ("GHz") and 2.5 GHz bands,
primarily in medium and small markets across Texas and the Midwestern United
States. We own the basic trading area ("BTA") authorization, or otherwise
license or lease MDS/MMDS/ITFS spectrum, in 93 markets covering an estimated 9
million total households, including three markets covering an estimated 460,000
total households for which we have entered into definitive agreements to
acquire. On average, we own or lease 152 MHz of spectrum per market. We often
refer to our frequencies collectively in this document as "MMDS."
Our long-term business strategy is to provide broadband wireless
services using our high-capacity MMDS radio spectrum in medium and small
markets. We currently provide always-on, high-speed wireless Internet access
service under temporary developmental FCC licenses to over 385 accounts serving
an estimated 3,000 end users in Austin and Sherman-Denison, Texas. These end
users primarily are medium-sized and small businesses, small offices/home
offices ("SOHOs") and telecommuters. Our service offerings include Internet
access from 128 Kbps to 1.54 Mbps, or up to 50 times faster than service
provided over standard dial-up telephone lines. Through two national independent
contractors, we also provide value-added services such as technical support,
e-mail, Web hosting and design, and domain name service.
In February 2000, we announced a strategic alliance and agreement with
Cisco to pursue testing and deployment of broadband wireless services using
Vector Orthogonal Frequency Division Multiplexing, or
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"VOFDM" technology. The tests include two field trials in Austin and Amarillo,
Texas. We successfully completed the initial phase of the Austin field trial in
August 2000. In February 2001, we announced that we had extended the Amarillo
field trial, which we currently expect to complete in the second quarter of
2001. Because the trial was extended beyond certain dates in the original
agreement with Cisco, our prior purchase commitment of $13 million in equipment
has expired. We currently are in discussions with Cisco regarding new purchase
commitments and equipment financing proposals. Although we currently intend to
complete our technology trial in Amarillo, there can be no assurance that the
trial will be successful or that we will enter into a subsequent purchase or
financing agreement with Cisco.
While our long-term business strategy is to be a leading provider of
broadband wireless services in our markets, we announced in February 2001 that,
because of the extended technology trial with Cisco, the delay in receiving
final two-way operating licenses from the FCC, and recent capital market
conditions, we had reduced our Internet deployment schedule for 2001. We also
announced in March 2001 that we had undertaken a reduction in force of 32
employees, or approximately 6% of our work force, primarily related to Internet
sales, marketing and support, as well as general corporate functions. We are
continuing to evaluate the development of technology by Cisco and other vendors
for MMDS service, as well as the capital markets and other sources of financing.
However, until we are able to deploy a cost-effective and reliable technology
platform, and have obtained financing on satisfactory terms and conditions, we
intend to continue to look for efficiencies, maximize our cash resources and
preserve our spectrum resources. This may result in no additional deployment of
new Internet markets in 2001. See Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD&A") - "Liquidity and
Capital Resources" and "Future Cash Requirements."
Historically, we have used our spectrum to provide wireless
subscription television, or "wireless cable," services. We presently have
wireless subscription television transmission facilities constructed and
operating in 58 markets in nine states. At February 28, 2001, we had
approximately 103,600 wireless subscription television customers, including
approximately 95,600 customers who subscribed only to programming service
provided over our MDS/MMDS/ITFS spectrum, and 8,000 "combo" subscribers who
subscribed to both our MMDS programming service and to DIRECTV, Inc.'s
("DIRECTV") programming service sold by us. In addition, at February 28, 2001,
there were approximately 22,000 customers who received only DIRECTV programming
sold by us.
We use our spectrum to transmit and/or receive signals between a base
station and transmit/receive equipment at each customer's location. Our radio
spectrum is comprised of the following channels:
o MDS (Multipoint Distribution Service) -- two channels in the
2150-2160 MHz band and three channels in the 2650-2680 MHz band,
o ITFS (Instructional Television Fixed Service) -- 20 channels in
the 2500-2686 MHz band,
o MMDS (Multichannel Multipoint Distribution Service) -- eight
channels in the 2596-2644 MHz band, and
o Leased rights to 20 MHz of WCS (Wireless Communications Service)
spectrum at 2.3 GHz in 19 markets.
We believe that our MMDS spectrum will be able to transmit and receive
data at aggregate data rates of up to 22 Mbps downstream and 19 Mbps upstream
per six-MHz channel, and cover a service area radius of up to 35 miles from a
single base station.
Nucentrix was incorporated under the laws of the State of Delaware in
October 1993 under the name Heartland Wireless Communications, Inc. Nucentrix
emerged from a reorganization under Chapter 11 of the U.S. Bankruptcy Code on
April 1, 1999, and we changed our name on that date to Nucentrix Broadband
Networks, Inc. See "Reorganization." Our executive offices are located at 200
Chisholm Place, Suite 200, Plano, Texas 75075, and our telephone number is (972)
423-9494.
INDUSTRY OVERVIEW
In 1998, Nucentrix and several other MMDS companies demonstrated the
commercial viability of providing high-speed Internet access using MMDS
spectrum. However, the FCC historically had limited the use of
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MMDS spectrum to one-way transmissions. In September 1998, the FCC announced
that it would authorize the use of MMDS spectrum to provide two-way services,
including high-speed data, voice and video communications. The FCC finalized its
ruling in July 1999 and, in August 2000, opened an initial, one-week filing
window for applications for two-way services. We filed over 400 applications
with the FCC in this initial filing window to provide digital two-way
communications services in 70 of our markets. All of these applications must
meet FCC interference protection rules or contain the consent of co-channel and
adjacent channel licensees in our markets and neighboring markets. The FCC
issued a public notice accepting these and other operators' filings on February
1, 2001. All applications that have not been opposed within 60 days after the
issuance of this public notice will be deemed granted. The grant will become
final upon FCC public notice and issuance of a new FCC license. Although we
believe we will receive two-way authorizations to replace our developmental
authorizations in Austin and Sherman-Denison, there can be no assurance that we
will receive such authorizations in these or other markets.
NUCENTRIX'S BROADBAND WIRELESS SERVICES
High-Speed Internet Access. In July 1998, we entered our first market
in Sherman-Denison, Texas on a developmental basis as a retail business
high-speed Internet service provider ("ISP"). We initially offered a one-way
wireless Internet access service using a six-MHz MMDS channel for downstream
transmission and a standard telephone line connection for an upstream path. In
August 1998, we received a temporary developmental authorization from the FCC to
conduct two-way operations in this market and, in February 1999, we began
offering high-speed two-way Internet access over our MMDS spectrum.
We upgraded our wireless cable headend facility in Austin, Texas and
successfully completed testing for Internet access over this system in the
second quarter of 1999. We launched this service in May 1999, also under a
temporary developmental authorization from the FCC. We currently offer a variety
of Internet services in Austin and Sherman-Denison, Texas for medium-sized and
small businesses, telecommuters, SOHOs, and residential customers, which
include:
o Internet access at speeds from 128 Kbps to 1.54 Mbps,
o technical support available 24 hours a day, 7 days a week,
o e-mail,
o Web design and hosting,
o domain name registration, and
o domain name and maintenance changes.
Subscription Television Business. Through our wireless cable
programming, we generally offer our subscribers local off-air VHF/UHF channels
from affiliates of ABC, NBC, CBS, and Fox, and other local independent broadcast
stations, as well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN, USA, TBS,
Discovery, TNN, A&E, and other cable programming. The channels and programming
that we offer in each market will vary depending upon the amount of spectrum
capacity controlled in such market. The preceding marks are trademarks of the
respective organizations and are not owned by us.
Currently, wireless cable providers can offer a maximum of 33 channels
of analog video programming. We have supplemented our analog channel capacity by
entering into cooperative marketing arrangements with DIRECTV and a DIRECTV
distributor, which allow us to market up to 185 channels of digital programming
in over 50 markets in combination with our MMDS offering or as a stand-alone
offering. See "Suppliers." Our long-term business strategy currently does not
include the launch of any new wireless cable-only markets, or adding wireless
cable programming to any of our unconstructed markets.
MMDS LICENSES AND LEASES
We hold the licenses granted by the FCC for approximately 80% of our
MMDS and MDS channels. We lease from third-party license holders the rights to
(1) the remaining 20% of our MMDS and MDS channels and (2) all of our ITFS
channels, which generally comprise 20 of the 33 channels available in each
market. All MDS and MMDS licenses expire in either 2001 or 2006. Approximately
50% of our MDS/MMDS licenses are for "incumbent" channels that expire in May
2001; the other 50% are BTA channels that expire in 2006. ITFS licenses
generally have a term of 10 years. All licenses are subject to renewal by the
FCC as described in "Government
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Regulation." We currently expect that substantially all of our licenses for
incumbent MDS/MMDS channels that expire in May 2001 will be renewed. Although
FCC custom and practice establish a presumption of granting renewals of
licenses, the presumption requires that the licensee substantially comply with
its regulatory obligations during the license period.
Each of our channel leases typically covers four ITFS channels or one
to four MDS/MMDS channels. The initial terms of our leases for ITFS channels
typically expire five to ten years after the license grant date, but in any
event may not exceed 15 years. The initial terms of the leases for MDS/MMDS
channels typically expire five to 10 years from the lease execution date. The
average remaining terms of most of our current ITFS and MDS/MMDS channel leases,
including all renewal terms, range from nine to 12 years. We believe that
substantially all of our MDS/MMDS channel leases allow for use of the spectrum
for two-way data transmission. Approximately 66% of our ITFS channel leases in
our top 40 Internet markets conform to the FCC's new rules for two-way use of
this spectrum. We believe that another 24% of these ITFS channel leases,
although entered into before the issuance of the two-way rules, would be
"grandfathered" under the FCC's rules and authorized for two-way use of the
spectrum.
We also hold licenses in 93 BTAs in which we have the exclusive right
to apply for and develop available MDS and MMDS frequencies, subject to our
lease of 10 BTAs and portions of four other BTAs to CS Wireless Systems, Inc.
("CS Wireless"). See "Government Regulation -- BTA Auction and Service
Requirements."
MARKETS
The following tables provide information as of February 28, 2001,
regarding the 93 markets in which we operate a wireless cable or broadband
wireless Internet system, own the BTA authorization or have acquired, or expect
to acquire, additional MDS/MMDS/ITFS channel rights. Certain of our channel
rights are subject to pending applications for new channel licenses,
modifications to existing channel licenses or special temporary and
developmental authorizations, and must be reviewed by the FCC's engineering and
legal staff. Additionally, we have filed for two-way authorization with the FCC
for channels in 70 of the markets listed below. We cannot assure you of the
number of applications that will be granted. See "Risk Factors -- Two-way
systems require regulatory approval. We are required to obtain regulatory
approval for our current and future two-way systems. If we do not obtain
requisite approvals for a market, then we will not be permitted to operate a
two-way system in that market."
We estimate that the BTAs and 35-mile protected service areas in our
markets include approximately 9 million households. Estimated household
information is based on 1990 census bureau data and data from a commercially
available 2001 population projection database. The actual number of households
that can receive and/or transmit an adequate unobstructed analog or digital
signal may vary significantly from this estimate based on a number of factors,
including transmitter height and power, topography and the proximity of adjacent
MMDS systems.
NUMBER OF ADDITIONAL
CHANNELS BANDWIDTH EXPECTED BANDWIDTH
MARKETS AVAILABLE (1) (MHZ) CHANNELS (2) (MHZ)
- ------- ------------------ ----------------- ------------------- -----------------
ARKANSAS
El Dorado, AR.................... 16 96
Fayetteville, AR(3) ............. 20 120 5 28
Forrest City, AR................. 20 120
Fort Smith, AR(3) ............... 31 186 2 10
Magnolia, AR..................... 20 120 2 10
+Paragould, AR................... 22 130
Searcy, AR....................... 22 130 11 66
ILLINOIS
+Champaign, IL................... 25 148
+Freeport, IL.................... 20 120
+Jacksonville, IL................ 26 154
+Macomb/Walnut Grove, IL......... 21 124
+McLeansboro, IL................. 33 196
+Olney, IL....................... 20 120
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NUMBER OF ADDITIONAL
CHANNELS BANDWIDTH EXPECTED BANDWIDTH
MARKETS AVAILABLE(1) (MHZ) CHANNELS(2) (MHZ)
- ------- ----------- --------- ---------- ---------
Ottawa/LaSalle, IL............... 16 96
+Peoria, IL...................... 29 172
Quincy, IL....................... 9 52
Rockford, IL(3) ................. 32 190
Springfield/Decatur, IL.......... 18 106
+Taylorville, IL................. 20 120
+Vandalia, IL.................... 20 120
IOWA
Des Moines, IA................... 33 196
+Radcliffe/Story City, IA........ 27 162
KANSAS
+Beloit, KS...................... 33 196
+Chanute, KS..................... 33(4) 196
Great Bend, KS................... 27 160 6 36
Hays, KS......................... 23 136 10 60
+Manhattan, KS................... 33 196
+Marion, KS...................... 23(5) 136 2 12
+Medicine Lodge/Anthony, KS...... 23 136
+Sterling, KS.................... 23 136 2 12
Topeka, KS....................... 33 196
MISSOURI
Columbia, MO..................... 21 124
Jefferson City, MO............... 13 76 2 12
+Monroe City/Lakenan, MO......... 32 190 1 6
+Montgomery City, MO............. 23 138
+Sikeston/Cape Girardeau, MO..... 20 120
Springfield, MO.................. 33 196
OKLAHOMA
+Ada, OK......................... 33 196
Altus, OK........................ 20 120 13 76
+Ardmore, OK..................... 33 196
Bartlesville/Ponca City, OK...... 28 166 5 30
Elk City, OK..................... 12 72 13 76
+Enid, OK........................ 33 196
Holdenville, OK.................. 22 130 11 66
+Lawton, OK...................... 33 196
Lenapah, OK...................... 22 130 11 66
+Lindsay, OK..................... 29 172 4 24
+McAlester, OK................... 22 130
+Muskogee, OK.................... 22 130
+Stillwater, OK.................. 33 196
+Tulsa, OK....................... 33 196
+Watonga, OK..................... 33 196
+Weatherford, OK................. 33 196
+Woodward, OK.................... 33 196
TEXAS
+Abilene, TX..................... 30 178 3 18
++Amarillo, TX................... 29 172
+/++Austin, TX................... 33 196
Burnet, TX....................... 21 124 11 66
+Corpus Christi, TX.............. 33 196
+Corsicana/Athens, TX............ 33 196
El Paso, TX...................... 25 148
Fischer, TX...................... 25 148
+Gainesville, TX................. 33 196
+George West, TX................. 25 148 8 48
+Hamilton, TX.................... 33 196
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NUMBER OF ADDITIONAL
CHANNELS BANDWIDTH EXPECTED BANDWIDTH
MARKETS AVAILABLE(1) (MHZ) CHANNELS(2) (MHZ)
- ------- ----------- --------- ---------- ---------
+Jourdanton/Charlotte, TX........ 29 172
+Kerrville, TX................... 33 196
+Kingsville/Falfurrias, TX....... 25 148 8 48
+Laredo, TX...................... 33 196
+Lubbock, TX..................... 33 196
Lufkin, TX....................... 13 76
+Midland/Odessa, TX.............. 33 196
+Mt. Pleasant, TX................ 25 148
+O'Donnell, TX................... 22 130 11 66
+Olton, TX....................... 33 196
Palestine/Kossuth, TX............ 28 166 5 30
+Paris, TX....................... 26 154
+/++Sherman/Denison, TX.......... 32 190 1 6
+Strawn/Ranger, TX............... 33 196
+Temple/Killeen, TX.............. 33 196
+Texarkana, TX................... 29 172
Tyler, TX........................ 25 148
+Uvalde/Sabinal, TX.............. 33 196
+Waco, TX........................ 33 196
+Wichita Falls, TX............... 33 196
WYOMING
Casper, WY....................... 8 46 5 30
Cheyenne, WY..................... 5 28 8 48
OTHER
+Bucyrus, OH..................... 21 126
Charleston, WV................... 4 24
Flagstaff, AZ.................... 6 34
+Greenville, PA.................. 20 120
Lake City, FL.................... 16 96
Paducah/Mayfield, KY............. 33 196
----- ------ --- ---
TOTAL.................. 2,384 14,156 160 950
===== ====== === ===
AVERAGE PER MARKET..... 26 152 2 10
===== ====== === ===
+ Operating wireless cable market.
++ Operating broadband wireless Internet market. The Amarillo market is in trial
stage.
(1) Unless otherwise noted, the number of channels available includes
channels (a) that are either licensed to us or leased to us from other
license holders, or (b) for which we or our ITFS lessors have filed
applications with the FCC that we expect to be granted in 2001. The
number of channels available includes leased ITFS channels that may not
currently be available for two-way broadband wireless services.
(2) Additional expected channels include (a) additional MDS or MMDS
channels for which, because of our BTA ownership, we have the exclusive
right to file license applications with the FCC that we expect to be
granted in 2001, or (b) additional ITFS channels that we have leased
and which we believe will be available for grant in the FCC's next ITFS
new station filing window.
(3) We have entered into a definitive purchase agreement to acquire this
market. The transaction is expected to close in the second or third
quarter of 2001 and is subject to customary closing conditions,
including FCC approval.
(4) Eight MMDS channels are currently authorized under a special temporary
authorization from the FCC. These channels are subject to pending
applications for permanent authority at the FCC that we believe are
available for grant.
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(5) Four ITFS channels are subject to applications pending proceedings at
the FCC, which we believe will be granted.
In addition to MDS, MMDS and ITFS spectrum rights owned by Nucentrix,
we are a party to an agreement with CS Wireless under which CS Wireless agreed
to assign to us 20 MHz of Wireless Communications Service, or "WCS," spectrum at
2.3 GHz in 19 markets, primarily in Texas. We currently lease this spectrum
under an exclusive lease agreement with CS Wireless. Assignment of the WCS
spectrum is subject to FCC approval and closing an assignment agreement with CS
Wireless.
NETWORKS
We transmit and/or receive signals through the air via microwave
frequencies from facilities, referred to as "base stations" or "cell sites" for
our broadband wireless Internet business or "headends" for our wireless cable
business, to an antenna and other customer premises equipment at each customer's
location. Each base station includes a tower, transmit and receive antennas,
waveguide, transmitters, and other equipment. The base station also includes a
central piece of equipment - a broadband router - that houses various network
components, including (i) air interface cards that interface to wireless
signals, (ii) router cards to transfer Internet protocol ("IP") traffic, and
(iii) port adapters for SONET and other high-capacity backhaul and backbone
lines. Each headend includes a transmission tower, transmit antennas, waveguide,
transmitters, and satellite reception equipment.
Internet Access. We provide our two-way, high-speed Internet access by
transmissions between our base stations and transmit/receive equipment at the
customer's premises. A transceiver, which transmits and receives data, is
connected to the customer's antenna and a "wireless" modem/router by coaxial
cable. The modem/router interfaces to the customer's personal computer through
an Ethernet card connection or to a network through a broadband router at a base
station. Upstream and downstream transmission is provided by two or more
separate MMDS channels, and Internet connectivity is maintained by our base
stations through two separate and diverse connections to Internet backbone
providers.
We plan to use primarily a sectorized, single cell design for our
two-way Internet access service. In certain markets where expected demand may
warrant the additional capital expenditure, we may cellularize channels to
create additional capacity. Sectorizing transmissions in a cell design (either
single or multi-cell) will divide channel service areas into sectors, and allow
re-use of frequencies in non-adjacent sectors, increasing the bandwidth capacity
for each channel used in the network design. Cellularization of channels in
certain markets could increase both the number of households our signal can
reach and the market's available bandwidth capacity; however, this type of
system design is more expensive to construct than a single-cell system.
Subscription Television. Subscription television programming is
received by the base station from satellite transmissions and then retransmitted
to receiving equipment located at the subscriber's premises. At the subscriber's
premises, the microwave signals are converted to frequencies that can pass
through conventional coaxial cable into an addressable descrambling converter
and then to a television set. Our customers who subscribe to DIRECTV receive
DIRECTV programming from an orbiting satellite that transmits to an 18-inch
parabolic dish located at the customers' premises. The DIRECTV signal is
converted through a separate set-top box at the customers' premises.
CUSTOMER SUPPORT
Customer support for our Internet service is provided 24 hours a day,
seven days a week through a toll free access telephone number. We have entered
into an agreement with ISP Alliance, Inc. ("ISPA"), a leading supplier of
systems and operational support for ISPs, to provide this customized customer
service and support for our Internet access customers, under the Nucentrix
brand. ISPA provides our technical support, e-mail, Web design and hosting,
domain name registration and maintenance on a "pay as used" basis. We also have
contracted with Critical Path, Inc., a leading provider of Internet messaging
solutions for ISPs, for certain e-mail support functions. Using this approach
has allowed us to defer building and training an internal customer service
organization until our business volume justifies this expense. Customer problems
called in to ISPA are handled within a traditional six-level customer service
escalation procedure. An unresolved problem is referred by ISPA to the
appropriate market's wireless specialist who will typically visit the customer
site and provide support and oversight through problem resolution.
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We provide field and technical support to our Internet and subscription
television business through our existing base of technical services personnel.
We provide our subscription television subscribers support 24 hours a day, seven
days a week, through a company-owned and operated centralized customer care
center and our existing base of technical services personnel.
SUPPLIERS
Internet Access Equipment. Our MMDS frequencies support radio-based
(microwave) access technology consisting of a number of elements common to most
radio systems capable of transporting data. These elements are commonly referred
to as data systems, radio transmission equipment and radio data elements.
Data systems include components such as routers or servers. These items
currently are manufactured by many suppliers and can be tailored to a wireless
environment. Providers include Cisco, Nortel Networks Corporation, Sun
Microsystems Inc., Hewlett-Packard Company, and others.
Radio transmission equipment (excluding towers) consists of elements
such as transmitters, antennas and receivers. This equipment is available from a
variety of suppliers in the radio business, such as ADC Telecommunications, Inc.
("ADC"), Andrew Corporation, Inc. ("Andrew") and many others.
Radio data elements are generally unique and/or proprietary to the
manufacturer, particularly in what is commonly referred to as "next generation"
MMDS Internet access equipment. These elements are the software and firmware
that controls when and how data is transported across a network. Manufacturers
currently are producing or testing radio data elements based on standards such
as DOCSIS and DOCSIS+ , and modulation or compression techniques such as QPSK,
QAM, OFDM, VOFDM, and WOFDM. Vendors include Adaptive Broadband Corporation,
ADC, Hybrid Networks, Inc., Cisco, Vyyo, Inc., NextNet, and Iospan, among
others. Although first generation MMDS radio data elements are widely available,
most next generation radio/modem equipment and technology for MMDS wireless
access is currently in lab or field test environments, or only limited
commercial deployment.
We believe that open, or non-proprietary, standards ultimately are
necessary in next generation MMDS technology to lower infrastructure and
customer premise equipment cost, and allow for interoperability and flexibility
for service providers. Although there are discussions among various vendors to
develop open standards in this area, there is no assurance that such standards
will evolve.
In February 2000, we announced a strategic alliance and agreement with
Cisco to pursue testing and deployment of broadband wireless services using a
VOFDM technology platform. See "Business" in this Item 1. The tests include two
field trials in Austin and Amarillo, Texas. We successfully completed the
initial phase of the Austin field trial in August 2000. In February 2001, we
announced an extension of the Amarillo field trial, which we currently expect to
complete in the second quarter of 2001. There can be no assurance that this
trial will be successful.
Subscription Television Equipment. We use subscriber and headend
equipment for our subscription television and DIRECTV business from a variety of
suppliers, including ADC, Andrew, Blonder-Tongue Laboratories, Inc., California
Amplifier, Inc., Comwave, General Instrument, Scientific-Atlanta, Inc., Passive
Devices, and PerfectTen Satellite Distributing.
DIRECTV. In February 2001, we entered into a new five-year agreement
with DIRECTV which allows us to market up to 185 channels of DIRECTV digital
programming to Single Family Unit ("SFU") subscribers, either alone or in
combination with our local and premium MMDS programming, referred to as a
"combo" package. DIRECTV pays us an up-front and residual commission for each
SFU subscriber to whom we sell a DIRECTV programming package, as well as
marketing subsidies. We also receive certain equipment subsidies from DIRECTV
equipment providers. These subsidies materially reduce the capital expenditure
costs required for these new subscribers. We currently market DIRECTV
programming to SFU subscribers in over 50 markets.
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In October 1997, we entered into a seven-year agreement with DIRECTV to
provide DIRECTV programming to Multiple Dwelling Units ("MDUs"), such as
apartment buildings and condominium complexes. The MDU agreement is
substantially similar to the SFU agreement for this programming. We currently
offer DIRECTV programming to residential MDUs in 50 markets.
Video Programming. We generally offer our subscribers local off-air
VHF/UHF channels from affiliates of ABC, NBC, CBS, and Fox and other local
independent broadcast stations, as well as HBO, HBO2, Cinemax, Showtime, Disney,
ESPN, CNN, USA, TBS, Discovery, TNN, A&E, and other cable programming. The
channels and programming that we offer in each market varies depending upon the
amount of spectrum capacity controlled in each market. We are required to obtain
the consent of local network affiliates to retransmit their signals.
Additionally, we are required to maintain contracts with cable programmers like
HBO and ESPN, which generally require payment on a per subscriber basis.
COMPETITION
High-Speed Internet Competition
The Internet access market is highly competitive. We face competition
from many Internet access and service providers with significantly greater
financial resources, well-established brand names and large, existing customer
bases. Our competition in this industry includes:
Internet Service Providers. ISPs provide Internet access to residential
and business customers. These companies can:
o provide Internet access over incumbent local exchange carriers'
("ILECs") networks at high speeds,
o offer digital subscriber line ("DSL")-based access using their
own DSL services, or DSL services offered by ILECs and others,
and
o have significant and sometimes nationwide marketing presences and
combine these with strategic or commercial alliances with
DSL-based competitive carriers. Significant ISPs include AOL Time
Warner, Inc. ("AOL"), XO Communications, Inc. ("XO") and
EarthLink, Inc.
Incumbent Local Exchange Carriers. ILECs, such as SBC Communications,
Inc. ("SBC"), Verizon Communications, Inc. and Qwest Communications
International, Inc. ("Qwest") have existing metropolitan area networks and
circuit-switched local access networks. Most incumbent carriers have deployed
commercial DSL services in certain areas and are combining their DSL service
with their own Internet access services. For example, SBC is investing $6
billion to upgrade its telephone networks to offer DSL service to 77 million
customers by 2002. The incumbent carriers generally have an established brand
name in their service areas and possess sufficient capital to deploy DSL
services rapidly.
Interexchange Carriers. Many of the interexchange carriers, such as
AT&T Corporation ("AT&T"), WorldCom, Inc. and Sprint Corporation, have the
capability to support high-speed, end-to-end networking services. These carriers
have deployed large scale networks, have large numbers of existing business and
residential customers and enjoy strong name recognition. These companies
increasingly are bundling their services to include high-speed local access
combined with metropolitan and wide area networks, and a full range of Internet
services and applications. Other carriers, such as Level 3 Communications, Inc.
and Qwest are building and managing high-capacity, nationwide IP-based networks
and partnering with ISPs to offer a range of services to businesses and
consumers.
Competitive Local Exchange Carriers. Certain DSL-based competitive
local exchange carriers ("CLECs"), including Covad Communications Group, Inc.
and Rhythms NetConnections, Inc., are offering DSL-based data services. We
expect other competitive carriers to offer similar services in the future. Also,
traditional CLECS, including Allegiance Telecom, Inc. and McLeodUSA, Inc., have
extensive fiber-based networks in numerous metropolitan areas and are capable of
providing voice and high-speed data services to businesses.
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Cable Modem Service Providers. Cable modem service providers, like
AOL's Roadrunner and At Home Corporation, currently offer consumers and
businesses high-speed Internet access over hybrid fiber coaxial cable networks.
Where deployed, these networks provide local access services similar to our
services, and in some cases at higher speeds. In January 2001, AOL, which
provides Internet access to over 26 million customers, completed its merger with
Time Warner, Inc., which owns broadband cable infrastructure serving up to 20
million subscribers. We expect the combination of these two companies to
represent significant competition to the residential broadband Internet access
market.
Other Wireless and Satellite Service Providers. We also may face
competition from other fixed wireless service providers, including Teligent,
Inc., XO, Winstar Communications, Inc., and Advanced Radio Telecom Corporation.
AT&T has also expanded its fixed wireless network to compete for voice and
high-speed data customers in businesses and residences. We also may face
competition from satellite-based systems. Both DirecPC (owned by Hughes Network
Systems, a unit of Hughes Electronics Corporation), and StarBand Communications
(a partnership of Gilat Satellite Networks, Ltd., Microsoft Corporation and
EchoStar Communications Corporation ("EchoStar")) have announced deployment of
two-way broadband satellite service.
Many of these competitors are offering, or may soon offer, technologies
and services that will directly compete with some or all of our service
offerings. We may not be able to compete effectively, especially against
established industry competitors with significantly greater financial resources.
We believe the principal competitive factors that we face include:
o transmission speed,
o reliability of service,
o ability to bundle services,
o price performance,
o customer support,
o brand recognition,
o operating experience, and
o capital availability.
For a further discussion of competition in this industry, see "Risk
Factors -- The Internet access market is highly competitive. Because many
competitors in our markets are well-established and have resources significantly
greater than those available to us, we may not be able to establish a
significant number of Internet access customers in our markets."
Other Telephony Services
We also will face intense competition from other providers of telephony
transmission services as we implement wireless telecommunications services and
voice over IP. This competition will be increased because MMDS spectrum
traditionally has not been used to deliver telephony services, and consumer
acceptance of such services delivered across MMDS spectrum is unknown at this
time. Many of the existing providers of telephony services, such as ILECs and
CLECs, have significantly greater financial and other resources than us and
better established brand awareness in their service areas.
Subscription Television Competition
The subscription television business also is highly competitive, and
many of our competitors have significantly greater resources and channel
capacity than we have. Our competition in the subscription television market
includes:
Hardwire Cable. Our principal subscription television competitors are
traditional hardwire cable operators such as AT&T Broadband and AOL. Hardwire
cable companies generally are well established and known to our potential
customers and have significantly greater financial and other resources than we
have. In addition, these competitors are also bundling additional services with
their cable TV services, such as high-speed Internet access and content, to
enhance their products.
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Direct Broadcast Satellite ("DBS"). DBS service is available from
DIRECTV and Echostar. We compete with many retail distributors of DIRECTV and
other DBS services. In November 1999, Congress enacted legislation allowing DBS
providers to offer local television stations. We do not expect DBS providers to
offer local stations into a majority of our existing local markets for some
time, if at all, because of the size of these markets; however, the growth of
DBS service has been significant since it was first launched, and we expect that
the DBS service providers will continue to be significant competitors for
subscription television customers.
Interexchange Carriers. AT&T has combined its current consumer
long-distance, wireless and Internet services units with cable,
telecommunications and high-speed Internet access capacity. With this ability to
bundle high-speed services with cable programming, we expect that AT&T will be a
significant competitor to our MMDS and DIRECTV programing services.
Private Cable. Private cable is a multichannel subscription television
service where the programming is received by satellite receiver and then
transmitted via coaxial cable throughout private property, often MDUs, without
crossing public rights of way. FCC rules permit 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 us for exclusive rights of
entry into larger MDUs.
Local Off-Air VHF/UHF Broadcasts. Local off-air VHF/UHF broadcast
television stations (such as affiliates of ABC, NBC, CBS, and Fox) provide free
programming to the public. Potential customers may forego subscription
television and only receive free off-air programming.
GOVERNMENT REGULATION
General. MDS, MMDS and ITFS services are subject to regulation by the
FCC under the Communications Act of 1934, as amended. The Communications Act
authorizes the FCC, among other things, to;
o issue, revoke, modify, and renew station licenses,
o approve the assignment and/or transfer of control of such
licenses,
o approve the location and technical parameters of MDS, MMDS and
ITFS transmission facilities (headends and base stations),
o regulate the kind, configuration and operation of equipment used
by MDS, MMDS and ITFS systems,
o impose certain equal employment opportunity and other periodic
reporting requirements on MDS, MMDS and ITFS operators, and
o review and approve/disapprove certain terms of airtime lease
agreements.
MDS, MMDS and ITFS Licenses. In our markets, a total of 32 six-MHz
channels and one four-MHz channel are available in the MDS, MMDS and ITFS
frequency bands. The FCC can license the 13 MDS and MMDS channels directly to
commercial entities for full-time operation without programming restrictions.
Except in limited circumstances, the FCC generally can license 20 ITFS channels
only to qualified non-profit educational organizations. When using analog
transmissions, each of the ITFS channels must broadcast programming for
educational purposes a minimum of 20 hours per week. The remaining air time on
ITFS channels may be leased for commercial use, without further programming
restrictions except that the ITFS license holder, at its option, must be
entitled to recapture up to an additional 20 hours of air time per channel per
week for educational programming. When using digital transmissions, an ITFS
licensee must reserve 5% of the capacity of each 6 MHz channel for immediate
ITFS use upon request. There is no additional recapture requirement for an ITFS
licensee when using digital transmissions.
The FCC began the establishment of the MDS/MMDS spectrum in 1974 with
the allocation of two channels (MDS-1 and MDS-2/2A). In 1983, the FCC
reallocated a total of eight ITFS channels to the MMDS spectrum to satisfy a
growing demand for the delivery of video entertainment programming to
subscribers and to provide competition to hardwire cable television systems.
Simultaneous with this reallocation of spectrum, the FCC amended its rules for
the remaining ITFS channels to permit ITFS licensees, subject to their meeting
certain educational programming requirements, to lease excess capacity to
commercial MMDS service providers. ITFS channels originally had been allocated
solely for educational purposes.
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In 1985, the FCC established a lottery procedure for awarding MDS and
MMDS station licenses. In 1990, the FCC shifted to a one-day cut-off period
application process, under which all mutually exclusive MDS and MMDS licenses
were issued on essentially a first-come, first-served basis. In 1995, the FCC
adopted rules under which MDS and MMDS applications for new stations would be
subject to a competitive bidding process, or spectrum auction. The FCC generally
considers applications to be mutually exclusive if the grant of one application
would effectively preclude the grant of one or more of the other applications
due to interference that cannot be avoided through cooperation of the parties.
Using the competitive bidding process, in 1996 the FCC auctioned off one
authorization for each of the 493 BTAs. Each BTA authorization holder is
permitted to apply for, and following FCC grant, to construct facilities to
provide services over any unlicensed MDS or MMDS channel within the BTA, and has
preferred rights to the available ITFS frequencies within the BTA, subject to
the superior rights of any qualified ITFS applicant. The MDS and MMDS licenses
issued or applied for before the BTA auction are commonly referred to as
"incumbent" MDS/MMDS licenses, while the MDS and MMDS station authorizations
issued pursuant to BTA ownership are commonly referred to as "BTA" MDS/MMDS
licenses.
The application and licensing process for ITFS stations is different
from those for MDS and MMDS stations. In 1995, the FCC adopted a national filing
window system. Under this system the FCC accepts applications for licenses for
new ITFS stations or major changes to existing ITFS licenses only if they are
filed within specific windows, typically five days, set by the FCC. Applications
filed in a particular window are subject only to competing proposals filed in
that same window. Where two or more applications are filed within the same
window and are predicted to cause each other harmful electrical interference,
licenses are awarded by the FCC pursuant to a comparative selection process.
In 1998, the FCC, acting pursuant to the Balanced Budget Act of 1997,
tentatively concluded that competing ITFS applications should be subject to
auction, or competitive bidding. However, because the FCC was uncertain at the
time whether its conclusion correctly reflected Congress's intent with regard to
the treatment of competing ITFS applications, it decided not to proceed
immediately with the auction of ITFS applications and to first seek
Congressional guidance on the matter. In April 1999, having received no specific
guidance from Congress, the FCC reaffirmed its previous decision to use spectrum
auctions to resolve competing ITFS applications. The FCC did, however, state
that it would amend its rules regarding ITFS auctions if Congress were to
specify a change to the FCC's auction authority in this regard.
Generally, in the case of MDS, MMDS and ITFS stations, the FCC issues
the station licensee a conditional license, allowing construction of the station
to commence. The station may be constructed and operated only in accordance with
the parameters set forth in the license. Channel transmission generally must
begin within one year of grant of the conditional license in the case of
incumbent MDS/MMDS licenses, 18 months in the case of ITFS licenses and five
years for BTA MDS/MMDS licenses. If channel construction deadlines for a license
are not met, then (1) the FCC may revoke the license or (2) in the case of the
BTA licenses, reduce the license service area if less than two-thirds of the
population of the BTA service area is capable of being reached by a station
signal by the expiration of the five-year BTA build-out period. Although FCC
rules permit parties to request extensions of channel construction deadlines,
the FCC is not required to grant extensions. We believe that we have satisfied
all construction deadlines relating to our licensed stations except for those
licenses for which the deadline has not yet passed or for which we have received
an extension.
MDS, MMDS and ITFS licenses generally have terms of 10 years. All
"incumbent" MDS/MMDS licenses expire on May 1, 2001. All BTA MDS/MMDS licenses
expire on March 28, 2006. Licenses may be renewed through applications filed
with the FCC within a certain period before expiration of the license term, and
petitions to deny applications for renewal may be filed by other parties during
certain periods following the filing of such applications. The FCC may revoke or
cancel licenses for violations of the Communications Act or the FCC's rules and
policies, whether or not related to the license under review. Alien ownership
exceeding prescribed levels and conviction of certain criminal offenses may also
render a licensee or applicant unqualified to hold a license. Although FCC
custom and practice establish a presumption granting renewals of licenses, the
presumption requires that the licensee substantially comply with its regulatory
obligations during the license period.
FCC rules generally prohibit the sale for profit of an MDS or MMDS
conditional license or of a controlling interest in the conditional license
holder before construction of the station or, in certain instances, prior to the
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completion of one year of operation. However, access to channels may be obtained
during these prohibited periods through the leasing of an MDS or MMDS license
holder's channel capacity. The granting of options to purchase a controlling
interest in a licensee or an option to purchase a license is also permitted
during these prohibited periods. During the lifetime of any such lease or option
agreement, the licensee must remain in control of its FCC license to avoid
violating FCC transfer-of-control rules. Our lease agreements with license
holders typically require the license holders, at our expense, to use their best
efforts, in cooperation with us, to make various required filings with the FCC
in connection with the maintenance and renewal of licenses. We believe this
reduces the likelihood that the FCC will revoke, cancel or fail to renew a
license.
BTA Auction and Service Requirements. In March 1996, the FCC concluded
its first auction of available commercial MMDS spectrum in the 493 BTAs. Under
the FCC's rules, certain qualified small business auction winners, called
"designated entities," were permitted to pay off winning bids in installment
payments. The winner of a BTA has the exclusive right to apply for and develop
the available MDS and MMDS frequencies in the BTA, subject to certain specified
interference criteria that protect incumbent MDS and MMDS stations. Incumbent
licensees also must protect the BTA licensees from system interference caused by
modifications to incumbent stations, including power increases or base station
relocations.
BTA auction winners with MDS/MMDS spectrum rights have a five-year
"build-out" period. During the build-out period, a BTA holder can initiate or
expand service within its BTA without competition from other MDS/MMDS spectrum
applicants except in those areas and on those channels for which there is an
incumbent MDS/MMDS licensee. After the five-year period, a BTA holder can retain
its authorization for an entire BTA if its signal is capable of covering at
least two-thirds of the population within its BTA service area, excluding those
who are located within the protected service areas of incumbent MDS/MMDS
stations licensed to others. If the BTA holder fails to meet the coverage
requirement after the five-year build-out period, or the FCC does not waive,
extend or otherwise modify the build-out requirement, then the BTA license for
the portion of the BTA that is not capable of being served will be subject to
forfeiture. The FCC's rules allow BTAs to be partitioned and BTA licensees are
permitted to contract with other entities to allow them to file applications
with the FCC for available channels within the partitioned area. We expect the
FCC to renew BTA licenses after the expiration of their 10-year term if the
authorization holder satisfies the coverage requirement and is in compliance
with the Communications Act and the FCC's rules.
We acquired 93 BTAs in the March 1996 auction. All of our BTA licenses
have an effective date of August 16, 1996, except for one which has an effective
date of September 17, 1996. Failure to remit installment payments in a timely
manner or to meet the five-year construction deadlines could result in the
forfeiture of some or all of the BTA authorizations that we hold. We believe
that we have satisfied the applicable financial and coverage requirements, or
that the FCC will waive, extend or otherwise modify the build-out requirement,
to allow us to retain substantially all our BTA authorizations in which we
intend to operate.
In October 1997, we entered into a lease and purchase option agreement
with CS Wireless for 10 BTAs and portions of four additional BTAs already
licensed to us. Under this agreement, CS Wireless has agreed to reimburse us for
all amounts paid to the FCC for the BTAs leased to CS Wireless. The agreement
also provides CS Wireless the option to purchase the leased BTAs.
WCS Licenses. In February 1997, the FCC reallocated and assigned the
use of the frequencies at 2305-2320 MHz and 2345-2360 MHz to WCS. WCS licensees
are permitted to provide fixed, mobile and radiolocation services throughout
their 2.3 GHz band. In addition, satellite digital audio radio service may be
provided on all frequencies in the band except for those at 2305-2310 MHz. The
regulatory treatment of WCS licensees depends on the type(s) of services they
provide.
WCS licenses, which generally are awarded by the FCC through
competitive bidding, have terms of 10 years. Although the licenses carry with
them a "renewal expectancy," each WCS licensee is subject to certain
"substantial service" requirements that must be met during the initial license
term. "Substantial service" is defined by the FCC as "service which is sound,
favorable, and substantially above the level of mediocre service which just
might minimally warrant renewal." Failure by a licensee to meet this requirement
may result in a forfeiture of its license. We lease 20 MHz of WCS spectrum in 19
markets from CS Wireless.
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Transmission. The FCC also regulates transmitter locations and signal
strengths. The operation of an MDS, MMDS and ITFS system typically requires the
co-location of a commercially viable number of channels operating with common
technical characteristics. To co-locate channels, an applicant must demonstrate
that its proposed signal does not violate interference standards in the
FCC-protected area of previously-authorized MDS, MMDS and ITFS stations. An MDS
and MMDS license holder generally is protected from interference from another
MDS or MMDS operator within a 35-mile radius of the base station called a
"protected service area." An ITFS license holder generally is entitled to
protection from electrical interference to all of its receive sites. In
addition, an ITFS station is entitled to a 35-mile protected service area (1)
during the use of the station's excess channel capacity by an MMDS operator if
it has requested and received a protected service area from the FCC or (2) from
all MDS, MMDS and ITFS station licensees that implement two-way digital
operations.
Two-Way Authorization. In September 1998, the FCC amended its rules to
allow for the use of MMDS spectrum for fixed, two-way digital voice, video and
data communications. As amended, these rules are referred to as the "two-way
rules." The two-way rules became final in July 1999, and in August 2000, the FCC
opened an initial, one-week filing window in which to file applications for
two-way services. Under the two-way rules, the FCC:
o permits MDS, MMDS and ITFS licensees to provide digital two-way
communications services,
o provides a number of technical parameters to mitigate the
potential for interference among service providers and to ensure
interference protection for existing MDS, MMDS and ITFS
licensees,
o simplifies and streamlines the licensing process for two-way
authorizations and ITFS major modifications, and
o modifies the ITFS programming requirements in the digital
environment.
The two-way rules are intended to provide licensees and operators in
the MDS, MMDS and ITFS spectrum with the technical and operational flexibility
to add various digital two-way services to their current offerings. The two-way
rules permit the use of MDS, MMDS and ITFS frequencies for both downstream and
response transmissions. Two-way service is provided through the use of
"response" stations, such as at the customer's premises, and response station
"hubs," or base stations, which serve as collection points for response
transmissions. The two-way rules also permit a cellular system design using a
"signal booster station," or additional transmission site not located at the
base station, which is used either to originate or relay signals to customers
and also serve as a response station hub for those customers.
Under the two-way rules, all 33 MDS, MMDS and ITFS channels generally
can be used for upstream or downstream communications. All channels will
continue to be subject to the FCC's interference protection requirements and
existing or future channel capacity lease agreements. In addition, MDS, MMDS and
ITFS operators that operate digital two-way communications systems are
permitted, subject to certain limitations, to "shift" required ITFS educational
programming to any MDS, MMDS or ITFS channel within the same operating system,
"load" ITFS programming on to less than the total number of channels licensed to
a particular ITFS licensee or "swap" their channels for other channels in the
same market. However, channel swaps represent changes in licensees and require
the filing of applications with the FCC and receipt of FCC approval.
The FCC opened an initial one-week filing window for two-way
applications in August 2000. We filed over 400 applications for 70 markets in
this filing window. All applications filed during this one-week window will be
considered as having been filed on the same day. Applicants must certify that
they are in compliance with all applicable technical, interference and
notification rules, including all necessary interference consent letters. The
FCC has indicated that its staff will review the applications for completeness,
but generally will not conduct its own interference studies. On February 1,
2001, the FCC issued a public notice accepting our two-way applications. All
applications that have not been challenged within 60 days after this public
notice will be deemed granted. The grant will become final upon FCC public
notice and issuance of a new FCC license.
After the initial one-week filing window, the FCC will use a "rolling"
one-day filing window for booster and hub applications. Applications will be
placed on public notice, allowing parties 60 days to file petitions to deny. If
no petitions to deny are filed, the applications are granted on the 61st day.
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Regulation of Internet Service Providers. Congress has passed a number
of laws that concern the Internet, including the Digital Millennium Copyright
Act, the Children's Online Privacy Protection Act, the Children's Online
Protection Act, and the Protection of Children from Sexual Predators Act of
1998. Generally, these laws provide liability limitations for Internet service
providers that do not knowingly engage in unlawful activity. Should we use our
licensed and leased MDS, MMDS and ITFS channels for the provision of Internet
access service, we do not anticipate that compliance with these laws will have
an adverse impact on us. However, we may be required to implement operating
guidelines to comply with the laws and could be subject to liability if we fail
to implement appropriate guidelines or otherwise violate any of these new laws.
Aside from the use of spectrum, the FCC has held that Internet access
services are "information services" not subject to FCC regulation. Nevertheless,
the FCC has held that the Internet dial-up traffic is interstate traffic subject
to FCC jurisdiction, although the U.S. Court of Appeals for the D.C. Circuit
reversed and remanded that decision. There can be no certainty that the
providing of Internet access services will continue to be free from FCC
regulation.
Regulation of Telecommunications Services. If we begin providing
wireless telecommunications services, we will be subject to FCC and state
regulation of our interstate and intrastate telecommunications services,
respectively.
The Cable Act. On October 5, 1992, Congress passed the Cable Television
Consumer Protection and Competition Act of 1992 (the "Cable Act"). Pursuant to
the Cable Act, effective October 6, 1993, commercial broadcasters may require
cable operators and other multichannel video service providers to obtain their
consent before retransmitting their signals. The FCC has exempted wireless cable
providers from the retransmission consent rules if the receive-site antenna is
either owned by the subscriber or within the subscriber's control and available
for purchase by the subscriber upon the termination of service. In all other
cases, wireless cable providers must obtain consent to retransmit broadcast
signals. We believe that we have obtained substantially all consents required to
retransmit local broadcast signals in our subscription television markets. We
cannot assure you that existing consents will be maintained or renewed or that
we will be able to obtain any additional necessary consents on terms
satisfactory to us, if at all. Unlike hardwire cable systems, wireless cable
systems are not required under the Cable Act and the FCC's "must carry" rules to
retransmit a specified number of local commercial and non-commercial television
or qualified low power television signals.
The Cable Act and the FCC's implementing regulations are intended to
ensure wireless cable operators have access to certain cable programming on fair
and non-discriminatory terms. If a wireless cable operator is unable to obtain
program services owned by cable operators on what it considers to be fair and
non-discriminatory terms, then it may file a complaint with the FCC. Access to
certain programming may be impeded or delayed as a result.
Copyright. Under the Federal copyright laws, permission from the
copyright holder generally must be secured before certain video programs may be
retransmitted. Under Section 111 of the Copyright Act of 1976, certain "cable
systems," including wireless cable providers, are entitled to engage in the
secondary transmission of broadcast programming without the prior permission of
the holders of copyrights in the programming if a compulsory copyright license
is secured. Such a license may be obtained upon the filing of certain reports
and the payment of certain fees set by copyright arbitration royalty panels. We
believe we have obtained all compulsory copyright licenses required for each of
our subscription television markets.
In 1994, Congress enacted legislation that clarified the ability of
wireless cable providers to obtain the benefit of the Section 111 compulsory
copyright license. Periodically, Congress has considered proposals to phase out
the Section 111 compulsory license. In response to a request from Congress, the
U.S. Copyright Office held a public hearing on the issue of compulsory licenses
in May 1997 and endorsed eventual replacement of the statutory license by a free
market negotiated license while recommending retention of the existing license
for the near future. There can be no assurances that Congress will not adopt
legislation affecting this or other recommendations. Because our wireless cable
systems retransmit only a limited number of broadcast channels, we do not
believe that the termination of the compulsory copyright license would have a
material adverse effect on our financial condition, results of operations or
cash flows.
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Other Regulations. As an antenna structure owner, we are subject to
Federal Aviation Administration regulation and FCC registration for the
construction, maintenance and lighting of transmission towers and by certain
local zoning regulations affecting construction of towers and other facilities.
Federal environmental regulations and state and local environmental land use,
and zoning regulations may also apply.
TRANSACTIONS
Strategic Alliance with Cisco. In February 2000, we entered into a
strategic alliance and agreement with Cisco to pursue testing and deployment of
next generation fixed wireless broadband technology. In August 2000, we
successfully completed the initial phase of a field trial with Cisco in Austin,
Texas. In February 2001, we announced that we were extending a second field
trial with Cisco in Amarillo, Texas, which we currently expect to complete in
the second quarter of 2001. Because the trial was extended beyond certain dates
in the original agreement with Cisco, our prior purchase commitment of $13
million in equipment has expired. We currently are in discussions with Cisco
regarding new purchase commitments and equipment financing proposals. Although
we currently intend to complete our technology trial in Amarillo, there can be
no assurance that the trial will be successful or that we will enter into a
subsequent purchase or financing agreement with Cisco.
Fayetteville and Fort Smith, Arkansas Acquisition. In December 2000, we
entered into a definitive agreement to acquire all of the MDS, MMDS and ITFS
spectrum licenses, lease rights and other assets of Smithco of Ft. Smith, Inc.
and Smithco Investments of West Memphis, Inc., in Fayetteville and Fort Smith,
Arkansas, for $3.5 million in common stock of Nucentrix. These markets are
contiguous with our existing BTAs in northeast Oklahoma and southwest Missouri,
and cover over 200,000 estimated households. The transaction is subject to
customary closing conditions, including due diligence and receipt of all
required regulatory approvals. On March 5, 2001, the FCC placed the application
to assign certain MMDS channels in Fort Smith on public notice for 30 days. If
no party challenges the application during the public notice period, the FCC
will process and, in its discretion, grant the application. The grant will go on
public notice and, absent any challenge, become final within 30 days of the
grant. We expect to close this transaction in the second quarter of 2001.
Rockford, Illinois Acquisition. In May 2000, we entered into a
definitive agreement to acquire all of the MDS, MMDS and ITFS spectrum licenses,
lease rights and other assets of Wireless Cable of Rockford, LLC and Allen Leeds
in Rockford, Illinois for $5.6 million in common stock of Nucentrix and the
assumption of $400,000 in BTA debt. This market is contiguous with our existing
markets in central Illinois and covers approximately 250,000 estimated
households. We currently are awaiting FCC approval of the assignment of the
Rockford BTA. There is no assurance that we will be able to obtain this
approval. If we do not receive such approval, or otherwise receive confirmation
from the FCC that the BTA is in good standing, we may terminate or modify the
purchase agreement. The transaction is subject to other customary closing
conditions, including due diligence.
SPECTRUM ALLOCATION PROCEEDINGS FOR ADVANCED WIRELESS SERVICES
General. The FCC and other government organizations have initiated
proceedings to study, identify and authorize additional radio frequencies for
advanced wireless services, including third generation, or "3G," mobile wireless
services. Several frequency bands are being studied in this process. One of the
frequency bands under consideration for such services is 2500 - 2690 MHz, in
which we hold substantially all of our MDS/MMDS/ITFS fixed wireless FCC licenses
and spectrum leases. We are vigorously opposing, and intend to continue to
vigorously oppose, any effort to share or reallocate any of our spectrum for 3G
services. However, we currently cannot predict how these various proceedings
will be resolved. We could be required to share part or all of these frequencies
with 3G mobile services, or relocate part or all of our fixed wireless services
to another frequency band. Although the National Telecommunications Information
Administration ("NTIA") Plan to Select Spectrum, which is discussed below,
recognizes that additional spectrum may have to be found or other accommodations
will have to be made for relocated licensees to continue their operations, it is
impossible to determine at this time what impact, if any, spectrum sharing or
relocation would have on our operations. However, sharing our spectrum with 3G
services, or relocating part or all of our fixed wireless services to another
frequency band, could require new or additional equipment and raise our
operating costs, delay the provision of service and/or render our services
uneconomic in certain areas.
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WRC-2000. In June 2000, the International Telecommunication Union
("ITU") concluded a World Radiocommunication Conference ("WRC-2000") in
Istanbul, Turkey. Among other things, WRC-2000 adopted nonbinding resolutions
inviting countries to make available, based on market demand and other national
considerations, additional spectrum in the following frequency bands for the
terrestrial component of International Mobile Telecommunications ("IMT-2000") or
3G mobile wireless services worldwide: (i) 806-960 MHz, (ii) 1710-1885 MHz and
(iii) 2500-2690 MHz. In connection with WRC-2000, the ITU estimated that as much
as 160 MHz of additional spectrum would be needed to meet projected demands in
the highest traffic areas worldwide by 2010.
WRC-2000 also adopted nonbinding resolutions requesting the ITU's
Radiocommunication Sector to conduct studies on: (i) the implications and
possibilities of sharing of services allocated in the identified frequency bands
with IMT-2000 services, (ii) harmonizing frequency arrangements for the
implementation of IMT-2000 in the bands, (iii) ways to facilitate global roaming
within the bands, (iv) spectrum demand forecasts, (v) adapting mobile
radiocommunication technologies (including IMT-2000) for developing countries,
(vi) maintaining a database of national studies and decisions on selection of
spectrum for IMT-2000, and (vii) providing a fixed wireless access interface
using IMT-2000 technologies. WRC-2000 instructed that these studies be completed
before the next World Radiocommunication Conference or before June 2003,
whichever is earlier.
The resolutions adopted by WRC-2000 expressly recognized that not all
countries may need all of the IMT-2000 bands identified at WRC-2000, and that
not all countries may be able to implement IMT-2000 in all of those frequency
bands, due to usage by, and investment in, existing services. WRC-2000 also
noted that its resolutions did not establish any regulatory priority with
respect to these bands, nor did the resolutions preclude the use of the bands
for any application of the services to which they currently are allocated.
Petitions for Rulemaking. In July 2000, the Cellular Telecommunications
Industry Association ("CTIA") filed a Petition for Rule Making with the FCC,
requesting that the FCC begin the process of designating additional spectrum for
3G services in a manner consistent with WRC-2000. In addition, in April 2000 the
Satellite Industry Association ("SIA") filed a Petition for Rule Making with the
FCC requesting that the FCC allocate the 2500 - 2520 MHz and 2670 - 2690 MHz
frequency bands for use by Mobile Satellite Service operators to develop 3G
services. In December 2000, the FCC denied the SIA's Petition for Rule Making.
The SIA has filed a Petition for Reconsideration of the FCC's decision, which
remains pending. CITA's Petition for Rule Making also remains pending at the
FCC.
Executive Memorandum. On October 13, 2000, former President Clinton
signed an Executive Memorandum (the "Executive Memorandum") that directed
federal agencies to work with the private sector and the FCC to identify radio
spectrum needed for 3G services. Specifically, the Executive Memorandum directed
the Secretary of Commerce to work with the FCC to develop a plan to select
spectrum for 3G services, and to issue an interim report on current spectrum
uses and the potential for realloction or sharing of the frequency bands
identified at WRC-2000 for 3G services. The Executive Memorandum set forth a
timetable of July 2001 for identifying additional spectrum for 3G services, and
September 30, 2002, for auctioning licenses to competing applicants. The
Executive Memorandum further directed the Secretaries of Defense, Treasury and
Transportation, and the heads of any other executive department or agency that
is currently authorized to use spectrum identified at WRC-2000, to participate
and cooperate in this process.
Plan to Select Spectrum. On October 20, 2000, the NTIA issued a Plan to
Select Spectrum (the "NTIA Plan") pursuant to the Executive Memorandum. The NTIA
Plan stated that, in addition to the three frequency bands identified at
WRC-2000, the following frequency bands would be given full consideration in
formulating a final allocation order for 3G services in the United States: 698 -
746 MHz, 746 - 764 MHz, 776 - 794 MHz, 1850 - 1990 MHz, 2110 - 2150 MHz, and
2160 - 2165 MHz. The NTIA Plan noted that extensive studies for certain of these
candidate bands would not be required to provide a factual basis for the NTIA
and FCC to identify and allocate spectrum for 3G services. The NTIA Plan further
stated that for license holders that may be required to relocate, additional
spectrum may have to be found or other accommodations will have to be made to
continue their operations.
The NTIA Plan provided for two reports to determine whether, and under
what circumstances, the 1755 - 1850 MHz and 2500 - 2690 MHz bands could be made
available for 3G wireless systems and the costs and operating impacts of such
action to the incumbent users, as well as to consider other relevant information
regarding
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the 806 - 960 MHz and other frequency bands identified in the preceding
paragraph. The NTIA Plan also indicated that the FCC intends to issue a Report
and Order to allocate spectrum for 3G services in July 2001, and complete
auctions of spectrum for 3G services by September 30, 2002.
NTIA and FCC Interim Reports. The first report under the NTIA Plan was
issued in two separate reports: (i) an NTIA Interim Report on federal operations
in the 1755 - 1850 MHz band (the "NTIA Interim Report"), and (ii) an FCC Interim
Report on current uses of the 2500 - 2690 MHz band (the "FCC Interim Report"),
both issued in November 2000.
The NTIA Interim Report examined federal operations in the 1755 - 1850
MHz band and discussed the potential for accommodating mobile 3G services in
this band. The report identified and discussed four principal federal functions
supported by this band: (i) space telecommand, tracking and control, (ii) medium
capacity fixed microwave services, (iii) tactical radio battlefield networks,
and (iv) air combat training systems. The NTIA Interim Report stated that, under
certain conditions, including reimbursement by 3G operators of federal operators
to relocate or retune operating systems and no impact on major federal
functions, sharing or segmenting part of the 1755 - 1850 band to accommodate 3G
systems might be possible. The report noted that the alternatives to sharing or
segmenting this band to support 3G systems would be to accommodate 3G services
in other frequency bands, or relocate federal operators in the 1755 - 1850 MHz
band to comparable spectrum.
The FCC Interim Report described current uses of the 2500 - 2690 MHz
band, in which we hold a majority of our MDS/MMDS/ITFS spectrum licenses and
lease rights. The report found that the MMDS industry had invested several
billion dollars to develop broadband fixed wireless data systems in this band,
and that the band was heavily licensed throughout the United States. The report
also found that, because of the large separation distances required between MMDS
and 3G base stations, "sharing" the 2.5 GHz band between the two services was
technically not feasible. Finally, the report examined the possibility of
dividing, or "segmenting," the 2.5 GHz band into one or more segments to be
reallocated for use by 3G systems. The report concluded segmenting the band
could raise technical difficulties for incumbent licensees.
FCC Notice of Proposed Rule Making. On January 5, 2001, the FCC
released a Notice of Proposed Rule Making (the "NPRM") to explore the possible
use of frequencies below 3 GHz for new advanced wireless services, including 3G
services. Specifically, the FCC sought comment on the introduction of new
advanced mobile and fixed services in frequency bands currently used for
cellular, broadband Personal Communications Service and Specialized Mobile Radio
services, as well as five other frequency bands: (i) 1710 - 1755 MHz, (ii) 1755
- - 1850 MHz, (iii) 2110 - 2150 MHz, (iv) 2160 - 2165 MHz, and (v) 2500 - 2690
MHz. In addition, the FCC sought comment on the current and planned use of the
MDS 1/2/2A channels at 2150-2162 MHz, and the possible use of these channels for
3G services.
Over 100 parties filed initial comments in this proceeding, including
Nucentrix, other MMDS operators and licensees, ITFS licensees, 3G service
providers, and MMDS and 3G equipment manufacturers. Reply comments also have
been filed. In the NPRM proceeding, Nucentrix and other MMDS and ITFS operators
and licensees argued that, among other things:
o MMDS/ITFS-based broadband wireless service is an essential
component of the FCC's mandate to accelerate deployment of
broadband services, especially in unserved and underserved areas,
o sharing the 2.5 GHz band between 3G and MMDS/ITFS systems is not
technically feasible,
o a reduction in the amount of spectrum available to
MMDS/ITFS-based networks at 2.1 or 2.5 GHz could negatively
impact the economics of providing broadband service over these
frequencies, particularly in less densely populated areas, and
thus could endanger the deployment of broadband service that the
FCC seeks to promote,
o the FCC cannot reallocate and reauction the 2.1 and 2.5 GHz bands
without infringing upon the rights it has previously sold to BTA
auction winners, and
o ample alternative spectrum is available for 3G services.
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The FCC has indicated that it will file a final report on the use of
the 2.5 GHz band by the end of March 2001, and intends to reallocate spectrum
for 3G services under this proceeding by July 2001.
TRADEMARKS
We own common law trademark rights in and have United States trademark
registrations on the trademarks NUCENTRIX BROADBAND NETWORKS, HEARTLAND WIRELESS
COMMUNICATIONS, INC., HEARTLAND WIRELESS COMMUNICATIONS, INC. and design,
HEARTLAND CABLE TELEVISION, and in the stylized mark HEARTLAND. We also own
common law rights in, and have a federal registration pending in the United
States for, the mark NUCENTRIX TELECOM, which we intend to use in connection
with our wireless telecommunications services. We also have federal
registrations pending on the marks CYBERWAVE, HEARTNET, THINK FAST and CLEAR
CHOICE TV and on a stylized heart design mark. We consider these intellectual
property rights important to our business.
EMPLOYEES
As of March 30, 2001, we had approximately 440 employees. On March 5,
2001, we implemented a reduction in our work force of 32 employees, or
approximately 6%. This reduction in force affected primarily Internet sales,
marketing and support personnel, as well as general corporate functions. None of
our employees is subject to a collective bargaining agreement. We have
experienced no work stoppages and believe that we generally have good relations
with our employees. We also presently use the services of independent service
providers to install certain components of our video operating systems.
REORGANIZATION
On December 4, 1998, we filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan") and disclosure statement under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware
(In re Heartland Wireless Communications, Inc., Case No. 98-2692 (JJF)). We
filed the Plan with the prepetition agreement from the holders of more than 70%
in principal amount of our $115 million 13% senior notes (the "Old 13% Notes")
and $125 million 14% senior notes (the "Old 14% Notes" and, together with the
Old 13% Notes, the "Old Senior Notes") to support the Plan.
On March 15, 1999, the bankruptcy court confirmed our Plan, which
became effective on April 1, 1999 (the "Effective Date"). As of the Effective
Date we changed our name from Heartland Wireless Communications, Inc.
("Heartland"), to Nucentrix Broadband Networks, Inc.
As of the Effective Date:
o all previously issued and outstanding common stock, options
granted under our stock option plans, warrants and any other
equity interests in Nucentrix were canceled,
o holders of the Old Senior Notes received 9,700,000 shares of
newly issued common stock, and
o holders of our $40.2 million convertible subordinated notes ("Old
Convertible Notes") received 300,000 shares of newly issued
common stock and warrants to purchase 825,000 shares of common
stock at an exercise price of $27.63 per share, subject to
downward adjustment in the event of a sale or merger of our
company.
We also are obligated under the Plan to issue warrants to acquire an
additional 275,000 shares of common stock at an exercise price of $27.63 per
share, subject to downward adjustment in the event of a sale or merger of our
company. These warrants will be allocated (1) first, to pre-petition bondholder
litigation claims, to the extent any of these claims are allowed by the
bankruptcy court and exceed any corporate liability insurance proceeds that are
available to satisfy such claims after satisfaction of certain indemnification
obligations as described under "Legal Proceedings -- Securities Litigation," and
(2) second, pro rata, based on the equity interests in Nucentrix represented by
such claims, among (A) pre-petition stockholder litigation claims, to the extent
any of these claims are allowed by the bankruptcy court and exceed any corporate
liability insurance proceeds available after
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satisfaction of pre-petition bondholder litigation claims, and (B) to holders of
common stock prior to the Effective Date. These warrants will be distributed (1)
with respect to pre-petition bondholder litigation claims, after the allowed
amounts of such claims and the number of warrants, if any, that will be required
to satisfy such claims are determined by the bankruptcy court and (2) with
respect to pre-petition stockholder litigation claims and to holders of common
stock prior to the Effective Date, after the allowed amounts of pre-petition
stockholder litigation claims and the number of warrants, if any, that will be
required to satisfy such claims is determined by the bankruptcy court. See Item
3., "Legal Proceedings."
We also may be required to issue additional shares of common stock to
settle miscellaneous unsecured claims under our Plan, to the extent these claims
are allowed by the bankruptcy court. These miscellaneous unsecured claims
include (1) tort claims, except for tort claims for personal injury or wrongful
death for which a proof of claim was timely filed, to the extent there is no
available coverage under our liability insurance (including any self-insured
retention), (2) claims under executory contracts and unexpired leases that we
specifically rejected under the Plan and (3) other unsecured claims arising from
contract or other disputes, except for administrative expense claims, priority
claims, Old Convertible Note claims, Old Senior Note claims, and securities
litigation claims. Based on information currently available to us, we believe we
will be required to issue up to a maximum of 75,000 shares of common stock to
settle these miscellaneous unsecured claims, if these claims are allowed by the
bankruptcy court. As of February 28, 2001, we had issued 16,523 shares of our
common stock to settle some of these claims.
In September 1999, we received notice that a Motion to Revoke Order of
Confirmation had been filed pro se in the U.S. Bankruptcy Court for the District
of Delaware by two former stockholders of Heartland, seeking to revoke the order
of the bankruptcy court confirming our Plan. See Item 3., "Legal Proceedings."
The motion asserts that we procured the order confirming our Plan by
fraudulently undervaluing our enterprise value, and seeks to set aside the
order. We have filed a Motion to Dismiss the Motion to Revoke, believe the
Motion to Revoke is without merit and intend to vigorously oppose the Motion to
Revoke.
In December 2000, several former stockholders of Heartland filed a
lawsuit against five of our current and former directors and officers, and eight
former holders of Old Senior Notes, in the District Court for Bryan County,
Oklahoma. See Item 3., "Legal Proceedings." The plaintiffs allege that the
defendants purposely undervalued our enterprise value as part of the Plan
confirmation process in order to extinguish all prepetition equity holders'
interests. We believe the lawsuit is without merit and intend to vigorously
defend the lawsuit on behalf of our current and former director and officer
defendants.
RISK FACTORS
Our business operations and the implementation of our long-term
business strategy are subject to significant risks inherent in our business,
including, without limitation, the risks and uncertainties described below. The
occurrence of any one or more of the risks or uncertainties described below
could have a material adverse effect on our financial condition, results of
operations and cash flows. Additionally, further discussion of these risk
factors and other risks may be found in Item 7., "MD&A" and Item 1., "Business"
and "Reorganization."
WE ARE PURSUING A NEW BUSINESS THAT WE HAVE NOT PREVIOUSLY OPERATED ON A LARGE
SCALE. WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR LONG-TERM BUSINESS
STRATEGY OR CORRECT OUR HISTORY OF LOSSES.
We historically have used our radio spectrum to provide wireless
subscription television services and incurred substantial operating and net
losses from these operations. While we plan to maintain subscription television
services in most of our existing markets for the foreseeable future, the
principal focus of our long-term business strategy is to expand the use of our
radio spectrum to provide broadband wireless services, such as high-speed
Internet access. We have launched commercial high-speed Internet access service
in only two of our markets, and the revenues that we have received in these two
initial markets are immaterial to date. When we determine to deploy additional
markets, we intend to increase our capital expenditures to develop and launch
broadband wireless services in these additional markets, and we expect operating
expenses from our broadband wireless operations to exceed revenues from those
operations until our customer base increases. As a result, we anticipate that
our net and operating losses will continue unless we successfully implement our
business strategy. We cannot assure you that
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we can develop, market and expand our broadband wireless services in the two
initial markets or any additional markets to the extent necessary to
successfully compete in the broadband services industry.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NECESSARY TO IMPLEMENT OUR
LONG-TERM BUSINESS STRATEGY ON SATISFACTORY TERMS AND CONDITIONS.
To implement our long-term business strategy, we will need additional
capital for capital expenditures, operating expenses, system development costs,
and acquisition costs, including debt that may be assumed in future
acquisitions. We plan to finance these activities by debt or equity financings,
secured or unsecured credit facilities, vendor financing, joint ventures, or
other arrangements. We cannot assure you that we will be able to obtain the
financing we will need to fund the implementation of our long-term business
strategy on satisfactory terms and conditions, if at all. If we incur additional
debt, we may have to dedicate a substantial portion of our cash flow from
operations to the payment of principal and interest, which may cause us to be
more vulnerable to competitive pressures and economic downturns. If we fail to
obtain additional financing in a timely manner and on acceptable terms, we may
have to delay, reduce or eliminate the launch of new high-speed Internet access
systems.
WE CANNOT ASSURE YOU THAT THE NEXT GENERATION TECHNOLOGY WE ARE TESTING FOR OUR
NETWORK PLATFORM WILL PROVIDE THE BENEFITS THAT WE NEED TO BE COMPETITIVE WITH
OTHER BROADBAND SERVICE PROVIDERS, OR THAT IT WILL BE READY FOR COMMERCIAL
DEPLOYMENT IN A TIMELY MANNER. IF THIS TECHNOLOGY PROVES UNRELIABLE, OR DOES NOT
BECOME COMMERCIALLY VIABLE IN TIME TO MEET PERCEIVED DEMAND, THEN DEMAND FOR OUR
SERVICES AND OUR ABILITY TO IMPLEMENT OUR LONG-TERM BUSINESS STRATEGY COULD BE
ADVERSELY AFFECTED.
In August 2000, we successfully completed the initial phase of field
trials with Cisco VOFDM technology as a network platform for delivering
broadband wireless Internet and voice services. In February 2001, we announced
that we were extending a subsequent field trial with Cisco, which we expect to
complete in the second quarter of 2001. We believe a VOFDM-based or OFDM-based
platform will increase our network capacity, coverage and reliability
capabilities by addressing line-of-sight, interference and multipath fading
problems that can occur in wireless environments. However, the technology is
largely unproven in commercial applications. We cannot assure you that this
technology will provide the advantages we expect or that it will be ready for
commercial deployment in a timely manner, if at all. Our failure to achieve or
maintain reliable service capabilities could significantly reduce or delay
consumer demand for our services. In addition, the failure of the platform to
evolve to a state of commercial readiness in a timely manner could delay, reduce
or eliminate our launch of new broadband wireless Internet systems.
WE EXPECT THAT OPEN TECHNOLOGY STANDARDS AMONG MMDS EQUIPMENT MANUFACTURERS WILL
LOWER EQUIPMENT AND OTHER COSTS FOR SERVICE PROVIDERS. THERE IS NO ASSURANCE
THAT SUCH STANDARDS WILL EVOLVE.
We believe that open, or non-proprietary, manufacturing standards
ultimately are necessary in next generation MMDS technology to lower
infrastructure and customer premise equipment costs, and allow for
interoperability and flexibility for service providers. Although there are
discussions among various vendors to develop open standards in this area, there
is no assurance that such standards will evolve in the near future or at all.
The failure of such standards to evolve could result in higher operating costs
and unacceptable operating margins.
THE INTERNET ACCESS MARKET IS HIGHLY COMPETITIVE. BECAUSE MANY COMPETITORS IN
OUR MARKETS ARE WELL-ESTABLISHED AND HAVE RESOURCES SIGNIFICANTLY GREATER THAN
THOSE AVAILABLE TO US, WE MAY NOT BE ABLE TO ESTABLISH A SIGNIFICANT NUMBER OF
INTERNET ACCESS CUSTOMERS IN OUR MARKETS.
As we enter the high-speed Internet access business, we will be forced
to compete with numerous service providers, including the following:
o other ISPs, which have developed high-speed access capabilities
such as DSL, along with their existing services,
o ILECs, which are providing DSL-based services in addition to
their existing wide area, metropolitan and local area networks,
o interexchange carriers, which are expanding their networks to
support high-speed local access, including DSL-based services and
a full range of Internet services and applications,
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o CLECs, which are offering DSL-based data and other services,
o cable modem service providers offering high-speed access services
to consumers and businesses, and
o other fixed wireless and satellite data service providers, which
have deployed or are developing broadband two-way data and voice
services.
Many of our competitors are well-established and have larger and better
developed networks and systems, longer-standing relationships with customers and
suppliers, greater name recognition and significantly greater financial,
technical and marketing resources than we have. Many of these companies can
subsidize competing services with revenues from other services and have ready
access to capital markets. As competition increases in the high-speed Internet
access market, we anticipate intensified downward pricing pressure for our
services. If we are unable to compete effectively it will adversely affect our
ability to successfully implement our business strategy.
WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR LONG-TERM
BUSINESS STRATEGY BECAUSE IT INCLUDES OPERATIONS THAT HAVE NOT BEEN WIDELY
DEPLOYED ON A COMMERCIAL BASIS. OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET
ACCEPTANCE COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY.
Our primary business strategy of providing broadband wireless services
over MDS, MMDS and ITFS spectrum has not been widely deployed on a commercial
basis. The success of our long-term business strategy depends on our ability to
develop and market our high-speed Internet access service at profitable rates.
We will face a number of the difficulties and uncertainties generally associated
with new businesses, such as:
o lack of consumer acceptance,
o difficulty in obtaining financing,
o competition from providers using more traditional and
commercially proven sources for these services,
o advances in competing technologies, and
o changes in laws and regulations.
We have launched commercial high-speed Internet access service in only
two of our existing markets, and we cannot assure you that businesses and
consumers will accept our service as a commercially viable alternative to other
means of Internet access.
To date we have not conducted tests involving wireless local loop or
voice over IP services over our spectrum. We cannot assure you that a system can
be designed to deliver telephony services over our spectrum on a commercial
basis or, if such a system can be designed, that we will receive the requisite
regulatory approvals to offer such services or that we will be able to deploy
such services in a commercially successful manner or at all.
WE ARE SUBJECT TO EXTENSIVE FEDERAL LAWS, RULES AND REGULATIONS. THE LAWS, RULES
AND REGULATIONS TO WHICH WE ARE SUBJECT COULD CHANGE AT ANY TIME IN AN
UNPREDICTABLE MANNER.
Our continued ability to acquire, lease and maintain MDS, MMDS and ITFS
spectrum, which is vital to our operations, is subject to extensive regulation.
These regulations directly affect the breadth of services we are able to offer,
as well as the rates, terms and conditions of those services. We also are
affected indirectly by other governmental regulations on companies that offer
competing services. Regulations and their application are subject to continual
change as a result of new legislation, regulations adopted from time to time by
regulatory authorities and judicial interpretation of these laws and
regulations. We are not able to predict the extent to which any such change in
the regulatory environment could affect our business. We cannot assure you that
changes in legislation, regulations and interpretations would not have a
significant adverse impact on our ability to implement our business strategy.
Aside from the use of spectrum, the FCC has held that Internet access
services are "information services" not subject to FCC regulation. Nevertheless,
the FCC has held that the Internet dial-up traffic is interstate traffic subject
to FCC jurisdiction, although the U.S. Court of Appeals for the D.C. Circuit
reversed and remanded that decision. There can be no certainty that the
providing of Internet access services will continue to be free from FCC
regulation. Moreover, if we begin providing wireless telecommunications or voice
over IP services, we will be subject to FCC and state regulation of our
interstate and intrastate telecommunications services, respectively.
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THE 2500 - 2690 MHZ RADIO FREQUENCY BAND IS ONE OF SEVERAL FREQUENCY BANDS
CURRENTLY BEING CONSIDERED AS A SOURCE OF ADDITIONAL SPECTRUM FOR THIRD
GENERATION, OR "3G," MOBILE SYSTEMS. WE COULD BE REQUIRED TO SHARE OR SEGMENT
ALL OR PART OF THE 2500 - 2690 MHZ BAND IN OUR MARKETS TO ACCOMMODATE 3G MOBILE
SYSTEMS, WHICH COULD RAISE OUR OPERATING COSTS, RENDER OUR SERVICES UNECONOMIC
IN CERTAIN AREAS AND DISRUPT RELATIONSHIPS WITH SPECTRUM LESSORS, POTENTIAL
CUSTOMERS, EQUIPMENT VENDORS, LENDERS, AND POTENTIAL INVESTORS.
Various government organizations have initiated proceedings to study,
identify and authorize additional radio frequencies for 3G mobile wireless
services worldwide. One frequency band currently under consideration in the
United States is the 2500 - 2690 MHz band, in which we hold substantially all of
our MDS, MMDS and ITFS fixed wireless FCC licenses and spectrum leases. We
currently cannot predict how these proceedings will be resolved. We could be
required to share part or all of these frequencies with 3G mobile services, or
relocate part or all of our fixed wireless services to another frequency band.
We also cannot currently determine with any certainty what impact, if any,
spectrum sharing or relocation would have on our operations. However, if we are
required to share our spectrum with 3G services, or to relocate part or all of
our fixed wireless services to another frequency band, such action could require
us to deploy new equipment or additional infrastructure, which may not be
commercially available, or may be available only at significant expense. Such
action also could disrupt relationships with MMDS or ITFS licensees who lease
spectrum to us, potential customers, equipment vendors, lenders, and potential
investors. Any of these effects could raise our operating costs, and otherwise
delay, reduce or eliminate our launch of new broadband wireless Internet
systems.
WE DEPEND ON FCC-REGULATED LICENSES AND CHANNEL LEASES. THE FAILURE TO MAINTAIN
CHANNEL RIGHTS IN CERTAIN MARKETS COULD ADVERSELY AFFECT OUR ABILITY TO TIMELY
IMPLEMENT OUR BUSINESS STRATEGY.
We depend upon licenses granted to us by the FCC and leases with other
FCC license holders for access to channel capacity necessary to operate our
Internet and video businesses. These licenses are subject to renewal as
determined by the FCC. FCC licenses also specify channel construction deadlines
by which channel transmissions must begin, which, if not met, would permit the
FCC to revoke the license. We cannot assure you that:
o the FCC will renew our licenses as their initial terms expire,
o our channel lessors will continue to hold valid licenses for
their channels,
o we will be able to renew our channel leases on terms acceptable
to us, or
o the FCC will grant requests for extensions of construction
deadlines.
The failure to maintain FCC licenses and channel leases will reduce the
total number of channels available for our use. If we fail to maintain
sufficient FCC licenses or channel leases in markets where we operate or in
which we intend to launch two-way Internet access service, then the resulting
reduction in channel capacity could have a material adverse effect on our
ability to:
o serve our existing Internet access and subscription television
customer base,
o serve increasing customer demand for high-speed Internet access
service, and
o add services such as voice over IP or wireless telecommunications
services.
We cannot assure you that we will be able to obtain replacement
spectrum or other acceptable alternatives in a market if we lose an FCC license
or channel lease in that market.
TWO-WAY SYSTEMS REQUIRE REGULATORY APPROVAL. WE WILL BE REQUIRED TO OBTAIN
REGULATORY APPROVAL FOR OUR CURRENT AND FUTURE TWO-WAY SYSTEMS. IF WE DO NOT
OBTAIN REQUISITE APPROVALS FOR A MARKET, THEN WE WILL NOT BE PERMITTED TO
OPERATE A TWO-WAY SYSTEM IN THAT MARKET.
In August 2000 we filed applications with the FCC to receive
authorization for two-way use of our MDS, MMDS and ITFS spectrum in 70 markets.
The applications must meet FCC interference protection rules or contain the
consent of other MDS, MMDS and ITFS licensees in these markets and adjacent
markets. We cannot assure you that:
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o applications filed will not be preempted or otherwise limited by
previously or concurrently filed applications of other operators,
or
o we will be able to obtain the necessary cooperation and consents
from channel licensees in our markets or adjacent markets to
enable us to use our spectrum for two-way communication services.
If we do not receive all required consents in a particular market or we
are not able to design a two-way system that will meet the FCC's interference
protection rules, we will be unable to obtain authorization to implement a
two-way system in that market.
OUR BASIC TRADING AREA, OR BTA, AUTHORIZATIONS ARE SUBJECT TO FORFEITURE IF WE
DEFAULT ON OUR PURCHASE PRICE PAYMENTS OR FAIL TO MEET CERTAIN SERVICE
REQUIREMENTS. THE COSTS OF THE BUILD-OUT TO SATISFY OUR BTA SERVICE REQUIREMENTS
COULD BE MATERIAL.
We acquired authorizations for 93 BTAs in August 1996 at a total cost
of approximately $19.8 million. As of December 31, 2000, $12.2 million in
principal amount of this debt remained payable quarterly through August 2006.
Each BTA is subject to an individual installment note. If we fail to make one or
more scheduled installment payments on a BTA note after any applicable grace
period, that BTA authorization may be forfeited to the FCC.
To retain a BTA authorization, we must provide a required level of
service in the BTA by August 2001. We will satisfy the service requirement for a
BTA if we construct MDS and MMDS stations capable of providing a signal to at
least two-thirds of the BTA population outside of the service areas of other
MMDS operators within our BTAs. If we fail to meet this requirement, or the FCC
does not waive, extend or otherwise modify the build-out requirement, then the
BTA authorization for the portion of the BTA that is not capable of being served
may be subject to forfeiture. Constructing MDS and MMDS channels capable of
providing service to the required population in unconstructed BTAs could require
substantial capital expenditures.
WE DEPEND ON CERTAIN KEY PERSONNEL. IF WE LOSE OUR CHIEF EXECUTIVE OFFICER OR
OTHER MEMBERS OF SENIOR MANAGEMENT, OUR ABILITY TO CARRY OUT OUR LONG-TERM
BUSINESS STRATEGY COULD BE ADVERSELY AFFECTED.
Our future success largely depends on the expertise of Carroll D.
McHenry, our Chief Executive Officer, President and Chairman of the Board, and
other members of senior management. We have employment agreements with Mr.
McHenry and other members of senior management, but do not maintain a key person
life insurance policy on the life of Mr. McHenry or other members of senior
management.
INTENSE COMPETITION EXISTS IN THE SUBSCRIPTION TELEVISION MARKET. WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS
WITH SIGNIFICANTLY GREATER FINANCIAL RESOURCES. OUR FAILURE TO MAINTAIN AND
EXPAND OUR WIRELESS CABLE SUBSCRIBER BASE COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
The subscription television business is also highly competitive, and
many of our competitors have significantly greater resources and channel
capacity than we have. Our principal subscription television competitors consist
of traditional wireline or franchised cable operators, direct to home/direct
broadcast satellite providers and private cable operators. Wireless cable
providers, including our subscription television service, have less than a 1%
share of the national subscription television market. In addition, local off-air
VHF/UHF broadcast television stations, such as affiliates of ABC, NBC, CBS and
Fox, continue to be a primary source of free video programming for the public.
Our failure to maintain our existing wireless cable subscriber base could
adversely affect our results of operations. We cannot assure you that we will be
able to maintain our subscriber base for our wireless cable services.
LOSS OF DIRECTV CONTRACTS COULD ADVERSELY AFFECT THE DEMAND FOR OUR WIRELESS
CABLE SERVICE.
Our business strategy assumes maintenance of our DIRECTV offerings,
either independently or in combination with our wireless cable offering. Because
certain of our DIRECTV offerings generate more favorable returns than our
stand-alone offering, and our DIRECTV offerings allow us to use MMDS/ITFS
spectrum for other purposes, we have shifted the focus of our sales and
marketing efforts to emphasize sales of DIRECTV service. We depend on our
contracts with DIRECTV to provide DIRECTV service. Our SFU and MDU contracts
with
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DIRECTV expire in February 2006 and October 2004, respectively. A cancellation
or nonrenewal of our contracts with DIRECTV could have a material adverse effect
on our ability to maintain our wireless cable subscriber base.
OUR CURRENT BROADBAND WIRELESS SERVICES HAVE LINE-OF-SIGHT LIMITATIONS. THESE
LINE-OF-SIGHT LIMITATIONS MAY REDUCE THE NUMBER OF CUSTOMERS WE CAN SERVE IN A
MARKET OR INCREASE OUR COST OF OPERATIONS.
Our current broadband wireless services require a direct line-of-sight
between our base station and the antenna at the customer's site. Transmission
paths can be obstructed by foliage, terrain and buildings, among other things.
As a result, we may not be able to supply service to all potential customers in
a market from a single base station. While in certain instances we can employ
additional cell sites to overcome line-of-sight obstructions, we may not always
be able to secure the required FCC approval necessary to achieve the desired
signal coverage. Adding this equipment in some instances also could increase our
costs of service. These costs may cause our broadband wireless services to
become less economical or prohibitive in certain markets. Although we expect a
VOFDM or OFDM technology platform to mitigate line-of-sight restrictions on our
services, we cannot assure you that we will be able to effectively implement a
VOFDM or OFDM technology platform or that it will mitigate line-of-sight
restrictions.
BUILDING AND TOWER OWNERS CONTROL ACCESS TO CERTAIN STRATEGIC ANTENNA SITES.
We will be required to obtain rights from building and tower owners to
install our antennas and other equipment to provide service to our customers. We
cannot assure you that we will be able to obtain, at costs or on terms
acceptable to us, the rights necessary to expand our services as planned.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGY CHANGES.
The high-speed Internet access industry is subject to rapid
technological change, frequent new service introductions and evolving industry
standards. We believe that our future success will depend largely on our ability
to anticipate or adapt to such changes and to offer, on a timely basis, services
that meet evolving standards. We cannot predict the extent to which competitors
using existing or currently undeployed methods of delivery of Internet access
services will compete with our services. We cannot assure you that:
o existing, proposed or undeveloped technologies will not render
our fixed wireless systems less profitable or less viable,
o we will have the resources to acquire new technologies or to
introduce new services that could compete with future
technologies, or
o we will be successful in responding to technological changes in a
timely and cost effective manner.
WE HAVE A LARGE PORTION OF OUR COMMON STOCK HELD BY A SMALL NUMBER OF OUR
STOCKHOLDERS. THIS CONCENTRATION OF OWNERSHIP CAN AFFECT STOCKHOLDER VOTES AND
CAUSE OUR STOCK PRICE TO BE VOLATILE IN THE PUBLIC TRADING MARKET.
A large portion of our common stock is held by a small number of
stockholders. As a result, these stockholders are able to influence the outcome
of stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions including business combinations. In
addition, the occurrence of sales of a large number of shares of our common
stock, or the perception that these sales could occur, may affect our stock
price and could impair our ability to obtain capital through an offering of
equity securities. Furthermore, the current ratios of ownership of our common
stock reduces the public float and liquidity of our common stock which can in
turn affect the market price of our common stock. A public trading market having
the desired characteristics of depth, liquidity and orderliness depends upon the
presence in the marketplace of willing buyers and sellers of our common stock at
any given time, which presence depends upon the individual decisions of
investors and general economic and market conditions, over which we have no
control.
ITEM 2. PROPERTIES
We currently lease approximately 24,000 square feet of office space for
our executive offices in Plano, Texas. We have notified the landlord of out
intent to terminate this lease effective June 30, 2001. We have entered into a
new lease for approximately 21,000 square feet of office space for our executive
offices in Carrollton, Texas.
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We also lease approximately 9,600 square feet of space for telemarketing,
customer care operations and training facilities in Denison, Texas. We believe
that the facilities described above are leased at fair market value and are
adequate for the foreseeable future.
The principal physical assets of our operating systems consist of
satellite signal reception equipment, radio transmitters and transmission
antennas and customer premises equipment. We lease space or have options to
lease space for our broadband wireless Internet and video operations on about
100 communications towers. The leases and options have terms from one to 15
years.
ITEM 3. LEGAL PROCEEDINGS
Securities Litigation. Nucentrix and certain of our former officers and
directors are co-defendants in a stockholder action originally filed in February
1998 in the United States District Court for the Northern District of Texas,
styled Coates, et al. v. Heartland Wireless Communications, Inc., et al.
(3-98-CV-0452-D). The Coates action involves federal securities laws claims
brought by two former stockholders of Heartland against Heartland and six former
officers and/or directors. The complaint asserts claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, and alleges that during a period
beginning on November 14, 1996, and ending on March 20, 1997, defendants
allegedly misrepresented Heartland's financial condition in various press
releases and public filings. The plaintiffs seek unspecified damages, costs and
expenses, including attorneys' and experts' fees. In June 2000, the court
dismissed the plaintiffs' complaint with prejudice. The plaintiffs have appealed
the dismissal to the U.S. Court of Appeals for the Fifth Circuit.
Three of our former officers and directors are co-defendants in a
purported class action lawsuit originally filed in July 1998 in State District
Court in Kleburg County, Texas. Heartland originally was a named defendant in
this lawsuit, which is styled Thompson, et al. v. David E. Webb, et al.
(98-371-D), but was dismissed as a named defendant in May 1999. In March 2000,
in a fifth amended petition, the plaintiffs added KPMG LLP as a named defendant.
The Thompson action seeks to represent a class consisting of anyone who acquired
the common stock of Heartland from November 15, 1995, to March 20, 1997.
Plaintiffs in the Thompson action allege state securities laws
violations, misrepresentation and civil conspiracy claims against the three
former officers and directors. The petition alleges that, during the purported
class period, defendants caused Heartland to misstate material facts concerning
Heartland's subscriber base and omit to disclose the need for a material
write-down of accounts receivable relating to its wireless cable subscriber
base. Plaintiffs' action further claims that Heartland violated generally
accepted accounting principles by allegedly (1) failing to recognize revenue
properly, (2) failing to adequately reserve for doubtful accounts receivable,
(3) failing to write off certain capitalized installation and equipment costs,
and (4) using unrealistically long amortization periods. The plaintiffs also
allege that KPMG LLP, Heartland's independent auditors during the purported
class period, issued false audit reports on Heartland's financial statements
during this time.
The plaintiffs seek unspecified compensatory and punitive damages,
costs and expenses, including attorneys' fees and experts' fees, as well as
injunctive relief relating to any proceeds derived from defendants' stock sales,
if any. In June 2000, the plaintiffs' counsel in this matter notified counsel
for defendants that the maximum amount of damages sought by the plaintiffs in
this matter was $700 million. The plaintiffs previously had indicated in a
statement of the case that their purported class damage models indicated total
damages of $70.5 million. Three of our former officers and directors remain
named defendants. Nucentrix's liability to these officers and directors with
respect to this lawsuit is limited under our Plan as described below. This
matter is currently set for trial in June 2001.
Our By-Laws as in effect before the Effective Date of our Plan provided
for indemnification of our officers and directors to the fullest extent
permitted under Delaware law. Generally, Section 145 of the General Corporation
Law of the State of Delaware (the "DGCL") permits a corporation to indemnify any
person who was or is a party to any action because such person is or was a
director, officer, employee or agent of such corporation for liabilities related
to any such action if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interest of such
corporation. As a result, our former directors and officers who are parties to
the Coates or Thompson actions discussed above, and the Hunt Capital case
discussed below, may have a claim for indemnification against us to the extent
they incur liabilities resulting from or incur expenses in defending these
actions. The treatment of any such claims is provided for in our Plan.
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Under Section 11.5 of our Plan, we are obligated, to the extent
permitted under the DGCL, to indemnify persons who served as officers or
directors of Nucentrix on or after April 25, 1997, for certain liabilities
arising as a result of such persons having served as an officer or director of
Nucentrix, including, subject to the limitations described below, liabilities
arising out of their being named as a defendant in the Coates, Thompson and Hunt
Capital actions. We refer to our obligation under Section 11.5 of our Plan as
"Assumed Indemnity Obligations." Our Assumed Indemnity Obligations do not apply,
however, with respect to any liability arising from acts or omissions occurring
prior to April 25, 1997, if the liability is based on (1) a breach of their duty
of loyalty to us or our stockholders, (2) acts or omissions taken not in good
faith and not in a manner they reasonably believed to be in or not opposed to
our best interest or which involve intentional misconduct, gross negligence or a
knowing violation of law, or (3) any transaction from which the director or
officer derived any improper personal benefit. Claims asserted by former
directors and officers of Heartland which are not covered by our Assumed
Indemnity Obligations, to the extent allowed by the bankruptcy court, would be
classified as Class 6 Indemnity Claims under our Plan. Under Section 4.6 of our
Plan, holders of Class 6 Indemnity Claims allowed by the bankruptcy court would
be entitled to recover on account of such claims only to the extent of any
available coverage under our corporate liability insurance, including any
self-insured retention under those policies.
All of our former officers and directors who are defendants in the Hunt
Capital, Coates and Thompson actions, other than two former officers and
directors who are defendants in each of the Coates and Thompson actions, served
as officers or directors after April 25, 1997, and, therefore, are beneficiaries
of the Assumed Indemnity Obligations. To the extent the two former officers and
directors who are not, or any other former or current officer or director who
otherwise is determined not to be, entitled to the benefit of the Assumed
Indemnity Obligations incur liability in any of these lawsuits, we believe that
any claim they may assert against us for indemnification, to the extent allowed
by the bankruptcy court, would be treated as Class 6 Indemnity Claims under our
Plan and their recovery would be limited to any available proceeds of our
corporate liability insurance. To the extent any of the other former or current
officers or directors incur any liability in any of these lawsuits, we would be
obligated to indemnify such persons as part of our Assumed Indemnity
Obligations, subject to the exceptions described above, to the extent the
proceeds of our corporate liability insurance are insufficient to cover such
liabilities.
To the extent plaintiffs in the Coates and Thompson actions are
entitled to any recovery from us and the bankruptcy court allows any claim they
may file against us, we believe any such claim for recovery would be classified
under our Plan as a Class 7 Bondholder Litigation Claim, which is a claim based
on the purchase or sale of our debt securities, or a Class 8 Stockholder
Litigation Claim, which is a claim based on the purchase or sale of our equity
securities. Under our Plan, each holder of a Bondholder Litigation Claim that is
allowed by the bankruptcy court will be entitled to receive, in full
satisfaction of such claim, (1) a pro rata portion of any liability insurance
proceeds that remain after the satisfaction of our Assumed Indemnity Obligations
and payments made on Class 6 Indemnity Claims and (2) if insurance proceeds are
insufficient to satisfy such claim in full, a pro rata portion of the 275,000
warrants that we are obligated to issue under our Plan, up to the number of
warrants with a value sufficient to satisfy the allowed amount of such claim.
Each holder of a Stockholder Litigation Claim that is allowed by the bankruptcy
court will be entitled to receive, in full satisfaction of such claim, (1) a pro
rata portion of any liability insurance proceeds that remain after the
satisfaction of our Assumed Indemnity Obligations, Class 6 Indemnity Claims and
Bondholder Litigation Claims and (2) if insurance proceeds are insufficient to
satisfy such claim in full, a pro rata portion of the Stockholder Litigation
Claims portion of the 275,000 warrants that we are obligated to issue under our
Plan, up to the number of warrants with a value sufficient to satisfy the
allowed amount of such claim. The Stockholder Litigation Claims Portion of these
warrants will be that portion of the warrants that remain after satisfaction of
Bondholder Litigation Claims that bears the same proportion to the total number
of remaining warrants as the number of shares of equity interests represented by
allowed Stockholder Litigation Claims bears to the number of shares of equity
interests represented by the allowed Stockholder Litigation Claims and the
allowed claims of previous holders of common stock and other equity interests in
Nucentrix prior to the Effective Date.
We are vigorously defending the Coates and, on behalf of our former
directors and officers that are parties thereto, Thompson actions. While it is
not feasible to predict or determine the final outcome of these proceedings or
to estimate the amounts or potential range of loss for these matters, and while
management does not expect such an adverse outcome, management believes that an
adverse outcome in one or more of these proceedings against one or more persons
entitled to the benefit of Assumed Indemnity Obligations which, in the
aggregate, exceeds or
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otherwise is excluded from applicable insurance coverage, could have a material
adverse effect on our financial condition, results of operations or cash flows.
Late Fee Litigation. Nucentrix is a party to a total of five purported
class action lawsuits relating to administrative late fees. All of these
lawsuits were filed by the same plaintiff's attorney in various state courts in
Texas, as follows:
o Garcia, et al. v. Heartland Wireless Communications, Inc. d/b/a
Heartland Cable Television (98- 60898-1), filed in May 1998 and
pending in State District Court in Brooks County, Texas,
o Ysasi, et al. v. Heartland Wireless Communications, Inc.
(98-6430-B), filed in December 1998 and pending in State District
Court in Nueces County, Texas,
o John Nolen, Jr., et al. v. Nucentrix Broadband Networks, Inc.
(DC-00-155), filed in May 2000 and pending in State District
Court in Duval County, Texas,
o Ortiz, et al. v. Nucentrix Broadband Networks, Inc.
(S-00-5731-CV-B), filed in September 2000 in State District Court
in Patricio County, Texas, and
o Perez, et al. v. Nucentrix Broadband Networks, Inc. (01-141-D),
filed in March 2001 in State District Court in Kleberg County,
Texas.
These lawsuits generally allege that administrative late fees charged
by Nucentrix are unenforceable and/or usurious. The lawsuits generally seek to
certify a class to represent all persons who have entered into wireless cable
service agreements with Nucentrix or who have paid an administrative late fee to
Nucentrix, and seek a declaration that any contractual provisions for
Nucentrix's administrative late fees are usurious and/or unenforceable as a
penalty, money damages, interest, attorneys' fees, and costs.
We believe that the plaintiff's claims in the Garcia case are barred
by, among other things, the order confirming our Plan entered by the bankruptcy
court on March 15, 1999, for plaintiff's failure to file a proof of claim in our
Chapter 11 proceedings, and that the plaintiff is entitled to no recovery under
the Plan. We have filed a motion with the bankruptcy court to permanently enjoin
and dismiss this matter. The bankruptcy court has heard oral arguments on the
motion, but has not rendered a decision.
In February 2001, the court in the Ysasi matter denied the plaintiff's
motion for class certification. This matter currently is set for trial in April
2001. In addition, in February 2001, the court in Ortiz granted our Motion to
Compel Arbitration in accordance with the plaintiff's customer agreement, and
dismissed the matter without prejudice. We have filed or intend to file
dispositive motions in the Nolen and Perez cases.
In addition, Nucentrix, certain of our former and current directors and
officers to whom we may have indemnity obligations, and certain of our
subsidiaries are defendants in a purported civil class action lawsuit, which was
filed in October 2000 and alleges violation of the federal Racketeering
Influenced and Corrupt Organizations Act ("RICO"). This case is styled Nolen, et
al. v. Nucentrix Broadband Networks, Inc., et al. (L-00CV134), and is pending in
U.S. District Court for the Southern District of Texas, Laredo Division. The
Nolen action alleges that Nucentrix and other defendants together caused the
collection of an unlawful debt comprised of a service fee for subscription
television services and an administrative late fee, in violation of RICO. The
plaintiff seeks to represent a class consisting of all persons from whom any of
the defendants has collected a late fee. The plaintiff in Nolen seeks
disgorgement and payment of unspecified restitution to members of the purported
class, as well as treble damages, attorneys' fees, interest and costs.
Nucentrix, its subsidiaries, and its former and current officers and directors
have filed a Motion to Dismiss this lawsuit. The motion is pending before the
court.
We believe the late fee actions to be without merit and intend to
vigorously defend them. While it is not feasible to predict or determine the
final outcome of these proceedings or to estimate the amounts or potential range
of loss with respect to these matters, and while management does not expect such
an adverse outcome, management believes that an adverse outcome in one or more
of these proceedings could have a material adverse effect on our financial
condition, results of operations or cash flows.
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Motion to Revoke Order of Confirmation. In September 1999, we received
notice that a Motion to Revoke Order of Confirmation had been filed pro se in
the U.S. Bankruptcy Court for the District of Delaware (No. 98-2692-JJF) by two
former stockholders of Heartland, seeking to revoke the order of the bankruptcy
court confirming our Plan under Chapter 11 of the U.S. Bankruptcy Code. The
motion asserts that we procured the order confirming our Plan by fraudulently
undervaluing our enterprise value in the confirmation process, and seeks to set
aside the order. While it is not feasible to predict or determine the final
outcome of this proceeding, and while management does not expect such an
outcome, an adverse outcome in this proceeding could result in the discharge of
our debt under our Plan being revoked and we could be placed back in
reorganization under Chapter 11. We have filed a Motion to Dismiss the Motion to
Revoke, believe the Motion to Revoke is without merit and intend to vigorously
oppose the Motion to Revoke. Our Motion to Dismiss the Motion to Revoke is under
consideration by the bankruptcy court.
State Court Action. In December 2000, several former stockholders of
Heartland filed a lawsuit against five of our current and former directors and
officers, and eight former holders of Old Senior Notes (several of whom
currently own more than five percent of our outstanding common stock), styled
Hunt Capital Group, L.L.C., et al., v. Carroll D. McHenry, et al., Case No.
OJ-2000-534 in the District Court for Bryan County, Oklahoma. The plaintiffs
allege that the defendants purposely undervalued our enterprise value as part of
the Plan confirmation process in order to extinguish all prepetition equity
holders' interests. The plaintiffs seek damages in excess of $10,000 on behalf
of all prepetition stockholders of Heartland, under theories of fraud, negligent
misrepresentation, unjust enrichment, breach of fiduciary duty, and constructive
trust.
On February 12, 2001, certain of the defendants removed this lawsuit to
the U.S. District Court for the Eastern District of Oklahoma, which was
subsequently assigned Civil Action No. 01-095-S. The defendants concurrently
sought transfer of venue from the Eastern District of Oklahoma to the U.S.
District Court for the District of Delaware, and filed a Motion to Dismiss in
the Eastern District of Oklahoma. The Motion to Transfer Venue and Motion to
Dismiss remain pending before the District Court for the Eastern District of
Oklahoma, and trial has been set for October 2001. In addition, on February 14,
2001, we filed, in the U.S. Bankruptcy Court for the District of Delaware, an
Emergency Motion to Enforce Plan of Reorganization and Confirmation Order,
seeking to enjoin and prevent the state court action from proceeding as a
violation of the terms of our confirmed Plan. The U.S. Bankruptcy Court for the
District of Delaware heard the motion on February 22, 2001, and it remains
pending.
We may have certain indemnity obligations to the director and officer
defendants in the Hunt Capital matter, as discussed above in this Item 3. under
"Securities Litigation." We believe the allegations to be without merit and
intend to vigorously defend this action on behalf of the director and officer
defendants.
Software Dispute. In February 2001, Nucentrix filed an action for
declaratory judgment in State District Court in Collin County, Texas against
TIBCO Software, Inc. ("TIBCO"), in which we asked the court for a declaratory
judgment that we had properly returned certain software unused and intact to
TIBCO, and that we were not liable for any invoice relating to the software.
This case is styled Nucentrix Broadband Networks, Inc. v. TIBCO Software, Inc.
(380-291-01). In March 2001, TIBCO filed a lawsuit against us in Santa Clara
County, California, alleging breach of contract relating to the software and
seeking $500,000 in damages, plus interest and attorneys' fees. This case is
styled TIBCO Software, Inc. v. Nucentrix Broadband Networks, Inc. (CV 796330).
Although we cannot predict the outcome of this matter, we do not believe that
this matter will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Other. Nucentrix is involved in routine legal and regulatory
proceedings incident to our business. We do not believe that any other pending
legal or regulatory matter will have a material adverse effect on our
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Nucentrix's common stock began trading on the Nasdaq Stock Market on
August 12, 1999, under the symbol "NCNX." From April 5, 1999, through August 11,
1999, our common stock traded on the over-the-counter bulletin board ("OTCBB")
quotation system under the symbol "NCNX." The following sets forth the high and
low sale prices of our common stock as reported on the Nasdaq Stock Market and
the OTCBB for the last two fiscal years. We have not provided market price
information for periods before April 5, 1999, because, as a result of our
reorganization, our capital structure and financial condition before the
Effective Date were substantially different than after the Effective Date.
The Nasdaq Stock Market
-----------------------------------
Fiscal Year 2000 High Low
- ---------------- -------------- -------------
January 1, 2000 to March 31, 2000 $ 36.00 $ 23.38
April 1, 2000 to June 30, 2000 $ 30.00 $ 18.63
July 1, 2000 to September 30, 2000 $ 28.44 $ 22.63
October 1, 2000 to December 31, 2000 $ 25.94 $ 10.00
Fiscal Year 1999
August 12, 1999 to September 30, 1999 $ 28.13 $ 24.00
October 1, 1999 to December 31, 1999 $ 25.88 $ 19.63
OTCBB
-----------------------------------
Fiscal Year 1999 High Low
- ---------------- --------------- -------------
April 5, 1999 to June 30, 1999 $ 39.25 $ 13.00
July 1, 1999 to August 11, 1999 $ 30.25 $ 24.00
The number of record holders of common stock as of February 28, 2001,
was 15.
DIVIDENDS
We have not paid any cash dividends on our common stock, and do not
intend to pay cash dividends in the foreseeable future. Our Board of Directors
may reexamine our dividend policy from time to time. However, if we raise
capital in the future through financings obtained from outside sources, the
terms of these financings may restrict or prohibit us from paying any dividends
on our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
Effective April 1, 1999, we issued 10,000,000 shares of common stock
and warrants to purchase 825,000 shares of our common stock (the "Issued
Securities") pursuant to our Plan. We also are obligated pursuant to the Plan to
issue (1) warrants to acquire an additional 275,000 shares of common stock to
certain classes of or claims against and/or interests in Nucentrix, which will
become issuable upon the resolution of certain pending litigation claims, and
(2) a yet to be determined number of additional shares of common stock to
satisfy certain miscellaneous unsecured claims that may be allowed by the
bankruptcy court (the "Future Securities" and, together with the Issued
Securities, the "Securities"). The Issued Securities were, and the Future
Securities will be, issued pursuant to the Plan under Section 1145(a) of the
Bankruptcy Code. Therefore, the issuance of the Securities is exempt from the
registration requirements of Section 5 of the Securities Act. However, pursuant
to Section 1145(c) of the Bankruptcy Code, the issuance of the Securities
pursuant to the Plan is deemed a public offering of the Securities and,
therefore, the Securities are not "restricted securities" for purposes of Rule
144 promulgated under the Securities Act. In accordance with the Plan, the
Securities were, or will be, distributed to certain creditors of and/or interest
holders in the registrant in exchange for claims against and/or interests in
Nucentrix. See "Reorganization" in Item 1.
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As of February 28, 2001, we had issued 16,523 shares of common stock
pursuant to the Plan as described in clause (2) of the preceding paragraph.
The issuance of shares of common stock upon the exercise of the
warrants issued, or to be issued, pursuant to the Plan also will be exempt from
the registration requirements of the Securities Act pursuant to Section
1145(a)(2) of the Bankruptcy Code and, pursuant to Section 1145(c) of the
Bankruptcy Code, such shares will not be "restricted securities" for purposes of
Rule 144.
On May 30, 2000, we issued to Kevin Ketelson, as the owner of an MDS
license in Des Moines, Iowa, 2,000 shares of our common stock in partial
consideration for the purchase of this license. These shares were issued
pursuant to Regulation D of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary historical financial and other
data for Nucentrix. As a result of the application of Fresh Start Reporting,
financial information as of December 31, 2000 and 1999, and for the year ended
December 31, 2000, and the period from the Effective Date to December 31, 1999
(the "Successor Period"), is presented on a different basis than the financial
information as of and for each of the years in the three year period ended
December 31, 1998, and for the period from January 1, 1999, to the Effective
Date (collectively, the "Predecessor Period"). See "Reorganization" in Item 1.
The selected historical financial data presented below as of and for each of the
years in the five year period ended December 31, 2000, is derived from the
audited Consolidated Financial Statements of Nucentrix. Historically, we have
used our spectrum primarily to deliver subscription television services and,
therefore, our historical results are not necessarily indicative of our future
results as we pursue our business strategy as described in Item 1., "Business."
You should read the financial data below together with Item 7., Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") and with Nucentrix's Consolidated Financial Statements, including the
notes thereto, included elsewhere in this document.
SUCCESSOR PREDECESSOR
----------------------------- ----------------------------------------------------
PERIOD FROM
EFFECTIVE PERIOD FROM
YEAR ENDED DATE TO JANUARY 1, 1999, YEAR ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, TO EFFECTIVE ----------------------------------
2000 1999 DATE 1998 1997 1996
------------ ------------- ---------------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $ 61,046 $ 52,009 $ 18,466 $ 73,989 $ 78,792 $ 56,017
Operating expenses:
System operations......................... 28,437 23,767 8,599 35,790 39,596 21,255
Selling, general and administrative....... 32,811 26,125 9,156 36,367 42,255 42,435
Depreciation and amortization (1) (2).... 27,321 19,167 6,104 39,550 65,112 39,323
Impairment of long-lived assets (2) ..... -- -- -- 105,791 -- --
-------- -------- -------- --------- --------- --------
Total operating expenses........... 88,569 69,059 23,859 217,498 146,963 103,013
-------- -------- -------- --------- --------- --------
Operating loss.............................. (27,523) (17,050) (5,393) (143,509) (68,171) (46,996)
Interest income (expense), net.............. 605 334 102 (34,436) (34,321) (18,166)
Equity in losses of affiliates.............. -- -- -- (30,340) (32,037) (18,612)
Other income (expense)...................... 4,839 483 2 (10) (54) 4,981
-------- -------- -------- --------- --------- --------
Loss before reorganization costs, income
taxes and extraordinary item............. (22,079) (16,233) (5,289) (208,295) (134,583) (78,793)
Reorganization costs (3).................... -- (1,011) (2,311) (3,266) -- --
-------- -------- -------- --------- --------- --------
Loss before income taxes and
extraordinary item........................ (22,079) (17,244) (7,600) (211,561) (134,583) (78,793)
Income tax benefit.......................... -- -- -- -- -- 28,156
-------- -------- -------- --------- --------- --------
Loss before extraordinary item.............. (22,079) (17,244) (7,600) (211,561) (134,583) (50,637)
Extraordinary item.......................... -- -- 173,783 -- -- (10,424)
-------- -------- -------- --------- --------- --------
Net income (loss)........................... $(22,079) $(17,244) $166,183 $(211,561) $(134,583) $(61,061)
======== ======== ======== ========= ========= ========
Net loss per new common share--
basic and diluted (4)..................... $ (2.17) $ (1.71) N/A N/A N/A N/A
======== ======== ======== ========= ========= ========
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SUCCESSOR PREDECESSOR
----------------------------- ----------------------------------------------------
PERIOD FROM
EFFECTIVE PERIOD FROM
YEAR ENDED DATE TO JANUARY 1, 1999, YEAR ENDED DECEMBER 31,
DECEMBER 31, DECEMBER 31, TO EFFECTIVE ----------------------------------
2000 1999 DATE 1998 1997 1996
------------ ------------- ---------------- --------- --------- --------
(DOLLARS IN THOUSANDS)
OTHER DATA:
EBITDA (5)....................... $ (202) $ 2,117 $ 711 $ 1,832 $ (3,059) $ (7,673)
Net cash provided by (used in)
operating activities........... (1,942) 5,593 2,449 (8,377) (41,646) (22,754)
Net cash provided by (used in)
investing activities........... (4,552) (3,949) (4,959) (2,038) 6,826 (34,169)
Net cash provided by (used in)
financing activities........... (285) (302) (576) (1,730) (1,955) 113,376
Capital expenditures............. 10,335 10,199 5,097 13,473 29,712 95,680
SUCCESSOR PREDECESSOR
------------------------------ ----------------------------------------
AS OF AS OF AS OF DECEMBER 31,
DECEMBER 31, DECEMBER 31, ----------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 22,153 $ 28,932 $ 30,676 $ 42,821 $ 79,596
Restricted assets............................ 599 650 1,011 10,333 30,007
Systems and equipment, net (2).............. 42,159 55,993 61,037 122,653 145,797
License and leased license investment,
net (2)................................... 69,713 73,310 79,703 123,369 129,725
Total assets................................. 143,280 168,811 186,032 372,134 515,364
Long-term debt, including current portion.... 14,961 16,516 16,277 308,196 303,538
Liabilities subject to compromise (3)....... -- -- 322,781 -- --
Total stockholders' equity (deficit)......... 109,684 130,045 (165,090) 46,408 180,847
- ----------
(1) We changed the useful lives for depreciating the nonrecoverable portion
of subscriber installation costs in 1997 and 1996, and for amortizing
license and leased license costs and excess of cost over fair value of
net assets acquired in 1996.
(2) During the second and third quarters of 1998, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, we wrote
down channel licenses and leases, systems and equipment and other
long-lived assets to estimated fair value, which resulted in a non-cash
impairment charge of $105.8 million. See Note 2 to the Consolidated
Financial Statements.
(3) We filed a voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code on December 4, 1998. Our Plan was confirmed on
March 15, 1999, and became effective on April 1, 1999. Accordingly, we
have reclassified our Old Senior Notes and Old Convertible Notes, which
were subject to compromise in the reorganization, to "Liabilities
Subject to Compromise" at December 31, 1998. Expenses related to our
reorganization, such as professional fees and administrative expenses,
were classified as "Reorganization costs." See Note 1(b) to the
Consolidated Financial Statements.
(4) Loss per basic and dilutive common share for each period presented has
been calculated using the provisions of SFAS No. 128, "Earnings per
Share," which is effective for periods ending after December 15, 1997,
and requires restatement of all prior period loss per share data.
Earnings per share information has not been presented for the
Predecessor Period because Nucentrix was recapitalized on the Effective
Date, in connection with the Plan, and accordingly, per share amounts
are not comparable between the Predecessor Period and the Successor
Period. See Note 1(l) to the Consolidated Financial Statements.
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(5) "EBITDA," or earnings before interest, taxes, depreciation,
amortization, and non-recurring items, is widely used by analysts,
investors and other interested parties in the Internet, cable
television and telecommunication industries. EBITDA is also widely
accepted as a financial indicator of a company's ability to incur and
service indebtedness. EBITDA is not a financial measure determined by
generally accepted accounting principles and should not be considered
as an alternative to net income as a measure of operating results or to
cash flows as a measure of funds available for discretionary or other
liquidity purposes. EBITDA may not be comparably calculated from one
company to another.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We provide broadband wireless Internet and wireless subscription
television services using up to 200 MHz of radio spectrum licensed by the FCC in
the 2.1 GHz and 2.5 GHz range, primarily in medium and small markets across
Texas and the Midwestern United States. We own the BTA authorization, or
otherwise license or lease MDS/MMDS/ITFS spectrum, in 93 markets covering an
estimated 9 million total households, including three markets covering an
estimated 460,000 total households for which we have entered into a definitive
agreement to acquire. On average, we own or lease 152 MHz of spectrum per
market.
Our long-term business strategy is to provide broadband wireless
services using our high-capacity radio spectrum in medium and small markets. As
of February 28, 2001, we provide always-on, high-speed wireless Internet access
service under temporary developmental FCC licenses to over 385 accounts serving
an estimated 3,000 end users in Austin and Sherman-Denison, Texas. These end
users primarily are medium-sized and small businesses, SOHOs and telecommuters.
Our service offerings include Internet access from 128 Kbps to 1.54 Mbps, or up
to 50 times faster than service provided over standard dial-up telephone lines.
Through two national independent contractors, we also provide value-added
services such as technical support, e-mail, Web hosting and design, and domain
name service.
In February 2000, we announced a strategic alliance and agreement with
Cisco to pursue testing of broadband wireless services using VOFDM technology.
The tests include two field trials in Austin and Amarillo, Texas. We
successfully completed the initial phase of the Austin field trial in August
2000, and expect to complete the Amarillo field trial in the second quarter of
2001. Because the trial was extended beyond certain dates in the original
agreement with Cisco, our prior purchase commitment of $13 million in equipment
has expired. We currently are in discussions with Cisco regarding new purchase
commitments and equipment financing proposals. Although we currently intend to
complete our technology trial in Amarillo, there can be no assurance that the
trial will be successful or that we will enter into a subsequent purchase or
financing agreement with Cisco.
In August 2000, we filed over 400 applications with the FCC to provide
digital two-way communications services in 70 of our markets. All such
applications must meet FCC interference protection rules or contain the consent
of co-channel and adjacent channel licensees in our markets and neighboring
markets. The FCC issued a public notice accepting these and other applicants'
filings on February 1, 2001. All applications that have not been opposed within
60 days after the issuance of this public notice will be deemed granted.
Although we believe we will receive two-way authorizations to replace our
developmental authorizations in Austin and Sherman-Denison, there can be no
assurance that we will receive such authorizations in these or other markets.
Historically, we have used our spectrum to provide wireless
subscription television services. We presently have wireless subscription
television transmission facilities constructed and operating in 58 markets in
nine states. At February 28, 2001, we had approximately 103,600 wireless
subscription television customers, including approximately 95,600 customers who
subscribed only to programming service provided over our MMDS spectrum, and
8,000 "combo" subscribers who subscribed to both our MDS/MMDS/ITFS programming
service and to DIRECTV programming service sold by us. In addition, at February
28, 2001, there were approximately 22,000 customers who received only DIRECTV
programming sold by us.
Our business strategy contemplates a decline in wireless subscription
television subscribers, revenues and EBITDA in 2001 and beyond, as we allocate
more of our spectrum and other resources to develop our broadband wireless
Internet access and other broadband wireless Internet protocol ("IP")-based
businesses.
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Reorganization. On the April 1, 1999, Effective Date, we consummated
our Plan to convert, among other things, approximately $325 million of senior
and subordinated debt and accrued interest into common stock. As a result of the
application of Fresh Start Reporting, financial information in the Consolidated
Financial Statements as of December 31, 2000 and 1999, and for the year ended
December 31, 2000 and the period from the Effective Date to December 31, 1999
(the "Successor Period"), is presented on a different basis than the financial
information as of December 31, 1998, for the year ended December 31, 1998, and
for the period January 1, 1999, to the Effective Date (collectively, the
"Predecessor Period"). Accordingly, such information is not comparable. The
Predecessor Period includes operations through March 31, 1999, plus the gain on
debt forgiveness recognized on the Effective Date. The Successor Period includes
operations from the Effective Date through December 31, 2000. See
"Reorganization" in Item 1.
Revenues. Our revenues currently consist primarily of monthly fees paid
by wireless cable subscribers for basic programming, premium programming,
equipment rental, and other miscellaneous fees, as well as fees generated from
start-up Internet operations in Austin and Sherman-Denison, Texas. Unless the
context requires otherwise, all references to "subscribers" or "systems" are to
our wireless cable subscribers and systems because revenues and subscribers from
our Internet business were immaterial in 2000.
System Operations Expenses. System operations expenses include channel
lease payments, wireless cable programming costs, labor, and overhead, and costs
related to service calls and disconnects, transmitter site and tower rentals,
and certain repairs and maintenance expenditures. Programming costs, with the
exception of minimum payments, channel lease payments, and repairs and
maintenance, are variable expenses based on the number of subscribers.
Selling, General and Administrative Expenses ("SG&A expenses"). SG&A
expenses include office and administrative costs of operating our 58
subscription television markets and our two Internet markets, as well as sales
and marketing and bad debt expenses related to these operations and corporate
costs directly and indirectly allocated to these operations.
Depreciation and Amortization Expense. Depreciation and amortization
expense includes depreciation of systems and equipment and capitalized
installation costs, amortization of license and leased license investment, and
amortization of the subscriber value and excess of cost over fair value of net
assets acquired. Our policy is to capitalize the excess of direct costs of
subscriber installations over installation fees. These direct costs include
reception materials and equipment on subscriber premises and installation labor.
These direct costs are capitalized as systems and equipment in the accompanying
Consolidated Balance Sheets.
EBITDA. EBITDA, or earnings before interest, taxes, depreciation,
amortization, and non-recurring items, is widely used by analysts, investors and
other interested parties in the Internet, cable television and telecommunication
industries. EBITDA is also widely accepted as a financial indicator of a
company's ability to incur and service indebtedness. EBITDA is not a financial
measure determined by generally accepted accounting principles and should not be
considered an alternative to net income as a measure of operating results or to
cash flows as a measure of funds available for discretionary or other liquidity
purposes. EBITDA may not be comparably calculated from one company to another.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 2000
The following table summarizes the operating results for the year ended
December 31, 2000, in comparison to the years ended December 31, 1999 and 1998,
combining the 1999 results for the 1999 Predecessor Period (January 1, 1999,
through the Effective Date) with the Successor Period (the Effective Date
through December 31, 1999). The most significant impact of the Plan was a
decrease in depreciation and amortization expense due to the write-down of
certain long-lived assets to estimated fair value, a decrease in interest
expense due to the extinguishment of certain liabilities subject to compromise,
and a one-time, nonrecurring gain on extinguishment of liabilities subject to
compromise. Specific trends addressed within the discussion of operating results
will refer to the combined results as presented in this table (in thousands),
unless otherwise noted:
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YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
---------- ---------- ----------
Revenues.............................................. $ 61,046 $ 70,475 $ 73,989
Systems operations expense............................ 28,437 32,366 35,790
System operations expense percent of revenue.......... 47% 46% 48%
Selling, general and administrative expense........... 32,811 35,281 36,367
Selling, general and administrative expense percent of
revenue............................................. 54% 50% 49%
Depreciation and amortization......................... 27,321 25,271 39,550
Interest income....................................... 1,976 1,583 2,659
Interest expense...................................... 1,371 1,147 37,095
Equity in losses of affiliates........................ -- -- 30,340
Other income (expense)................................ 4,839 485 (10)
Reorganization costs.................................. -- 3,322 3,266
Net cash provided by (used in ) operating activities.. (1,942) 8,042 (8,377)
Net cash used in investing activities................. (4,552) (8,908) (2,038)
Net cash used in financing activities................. (285) (878) (1,730)
Revenues. Our revenues were $61.0 million in 2000, $70.5 million in
1999 and $74.0 million in 1998, representing a 13.4% decrease from 1999 to 2000
and a 4.7% decrease from 1998 to 1999. The average number of wireless
subscription television subscribers for the year ended December 31, 2000, was
121,000 compared to 145,000 and 170,000 for the years ended December 31, 1999
and 1998, respectively. In addition, during the year ended December 31, 2000 and
1999, we had 16,500 and 9,300 average subscribers, respectively, who received
only DIRECTV programming sold by us. Beginning in January 2000, we did not
include these customers in our reported wireless subscription television
subscriber base but we do receive certain agency revenue from DIRECTV related to
these accounts, as well as equipment lease payments from a portion of these
customers. We also do not include these customers or their related revenues in
our calculation of recurring average revenue per subscriber. Prior year
calculations have been revised to conform with this presentation.
The decline in revenues from 1998 to 2000 was primarily due to fewer
total subscription television subscribers resulting from:
o decreased sales and marketing as we continued to shift our
principal business focus from subscription television service to
testing and developing our broadband wireless IP-based services,
o the suspension, in seven markets in March 2000, of our offer of
video programming provided solely over MMDS frequencies in
anticipation of transitioning this spectrum to Internet services,
o our first system-wide price increase in the fourth quarter of
1998, which resulted in increased disconnects by video
subscribers in 1999, and
o loss of subscribers in Austin in the second quarter of 1999 as a
result of a technology conversion that caused some existing
subscribers to fall outside of the coverage range of the new
technology.
This decline was partially offset by additional revenues recognized
from our agency relationships with DIRECTV and its distributors.
Average monthly recurring revenue per subscriber was $35.44, $35.04 and
$33.40 for the years ended December 31, 2000, 1999 and 1998, respectively. The
increase over these periods is due to overall higher priced packages being
purchased by our subscribers, including increased purchases of premium
programming.
We expect revenues and video subscribers to continue to decline in 2001
as we continue to transition our business from subscription television to
broadband wireless Internet and other IP-based services. We do not expect the
decline to be offset materially by an increase in revenues from our Internet
business in 2001, as we do not expect to complete field trials for our new
Internet services technology platform until the second quarter of 2001. We are
continuing to evaluate our deployment schedule and intend to finalize the
schedule after our technology trial with Cisco is completed. We currently do not
expect the number of new markets that we will launch in 2001, if any, will be
material.
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System Operations Expense. System operations expenses were $28.4
million in 2000, $32.4 million in 1999, and $35.8 million in 1998. As a
percentage of revenues, system operations expenses were 47% in 2000, 46% in 1999
and 48% in 1998.
The decrease in system operations expense over the periods presented,
including the decrease as a percent of revenues from 1998 to 1999, was primarily
due to lower service call expense and programming expense as a result of lower
subscriber count and a larger proportion of DIRECTV subscribers, which have
lower programming costs. System operations expense as a percent of revenue was
higher in 2000 compared to 1999 due to higher costs under certain spectrum
leases that were renegotiated in preparation for providing two-way broadband
wireless services.
Selling, General and Administrative ("SG&A") Expense. SG&A expense was
$32.8 million in 2000, $35.3 million in 1999 and $36.4 million in 1998. As a
percent of revenues, SG&A expense was 54% for 2000, 50% for 1999 and 49% for
1998.
SG&A expense decreased annually from 1998 to 2000 due to savings from
the consolidation of certain offices and management in our subscription
television markets, lower bad debt expense due to improved collections and lower
subscription television marketing expenses. These costs were partially offset by
increased costs related to our broadband wireless Internet business and
increased costs to improve service at our customer care center.
Internet SG&A costs, which include (i) costs related to the development
of broadband wireless Internet access and other IP-based services, (ii) costs
related to our two operating Internet markets in Austin and Sherman-Denison,
Texas, and (iii) allocable corporate overhead, were $5.4 million in 2000 and
$1.5 million in 1999. The increase in Internet SG&A expense from 1999 to 2000
was primarily due to increased costs for technology trials and for building the
field and corporate organizations to develop and support the Internet business,
as well as an increase in the allocation to Internet of existing corporate
resources. Excluding Internet costs and revenues, SG&A would have been 45% of
revenues for 2000 and 48% of revenues for 1999.
Depreciation and Amortization. Depreciation and amortization expense
was $27.3 million in 2000, $25.3 million in 1999 and $39.6 million in 1998.
The increase in depreciation and amortization expense from 1999 to 2000
was primarily due to a larger number of disconnected MMDS subscribers. When
subscribers are disconnected, the remaining balance of non-recoverable equipment
related to the installation of that subscriber is written off to depreciation
expense.
The decrease in depreciation and amortization expense from 1998 to 1999
was due to a write down of certain long-lived assets to estimated fair market
value during 1998 in accordance with 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."
Impairment of Long-Lived Assets. We continually review components of
our business for possible impairment of assets based on, among other things,
changes in technology, competition, consumer habits, and business climate. SFAS
No. 121 addresses the accounting for impairment of long-lived assets to be
disposed of and certain identifiable intangibles and goodwill related to those
assets, provides guidelines for recognizing and measuring impairment losses, and
requires that the carrying amount of impaired assets be reduced to estimated
fair value.
During the second quarter of 1998, we reviewed the assets associated
with certain undeveloped markets and concluded that:
o cash flows from operations would not be adequate to fund the
capital outlay required to build out such markets, and
o because of our default on our interest payment on the Old 13%
Notes in the second quarter of 1998, outside financing for the
build-out of these markets was not readily available prior to the
consummation of a financial restructuring.
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Therefore, in accordance with SFAS No. 121, the channel licenses and
leases in these undeveloped markets were individually evaluated and written down
to estimated fair value, resulting in a non-cash impairment charge of $17.7
million in the second quarter of 1998.
Throughout the second and third quarters of 1998, we analyzed various
recapitalization and restructuring alternatives with the assistance of our
financial advisors, Wasserstein Perella and Co., Inc., including consensual,
out-of-court alternatives. In October 1998, we announced that we intended to
pursue a prenegotiated plan of reorganization by filing a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. This event caused us to evaluate
all of our long-lived assets for impairment, according to the requirements of
SFAS No. 121 and to write those assets down to fair market value. We retained
the services of another third party to assist in performing the allocation of
fair market value. This resulted in a non-cash impairment charge of $88.1
million for the third quarter of 1998. The impairment included write-downs of
systems and equipment in the amount of $44.5 million, license and leased license
investment in the amount of $18.9 million and the excess of cost over fair value
in the amount of $24.7 million.
Operating Loss. We generated operating losses of $27.5 million in 2000,
$22.4 million in 1999 and $143.5 million in 1998.
The increased losses from 1999 to 2000 were primarily due to lower
wireless subscription television revenues, additional expenditures related to
testing and development of broadband wireless services, and increased
depreciation related to a larger number of disconnects in 2000. These cost
increases were partially offset by lower programming expense, savings from
consolidation of certain offices and management in our subscription television
markets, lower subscription television marketing costs, and lower bad debt
expense.
Excluding the write-down of long-lived assets to estimated fair market
value in the second and third quarters of 1998, operating loss for the year
ended December 31, 1998, was $37.7 million reflecting an improvement of $15.3
million in 1999 compared to 1998. This was primarily due to lower programming
costs, decreased subscription television marketing expenses, savings from
consolidation of certain markets, and lower depreciation expense resulting from
the write-down of long-lived assets during 1998.
EBITDA. Excluding non-recurring items, EBITDA was a negative $202,000
for the year ended December 31, 2000 compared to a positive $2.8 million and
$1.8 million for the years ended December 31, 1999 and 1998, respectively. The
decrease in EBITDA from 1999 to 2000 was primarily due to decreased subscription
television revenues resulting from fewer subscribers as we continue to shift our
principal focus to developing our broadband wireless IP-based services, and from
start-up and SG&A costs related to our broadband wireless Internet operations.
EBITDA increased from 1998 to 1999 due to lower programming costs, decreased
subscription television marketing expense and savings from consolidation of
certain markets. We expect EBITDA to further decline in 2001 as we continue to
transition our business from subscription television to development of our
broadband wireless Internet and other IP-based services.
Interest Income. Interest income was $2 million in 2000, $1.6 million
in 1999 and $2.7 million in 1998. The increase in interest income from 1999 to
2000 was due to higher earnings during the current year on larger unrestricted
cash balances. The decrease in interest income from 1998 to 1999 was due to
higher interest earnings in the first quarter of 1998 on larger escrowed
balances segregated for the payment of interest on the Old Senior Notes, which
was paid in April 1998, combined with lower overall cash balances in 1999 due to
payment of reorganization costs.
Interest Expense. Interest expense was $1.4 million in 2000, $1.1
million in 1999 and $37.1 million in 1998. Interest expense increased slightly
from 1999 to 2000 because of higher debt balances related to capital lease
obligations incurred in connection with the sale and leaseback of 34 tower sites
that were sold during the fourth quarter of 1999 and the first nine months of
2000. Interest expense decreased from 1998 to 1999 because we discontinued the
accrual of interest and the amortization of deferred debt issuance costs on our
Old Senior Notes and Old Convertible Notes upon filing the voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code on December 4, 1998. See
"Reorganization" in Item 1. If interest had continued to be accrued, total
interest expense would have been $12.6 million for the period from January 1,
1999, through the Effective Date.
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Equity in Losses of Affiliates. We had no equity in losses of
affiliates for the year ended December 31, 2000 or 1999, compared to losses of
$30.3 million during the year ended December 31, 1998. During the years ended
December 31, 1999 and 1998, we owned approximately 20% of the outstanding common
stock of Wireless One, Inc. ("Wireless One") and at December 31, 1998, we also
owned approximately 36% of the outstanding common stock of CS Wireless. Losses
recorded in prior years for Wireless One reduced our investment balance to zero
in November 1997, although we still owned approximately 20% of the outstanding
common stock. During the first and third quarters of 2000, we received $3.8
million and $723,000, respectively, in exchange for our equity interest in
Wireless One, Inc. ("Wireless One"), which announced confirmation of its plan of
reorganization in November 1999. These proceeds were recorded as a gain and are
reflected in other income on the accompanying Consolidated Statement of
Operations for the year ended December 31, 2000.
During the year ended December 31, 1998, we wrote off $6.8 million of
our excess cost in CS Wireless and our remaining investment balance of $11.7
million based on losses incurred by CS Wireless. In December 1998, we sold our
36% equity interest in CS Wireless to CAI Wireless Systems, Inc. Accordingly, no
losses from affiliates were recorded in the year ended December 31, 1999 or
2000.
Other income (expense). During the first and third quarters of 2000, we
received $3.8 million and $723,000, respectively, in exchange for our equity
interest in Wireless One described above. The entire amount was recognized as
other income, as our investment balance had been reduced to zero. Other income
during 2000 also includes the recognition of a deferred gain on the sale and
leaseback of 34 of our towers during 1999 and 2000. Other income in 1999
consists primarily of cash settlements from certain litigation matters.
Income Tax Benefit. Federal income tax law related to reorganizations
generally requires that the amount of income from discharge of indebtedness that
occurs in connection with a Chapter 11 bankruptcy be used to reduce federal tax
attributes. Generally, the reduction is applied to reduce net operating loss
carryforwards, followed by other tax attributes including the basis of certain
assets and the tax basis of subsidiary stock ("Tax Attribute Reduction"). An
election exists to reduce the basis of depreciable assets first, which can be
favorable under certain circumstances. Management elected to apply the required
reduction first to tax basis in depreciable assets, and then to net operating
loss carryforwards. The amount of reduction in depreciable assets was
approximately $56 million. The amount of reduction in net operating loss
carryforwards was approximately $118 million, leaving approximately $222 million
in remaining net operating loss carryforwards. No income tax benefit was
recorded for the years ended December 31, 2000, 1999 and 1998. See "MD&A --
Effects of Reorganization."
Reorganization Costs. During each of the years ended December 31, 1999
and 1998, we incurred $3.3 million in expenses related to our reorganization
under Chapter 11 of the U.S. Bankruptcy Code. These costs were for financial and
legal advisors, accountants and administrative costs. See "Reorganization" in
Item 1. There were no reorganization costs in 2000.
Gain on Debt Forgiveness. In connection with our reorganization under
Chapter 11, on the April 1, 1999 Effective Date of our reorganization, we
recorded an extraordinary gain of approximately $173.8 million reflecting the
extinguishment of certain liabilities subject to compromise in exchange for
common stock and warrants. Upon consummation of our Plan on April 1, 1999, our
Old Senior Notes and Old Convertible Notes totaling approximately $318 million,
including the interest accrued thereon and associated unamortized discounts and
debt issuance costs, were canceled and exchanged for 10 million shares of
newly-issued common stock and warrants to acquire 825,000 shares of common
stock, with a combined estimated fair value of $144.2 million as of the
Effective Date. This extraordinary gain is not taxable to us pursuant to Federal
income tax law because it arose in connection with our recapitalization under
Chapter 11 of the U.S. Bankruptcy Code. It does, however, result in a permanent
Tax Attribute Reduction. See "MD&A -- Effects of Reorganization."
Net Loss. We have recorded net losses since our inception. Our net loss
in 2000 was $22.1 million. Excluding the extraordinary gain on debt forgiveness
discussed above, we incurred a net loss of $7.6 million for the period from
January 1, 1999, to the Effective Date and a net loss of $17.2 million for the
period from the Effective Date to December 31, 1999. For the year ended December
31, 1998, we incurred a net loss of $212 million. The improvement in annual net
loss from 1998 to 2000 (excluding impairment charges of $106 million in 1998)
resulted from:
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o lower video programming costs related to fewer subscribers,
o lower interest expense due to the cancellation of approximately
$318 million in debt in our financial restructuring, slightly
offset by added interest on capital lease obligations related to
the sale and leaseback of our towers,
o cost savings from consolidation of certain market offices and
management,
o a gain of $4.8 million during 2000 on the exchange of our equity
interest in Wireless One and on the sale and leaseback of our
towers,
o decreased subscription television marketing expenses, and
o no reorganization costs in 2000 compared to $3.3 million in 1999
and $3.3 million in 1998.
Loss per share for the year ended December 31, 2000, and for the period
from the Effective Date to December 31, 1999, was $2.17 and $1.71, respectively.
Earnings per share information has not been presented for the Predecessor Period
as Nucentrix was recapitalized on the Effective Date in connection with our Plan
and, accordingly, per share amounts are not comparable between the Predecessor
Period and the Successor Period.
BALANCE SHEET AS OF DECEMBER 31, 2000, COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 1999
On April 1, 1999, the Plan became effective and we adopted Fresh Start
Reporting in accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7"). Fresh Start Reporting resulted in a new
reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities Subject to Compromise were
adjusted to zero in the debt discharge portion of the Fresh Start Reporting. All
outstanding common stock, stock options and warrants were canceled and new
common stock and warrants were issued. See Note 1 of Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.
Other material changes to balance sheet accounts from 1999 to 2000 were
as follows:
o the decrease in subscriber receivables resulted primarily from a
decrease of 24,000 average subscription television subscribers,
o the increase in prepaid expenses and other is due to a
reclassification from a long-term to a current asset of the
portion of the capitalized customer acquisition costs associated
with DIRECTV customers that are being amortized to sales and
marketing expense during the current year, and
o the decrease in accounts payable and accrued liabilities is due
to the settlement of certain tax and programming audits in the
current year, lower deferred revenue related to our agency
relationship with DIRECTV and payment of accrued Chapter 11
expenses in the current year.
CHANGES IN METHOD FOR REPORTING SUBSCRIBERS
Periodically, we may implement price increases or create new program
offerings that upgrade our basic program price structure. Upon such occurrence,
we also may update our methodology for reporting subscribers in MDUs who are
billed in bulk to the MDU owner. These "bulk" MDU subscribers are converted to
SFU subscribers for reporting purposes using an equivalent basic unit ("EBU")
rate that corresponds to our most utilized current pricing tier for basic
programming for SFU subscribers. This rate is divided into the total revenue
from bulk subscribers to get an "equivalent" number of subscribers for reporting
purposes. Consequently, when this rate is increased, the number of equivalent
subscribers will change and normally decrease. The following EBU rate revisions
occurred during the periods presented herein:
o effective March 31, 1998, our EBU rate was increased to $24.99,
resulting in a decrease of approximately 4,000 reported
subscribers, and
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o effective November 1, 1998, the EBU rate was increased to $26.99,
resulting in a decrease of approximately 600 reported
subscribers.
LIQUIDITY AND CAPITAL RESOURCES
The broadband wireless business is capital-intensive. Since inception,
we have spent funds to lease or otherwise acquire MMDS channel rights in various
markets and operating systems, to construct operating systems, and to finance
initial system operating losses. Our primary sources of capital have been
subscription fees, debt financing, the sale of common stock, and the sale of
MMDS channel rights that were not essential to our business strategy. The
approval by the FCC of the use of MMDS spectrum for digital two-way
communications services allows us to use our spectrum to provide broadband
wireless services such as high-speed Internet access services, voice over IP and
wireless telecommunications services. The growth of our business by using our
spectrum to provide two-way communications services will require substantial
investment in capital expenditures for the development and launch of broadband
wireless services.
Cash used in operations was $1.9 million during the year ended December
31, 2000, compared to cash provided by operations of $8.0 million during the
year ended December 31, 1999. The decrease in cash provided by operations
resulted primarily from current year recognition of deferred agency revenue
received in the prior year from our alliance with DIRECTV and its distributors,
and from payment of previously accrued reorganization costs. Cash used in
operations was $8.4 million during the year ended December 31, 1998. During the
second quarter of 1998, we paid $8.8 million in interest on our Old Senior
Notes. No interest was paid on the Old Senior Notes after that time, as we
discontinued accruing interest on these notes when we filed our bankruptcy
petition on December 4, 1998. The debt was discharged effective April 1, 1999,
upon confirmation of our Plan.
Cash used in investing activities principally relates to the
construction of additional operating systems, the acquisition and installation
of subscriber equipment, the upgrade of transmission equipment in certain
markets, and the acquisition of wireless cable channel rights and operating
systems, partially offset by the sale of MMDS channel rights that are not a part
of our strategic plan. Cash used in investing activities was $4.6 million in
2000 compared to $8.9 million in 1999 and $2 million in 1998. Cash used in
investing activities decreased from 1999 to 2000 primarily due to $4.5 million
received in the first nine months of 2000 from the exchange of our equity
interest in Wireless One. In addition, we had lower expenditures for systems and
equipment related to our subscription television business, somewhat offset by
higher expenditures for engineering, legal, site acquisition, and other costs
related to the preparation of FCC applications necessary to provide two-way
communications services. The increase in cash used in investing activities from
1998 to 1999 resulted from $9.4 million received in 1998 from the sale of debt
securities held in our escrow account for payment of interest on our Old 14%
Senior Notes. This was partially offset in 1999 by proceeds from the sale and
lease back of 30 communications towers for approximately $6.2 million.
Cash used in financing activities was $285,000 during 2000 compared to
$878,000 during 1999 and $1.7 million during 1998. Cash used by financing
activities during 2000 included principal payments on our BTA debt and on
capital leases related to the sale and leaseback of 34 of our communications
towers (including 30 towers sold in the fourth quarter of 1999 and four towers
sold in the first three quarters of 2000). This was partially offset by $1.5
million in cash proceeds received from the exercise of employee stock options.
Cash used during 1999 was for principal payments on our BTA debt, capital lease
obligations and other notes payable, several of which have been fully repaid,
offset by $1.1 million in cash proceeds from employee stock option exercises.
Cash used during 1998 was primarily for principal payments on obligations
related to capital leases and various prior period cable system acquisitions.
At February 28, 2001, we had approximately $20.7 million of
unrestricted cash and cash equivalents and $599,000 in restricted cash
representing collateral securing various outstanding letters of credit to
certain of our vendors.
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FUTURE CASH REQUIREMENTS
Our goal is to become a leading provider of broadband wireless services
in our markets. To implement our long-term business strategy we intend to first
offer high-speed Internet access service to medium-sized and small businesses,
SOHOs, telecommuters, and residential consumers in our markets, and later offer
telephony services, including wireless telecommunications and voice over IP
services.
We estimate that a launch of a new broadband wireless system providing
high-speed Internet access in a typical market will involve an initial
expenditure of approximately $500,000 to $900,000 for network equipment,
depending upon the system design and type and sophistication of the equipment.
In addition, we estimate that the acquisition and installation of each new
Internet subscriber will cost between $1,500 and $1,800 depending upon the type
of customer. This includes charges for equipment, labor and direct commissions.
This may be offset partially by installation and other up-front fees. Other
launch costs include the cost of securing adequate space for marketing
facilities in markets not previously operating a wireless subscription
television business, as well as costs related to employees. As a result of these
costs, operating losses are likely to be incurred by a system during the
start-up period.
We believe that additional capital will be required to fully implement
our long-term business strategy of providing broadband wireless service in
medium and small markets. However, until such additional capital becomes
available on acceptable terms, we have implemented a plan to maximize cash
resources and reduce expenditures in 2001. As we announced in February 2001, we
have reduced the number of markets in which we intend to launch broadband
wireless Internet service in 2001. In addition, we announced in March 2001 that
we had reduced our work force by 32 employees, or approximately 6%. The
reduction in force primarily was related to Internet sales, marketing and
support. We are continuing to evaluate the development of technology by Cisco
and other vendors for MMDS service, as well as the capital markets and other
sources of financing. However, until we are able to deploy a cost-effective and
reliable technology platform, and have obtained financing on satisfactory terms
and conditions, we intend to continue to look for efficiencies, maximize our
cash resources and preserve our spectrum resources. This may result in
deployment of no new Internet markets in 2001. We expect that under this plan,
cash on hand, cash generated from operations, and equipment financing will be
sufficient to fund operations in the normal course of business at least through
the second quarter of 2002.
We are continuing to evaluate our near and long-term capital needs, and
likely will seek additional capital in 2001. Options for raising additional
capital include the sale of debt or equity securities, borrowings under secured
or unsecured loan arrangements, including vendor equipment financing, and sales
of assets. We can provide no assurance that such capital or financing will be
available in a timely manner or on satisfactory terms.
EFFECTS OF REORGANIZATION
Our company and certain of our subsidiaries file a consolidated federal
income tax return. Subsidiaries in which we own less than 80% of the voting
stock will file separate federal income tax returns. We have had no material
state or federal income tax expense since inception. As of December 31, 1999 and
before taking into consideration the effects of the reorganization, we had
approximately $366.8 million in net operating losses for U.S. federal income tax
purposes, expiring in years 2013 through 2019. We estimate that approximately
$38 million of the above losses relate to various acquisitions and as such are
subject to certain limitations.
Federal income tax law generally requires that the amount of income
from discharge of indebtedness that occurs in connection with a Chapter 11
bankruptcy be used to reduce federal tax attributes. Generally, the reduction is
applied to reduce net operating loss carryforwards, followed by other tax
attributes including the basis of certain assets and the tax basis of subsidiary
stock ("Tax Attribute Reduction"). An election exists to reduce the basis of
depreciable assets first, which can be favorable under certain circumstances.
Management has elected to apply the required reduction first to tax basis in
depreciable assets, and then to net operating loss carryforwards. The amount of
reduction in the tax basis of depreciable assets was approximately $96 million,
leaving approximately $143 million in remaining basis in depreciable assets. The
amount of reduction in net operating loss carryforwards was approximately $78
million, leaving approximately $233 million in remaining net operating loss
carryforwards.
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In addition to the permanent Tax Attribute Reduction, we also must
limit the annual deduction of pre-bankruptcy net operating losses and "built-in
deductions" to an amount no greater than the fair market value of Nucentrix
immediately after the reorganization, multiplied by the long-term tax exempt
rate. The annual limitation applicable to our pre-bankruptcy net operating
losses and "built-in" deductions is currently estimated to be approximately $7.3
million.
We adopted Fresh Start Reporting on the April 1, 1999, Effective Date
of our Plan in accordance with SOP 90-7. Fresh Start Reporting resulted in a new
reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities subject to compromise also
were adjusted to zero in the debt discharge portion of the Fresh Start Reporting
entry. In addition, on the Effective Date our outstanding common stock was
canceled and newly issued shares of common stock and warrants were distributed
to certain creditors in satisfaction of their claims against us. In connection
with the debt discharge, Nucentrix recorded an extraordinary gain of
approximately $174 million.
COMMITMENTS AND CONTINGENCIES
Certain of our former directors and officers, to whom we may have
indemnity obligations, are defendants in a purported class action securities
lawsuit in State District Court in Kleberg County, Texas. This action alleges,
among other things, various violations of state securities laws. A second
securities lawsuit against former directors and officers of Nucentrix was
dismissed with prejudice in June 2000 by the U.S. District Court for the
Northern District of Texas, although the plaintiffs have appealed the decision
to the U.S. Court of Appeals for the Fifth Circuit. In addition, several former
directors and officers to whom we may have indemnity obligations are defendants
in a purported class action lawsuit filed on behalf of former stockholders of
Heartland, alleging that the defendants purposely undervalued our enterprise
value as part of our Plan confirmation process in order to extinguish
prepetition equity holders' interests. We also are a party to several purported
class action lawsuits alleging that we overcharged our customers for
administrative late fees, including one administrative late fee lawsuit alleging
violation of the federal RICO Act.
We intend to vigorously defend the above matters. While it is not
feasible to predict or determine the final outcome of these proceedings or to
estimate the amounts or potential range of loss with respect to these matters,
and while we do not expect such an adverse outcome, we believe that an adverse
outcome in one or more of these proceedings that exceeds or otherwise is
excluded from applicable insurance coverage could have a material adverse effect
on our consolidated financial condition, results of operations and/or cash
flows.
In September 1999, two former stockholders of Heartland filed a motion
in U.S. Bankruptcy Court to revoke the order confirming our Plan which became
effective in April 1999. We intend to vigorously oppose the motion, and it is
not possible at this time to predict the effect of any action by the Bankruptcy
Court to revoke the Plan.
For a more detailed discussion of legal matters, see Item 3., "Legal
Proceedings."
As discussed in Item 1., "Business - Spectrum Allocation Proceedings,"
the FCC and other government organizations have initiated proceedings to study,
identify and authorize additional radio frequencies for third generation, or
"3G," mobile wireless services worldwide. Several frequency bands are being
studied in this process. One of the frequency bands under consideration for such
services is 2500 - 2690 MHz, in which we hold substantially all of our
MDS/MMDS/ITFS fixed wireless FCC licenses and spectrum leases. We intend to
vigorously oppose any effort to share or reallocate any of our spectrum for 3G
services. However, we cannot predict how these various proceedings will be
resolved. We could be required to share part or all of these frequencies with 3G
mobile services, or relocate part or all of our fixed wireless services to
another frequency band. Although the NTIA Plan to Select Spectrum recognizes
that additional spectrum may have to be found or other accommodations will have
to be made for relocated licensees to continue their operations, it is
impossible to determine at this time exactly what impact, if any, spectrum
sharing or relocation would have on our consolidated financial condition,
results of operations or cash flows. However, sharing our spectrum with 3G
services, or relocating part or all of our fixed wireless services to another
frequency band, could require new or additional equipment and raise our
operating costs, delay the provision of service and/or render our services
uneconomic in certain areas.
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Certain of our current and former officers, to whom we may have
indemnity obligations, were notified by the U.S. Department of Labor ("DOL") in
March 2001 that they may have breached certain fiduciary obligations to
Nucentrix's 401(k) Plan (the "401(k) Plan") in violation of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The DOL alleges that from June
1996 through March 1998, Nucentrix did not timely remit employees' contributions
to be invested in the 401(k) Plan's investment options. The DOL also alleges
that Nucentrix failed to monitor the investments available to the participants
in the 401(k) Plan as well as the performance of these investments. Finally, the
DOL alleges that Nucentrix failed to timely distribute certain vested company
contributions of Heartland common stock after we suspended these contributions
in October 1998. We are investigating this matter to determine what, if any,
corrective actions may be necessary to address these allegations, and cannot at
this time predict with any certainty any monetary obligations that we may incur
with respect to this matter. However, we do not believe that this matter will
have a material adverse effect on our consolidated financial position, results
of operations or cash flows.
In December 2000, we entered into a definitive agreement to acquire all
of the MDS, MMDS and ITFS spectrum licenses, lease rights, and other assets of
Smithco of Ft. Smith, Inc. and Smithco Investments of West Memphis, Inc. in
Fayetteville and Fort Smith, Arkansas for $3.5 million in common stock of
Nucentrix. The transaction is subject to customary closing conditions, including
due diligence and receipt of all required regulatory approvals. We expect to
close this transaction in the second quarter of 2001.
In May 2000, we entered into a definitive agreement to acquire all of
the MDS, MMDS and ITFS spectrum licenses, lease rights and other assets of
Wireless Cable of Rockford, LLC and Allen Leeds in Rockfort, Illinois for $5.6
million in common stock of Nucentrix and the assumption of $400,000 in BTA debt.
We currently are awaiting FCC approval of the assignment of the Rockford BTA.
There is no assurance that we will be able to obtain this approval. If we do not
receive such approval, or otherwise receive confirmation from the FCC that the
BTA is in good standing, we may terminate or modify the purchase agreement. The
transaction is subject to other customary closing conditions including due
diligence.
INFLATION
We do not believe that inflation has had or is likely to have any
significant impact on our operations. We believe that we will be able to
increase subscriber rates, if necessary, to keep pace with inflationary
increases in costs.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activity," which
requires that all derivatives be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. In July 1999, the
Financial Accounting Standards Board issued SFAS No. 137, which delayed the
effective date of SFAS No. 133. SFAS 133 is now effective for all fiscal
quarters and for all fiscal years beginning after December 31, 2000. We expect
that the adoption of SFAS 133 will not have an impact on our results of
operations, financial condition or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in
applying Generally Accepted Accounting Principles to revenue recognition and
accounting for deferred costs in the financial statements. Based on our current
revenue recognition policies, SAB 101 did not materially impact our financial
position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We are exposed to market risk from changes in marketable securities
(which mainly consist of commercial paper). At December 31, 2000, our marketable
securities were recorded at a fair value of approximately $600,000, with an
overall weighted average return of approximately 6% and an overall weighted
average life of less than 1
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year. The marketable securities held by us have exposure to price risk, which is
estimated as the potential loss in fair value due to a hypothetical change of 60
basis points (10% of our overall average return on marketable securities) in
quoted market prices. This hypothetical change would have an immaterial effect
on the recorded value of the marketable securities.
We are not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt since 100% of our
long-term debt is at a fixed rate as of December 31, 2000. The fair value of our
long-term debt at December 31, 2000, is estimated to be $15.0 million based on
the overall rate of the long-term debt of 10% and an overall maturity of six
years compared to terms and rates currently available in long-term financing
markets. To date, we have not entered into any derivative financial instruments
to manage interest rate risk and are not currently evaluating the future use of
any such financial instruments.
We do not currently have any exposure to foreign currency transaction
gains or losses. All business transactions are in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is included on pages F-1
through F-22 of this annual report on Form 10-K, which information is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is included in our Proxy Statement for its
Annual Meeting of Stockholders to be held on May 10, 2001 and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is included in our Proxy Statement for our
Annual Meeting of Stockholders to be held on May 10, 2001 and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is included in our Proxy Statement for our
Annual Meeting of Stockholders to be held on May 10, 2001 and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is included in our Proxy Statement for our
Annual Meeting of Stockholders to be held on May 10, 2001 and is incorporated
herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are filed as part of this Form 10-K:
Independent Auditors' Report....................................................................................... F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999....................................................... F-2
Consolidated Statements of Operations for the year ended December 31, 2000, the period from the
Effective Date to December 31, 1999, the period from January 1, 1999, to the Effective Date, and
the year ended December 31, 1998................................................................................. F-3
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1998, the period from
January 1, 1999, to the Effective Date and the period from the Effective Date to December 31, 1999,
and the year ended December 31, 2000............................................................................. F-4
Consolidated Statements of Cash Flows for the year ended December 31, 2000 the period from the
Effective Date to December 31, 1999, the period from January 1, 1999 to the Effective Date, and
the year ended December 31, 1998................................................................................. F-5
Notes to Consolidated Financial Statements......................................................................... F-6
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this Form 10-K:
Schedule II-- Valuation and Qualifying Accounts...................................................... S-1
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the financial
statements or notes thereto.
3. Exhibits
Reference is made to the Index to Exhibits immediately following
Schedule II on page S-1 of this report for a list of all exhibits filed as a
part of this report.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ Carroll D. McHenry
----------------------------------------
Carroll D. McHenry
Chairman of the Board, President and
Chief Executive Officer
Date: March 26, 2001
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 capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Carroll D. McHenry Chairman of the Board, March 26, 2001
- -------------------------------------- President and Chief Executive Officer
Carroll D. McHenry (Principal Executive Officer)
/s/ J. David Darnell Senior Vice President and Chief March 26, 2001
- -------------------------------------- Financial Officer (Principal Financial Officer)
J. David Darnell
/s/ Amy E. Ivanoff Controller (Principal Accounting Officer) March 26, 2001
- --------------------------------------
Amy E. Ivanoff
/s/ Richard B. Gold Director March 27, 2001
- --------------------------------------
Richard B. Gold
/s/ Terry S. Parker Director March 27, 2001
- --------------------------------------
Terry S. Parker
/s/ Neil S. Subin Director March 27, 2001
- --------------------------------------
Neil S. Subin
/s/ R. Ted Weschler Director March 27, 2001
- --------------------------------------
R. Ted Weschler
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nucentrix Broadband Networks, Inc.
We have audited the accompanying consolidated balance sheets of Nucentrix
Broadband Networks, Inc. and subsidiaries as of December 31, 2000 and 1999 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 2000, the periods from January 1, 1999 to
April 1, 1999, the effective date of the reorganization discussed in the fourth
paragraph below (the "Effective Date"), and from the Effective Date to December
31, 1999, and for the year ended December 31, 1998. In connection with our
audits of the consolidated financial statements, we also have audited the
accompanying financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Nucentrix Broadband
Networks, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the year ended December 31,
2000, the periods from the Effective Date to December 31, 1999 and from January
1, 1999 to the Effective Date and for the year ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America. 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.
As discussed in note 1(b) to the consolidated financial statements, upon
consummation of a prenegotiated Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code on the Effective Date, the Company adopted Fresh
Start Reporting in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. As a result of the application of
Fresh Start Reporting, the consolidated financial statements of Nucentrix
Broadband Networks, Inc. and subsidiaries for the period from the Effective Date
to December 31, 1999 are presented on a different cost basis than those for
periods prior to the Effective Date, and accordingly, are not directly
comparable.
KPMG LLP
Dallas, Texas
February 23, 2001
F-1
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NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AS OF DECEMBER 31,
----------------------------
2000 1999
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents ................................................. $ 22,153 $ 28,932
Restricted assets-- investment in certificates of deposit ................. 201 251
Subscriber receivables, net of allowance for doubtful accounts
of $246 and $407, respectively ......................................... 870 1,342
Other receivables ......................................................... 1,105 1,297
Prepaid expenses and other ................................................ 2,085 1,228
--------- ---------
Total current assets .............................................. 26,414 33,050
Systems and equipment, net .................................................. 42,159 55,993
License and leased license investment, net .................................. 69,713 73,310
Note and lease receivables .................................................. 2,377 2,849
Other assets, net ........................................................... 2,617 3,609
--------- ---------
Total Assets ...................................................... $ 143,280 $ 168,811
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities .................................. $ 13,165 $ 16,773
Current portion of long-term debt ......................................... 2,014 1,845
--------- ---------
Total current liabilities ......................................... 15,179 18,618
--------- ---------
Long-term debt, less current portion ........................................ 12,947 14,671
Other long-term liabilities ................................................. 5,470 5,477
Stockholders' equity
Common stock, $.001 par value; 30,000,000 shares authorized; 10,228,935 and
10,099,717 shares issued and outstanding,
respectively ........................................................... 10 10
Preferred stock, $.01 par value; 15,000,000 shares authorized;
none issued ............................................................ -- --
Additional paid-in capital ................................................ 148,997 147,279
Accumulated deficit ....................................................... (39,323) (17,244)
--------- ---------
Total stockholders' equity ........................................ 109,684 130,045
--------- ---------
Commitments and contingencies
Total Liabilities and Stockholders' Equity ........................ $ 143,280 $ 168,811
========= =========
See accompanying notes to consolidated financial statements.
F-2
51
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUCCESSOR PREDECESSOR
--------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
EFFECTIVE JANUARY 1,
YEAR ENDED DATE TO 1999 TO YEAR ENDED
DECEMBER 31, DECEMBER 31, EFFECTIVE DECEMBER 31,
2000 1999 DATE 1998
------------- --------------- ------------ ------------
Revenues .................................... $ 61,046 $ 52,009 $ 18,466 $ 73,989
Operating expenses:
System operations ......................... 28,437 23,767 8,599 35,790
Selling, general and administrative ....... 32,811 26,125 9,156 36,367
Depreciation and amortization ............. 27,321 19,167 6,104 39,550
Impairment of long-lived assets ........... -- -- -- 105,791
--------- --------- --------- ---------
Total operating expenses ........... 88,569 69,059 23,859 217,498
--------- --------- --------- ---------
Operating loss ..................... (27,523) (17,050) (5,393) (143,509)
Other income (expense):
Interest income ........................... 1,976 1,160 423 2,659
Interest expense .......................... (1,371) (826) (321) (37,095)
Equity in losses of affiliates ............ -- -- -- (30,340)
Other ..................................... 4,839 483 2 (10)
--------- --------- --------- ---------
Total other income (expense) ....... 5,444 817 104 (64,786)
--------- --------- --------- ---------
Loss before reorganization costs and
extraordinary item ........................ (22,079) (16,233) (5,289) (208,295)
Reorganization costs ........................ -- (1,011) (2,311) (3,266)
--------- --------- --------- ---------
Loss before extraordinary item .............. (22,079) (17,244) (7,600) (211,561)
Extraordinary item--gain on
extinguishment of debt, net of tax ........ -- -- 173,783 --
--------- --------- --------- ---------
Net income (loss) .................. $ (22,079) $ (17,244) $ 166,183 $(211,561)
========= ========= ========= =========
Net loss per new common
share-- basic and diluted ................. $ (2.17) $ (1.71) N/A N/A
========= ========= ========= =========
Average shares outstanding--
basic and diluted ......................... 10,170 10,056 N/A N/A
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
52
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN ACCUMULATED -------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
--------- -------- ----------- ----------- ------ ------ -----
BALANCE, DECEMBER 31, 1997 ............. 19,688,527 $ 20 $ 261,880 $ (215,134) (13,396) $ (358) $ 46,408
Net loss ............................. -- -- -- (211,561) -- -- (211,561)
Issuance of common stock to
officer ............................ 10,000 -- 14 -- -- -- 14
Issuance of common stock for
401(k) Plan ........................ 96,994 -- 49 -- -- -- 49
---------- ------ ----------- ----------- ------- ------- -----------
BALANCE, DECEMBER 31, 1998 ............. 19,795,521 20 261,943 (426,695) (13,396) (358) (165,090)
Net income ........................... -- -- -- 166,183 -- -- 166,183
Cancellation of old common stock
pursuant to the Plan ............... (19,795,521) (20) (261,943) -- 13,396 358 (261,605)
Elimination of accumulated deficit
upon adoption of Fresh Start
Reporting .......................... -- -- -- 260,512 -- -- 260,512
Issuance of new common stock
pursuant to the Plan ............... 10,000,000 10 146,216 -- -- -- 146,226
----------- ------ ----------- ----------- ------- ------- -----------
BALANCE, EFFECTIVE DATE ................ 10,000,000 10 146,216 -- -- -- 146,226
Net loss ............................. -- -- -- (17,244) -- -- (17,244)
Additional shares issued pursuant
to the Plan ........................ 14,717 -- -- -- -- -- --
Exercise of employee stock options ... 85,000 -- 1,063 -- -- -- 1,063
----------- ------ ----------- ----------- ------- ------- -----------
BALANCE, DECEMBER 31, 1999 ............. 10,099,717 10 147,279 (17,244) -- -- 130,045
Net loss ............................. -- -- -- (22,079) -- -- (22,079)
Additional shares issued pursuant
to the Plan ........................ 6,766 -- -- -- -- -- --
Shares issued for purchase of
license ............................ 2,000 -- 45 -- -- -- 45
Compensation expense related to
issuance of stock options ......... -- -- 169 -- -- -- 169
Exercise of employee stock options ... 120,452 -- 1,504 -- -- -- 1,504
----------- ------ ----------- ----------- ------- ------- -----------
BALANCE, DECEMBER 31, 2000 ............. 10,228,935 $ 10 $ 148,997 $ (39,323) -- $ -- $ 109,684
=========== ====== =========== =========== ======= ======= ===========
See accompanying notes to consolidated financial statements.
F-4
53
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SUCCESSOR PREDECESSOR
----------------------------------- -------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED EFFECTIVE DATE TO JANUARY 1, YEAR ENDED
DECEMBER 31, DECEMBER 31, 1999 TO DECEMBER 31,
2000 1999 EFFECTIVE DATE 1998
------------- ----------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (22,079) $ (17,244) $ 166,183 $(211,561)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ...................... 27,321 19,167 6,104 39,550
Debt accretion and debt issuance cost
amortization ..................................... -- -- -- 5,686
Equity in losses of affiliates ..................... -- -- -- 30,340
Compensation expense related to issuance
of common stock and stock options ................ 169 -- -- 63
Write-down of assets due to impairment ............. -- -- -- 105,791
Extraordinary item--debt extinguishment ............ -- -- (173,783) --
Gain on sale of assets ............................. (4,951) -- -- --
Changes in operating assets and liabilities, net
of acquisitions:
Restricted assets ................................ 50 361 -- --
Subscriber and other receivables ................. 683 1,550 (954) (674)
Prepaid expenses and other ....................... 483 405 (158) (132)
Accounts payable, accrued expenses and
other liabilities .............................. (3,618) 1,354 5,057 22,560
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ......................... (1,942) 5,593 2,449 (8,377)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable--affiliate ............. -- -- -- 366
Proceeds from sale of investment in affiliate ........ 4,550 -- -- 1,534
Proceeds from sale of assets ......................... 780 6,072 -- 236
Purchases of systems and equipment ................... (7,096) (10,078) (5,081) (13,473)
Expenditures for licenses and leased licenses ........ (3,239) (121) (16) --
Purchase of debt securities .......................... -- -- -- (69)
Proceeds from sale of debt securities ................ -- -- -- 9,368
Collections of note and lease receivable ............. 453 178 138 --
--------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ......... (4,552) (3,949) (4,959) (2,038)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt ........................... (1,480) (1,032) (335) (327)
Payments on short-term borrowings and
other notes payable ................................ (309) (333) (241) (1,403)
Proceeds from exercise of stock options .............. 1,504 1,063 -- --
--------- --------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES .......... (285) (302) (576) (1,730)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents .......................................... (6,779) 1,342 (3,086) (12,145)
Cash and cash equivalents at beginning of
period ............................................... 28,932 27,590 30,676 42,821
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 22,153 $ 28,932 $ 27,590 $ 30,676
========= ========= ========= =========
Cash paid for interest ................................ $ 1,349 $ 762 $ 391 $ 10,416
========= ========= ========= =========
Cash paid for reorganization costs .................... $ 525 $ 891 $ 2,311 $ 2,921
========= ========= ========= =========
Non-cash financing activities:
Incurrence of capital lease obligations ............... $ 294 $ 2,180 $ -- $ --
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
54
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Nucentrix Broadband Networks, Inc. ("Nucentrix" or the "Company")
provides fixed broadband wireless services in medium and small markets across
Texas and the Midwestern United States. The Company controls up to approximately
200 MHz of radio spectrum in the 2.1 and 2.5 GHz band licensed by the Federal
Communications Commission ("FCC") in 93 markets (including three markets for
which there is a definitive agreement to acquire). The Company currently
provides high-speed wireless Internet access service under temporary
developmental FCC licenses in three markets (including one trial market),
primarily to medium-sized and small businesses, small offices/home offices and
telecommuters.
At December 31, 2000, Nucentrix provided wireless subscription
television service in 58 markets, including an offering of up to 185 digital
channels from DIRECTV, Inc. ("DIRECTV") and its distributors in over 50 markets.
(b) Financial Restructuring
On December 4, 1998, Nucentrix filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan" or "Plan of Reorganization") under Chapter 11 of the
U.S. Bankruptcy Code, with the prepetition support from holders of more than 70%
in principal amount of its 13% Senior Notes ("Old 13% Notes") and 14% Senior
Notes ("Old 14% Notes") (collectively, "the Old Senior Notes"). On April 1, 1999
(the "Effective Date"), Nucentrix canceled all issued and outstanding common
stock, stock options and warrants and issued 10,000,000 shares of new common
stock and warrants to purchase 825,000 shares of common stock. Nucentrix also is
obligated under the Plan to issue warrants to purchase an additional 275,000
shares of common stock to certain classes of or claims against and/or interests
in Nucentrix, which will become issuable upon the resolution of certain pending
litigation claims.
Nucentrix continued business operations as a debtor-in-possession until
the Plan was fully consummated. Prior to April 1, 1999, the obligations of
Nucentrix that were eligible for compromise under the Plan were classified as
Liabilities Subject to Compromise on Nucentrix's Consolidated Balance Sheets as
of December 31, 1998, and March 31, 1999. As of December 4, 1998, Nucentrix
discontinued the accrual of interest and amortization of deferred debt issuance
costs and discounts to notes payable related to Liabilities Subject to
Compromise. On March 15, 1999, the U.S. Bankruptcy Court for the District of
Delaware confirmed the Plan, and Nucentrix consummated the Plan on April 1,
1999.
On April 1, 1999, Nucentrix adopted Fresh Start Reporting in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"). Fresh Start Reporting resulted in a new reporting entity
with assets and liabilities adjusted to fair value and beginning retained
earnings set to zero. Liabilities Subject to Compromise were adjusted to zero in
the debt discharge portion of the Fresh Start Reporting. In connection with the
debt discharge, Nucentrix recorded an extraordinary gain of approximately $174
million. The effects of the Plan and the application of Fresh Start Reporting on
the Company's Consolidated Balance Sheet at the Effective Date are as follows:
F-6
55
FRESH START REPORTING
---------------------------------------------------------
PREDECESSOR ADJUSTMENTS SUCCESSOR
----------------- ----------------- ----------------
Current assets ...................................... $ 33,931 $ 33,931
Systems and equipment, net .......................... 61,909 $ (2,917)(A) 58,992
License and leased license investment, net .......... 78,088 78,088
Note and lease receivables .......................... 3,763 3,763
Other assets, net ................................... (4,750)(B)
5,222 3,802 (A) 4,274
--------- --------- ---------
$ 182,913 $ (3,865) $ 179,048
========= ========= =========
Current liabilities ................................. $ 18,818 $ 18,818
Long-term debt, less current portion ................ 13,855 13,855
Other liabilities ................................... 149 149
Liabilities subject to compromise ................... 322,781 $(322,781)(B) --
Stockholders' equity(deficit):
Old common stock .................................. 20 (20)(A) --
Additional paid-in capital ........................ 261,943 (261,943)(A) --
Accumulated deficit ............................... (434,295) 318,031 (B) --
116,264 (A)
Treasury stock-- 13,396 shares at cost ............ (358) 358 (A) --
New common stock .................................. -- 10 (A) 10
New additional paid-in capital .................... -- 146,216 (A) 146,216
--------- --------- ---------
Total stockholders' equity (deficit) ...... (172,690) 318,916 146,226
--------- --------- ---------
$ 182,913 $ (3,865) $ 179,048
========= ========= =========
- ----------
(A) Reflects the issuance of new shares of Nucentrix common stock to the
holders of Old Senior Notes and 9% Convertible Notes ("Old Convertible
Notes"), and the allocation of reorganization value to identifiable
tangible and intangible assets based on the estimated fair value of the
assets, and the adjustment to eliminate the Company's common stock
outstanding as of the Effective Date (which was canceled pursuant to
the Plan) and to reset beginning retained earnings of the Company to
zero in accordance with Fresh Start Reporting.
(B) Reflects the discharge of debt and write-off of related unamortized
debt discounts and debt issuance costs.
As a result of the application of Fresh Start Reporting, financial
information in the accompanying Consolidated Financial Statements as of December
31, 2000 and 1999, and for the year ended December 31, 2000, and the period from
the Effective Date to December 31, 1999 (collectively, the "Successor Period"),
is presented on a different basis than the financial information for the year
ended December 31, 1998, and for the period January 1, 1999, to the Effective
Date (collectively, the "Predecessor Period"). Accordingly, such information is
not comparable. The Predecessor Period includes operations through March 31,
1999, plus the gain on debt forgiveness recognized on the Effective Date. The
Successor Period includes operations for the year ended December 31, 2000, and
the period from the Effective Date through December 31, 1999.
Federal income tax law requires that the amount of income from
discharge of indebtedness that occurs in connection with a Chapter 11 bankruptcy
be used to permanently reduce federal tax attributes. These reductions may be
applied to one or more tax items, including but not limited to pre-bankruptcy
net operating loss carryforwards, the tax basis of certain assets and the tax
basis of subsidiary stock ("Tax Attribute Reduction"). Management has elected to
apply the required reduction first to tax basis in depreciable assets, and then
to net operating loss carryforwards. The amount of reduction in the tax basis of
depreciable assets was approximately $56 million. The amount of reduction in net
operating loss carryforwards was approximately $118 million, leaving
approximately $222 million in remaining net operating loss carryforwards at
December 31, 2000. (See Note 10 for further discussion).
(c) Liquidity
Nucentrix's Consolidated Financial Statements have been presented on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
F-7
56
The Company anticipates that additional capital will be required to
fully implement its long-term business strategy. However, until such additional
capital becomes available on acceptable terms, the Company has implemented a
plan to maximize cash resources and reduce expenditures in 2001. The Company
announced in February 2001 that it had extended its technology trial with Cisco
Systems, Inc. ("Cisco"), and reduced the number of markets in which it intends
to launch broadband wireless Internet service in 2001. The Company is continuing
to evaluate the development of technology by Cisco and other vendors for MMDS
service, as well as the capital markets and other sources of financing. However,
until the Company is able to deploy a cost-effective and reliable technology
platform, and has obtained financing on satisfactory terms and conditions, the
Company intends to continue to look for efficiencies, maximize its cash
resources and preserve its spectrum resources. This may result in deployment of
no new Internet markets in 2001. The Company expects that under this plan, cash
on hand, cash generated from operations, and equipment financing will be
sufficient to fund operations in the normal course of business at least through
the second quarter of 2002.
The Company is continuing to evaluate its near and long-term capital
needs, and likely will seek additional capital in 2001. Options for raising
additional capital include the sale of debt or equity securities, borrowings
under secured or unsecured loan arrangements, including vendor equipment
financing, and sales of assets. The Company can provide no assurance that such
capital or financing will be available in a timely manner or on satisfactory
terms.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Nucentrix
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(e) Cash and Cash Equivalents
Nucentrix considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents consist of money market funds, certificates of deposit,
overnight repurchase agreements and other investment securities.
(f) Restricted Assets
Restricted assets consist of bank certificates of deposit with an
original maturity of less than one year. These investments are considered held
to maturity and are stated at amortized cost which approximates fair value. The
Company has pledged these certificates of deposit as letters of credit primarily
for operating leases.
Other assets include $398,000 in restricted investments in bank
certificates of deposit pledged as collateral for long-term operating leases.
Although these certificates of deposit have original maturities of less than one
year, the Company must renew them for the length of the lease and such
investments are therefore classified as long-term assets.
(g) Systems and Equipment
Systems and equipment are recorded at cost and include the cost of
transmission equipment as well as the excess of direct costs of subscriber
installations over installation fees (See Note 3). Upon installation,
depreciation and amortization of systems and equipment is recorded on a
straight-line basis over the estimated useful lives, from three to twenty years.
The direct costs of video subscriber installations include reception
materials and equipment on subscriber premises and installation labor, which are
amortized over the useful life of the asset (presently five years) for the
recoverable portion and the estimated average subscription term (presently three
years) for the nonrecoverable portion of such costs. The nonrecoverable portion
of the cost of a subscriber installation becomes fully depreciated upon
subscriber disconnect.
F-8
57
(h) License and Leased License Investment
License and leased license investment includes costs incurred to
acquire and/or develop broadband wireless channel rights and are amortized over
15 years beginning with inception of service in each market.
During the third quarter of 1998, Nucentrix wrote down the value of its
operating licenses to estimated fair market value in accordance with 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"
(See Note 2). The re-valued licenses are being amortized over the average
remaining life of 12.5 years.
(i) Impairment of Long Lived Assets
SFAS No. 121 requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to the future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the net asset exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell (See Note 2).
(j) Revenue Recognition
Revenues from subscribers are recognized as service is provided.
Revenue from agency relationships with DIRECTV and its distributors are deferred
and recognized over the expected term of the DIRECTV customer relationship.
(k) Income Taxes
Nucentrix utilizes the asset and liability method for accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. 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 or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Based on the foregoing policy, deferred tax assets net of
deferred tax liabilities have been fully reserved.
(l) Net Loss Per Common Share -- Basic and Diluted
The Company has presented (1) basic loss per share, computed on the
basis of the weighted average number of common shares outstanding during the
period, and (2) diluted loss per share, computed on the basis of the weighted
average number of common shares and all dilutive potential common shares
outstanding during the period. Outstanding options to purchase 902,700 and
713,000 shares of common stock at December 31, 2000 and 1999, respectively and
outstanding warrants to purchase 825,000 shares of common stock at December 31,
2000 and 1999, were not included in the computation of diluted loss per share
because their effects are antidilutive. Earnings per share information has not
been presented for the Predecessor Period as the Company was recapitalized on
the Effective Date in connection with the Plan, and accordingly, per share
amounts are not comparable between the Predecessor and Successor Periods.
(m) Use of Estimates
Preparation of Consolidated Financial Statements in conformity 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 Consolidated
Financial Statements and
F-9
58
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(n) Concentrations of Credit Risk and Accounts Receivable
Nucentrix's subscribers and the related accounts receivable are
primarily residential subscribers that are concentrated in nine states across
Texas and the Midwestern United States. Nucentrix establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
subscribers, historical trends and other information.
(o) Other Assets
Other assets include amounts allocated to subscriber value and excess
reorganization value. These assets are amortized on a straight line basis over
the estimated useful lives of three years and 15 years, respectively.
(p) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(q) Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan
using the intrinsic value-based method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). As
such, compensation expense is recorded on the date of grant to the extent the
current market price of the underlying stock exceeds the exercise price. The
Company has provided pro forma disclosures as if the fair value-based method of
accounting for these plans, as prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," had been applied. (See Note 9)
(r) Comprehensive Income
Effective January 1, 1998, Nucentrix adopted SFAS 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 all periods presented,
comprehensive income (loss) and net income (loss) are the same amount.
(s) Segment Reporting
In January 1998, Nucentrix adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." 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, Nucentrix was comprised of two reportable segments at the end of 2000 (i)
distribution of subscription television services, and (ii) delivery of IP-based
services (See Note 14).
(2) IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of 1998, Nucentrix reviewed the assets
associated with certain undeveloped markets and determined that (i) cash flows
from operations would not be adequate to fund the capital outlay required to
build out such markets, and (ii) because of Nucentrix's default on its interest
payment on the Old 13% Notes in the second quarter of 1998, outside financing
for the build-out of these markets was not readily available prior to the
consummation of a financial restructuring. Therefore, in accordance with SFAS
No. 121, the channel licenses and leases in these undeveloped markets were
individually evaluated and written down to estimated fair value, resulting in a
non-cash impairment charge of $17.7 million in the second quarter of 1998.
F-10
59
Throughout the second and third quarters of 1998, Nucentrix analyzed
various recapitalization and restructuring alternatives with the assistance of
Wasserstein Perella & Company, including consensual, out-of-court alternatives.
In October 1998, Nucentrix announced that it intended to file a voluntary
prenegotiated plan of reorganization under Chapter 11 of the U.S. Bankruptcy
Code (See Note 1(b)). This event caused Nucentrix to evaluate all of its
long-lived assets for impairment according to the requirements of SFAS No. 121.
Nucentrix retained the services of a third party to assist in performing a fair
market valuation of substantially all of Nucentrix's assets. This valuation
resulted in a non-cash impairment charge during the third quarter of 1998 of
$105.8 million, as follows:
DESCRIPTION OF WRITE-DOWNS
Systems and equipment...................................... $ 44,510
License and leased license investment...................... 36,550
Excess of cost over fair value of net assets acquired...... 24,731
---------
Total............................................ $ 105,791
=========
Nucentrix's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both could be
reduced in the future due to changes in, among other things, technology,
government regulation, available financing, interference issues, or competition.
(3) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at December 31, 2000
and 1999:
2000 1999
--------- --------
Equipment awaiting installation............................... $ 1,531 $ 1,910
Subscriber premises equipment and installation costs.......... 30,984 35,016
Transmission equipment and system construction costs.......... 27,102 27,183
Office furniture and equipment................................ 1,857 699
Assets under capital leases................................... 3,935 3,641
Buildings and leasehold improvements.......................... 455 438
-------- --------
65,864 68,887
Accumulated depreciation and amortization..................... (23,705) (12,894)
-------- ---------
$ 42,159 $ 55,993
======== ========
In the fourth quarter of 1999, Nucentrix sold 30 of its communication
towers to SBA Towers, Inc. ("SBA Towers") for approximately $6.2 million in a
transaction accounted for as a sale-leaseback (see Note 6). This transaction
resulted in a deferred gain of approximately $3.8 million. The sale of four
additional tower sites was closed in the second and third quarters of 2000 for
approximately $830,000, resulting in a deferred gain of approximately $450,000.
During the year ended December 31, 2000, $400,000 of the total $4.2 million gain
was recognized as other income. The remaining deferred gain is included in other
long-term liabilities (long-term portion) and accrued liabilities (current
portion) on the accompanying consolidated balance sheet as of December 31, 2000.
See Note 2 for discussion of systems and equipment written down in the
third quarter of 1998.
(4) FCC LICENSES AND OPERATING LEASES
License and leased license investment consists primarily of costs
incurred in connection with the Company's acquisition and development of channel
rights. Channel rights represent the right to utilize all of the capacity on
channels operated under a license received from the FCC. These assets are
recorded at cost and amortized using the straight line method over the assets'
estimated useful lives, approximately 15 years, beginning with the inception of
service in each market. Accumulated amortization on license and leased license
investments was $15.2 million and $8.4 million at December 31, 2000 and 1999,
respectively. Additions to license and leased
F-11
60
license investment of $3.2 million and $137,000 during 2000 and 1999,
respectively, consisted of engineering and other costs related to the
preparation and filing of applications with the FCC for two-way use of our
spectrum, as well as the cost to acquire new licenses in several markets.
Nucentrix depends on leases with third parties for some of its channel
rights. FCC licenses generally must be renewed every ten years. All licenses are
subject to renewal by the FCC. Although FCC custom and practice establish a
presumption of granting renewals of licenses, the presumption requires that the
licensee substantially comply with its regulatory obligations during the license
period.
Channel lease agreements generally require payments based on the
greater of specified minimums or amounts based upon subscriber levels or
revenues. Channel lease payments generally begin upon the completion of
construction of transmission equipment and facilities and upon approval for
operation under FCC rules. For certain leases, payments begin upon grant of the
channel rights. Channel lease expense was $3.5 million, $900,000, $2.7 million,
and $3.0 million for the year ended December 31, 2000, the periods from January
1, 1999, to the Effective Date, from the Effective Date to December 31, 1999,
and for the year ended December 31, 1998, respectively.
Nucentrix also has other operating leases for office space, vehicles,
equipment, and transmission tower space. Rent expense incurred in connection
with these leases was $2.6 million, $1 million, $2.7 million, and $4.2 million
for the year ended December 31, 2000, the periods from January 1, 1999, to the
Effective Date, from the Effective Date to December 31, 1999, and for the year
ended December 31, 1998, respectively.
Future minimum lease payments due under noncancellable leases at
December 31, 2000, are as follows:
OTHER
YEAR ENDING CHANNEL OPERATING
DECEMBER 31 LEASES LEASES
----------- ------ ------
2001......................................... $ 2,943 $ 2,161
2002......................................... 2,456 1,564
2003......................................... 2,272 1,202
2004......................................... 1,985 758
2005......................................... 1,900 424
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consists of the following at
December 31, 2000 and 1999:
2000 1999
-------- --------
Accounts payable................................. $ 168 $ 1,083
Accrued programming.............................. 1,912 2,394
Subscriber deposits.............................. 345 319
Deferred revenue (Note 1(j))..................... 5,198 6,891
Accrued sales, property and franchise taxes...... 996 1,474
Accrued compensation and benefits................ 1,298 1,782
Other accrued expenses and other liabilities..... 3,248 2,830
-------- --------
$ 13,165 $ 16,773
======== ========
(6) LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999, consists of the
following:
2000 1999
--------- ---------
Capital leases................................... $ 2,762 $ 2,776
Other notes payable.............................. 12,199 13,740
--------- --------
14,961 16,516
Less current portion............................. (2,014) (1,845)
--------- --------
$ 12,947 $ 14,671
========= ========
F-12
61
In December 1999, Nucentrix entered into capital lease agreements with
SBA Towers to lease back space on 34 towers which Nucentrix sold to SBA Towers
in 1999 and 2000 (See Note 3). A lease obligation of $2.2 million was recorded
in connection with the lease of 30 of the towers as of December 31, 1999, and an
additional obligation of $294,000 was recorded when the sale of the four
remaining towers closed during 2000. These capital lease obligations have an
initial term of 10 years, with three (3) five-year renewal options. The Company
also leases computer and office equipment under capital leases, with remaining
terms of one to three years.
Other notes payable at December 31, 2000 and 1999, relate to the
acquisition of BTAs from the FCC. The note payable to the FCC bears interest at
9.5%, payable quarterly over ten years beginning November 1996. Quarterly
principal payments are payable over the remaining eight years beginning November
1998.
Nucentrix and CS Wireless Systems, Inc. ("CS Wireless") entered into a
lease and purchase option agreement for certain of the BTAs (collectively, the
"Leased BTAs") awarded to Nucentrix at a total cost of approximately $5.2
million. Under this agreement, CS Wireless reimburses Nucentrix for principal
and interest paid to the FCC for the Leased BTAs. As of December 31, 2000 and
1999, the amount of FCC debt related to the Leased BTAs totaled $2.4 million
(net of current portion of $400,000), and $2.8 million (net of current portion
of $400,000), respectively, and has been recorded as a receivable.
Aggregate maturities of long-term debt as of December 31, 2000, for the
five years ending December 31, 2005, are as follows: 2001 -- $2.0 million; 2002
- -- $2.1 million; 2003 -- $2.2 million; 2004 -- $2.4 million; and 2005 -- $2.7
million.
Debt Cancellation Under the Plan
On April 1, 1999, under the terms of the Plan, the Old 13% Notes, Old
14% Notes and Old Convertible Notes were canceled. The holders of the Old Senior
Notes and Old Convertible Notes received 9,700,000 and 300,000 shares,
respectively, of newly issued common stock in exchange for cancellation of their
debt. The holders of the Old Convertible Notes also received warrants to
purchase 825,000 shares of newly issued common stock. As of December 4, 1998,
Nucentrix discontinued the accrual of interest and amortization of deferred debt
issuance costs and discounts on notes payable related to Liabilities Subject to
Compromise. If interest had continued to be accrued, total interest expense
would have been $39.9 million for the year ended December 31, 1998, and $12.6
million for the period from January 1, 1999 to the Effective Date.
(7) OTHER LONG-TERM LIABILITIES
Other long-term liabilities at December 31, 2000 and 1999 consists of
the following:
2000 1999
-------- --------
Deferred gain on sale of towers (Note 3)........... $ 3,357 $ 3,397
Sales and franchise tax liabilities................ 1,608 1,166
Deferred revenue (Note 1(j))....................... -- 125
Other.............................................. 505 789
------- -------
$ 5,470 $ 5,477
======= =======
(8) ACQUISITIONS/DISPOSITIONS
CS Wireless Transaction
Effective December 2, 1998, Nucentrix, CAI Wireless Systems, Inc.
("CAI") and CS Wireless signed a Master Agreement, pursuant to which CAI
purchased Nucentrix's 36% equity interest in CS Wireless for $1.5 million.
Effective May 26, 2000, CS Wireless assigned certain MDS-1 channel rights and an
MMDS subscription television operating system in Radcliffe, Iowa to Nucentrix.
In addition, Nucentrix assigned channel rights and related equipment in
Portsmouth, New Hampshire to CS Wireless, and canceled a promissory note issued
by CS Wireless to Nucentrix. The carrying value of this note on Nucentrix's
Consolidated Balance Sheet at December 31,
F-13
62
1999, was $62,000. No gain or loss was recorded on this transaction. The final
phase of the Master Agreement is the assignment of 20 MHz of Wireless
Communications Service spectrum in 19 markets from CS Wireless to Nucentrix. The
Company currently leases this spectrum from CS Wireless under an exclusive
spectrum lease. The consummation of this assignment is subject to FCC approval.
Exchange of Equity Interest in Wireless One, Inc.
In January 2000, the Company exchanged 2,911,725 shares of common stock
in Wireless One, Inc. ("Wireless One") for approximately $3.8 million, pursuant
to Wireless One's plan of reorganization under Chapter 11 of the Bankruptcy
Code. In July 2000, an additional 547,783 shares of common stock in Wireless One
was exchanged for approximately $700,000. After these transactions, Nucentrix
retained no equity interest in Wireless One. Losses recorded in prior years for
Wireless One had reduced the carrying amount of the Company's investment to
zero. Accordingly, the proceeds have been classified as a gain on sale of assets
and included in other income in the consolidated statement of operations for the
year ended December 31, 2000.
(9) STOCKHOLDERS' EQUITY
(a) Stock Options
The First Amended and Restated 1999 Share Incentive Plan (the "New
Stock Option Plan") provides for the grant of options to purchase a maximum of
1,300,000 shares of common stock of the Company. Options vest according to
schedules set by the Compensation Committee of the Board of Directors. The 1994
Employee Stock Option and Non-Employee Director Plans (collectively, the "Old
Stock Option Plans") provided for the granting of options to purchase a maximum
of 1,950,000 and 50,000 shares of common stock, respectively.
On April 1, 1999, the Effective Date of the Plan, the Old Stock Option
Plans were canceled and the New Stock Option Plan was adopted.
A summary of option activity during 1998, 1999 and 2000 follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF OPTIONS PRICE
---------- -----
Outstanding at December 31, 1997............. 1,357,000 $ 6.42
Granted...................................... 165,000 $ 3.33
Forfeited.................................... (72,000) $ 7.19
------------
Outstanding at December 31, 1998............. 1,450,000 $ 6.03
Canceled on April 1, 1999.................... (1,450,000) $ 6.03
------------
Granted under New Stock Option Plan.......... 807,000 $ 12.50
Exercised.................................... (85,000) $ 12.50
Forfeited.................................... (9,000) $ 12.50
------------
Outstanding at December 31, 1999............. 713,000 $ 12.50
Granted at market............................ 252,000 $ 21.64
Granted at less than market.................. 110,000 $ 21.41
Exercised.................................... (120,452) $ 12.50
Forfeited.................................... (51,848) $ 12.50
------------
Outstanding at December 31, 2000............. 902,700 $ 16.13
============
F-14
63
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/00 LIFE PRICE AT 12/31/00 PRICE
--------------- ----------- ----------- --------- ----------- ---------
$12.50 - $18.75 595,700 5.38 years $ 12.60 338,532 $ 12.50
$18.76 - $28.14 303,000 6.56 years $ 22.90 -- --
$29.50 4,000 6.25 years $ 29.50 -- --
At December 31, 1999 and 1998, the number of options exercisable and
the weighted average exercise prices of those options were 397,480 and 719,000
and $12.50 and $9.73, respectively.
The per share weighted average fair values of stock options granted
during fiscal years 2000, 1999 and 1998, estimated on the dates of grant using
the Black-Scholes option pricing model, were as follows:
2000 1999 1998
----------- ------------ -----------
Options whose exercise price equaled
market price on grant date $ 15.74 $ 8.52 $ 1.16
Options whose exercise price was less than
market price on grant date $ 20.63 $ -- $ --
The following weighted-average assumptions for stock options granted
during fiscal years 2000, 1999 and 1998 were used:
2000 1999 1998
--------- -------- ------
Expected dividend yield......... 0% 0% 0%
Stock price volatility.......... 89% 81% 131%
Risk-free interest rate......... 6.0% 5.1% 5.5%
Expected option term............ 5 years 5 years 5 years
Nucentrix applies APB Opinion No. 25 in accounting for its stock option
plans and has recorded compensation expense of $169,000 related to the issuance
of stock options in the Consolidated Financial Statements for the year ended
December 31, 2000. Had Nucentrix determined compensation based on the fair value
at the grant date for its stock options under SFAS No. 123, net loss and loss
per share would have been increased as indicated below:
SUCCESSOR PREDECESSOR
----------------------------------------- -------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED EFFECTIVE DATE TO JANUARY 1, 1999 YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 TO EFFECTIVE DATE DECEMBER 31, 1998
----------------- ------------------ ----------------- -----------------
Net income (loss) attributable
to common stockholders:
As reported........................... $ (22,079) $ (17,244) $ 166,183 $ (211,561)
Pro forma for SFAS No. 123............ $ (22,796) $ (21,758) $ 166,183 $ (213,077)
Net loss per share -- Basic and
Diluted:
As reported........................... $ (2.17) $ (1.71) N/A N/A
Pro forma for SFAS No. 123............ $ (2.24) $ (2.16) N/A N/A
Pro forma net loss reflects only options granted after 1994.
Compensation cost is reflected over the options' vesting period of three to five
years.
F-15
64
(b) Old Common Stock to Officers
In April 1998, Nucentrix issued 10,000 shares of common stock to an
officer of Nucentrix. The quoted market price of the shares on the grant date
has been expensed in the accompanying Consolidated Financial Statements. This
common stock was canceled on April 1, 1999, the Effective Date of the Plan.
(c) Warrants
On April 1, 1999, under the terms of the Plan, holders of Old
Convertible Notes received warrants to purchase 825,000 shares of common stock
at an exercise price of $27.63 per share, subject to downward adjustment in the
event of a sale or merger of the Company. As of December 31, 2000 and 1999, all
of these warrants were outstanding.
(10) INCOME TAXES
Income tax expense (benefit) for the year ended December 31, 2000, the
periods from the Effective Date to December 31, 1999, and from January 1, 1999
to the Effective Date, and for the year ended December 31, 1998, differed from
the amount computed by applying the U.S. federal income tax rate of 35% to
income (loss) before income taxes as a result of the following:
SUCCESSOR PREDECESSOR
---------------------------------------- --------------------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED EFFECTIVE DATE TO JANUARY 1, 1999 YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 TO EFFECTIVE DATE DECEMBER 31, 1998
----------------- ------------------ ------------------ -----------------
Computed "expected" tax expense
(benefit)......................... $ (7,728) $ (6,035) $ 58,164 $ (73,890)
Amortization and write-down of
goodwill.......................... -- 337 113 9,300
Discharge of debt................... -- -- (64,300) --
Loss for which no tax benefit was
recognized........................ 8,169 6,043 6,175 68,812
State income tax.................... (441) (345) (152) (4,222)
-------- -------- -------- ---------
$ -- $ -- $ -- $ --
======== ======== ======== =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999, are presented below:
2000 1999
---------- ----------
Deferred tax assets:
Net operating loss carryforwards ........ $ 81,400 $ 124,647
Subscriber receivables................... 151 151
Asset impairment......................... 7,498 28,080
Systems and equipment.................... 14,770 7,964
Deferred revenue......................... 2,598 1,674
Debt restructuring....................... -- 1,229
Other.................................... 1,822 3,375
---------- ----------
Total gross deferred tax assets............ 108,239 167,120
Less valuation allowance................... (100,421) (162,802)
---------- ----------
Net deferred tax assets.................. 7,818 4,318
Deferred tax liabilities:
License and leased license investment ... (7,818) (4,318)
---------- ----------
Net deferred tax liability................. $ -- $ --
========== ==========
The net changes in the total valuation allowance for the year ended
December 31, 2000, the periods from the Effective Date to December 31, 1999 and
from January 1, 1999 to the Effective Date, and for the year ended December 31,
1998, were increases (decreases) of ($62.4) million, $8.9 million, $2.6 million,
and $82.6 million, respectively. In assessing the realizability of deferred tax
assets, Nucentrix 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
F-16
65
assets depends on the generation of future taxable income during the periods in
which those temporary differences become deductible. Nucentrix considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon these
considerations, Nucentrix has fully reserved all deferred tax assets to the
extent such assets exceed deferred tax liabilities.
As a result of the cancellation of the Old Senior Notes, Old
Convertible Notes and common stock outstanding at the Effective Date, and the
issuance of new shares of common stock and warrants in accordance with the Plan,
federal tax law requires that the amount of income from discharge of
indebtedness that occurs in connection with a Chapter 11 bankruptcy be used to
permanently reduce federal tax attributes. These reductions may be applied to
one or more tax items, including but not limited to pre-bankruptcy net operating
loss carryforwards, the tax basis of certain assets and the tax basis of
subsidiary stock. Management has elected to apply the required reduction first
to tax basis in depreciable assets, and then to net operating loss
carryforwards. The amount of reduction in the tax basis of depreciable assets
was approximately $56 million. The amount of reduction in net operating loss
carryforwards was approximately $118 million, leaving approximately $222 million
in remaining net operating loss carryforwards at December 31, 2000. These net
operating loss carryforwards expire in years 2013 through 2019. Nucentrix
estimates that approximately $38 million of the above carryforwards relate to
various acquisitions and are subject to certain limitations.
In addition to the permanent Tax Attribute Reduction, the Company also
must limit the annual deduction of pre-bankruptcy net operating losses and
"built-in deductions" to an amount no greater than the fair market value of the
Company immediately after the restructuring, multiplied by the long-term tax
exempt rate. This annual limitation is currently estimated to be approximately
$7.3 million.
(11) RELATED PARTY TRANSACTIONS
During 1999, Nucentrix leased office space from entities owned by
certain former officers and directors of Nucentrix for which the expense
amounted to approximately $19,000 for the period from January 1, 1999, to the
Effective Date, $58,000 for the period from the Effective Date to December 31,
1999 and $205,000 in 1998. In connection with its restructuring, Nucentrix
terminated approximately 56,000 square feet of such leases. The Company then
terminated all of these remaining leases in November 1999.
In 1997, Nucentrix, CS Wireless, Wireless One, and CAI formed Wireless
Enterprises, LLC ("Wireless Enterprises"). Wireless Enterprises is a programming
cooperative that negotiated programming and marketing services with suppliers of
programming. In 1998 Nucentrix paid approximately $24.5 million to Wireless
Enterprises as reimbursement of programming expenses and for other
administrative services. The Company did not purchase programming from Wireless
Enterprises during 1999 or 2000.
(12) COMMITMENTS AND CONTINGENCIES
Certain former directors and officers of the Company's predecessor,
Heartland Wireless Communications, Inc. ("Heartland"), to whom the Company may
have indemnity obligations, are defendants in a purported class action
securities lawsuit filed in State District Court in Kleburg County, Texas in
July 1998. This action alleges, among other things, various violations of state
securities laws. In June 2000, the plaintiffs' counsel in this matter notified
counsel for defendants that the maximum amount of damages sought by the
plaintiffs in this matter was $700 million. The plaintiffs previously had
indicated in a statement of the case that their purported class damage models
indicated total damages of $70.5 million. In addition, certain former officers
and directors of Heartland, to whom the Company also may have indemnity
obligations, are defendants in a federal securities action filed in U.S.
District Court for the Northern District of Texas in February 1998. In June
2000, the court dismissed the plaintiffs' claims in this matter, with prejudice.
The plaintiffs have appealed the dismissal to the U.S. Circuit Court of Appeals
for the Fifth Circuit.
The Company is a party to five purported class action lawsuits alleging
that the Company overcharged its customers for administrative late fees in
violation of various states' laws. All of these lawsuits were filed by the same
plaintiff's attorney in various state courts in Texas. These lawsuits generally
allege that administrative late fees charged by Nucentrix are unenforceable
and/or usurious. The lawsuits generally seek to certify a class to represent all
persons receiving wireless cable service from Nucentrix or who have been charged
a late fee by Nucentrix, and seek a declaration that any contractual provisions
for Nucentrix's administrative late fees are void or usurious, as well as money
damages, interest, attorneys' fees, and costs.
F-17
66
In 2001, the court in one of the late fee actions, Ysasi, et al. v.
Heartland Wireless Communications, Inc. (98 6430-B), denied the plaintiff's
motion for class certification. This matter is set for trial in April 2001. Also
in 2001, the court in another late fee action, Ortiz, et al. v. Nucentrix
Broadband Networks, Inc. (S-00-5731-CV-B), granted the Company's Motion to
Compel Arbitration in accordance with the plaintiff's customer agreement, and
dismissed the matter without prejudice.
The Company, certain former directors and officers of the Company to
whom the Company may have indemnity obligations, certain subsidiaries of the
Company, and other parties are defendants in a purported civil class action
lawsuit filed in October 2000 and alleging violation of the federal Racketeering
Influenced and Corrupt Organizations Act ("RICO"). This case is styled Nolen, et
al. v. Nucentrix Broadband Networks, Inc., et al. (L-00CV134), and is pending in
U.S. District Court for the Southern District of Texas, Laredo Division. The
plaintiff in the Nolen action is represented by the same counsel who filed the
state court lawsuits described above in this Note 12. The Nolen action alleges
that the Company and other defendants together caused the collection of an
unlawful debt comprised of a service fee for subscription television services
and an administrative late fee, in violation of RICO. The plaintiff seeks to
represent a class consisting of all persons from whom any of the defendants has
collected a late fee. The plaintiff in Nolen seeks disgorgement and payment of
unspecified restitution to members of the purported class, as well as treble
damages, attorneys' fees, interest, and costs.
The Company intends to vigorously defend all of the matters discussed
above. While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, and while management does not expect such an adverse
outcome, management believes that an adverse outcome in one or more of these
proceedings that exceeds or otherwise is excluded from applicable insurance
coverage could have a material adverse effect on the consolidated financial
condition, results of operations or cash flows of the Company.
In September 1999, two former stockholders of Heartland filed a Motion
to Revoke the U.S. Bankruptcy Court's order confirming the Company's Plan of
Reorganization. The motion asserts that the Company procured the order by
fraudulently undervaluing the Company's enterprise value in the confirmation
process, and seeks to set aside the order. The Company has filed a Motion to
Dismiss the Motion to Revoke, believes the Motion to Revoke is without merit and
intends to vigorously oppose the Motion to Revoke. The Company's Motion to
Dismiss the Motion to Revoke is under consideration by the Bankruptcy Court. It
is not possible at this time to predict the effect of any action by the
Bankruptcy Court to revoke the Plan.
In addition, in December 2000, several former stockholders of Heartland
filed a lawsuit in State Court in Bryan County, Oklahoma against certain of the
Company's current and former directors and officers, and former holders of Old
Senior Notes. These plaintiffs also allege that the defendants fraudulently
undervalued the Company's enterprise value as part of the Plan confirmation
process in order to extinguish all prepetition equity holders' interests. The
plaintiffs seek damages in excess of $10,000 on behalf of all prepetition
stockholders of Heartland, under theories of fraud, negligent misrepresentation,
unjust enrichment, breach of fiduciary duty, and constructive trust. The Company
believes the allegations to be without merit and intends to vigorously defend
this action on behalf of the director and officer defendants.
In December 2000, the Company entered into a definitive agreement to
acquire all of the MDS, MMDS and ITFS spectrum licenses, lease rights and other
assets of Smithco of Ft. Smith, Inc. and Smithco Investments of West Memphis,
Inc. in Fayetteville and Fort Smith, Arkansas for $3.5 million in common stock
of the Company. The transaction is subject to customary closing conditions,
including due diligence and receipt of all required regulatory approvals. We
expect to close this transaction in the second quarter of 2001.
In May 2000, the Company entered into a definitive agreement to acquire
all of the MDS, MMDS and ITFS spectrum licenses, lease rights and other assets
of Wireless Cable of Rockford, LLC and Allen Leeds in Rockfort, Illinois for
$5.6 million in common stock of Nucentrix and the assumption of $400,000 in BTA
debt. The Company currently is awaiting FCC approval of the assignment of the
Rockford BTA. There is no assurance that the Company will be able to obtain this
approval. If the Company does not receive such approval, or otherwise receive
confirmation from the FCC that the BTA is in good standing, the Company may
terminate or modify the purchase agreement. The transaction is subject to other
customary closing conditions including due diligence.
F-18
67
The FCC and other government organizations have initiated proceedings
to study, identify and authorize additional radio frequencies for third
generation, or "3G," mobile wireless services worldwide. Several frequency bands
are being studied in this process. One of the frequency bands under
consideration for such services is 2500 - 2690 MHz, in which the Company holds
substantially all of its MDS/MMDS/ITFS fixed wireless FCC licenses and spectrum
leases. The Company intends to vigorously oppose any effort to share or
reallocate any of its spectrum for 3G services. However, the Company cannot
predict how these various proceedings will be resolved. Nucentrix could be
required to share part or all of these frequencies with 3G mobile services, or
relocate part or all of its fixed wireless services to another frequency band.
It is impossible to determine at this time exactly what impact, if any, spectrum
sharing or relocation would have on the Company's consolidated financial
condition, results of operations or cash flows.
The Company also is a party to other legal and regulatory proceedings,
a majority of which are incidental to its business. In the opinion of
management, and after consideration for amounts recorded in the accompanying
condensed consolidated financial statements, the ultimate effects of such other
matters are not expected to have a material adverse effect on the consolidated
financial condition, results of operations or cash flows of the Company.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of Nucentrix's financial instruments at December 31, 2000 and 1999. 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:
2000 1999
---------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- -------- --------- ---------
Restricted assets-- investments in bank
certificates of deposit................. $ 600 $ 600 $ 650 $ 650
Note receivable from affiliate............ 2,759 2,759 3,212 3,212
Long-term debt............................ 14,961 15,464 16,516 16,516
The fair value of cash and cash equivalents, accounts receivable and
accounts payable approximate the carrying amounts of these assets and
liabilities because of the short maturity of these instruments.
The carrying value of bank certificates of deposit approximates fair
value since the term of the underlying deposits is short-term at the reporting
date. The carrying amount of note receivable from affiliate approximates fair
value since the interest rate equates to the market rate of interest. The fair
values of the long-term debt are based on management's estimates derived from
current rates offered for similar borrowings.
(14) SEGMENT REPORTING
Historically the Company has been considered to have a single
reportable segment: the distribution of subscription television services.
However, based on the Company's long-term business strategy to provide broadband
wireless services in its markets, the Company is considered to be comprised of
two reportable segments at the end of 2000: (i) distribution of subscription
television services and (ii) delivery of IP-based services. The Company measures
segment profit as EBITDA. EBITDA is defined as earnings before interest, taxes,
depreciation, and amortization. Information regarding operating segments as of
and for the years ended December 31, 2000 and 1999 is presented in the following
tables. For comparison purposes, references to the year ended December 31, 1999,
represent the combined amounts for the period of January 1, 1999, through the
Effective Date and the period from the Effective Date through December 31, 1999.
F-19
68
REVENUES INTERSEGMENT
FROM EXTERNAL REVENUE
CUSTOMERS (A) (EXPENSE) (B) EBITDA
--------------- ------------ ---------
YEAR ENDED
DECEMBER 31, 2000
Subscription television services segment $ 60,638 $ (4,449) $ 10,344
IP-based services segment 408 4,449 (9,473)
Other -- -- (1,073)
-------- --------- --------
Total $ 61,046 $ -- $ (202)
======== ========= ========
YEAR ENDED
DECEMBER 31, 1999
Subscription television services segment $ 70,386 $ (4,779) $ 9,912
IP-based services segment 89 4,779 (4,593)
Other -- -- (2,491)
-------- -------- --------
Total $ 70,475 $ -- $ 2,828
======== ======== ========
A reconciliation from the segment information to the loss before
reorganization costs and extraordinary item for the years ended December 31,
2000 and 1999 is as follows:
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999
--------- -----------
EBITDA (C) $ (202) $ 2,828
Depreciation and amortization (27,321) (25,271)
--------- ---------
Operating loss (27,523) (22,443)
Interest income 1,976 1,583
Interest expense (1,371) (1,147)
Other income (expense), net 4,839 485
Loss before reorganization costs --------- ---------
and extraordinary item $ (22,079) $ (21,522)
========= =========
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69
Total expenditures for additions to long-lived assets during the years
ended December 31, 2000 and 1999 are as follows:
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999
--------- -----------
Subscription television services segment $ 5,112 $ 14,162
IP-based services segment 4,701 778
Other 522 356
-------- --------
Total $ 10,335 $ 15,296
======== ========
TOTAL ASSETS AT
DECEMBER 31,
------------------------------
2000 1999
--------- -----------
Subscription television services segment $ 39,557 $ 53,634
IP-based services segment 77,295 80,822
Other 26,428 34,355
--------- ---------
Total $ 143,280 $ 168,811
========= =========
(A) Revenues from the subscription television services segment's agency
relationship with DIRECTV represent approximately $6.3 million and $4.3 million
of the Company's consolidated revenue for the years ended December 31, 2000 and
1999, respectively.
(B) Intersegment revenue (expense) represents a charge from the
IP-based services segment to the subscription television services segment for
the use of shared assets. The "other" category includes corporate expenses,
other income and assets not considered part of the two reportable segments.
(C) EBITDA. EBITDA, or earnings before interest, taxes, depreciation,
and amortization, is widely used by analysts, investors and other interested
parties in the Internet, cable television and telecommunication industries.
EBITDA is also widely accepted as a financial indicator of a company's ability
to incur and service indebtedness. EBITDA is not a financial measure determined
by generally accepted accounting principles and should not be considered an
alternative to net income as a measure of operating results or to cash flows as
a measure of funds available for discretionary or other liquidity purposes.
EBITDA may not be comparably calculated from one company to another.
F-21
70
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited financial data of Nucentrix for
each quarter of fiscal years 2000 and 1999.
SUCCESSOR
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
Year Ended December 31, 2000:
Revenues ............................................ $ 16,323 $ 15,818 $ 14,697 $ 14,208
Operating loss ...................................... (5,985) (7,390) (7,450) (6,698)
Net loss ............................................ (2,024) (7,149) (6,446) (6,460)
Net loss per common share--basic and
diluted .......................................... (0.20) (0.70) (0.63) (0.64)
PREDECESSOR SUCCESSOR
----------- ---------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ ------------
Year Ended December 31, 1999:
Revenues ............................................ $ 18,466 $ 17,269 $ 17,592 $ 17,148
Operating loss ...................................... (5,393) (5,551) (5,311) (6,188)
Net loss before extraordinary item .................. (7,600) (4,935) (5,845) (6,464)
Net loss per common share-- basic and
diluted .......................................... N/A (0.49) (0.58) (0.64)
During the fourth quarter of 1999, Nucentrix revised its method of
recognizing revenue from its agency relationships with DIRECTV and its
distributors. The effect of this change on the first, second and third quarters
of 1999 was an increase in reported revenues of $380,000, $458,000 and $1
million, respectively, and an increase in reported depreciation expense of
$151,000, $287,000 and $432,000, respectively. The effect of this change on
first quarter loss before extraordinary item was an increase of $229,000. The
impact of this change on the second and third quarters was a decrease in net
loss and loss per basic and diluted common share of $171,000 and $0.02, and
$568,000 and $0.06, respectively. These quarters have been restated to reflect
this change.
F-22
71
SCHEDULE II
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
---------- ----------- ----------- ----------- ----------
Description
Year ended December 31, 2000
Allowance for doubtful accounts ............ $ 407 688 -- (849)(a) $ 246
========= ========== ========== ========== =========
Valuation allowance for deferred
tax assets .............................. $ 162,802 -- -- (62,381)(b) $ 100,421
========= ========== ========== ========== =========
Year ended December 31, 1999
Allowance for doubtful accounts ............ $ 348 1,691 -- (1,632)(a) $ 407
========= ========== ========== ========== =========
Valuation allowance for deferred
tax assets .............................. $ 151,253 -- 11,549(b) -- $ 162,802
========== ========== ========== =========
Year ended December 31, 1998:
Allowance for doubtful accounts ............ $ 340 1,649 -- (1,641)(a) $ 348
========= ========== ========== ========== =========
Valuation allowance for deferred
tax assets .............................. $ 68,697 -- 82,556(b) -- $ 151,253
========== ========== ========== =========
- ----------
(a) Accounts written off.
(b) Recognized as a component of deferred tax assets.
S-1
72
INDEX TO EXHIBITS
Exhibits followed by an (*) constitute management contracts or compensatory
plans or arrangements.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 Registrant's Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code
(incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated
January 19, 1999).
2.2 Order Confirming Registrant's Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated
as of March 16, 1999 (incorporated by reference to Exhibit 2.2 to the Registrant's Registration
Statement on Form S-1, Registration No. 333-80929 (the "Form S-1")).
3.1 Amended and Restated Certificate of Incorporation of Registrant, (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 Form 10-Q")).
3.2 Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to the March 1999 Form
10-Q).
4.1 Specimen Nucentrix Broadband Networks, Inc. Stock Certificate (incorporated by reference to Exhibit
4.1 to the Form S-1).
4.2 Registration Rights Agreement dated as of April 1, 1999, between the Registrant and the selling
stockholders named therein (incorporated by reference to Exhibit 4.2 to the Form S-1).
10.1* Registrant's First Amended and Restated 1999 Share Incentive Plan (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, Registration No. 333- 79913).
10.2 Office Lease, dated April 10, 1996, between Merit Office Portfolio Limited Partnership and the
Registrant for the Registrant's Plano, Texas office (incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 ("June 1996 Form 10-Q")).
10.3 Cooperative Marketing Agreement between the Registrant and DIRECTV, dated November 12, 1997, and
the following related agreements between the Registrant and DIRECTV: Transport Agreement, DSS
Receiver Support Agreement and Subscriber Payment Agreement (incorporated by reference to Exhibit
10.16 to the Registrant's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1997
(the "1997 Form 10-K")).
10.4* Registrant's Performance Incentive Compensation Plan (incorporated by reference to Exhibit 10.17 to
the 1997 Form 10-K).
10.5* Employment Agreement between the Registrant and Carroll D. McHenry dated as of March 6, 1998
(incorporated by reference to Exhibit 10.18 to the 1997 Form 10-K).
10.6* Employment Agreement between the Registrant and J. Curtis Henderson dated as of April 8, 1998
(incorporated by reference to Exhibit 10.4 to the June 1998 Form 10-Q).
10.7* Employment Agreement between the Registrant and Frank H. Hosea dated as of November 3, 1998
(incorporated by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1998).
73
10.8* Nonqualified Stock Option Agreement between Registrant and Carroll D. McHenry dated as of April 1,
1999 (incorporated by reference to Exhibit 10.15 to the Form S-1).
10.9* Nonqualified Stock Option Agreement between Registrant and Russell A. Wiseman dated as of January
31, 2001 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2001).
10.10* Nonqualified Stock Option Agreement between Registrant and Russell A. Wiseman dated as of April 3,
2001 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001).
+10.11* Nonqualified Stock Option Agreement between Registrant and J. David Darnell dated as of November 1,
2000 (70,000 shares).
+10.12* Nonqualified Stock Option Agreement between Registrant and J. David Darnell dated as of November 1,
2000 (10,000 shares).
10.13* Nonqualified Stock Option Agreement between Registrant and J. Curtis Henderson dated as of April 1,
1999 (incorporated by reference to Exhibit 10.17 to the Form S-1).
10.14* Nonqualified Stock Option Agreement between Registrant and Frank H. Hosea dated as of April 1, 1999
(incorporated by reference to Exhibit 10.19 to the Form S-1).
10.15 Registrant's Warrant Agreement, dated as of April 1, 1999 (incorporated by reference to Exhibit
10.2 to the March 1999 Form 10- Q).
10.16 Master Agreement, dated as of December 2, 1998, among the Registrant, CS Wireless Systems, Inc. and
CAI Wireless Systems, Inc. (incorporated by reference to Exhibit 10.16 to the Registrants' Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K")).
+21.1 List of subsidiaries.
+23.1 Consent of KPMG LLP.
- ---------------
+ Filed herewith.