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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-23694
Nucentrix Broadband Networks, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 73-1435149
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4120 International Parkway, Suite 2000, Carrollton, Texas 75007-1906
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 662-4000
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check [X] 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Shares Outstanding
Class as of August 1, 2002
----- --------------------
Common Stock, $.001 par value 10,404,443
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
--------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents ............................... $ 11,556 $ 15,364
Restricted assets - investment in certificates of deposit 23 300
Subscriber receivables, net of allowance for
doubtful accounts of $116 and $137, respectively ...... 475 545
Other receivables ....................................... 1,063 510
Prepaid expenses and other .............................. 580 943
--------- ---------
Total current assets ......................... 13,697 17,662
Systems and equipment, net ...................................... 13,049 22,670
License and leased license investment, net ...................... 55,057 57,586
Lease receivable ................................................ 1,749 1,974
Other assets, net ............................................... 4,852 4,290
--------- ---------
Total assets ................................. $ 88,404 $ 104,182
========= =========
Current liabilities:
Accounts payable and accrued liabilities ................ $ 12,550 $ 12,627
Current portion of long-term debt
and capital lease obligations ......................... 2,516 2,423
--------- ---------
Total current liabilities .................... 15,066 15,050
--------- ---------
Long-term debt and lease obligations,
less current portion ..................................... 9,553 10,601
Other long-term liabilities ..................................... 5,233 4,878
Stockholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares
authorized; none issued ........................... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized; 10,404,443 and 10,402,814 shares issued
and outstanding at June 30, 2002 and December 31,
2001, respectively ............................... 10 10
Additional paid-in capital .............................. 153,775 153,822
Accumulated deficit ..................................... (95,233) (80,179)
--------- ---------
Total stockholders' equity ................... 58,552 73,653
--------- ---------
Commitments and contingencies
Total liabilities and stockholders' equity ... $ 88,404 $ 104,182
========= =========
See accompanying notes to condensed consolidated financial statements.
2
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues ..................................... $ 9,981 $ 12,608 $ 20,554 $ 26,524
-------- -------- -------- --------
Operating expenses:
System operations ................... 5,629 6,605 11,492 13,918
Selling, general and administrative . 5,429 6,913 10,996 14,242
Depreciation and amortization ....... 6,306 6,328 13,082 13,506
-------- -------- -------- --------
Total operating expenses ... 17,364 19,846 35,570 41,666
-------- -------- -------- --------
Operating loss ............. (7,383) (7,238) (15,016) (15,142)
Other income (expense):
Interest income ..................... 102 263 189 641
Interest expense .................... (269) (309) (551) (631)
Other ............................... 219 208 324 376
-------- -------- -------- --------
Total other income (expense) 52 162 (38) 386
-------- -------- -------- --------
Net loss ..................................... $ (7,331) $ (7,076) $(15,054) $(14,756)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.70) $ (0.69) $ (1.45) $ (1.44)
======== ======== ======== ========
Weighted average shares outstanding -
basic and diluted ......................... 10,404 10,328 10,403 10,278
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
-------- --------
Cash flows from operating activities:
$(15,054) $(14,756)
Net loss ......................................................
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................. 13,082 13,506
Gain on sale of assets .................................... (322) (310)
Write-down of Fresh Start intangible assets ............... -- 2,530
Stock-based compensation .................................. (47) 146
Changes in operating assets and liabilities:
Restricted cash ..................................... 277 281
Subscriber and other receivables .................... (443) 618
Prepaid expenses and other assets ................... (477) (1,767)
Accounts payable, accrued expenses and other
liabilities .................................. 527 (2,339)
-------- --------
Net cash used in operating activities .......... (2,457) (2,091)
-------- --------
Cash flows from investing activities:
Proceeds from sale of assets .................................. 221 287
Purchases of systems and equipment ............................ (727) (1,243)
Expenditures for licenses and leased licenses ................. (75) (242)
Proceeds from note receivable ................................. 205 186
-------- --------
Net cash used in investing activities .......... (376) (1,012)
-------- --------
Cash flows from financing activities:
Payments on short-term borrowings and notes payable ........... (214) (227)
Payments on long-term debt .................................... (761) (795)
-------- --------
Net cash used in financing activities .......... (975) (1,022)
-------- --------
Net decrease in cash and cash equivalents ............................. (3,808) (4,125)
Cash and cash equivalents at beginning of period ...................... 15,364 22,153
-------- --------
Cash and cash equivalents at end of period ............................ $ 11,556 $ 18,028
======== ========
Cash paid for interest ................................................ $ 488 $ 626
======== ========
See accompanying notes to condensed consolidated financial statements.
4
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(1) Description of Business
Nucentrix Broadband Networks, Inc. ("Nucentrix" or the "Company")
provides broadband wireless Internet and wireless subscription
television, or "wireless cable," services using up to approximately 200
megahertz ("MHz") of radio spectrum licensed by the Federal
Communications Commission ("FCC") in the 2.1 gigahertz ("GHz") and 2.5
GHz bands, primarily in medium and small markets across Texas, Oklahoma
and the Midwestern United States. The Company owns the basic trading
area ("BTA") authorization, or otherwise licenses or leases spectrum,
in 94 markets covering an estimated 8.9 million total households,
including one market covering an estimated 250,000 total households for
which the Company has entered into a definitive agreement to acquire.
On average, the Company owns or leases 152 MHz of spectrum per market.
This spectrum commonly is referred to as Multichannel Multipoint
Distribution Service, or "MMDS," and Instructional Television Fixed
Service, or "ITFS." The Company currently provides high-speed wireless
Internet access service in two markets, primarily to medium-sized and
small businesses, small offices/home offices and telecommuters.
Nucentrix also provides wireless cable services in 57 markets. In March
2002, as part of the Company's long-term plan to focus its use of
spectrum from wireless cable to broadband Internet and other advanced
wireless services, the Company announced the signing of agreements with
DIRECTV, Inc. ("DIRECTV"), Pegasus Satellite Television, Inc.
("Pegasus") and an affiliate of Time Warner Cable ("Time Warner Cable")
to convert substantially all of the Company's wireless cable
subscribers to programming provided by these entities.
(2) Liquidity and Capital Resources
The Company's condensed 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.
The Company has incurred operating losses since its inception. The
future growth of the Company's business by using its spectrum to
provide fixed, portable or mobile broadband Internet service will
require substantial investment in capital expenditures, and additional
capital will be required to implement the Company's long term strategy
of providing advanced wireless services in medium and small markets.
The Company currently is focused on validating the most efficient
technology platform from which to deliver its services, and during the
next six months the Company likely will seek to raise capital for
spectrum maintenance, operating expenses and/or to fund deployment.
There can be no assurance that additional capital will be available on
acceptable terms or in a timely manner.
As part of its long-term shift in strategic focus, in March 2002 the
Company announced the signing of agreements with DIRECTV, Pegasus and
Time Warner Cable to convert substantially all of its wireless cable
subscribers to programming provided by these entities. In exchange for
each subscriber converted, the Company will receive a conversion
payment and, in the case of subscribers converted to DIRECTV and
Pegasus, an equipment subsidy, installation payment and residual
royalty. As a result of these transactions, revenues and cash flows
from the Company's wireless cable business will decline substantially
as its wireless cable subscribers convert to DIRECTV, Pegasus or Time
Warner Cable or otherwise disconnect their service. Except for a
nominal residual royalty payment, the Company does not expect its
existing wireless cable subscriber base to generate material revenues
or cash flows for the Company after March 2003. Although the Company
intends to reduce expenditures associated with its wireless cable
business, ongoing costs of maintaining the Company's FCC spectrum
licenses and leases, as well as other corporate overhead, will exceed
recurring revenues as the Company implements this conversion program.
The Company is continuing to evaluate the technology for MMDS service,
the commitments by other MMDS operators to specific technology
platforms, the accessibility of capital markets, and the availability
of other sources
5
of financing. The Company expects that cash on hand and cash generated
from operations will be sufficient to fund operations in the normal
course of business at least through the first quarter of 2003. If the
Company is unable to obtain financing in a timely manner and on
acceptable terms, management has developed and intends to implement a
plan that would allow the Company to continue operations at least
through the second quarter of 2003. This plan would include reducing or
eliminating spectrum carrying and construction costs in non-strategic
markets, reducing corporate overhead (including personnel reductions)
and reducing or eliminating other discretionary expenditures. The
consolidated financial statements do not include any adjustments that
might result from the outcome of any of the uncertainties discussed
above.
(3) Principles of Consolidation
The condensed consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Significant
intercompany balances and transactions between the entities have been
eliminated in consolidation.
(4) Interim Financial Information
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all
adjustments, consisting only of those of a normal recurring nature
(other than adjustments recorded to the statements of operations for
the three and six months ended June 30, 2001, and statement of cash
flows for the six months ended June 30, 2001, as further discussed in
note 16 of the Company's consolidated financial statements included in
the Company's Annual Report on Form 10-K for 2001), necessary to
present fairly the Company's financial position as of June 30, 2002,
and the results of operations for the three and six months ended June
30, 2002 and 2001, and statements of cash flows for the six months
ended June 30, 2002 and 2001. These results are not necessarily
indicative of the results to be expected for the full fiscal year. The
accompanying financial statements are for interim periods and should be
read in conjunction with the 2001 audited consolidated financial
statements of the Company included in the Company's Annual Report on
Form 10-K for 2001.
(5) Net Loss Per Common Share - Basic and Diluted
The Company has presented basic and diluted loss per share, computed on
the basis of the weighted average number of common shares outstanding
during the period. Outstanding options to purchase 789,100 and 781,700
shares of common stock at June 30, 2002 and 2001, respectively, and
outstanding warrants to purchase 1,099,635 and 825,000 shares of common
stock at June 30, 2002 and 2001, respectively, were not included in the
computation of diluted loss per share because their effects are
antidilutive.
(6) Commitments and Contingencies
Nucentrix is a party to several purported class action lawsuits
alleging that it overcharged its customers for administrative late
fees. All of these lawsuits were filed by the same plaintiff's attorney
in various state and federal courts in Texas. Management believes these
actions to be without merit and intends 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 such 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
the Company's financial condition, results of operations or cash flows.
Nucentrix is involved in routine legal and regulatory proceedings
incident to its business. The Company does not believe that any other
pending legal or regulatory matter will have a material adverse effect
on its financial condition, results of operations or cash flows.
6
(7) Segment Reporting
The Company is considered to be comprised of two reportable segments:
(i) distribution of wireless cable services and (ii) delivery of
Internet protocol ("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 three and six months ended June 30, 2002 and
2001, is presented in the following tables (in thousands):
REVENUES INTERSEGMENT
FROM EXTERNAL REVENUE
CUSTOMERS (A) (EXPENSE)(B) EBITDA (C)
------------- ------------ ----------
THREE MONTHS ENDED
JUNE 30, 2002
Wireless cable services segment $ 9,857 $(722) $ 1,785
IP-based services segment 124 722 (2,514)
Other -- -- (348)
------- ----- -------
Total $ 9,981 $ 0 $(1,077)
======= ===== =======
THREE MONTHS ENDED
JUNE 30, 2001
Wireless cable services segment $12,468 $(927) $ 2,301
IP-based services segment 140 927 (2,744)
Other -- -- (467)
------- ----- -------
Total $12,608 $ 0 $ (910)
======= ===== =======
REVENUES INTERSEGMENT
FROM EXTERNAL REVENUE
CUSTOMERS (A) (EXPENSE)(B) EBITDA (C)
------------- ------------ ----------
SIX MONTHS ENDED
JUNE 30, 2002
Wireless cable services segment $20,303 $(1,511) $ 3,733
IP-based services segment 251 1,511 (4,984)
Other -- -- (683)
------- ------- -------
Total $20,554 $ 0 $(1,934)
======= ======= =======
SIX MONTHS ENDED
JUNE 30, 2001
Wireless cable services segment $26,250 $(1,904) $ 5,052
IP-based services segment 274 1,904 (5,884)
Other -- -- (804)
------- ------- -------
Total $26,524 $ 0 $(1,636)
======= ======= =======
A reconciliation from the segment information to the net loss for the three and
six months ended June 30, 2002 and 2001, is as follows:
7
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
------- ------- -------- --------
EBITDA (C) $(1,077) $ (910) $ (1,934) $ (1,636)
Depreciation and amortization (6,306) (6,328) (13,082) (13,506)
------- ------- -------- --------
Operating loss (7,383) (7,238) (15,016) (15,142)
Interest income 102 263 189 641
Interest expense (269) (309) (551) (631)
Other income (expense), net 219 208 324 376
------- ------- -------- --------
Net loss $(7,331) $(7,076) $(15,054) $(14,756)
======= ======= ======== ========
Total assets for the operating segments as of June 30, 2002, and
December 31, 2001, are as follows:
TOTAL ASSETS AT
-----------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Wireless cable services segment $14,854 $ 21,748
IP-based services segment 60,591 63,635
Other 12,959 18,799
------- --------
Total $88,404 $104,182
======= ========
(A) Revenues from the wireless cable services segment's agency relationship
with DIRECTV represent approximately $822,000 and $1 6 million of the
Company's consolidated revenue for the three and six months ended June
30, 2002, respectively.
(B) Intersegment revenue (expense) represents a charge from the IP-based
services segment to the wireless cable 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 operating
segments.
(C) 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
telecommunications industries. EBITDA is also a widely accepted
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.
8
(8) Acquisitions
In April 2002, the Company signed a letter of intent to acquire the
MMDS incumbent licenses and ITFS spectrum leases in Beaumont/Port
Arthur, Texas in a Chapter 11 bankruptcy proceeding, for $300,000 in
common stock of the Company as of the date of closing. In August 2002,
the parties mutually agreed to terminate the letter of intent.
(9) Change in Accounting Estimate
At December 31, 2001, the Company changed its estimated useful life on
systems and equipment for its wireless cable operations (subscriber
premises equipment, installation costs, transmission equipment, and
systems construction costs) from 3-10 years to 1 year, effective as of
January 1, 2002. The change increased net loss for the six months ended
June 30, 2002, by $3.9 million, or $0.38 per share. The change was made
to better reflect the estimated useful life of systems and equipment
and more accurately match depreciation expense with the future
estimated cash flows generated by these assets. The Company expects
decreasing future cash flows generated by its wireless cable systems
and equipment as a result of the conversion of the Company's wireless
cable subscribers discussed in note 2 above.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Quarterly Report on Form 10-Q, we will refer to Nucentrix
Broadband Networks, Inc., a Delaware corporation, as "the Company," "we," "us,"
and "our."
FORWARD-LOOKING STATEMENTS
This report 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," "continues," 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. These 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:
- our ability to obtain financing necessary to implement our business
strategy in a timely manner and on acceptable terms,
- the capabilities and availability of technology platforms for
commercial deployment of broadband wireless services over Multipoint
Distribution Service ("MDS"), Multichannel Multipoint Distribution
Service ("MMDS") and Instructional Fixed Service Television ("ITFS")
spectrum,
- competitive technologies, products and services,
- regulatory and interference issues, including the ability to obtain
and maintain MDS and MMDS licenses and MDS, MMDS and ITFS spectrum
leases, further rulemakings to address technical and interference
rules for mobile use of the 2500 - 2690 megahertz ("MHz") band (or "2.5
GHz" band), and further rulemakings to address relocation of licenses
in the 2150 - 2162 MHz band (or "2.1 GHz" band),
- business and economic conditions in our existing markets,
- with respect to pending transactions, executing definitive agreements,
satisfying our due diligence efforts and obtaining required third
party consents, including consent of the Federal Communications
Commission ("FCC"), and
- those matters discussed specifically under Item 1, "Business - Risk
Factors" and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A")" in our Form
10-K for the year ended December 31, 2001, filed with the Securities
and Exchange Commission on May 8, 2002.
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 report. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
We provide broadband wireless Internet and wireless subscription
television services using up to approximately 200 MHz of radio spectrum licensed
by the FCC in the 2.1 GHz and 2.5 GHz bands, primarily in medium and small
markets across Texas, Oklahoma and the Midwestern United States. We own the
basic trading area ("BTA") authorization, or otherwise license or lease MDS,
MMDS and ITFS spectrum, in 94 markets covering an estimated 8.9 million total
households, including one market covering an estimated 250,000 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. We often refer to our frequencies
collectively in this document as "MMDS."
The FCC has allocated the 2.5 GHz band for flexible use, making this
band available for advanced fixed, portable
10
and mobile services, including mobile 3G wireless systems. The flexible use
allocation is subject to the protection of existing fixed wireless licenses in
the 2.5 GHz band from interference.
Our long-term business strategy is to provide fixed, portable and,
ultimately, mobile broadband Internet access and other information services
using our high-capacity MMDS radio spectrum in medium and small markets. Our
expected range of services includes high-speed Internet connectivity that is
integrated with wireless Local Area Networks for businesses and Home Area
Networks for residential users, to distribute broadband services throughout a
customer's business and home. We currently provide high-speed wireless Internet
access service to 420 accounts in Austin and Sherman-Denison, Texas. These
accounts primarily are medium-sized and small businesses, small offices/home
offices ("SOHOs") and telecommuters. Our current 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 e-mail,
Web hosting and design, and domain name service.
We believe we are well positioned to bring advanced wireless services
to our medium and small markets, due to the relatively large amount of spectrum
(an average of 152 MHz per market) that we hold. We currently are focused on
validating the most efficient technical platform from which to deliver our
services and, during the next six months, we likely will seek to raise capital
for spectrum maintenance, operating expenses and/or to fund deployment. There
can be no assurance that additional capital will be available on acceptable
terms or in a timely manner.
We currently do not plan to launch additional Internet markets with
existing first generation technology. We believe that a "next generation"
technology platform that (1) addresses line-of-sight limitations that exist in
current generation equipment, (2) allows customers to install and upgrade their
customer premises equipment themselves, and (3) is cost effective to deploy,
must become commercially available before launching broadband services in
additional markets. We are continuing to evaluate the development of next
generation MMDS technology platforms, including a technology trial in one of our
markets. In addition, we are continuing to monitor the commitments by other MMDS
operators to next generation technology platforms. We also are evaluating the
accessibility of capital markets, and the availability of other sources of
financing. Until we are able to deploy a next generation technology platform
that meets our cost and performance criteria, and have obtained financing on
satisfactory terms and conditions, we intend to continue to look for
efficiencies, maximize our cash resources and preserve strategic spectrum
resources. This likely will result in deployment of no new Internet markets in
2002. See "Future Cash Requirements" in this report.
Historically, we have used our spectrum to provide wireless
subscription television services, commonly referred to as "wireless cable." We
presently have wireless cable transmission facilities constructed and operating
in 57 markets in eight states. At July 31, 2002, we had approximately 61,600
wireless cable customers, including approximately 59,600 customers who
subscribed only to programming service provided over our MMDS spectrum, and
2,000 "combo" subscribers who subscribed to both our MMDS programming service
and to DIRECTV, Inc. ("DIRECTV") programming service sold by us. In addition, at
July 31, 2002, there were approximately 23,500 customers who received only
DIRECTV programming sold by us.
We have marketed and sold DIRECTV digital broadcast satellite
programming as a commissioned sales agent for DIRECTV since 1998. We currently
market and sell DIRECTV programming under an agreement with DIRECTV entered into
in February 2001. DIRECTV pays us an up-front and a residual commission for each
subscriber to whom we sell a DIRECTV programming package. We also receive
certain equipment subsidies from DIRECTV - approved equipment providers. Our
agreement with DIRECTV expires in February 2006. The up-front commissions we
receive from DIRECTV are subject to a chargeback that we pay DIRECTV if the
subscriber terminates, cancels or disconnects service before the end of one
year. The amount of the chargeback is prorated based on the length of time
remaining in the one-year chargeback period. Residual commissions are payable to
us until the earlier of (1) disconnection or termination of the subscriber, (2)
termination or expiration of our agreement with DIRECTV, or (3) five years after
activation of the subscriber. Our failure to achieve certain subscriber
benchmarks during any calendar year of our agreement with DIRECTV would result
in a reduction of the residual commission for the next calendar year. This sales
agency agreement applies only to new DIRECTV subscribers procured by the
Company. As discussed below, we plan to convert our existing wireless cable
subscribers to
11
satellite programming provided by DIRECTV and Pegasus Satellite Television, Inc.
("Pegasus"), and cable programming provided by an affiliate of Time Warner Cable
("Time Warner Cable").
Our business strategy contemplates a decline in wireless cable
subscribers, DIRECTV subscribers, revenues, and cash flows in 2002 and beyond,
as we allocate most of our resources to develop our broadband wireless Internet
access and other advanced wireless services. As a result of our previously
announced strategic shift in the use of our spectrum from analog video service
to digital broadband wireless Internet and other advanced wireless services, in
March 2002 we announced the signing of agreements with DIRECTV, Pegasus and an
affiliate of Time Warner Cable to convert substantially all of our wireless
cable subscribers to programming provided by these entities. In exchange for
each subscriber converted, we will receive a conversion payment and, in the case
of subscribers converted to DIRECTV and Pegasus, an equipment subsidy,
installation payment and residual royalty. As a result of these transactions,
revenues and cash flows from our wireless cable business will decline
substantially as our wireless cable subscribers convert to DIRECTV, Pegasus or
Time Warner Cable or otherwise disconnect their service. Except for a nominal
residual royalty payment, we do not expect our existing wireless cable
subscriber base to generate material revenues or cash flows for the Company
after March 2003. Although we intend to reduce expenditures associated with our
wireless cable business, ongoing costs of maintaining our FCC spectrum licenses
and leases, as well as other corporate overhead, will exceed recurring revenues
as we implement this conversion program. At July 31, 2002, we had converted a
total of approximately 4,600 wireless cable customers to programming provided by
DIRECTV, Pegasus and Time Warner Cable.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2001.
Revenues; Subscribers. Our revenues consist primarily of monthly fees
paid by wireless cable subscribers for basic programming, premium programming,
equipment rental, and other miscellaneous fees, revenue from our agency
relationship with DIRECTV, and revenues from the conversion program discussed
above under "Overview." Revenues also include fees generated from 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 for the three months and six months ended June 30, 2002
and 2001.
Subscription revenues from wireless cable subscribers and continuing
monthly service fees from DIRECTV for each DIRECTV customer generated are
recognized as service is provided. If the Company does not meet minimum
subscriber benchmarks each year, the DIRECTV continuing monthly service fee will
be reduced. Management currently does not expect that any such reduction would
have a material effect on the Company's financial condition, results of
operations or cash flows.
Wireless cable and DIRECTV installation revenue, and revenue received
from our agency relationship with DIRECTV (except for continuing monthly service
fees, which are recognized as received), is recognized to the extent of direct
selling costs incurred, and the remainder is deferred and amortized to income
over the expected subscriber relationship period of one year for wireless cable
installation revenue and three years for DIRECTV installation and agency
revenue. A chargeback reserve is recorded for DIRECTV contingencies in the event
that a subscriber terminates, cancels or disconnects his or her DIRECTV
subscription within 12 months.
Our revenues for the second quarter of 2002 were $10 0 million,
compared to $12 6 million for the second quarter of 2001. Revenues for the six
months ended June 30, 2002, were $20 6 million, compared to $26 5 million for
the same period last year. The average number of wireless cable subscribers for
the three months ended June 30, 2002, was 71,161 compared to 97,821 for the same
period of 2001. For the six months ended June 30, 2002, the average number of
wireless cable subscribers was 74,420 compared to 101,197 for the six months
ended June 30, 2001. In addition, during the three and six months ended June 30,
2002, we had 23,582 and 24,537 average subscribers who received only DIRECTV
programming sold by us. As of January 1, 2000, we do not include these customers
in our reported wireless cable 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.
The decrease in revenues for the three and six months ended June 30,
2002, resulted primarily from fewer total
12
wireless cable subscribers as we reduced sales and marketing relating to our
wireless cable services and began converting our wireless cable subscribers to
programming provided by DIRECTV, Pegasus and Time Warner Cable. Recurring
average revenue per subscriber was $38.30 for the three and six months ended
June 30, 2002, compared to $36.48 and $36.31 for the same periods last year.
Internet service revenues for the three and six months ended June 30, 2002 and
2001 were not material.
System Operations Expense. Systems operations expense includes spectrum
lease payments, programming costs, labor and overhead relating to service calls
and disconnects, transmitter site and tower rentals, certain repairs and
maintenance expenditures, and Internet service costs. Programming costs (with
the exception of minimum payments), spectrum lease payments (with the exception
of certain fixed payments), and repairs and maintenance are variable expenses
based on the number of subscribers. Systems operations expense was $5.6 million,
or 56.4% of revenues, for the second quarter of 2002, compared to $6.6 million,
or 52.4% of revenues, for the same period in 2001. For the six months ended June
30, 2002, systems operations expense was $11.5 million, or 55.9% of revenues,
compared to $13.9 million, or 52.5% of revenues, for the comparable prior year
period. System operations expense decreased over both periods primarily due to
lower programming expense as a result of fewer subscribers.
Selling, General and Administrative (SG&A) Expense. SG&A expenses
include office and administrative costs of operating our 57 wireless cable
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. In addition, the direct incremental
costs incurred in generating a customer relationship with DIRECTV, comprised of
material, equipment and labor, are recorded as an asset. This asset, referred to
as "subscriber acquisition costs," is amortized as a component of SG&A expense
over the estimated subscriber relationship period of three years.
SG&A expense for the second quarter of 2002 was $5.4 million, or 54.4%
of revenues, compared to $6.9 million, or 54.8% of revenues, for the same period
last year. For the six months ended June 30, 2002, SG&A expense was $11.0
million, or 53.5% of revenues, compared to $14.2 million, or 53.7% of revenues,
for the same period last year. SG&A expense for the three and six months ending
June 30, 2002, included $1.1 million and $2.2 million in costs associated with
our Internet operations SG&A expense for the three and six months ending June
30, 2001 included $1.9 million and $3.3 million in costs associated with our
Internet operations. These costs primarily consist of (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.
SG&A expense decreased over the periods presented due to lower
advertising and field administrative costs in our wireless cable markets
resulting from lower subscriber counts as we began converting our wireless cable
subscriber base to programming provided by DIRECTV, Pegasus and Time Warner
Cable. In addition, start-up and general and administrative costs related to our
broadband wireless Internet business, which were principally incurred in the
first quarter of 2001, decreased in the current year following a reduction in
force and a delay in availability of a next generation technology platform.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and capitalized installation
costs, and amortization of license and leased license investment. Our policy is
to capitalize the direct costs of wireless cable installations. These direct
costs include reception materials and equipment on subscriber premises and
installation labor. These direct costs are capitalized as systems and equipment
and amortized over the estimated remaining life of 12 months. The
non-recoverable portion of the cost of a wireless cable installation becomes
fully depreciated upon disconnection of the subscriber. License and leased
license investment includes costs incurred to acquire and/or develop MMDS and
ITFS spectrum rights. These costs are capitalized and amortized over the
estimated remaining life of 10 years.
Depreciation and amortization expense was $6.3 million and $13.1
million for the three and six months ended June 30, 2002, compared to $6.3
million and $13.5 million for the same periods last year. Depreciation and
amortization expense decreased during the current year due to fewer disconnects
in 2002 compared to 2001. When subscribers are disconnected, the remaining
balance of non-recoverable equipment related to that installation is written off
to depreciation expense. Depreciation and amortization also decreased due to a
$14.1 million impairment charge in the fourth quarter of 2001 to write down
systems and equipment and license and leased license investment to estimated
fair value. This decrease was offset by
13
increased depreciation as a result of the Company changing its estimated useful
life for systems and equipment relating to its wireless cable operations from
3-10 years to one year. See note 9 of the financial statement footnotes for this
report.
Operating Loss. We generated operating losses of $7.4 million and $15.0
million for the three and six months ended June 30, 2002, compared to operating
losses of $7.2 million and $15.1 million for the three and six months ended June
30, 2001. Operating loss increased slightly for the three months ending June 30,
2002, due to lower revenue from fewer wireless cable subscribers, partially
offset by savings from lower programming costs, lower advertising and field
administrative costs in our wireless cable markets, and lower start-up and
general and administrative costs related to our Internet business. For the six
months ending June 30, 2002, operating loss decreased slightly due to lower
depreciation and amortization expense discussed above.
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 telecommunications industries. EBITDA is
also a widely accepted 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. EBITDA was a negative $1.1
million and a negative $1.9 million for the three and six months ended June 30,
2002, compared to a negative $910,000 and a negative $1.6 million for the same
periods in 2001. The decrease in EBITDA over the periods presented was
attributable primarily to decreased revenues from our wireless cable business,
partially offset by lower SG&A expense and systems operations expense discussed
above.
Interest Income. Interest income was $102,000 and $189,000 for the
three and six months ended June 30, 2002, compared to $263,000 and $641,000 for
the same periods last year. The decrease in interest income was due to higher
earnings during the prior year on larger unrestricted cash balances.
Interest Expense. We incurred interest expense of $269,000 and $551,000
for the three and six months ended June 30, 2002, compared to $309,000 and
$631,000 for the same periods last year. Interest expense decreased in 2002 due
to lower principal balances on our BTA debt and capital leases.
Other Income (Expense). Other income was $219,000 and $324,000 for the
three and six months ended June 30, 2002, compared to $208,000 and $376,000 for
the same periods of 2001. Other income in the current year primarily includes
recognition of a deferred gain related to the sale-leaseback of our
communications towers during 1999 and 2000, and $114,000 in gain recognized on
the conversion of our wireless cable subscribers to programming provided by Time
Warner Cable. Other income in the prior year includes recognition of a deferred
gain related to the sale-leaseback of our communications towers, as well as a
$100,000 gain from the sale of our equity interest in a Mexican MMDS company.
Net Loss. We have recorded net losses since our inception. Net loss for
the three and six months ended June 30, 2002, was $7.3 million ($0.70 per share)
and $15.1 million ($1.45 per share), compared to $7.1 million ($0.69 per share)
and $14.8 million ($1.44 per share) for the same periods last year. The increase
in net loss over the periods presented resulted primarily from increased
operating loss and lower interest income, as discussed above.
14
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 video operating systems and two
Internet 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 spectrum 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 and the FCC's flexible use authorization
will allow us to use our spectrum to provide fixed, portable and, ultimately,
mobile 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 broadband data and voice
communications services will require substantial investment in capital
expenditures.
Cash used in operations was $2.5 million during the six months ended June
30, 2002, compared to $2.1 million during the same period in 2001. Cash used in
operations in the current period was primarily from our net loss of $15.1
million, offset by depreciation and amortization of $13.1 million, and payment
of accrued property taxes and other liabilities. Cash used in operations for the
first six months of 2001 was primarily from our net loss of $14.8 million,
offset by depreciation and amortization of $13.5 million, and from increased
subscriber acquisition costs related to our DIRECTV agency relationship,
severance payments related to a reduction in force and payments of accrued
property taxes and other liabilities.
Cash used in investing activities was $376,000 during the six months ended
June 30, 2002, compared to $1.0 million during the same period in 2001. Cash
used in investing activities during both periods include the acquisition and
installation of subscriber equipment, and expenditures for engineering, legal,
site acquisition, and other costs related to the acquisition of MMDS spectrum
rights.
Cash used in financing activities was $975,000 during the six months ended
June 30, 2002, compared to $1.0 million for the same period in 2001. Cash used
in financing activities during both periods was for payments on our BTA debt and
capital lease obligations.
At July 31, 2002, we had approximately $11.0 million of unrestricted cash
and cash equivalents and $23,000 in restricted cash representing collateral
securing various outstanding letters of credit to certain of our vendors.
FUTURE CASH REQUIREMENTS
Our goal is to become a leading provider of advanced wireless services in
our markets. To implement our long-term business strategy we intend to first
offer high-speed fixed and portable broadband Internet access to medium-sized
and small businesses, SOHOs, telecommuters, and residential consumers in our
markets. Subject to market demand, technological developments and interference
regulations, a flexible use allocation in the 2.5 GHz band could allow us
ultimately to offer mobile 3G and voice services.
The growth of our business by using our spectrum to provide fixed,
portable or mobile broadband Internet service will require substantial
investment in capital expenditures. We expect that next generation MMDS
technology will provide greater coverage capabilities by addressing
line-of-sight limitations that exist in current equipment, and will allow
customers to install and upgrade customer premises equipment themselves. These
improvements should allow us to reduce subscriber-related costs and operating
expenses; however, the development and launch of broadband wireless MMDS
networks will be capital intensive, and additional capital will be required to
implement our long-term strategy of providing advanced wireless services in
medium and small markets.
We estimate that a launch of a next generation broadband wireless system
providing high-speed Internet access in a typical market will involve an initial
expenditure of approximately $500,000 to $1.5 million 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 $500 and $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
15
fees. Other launch costs include the cost of securing adequate space for
marketing and operational facilities, 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.
As part of our long-term plan to focus on the use of our spectrum for
broadband Internet and other advanced wireless services, in March 2002 we
announced agreements to convert substantially all of our wireless cable
subscribers to DIRECTV, Pegasus and Time Warner Cable. As a result of this
strategic shift in the focus of our business, revenues and cash flows from our
wireless cable business will decline substantially as our wireless cable
subscribers convert to DIRECTV, Pegasus or Time Warner Cable or otherwise
disconnect their service with us. Except for a nominal residual royalty payment
and recognition of deferred revenue related to cash received at the time of
conversion, we do not expect our existing wireless cable subscriber base to
continue to generate material revenues or cash flows for the Company after March
2003. Although we intend to reduce expenditures associated with our wireless
cable business, ongoing costs of maintaining our FCC spectrum licenses and
leases, as well as other corporate overhead, will exceed revenues as we
implement the conversion program.
We are continuing to evaluate the development of technology for MMDS
service, the commitments by other MMDS operators to specific technology
platforms, the accessibility of capital markets, and the availability of other
sources of financing. However, until we are able to deploy a technology platform
that meets our cost and performance criteria, and have obtained financing on
satisfactory terms and conditions, we intend to continue to look for
efficiencies, maximize our cash resources and preserve strategic spectrum
resources. This likely will result in deployment of no new Internet markets in
2002.
We also are continuing to evaluate our near- and long-term capital needs,
and likely will seek additional capital during the next six months. 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. We expect that cash on hand of $11.0 million at July 31, 2002, and cash
generated from operations, with no additional financing, will be sufficient to
fund operations in the normal course of business at least through the first
quarter of 2003. If the Company is unable to obtain financing in a timely manner
and on acceptable terms, management has developed and intends to implement a
plan that management believes will allow the Company to continue operations at
least through the second quarter of 2003. This plan would include reducing or
eliminating spectrum carrying and construction costs in non-strategic markets,
reducing corporate overhead (including personnel reductions) and reducing or
eliminating other discretionary expenditures. The consolidated financial
statements do not reflect any adjustments that might result from the outcome of
any uncertainty discussed in this report.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require the
Company to make estimates and assumptions. The Company's significant accounting
policies and methods used in the preparation of the consolidated financial
statements are discussed in note 1 of the notes to consolidated financial
statements of the Company's Annual Report on Form 10-K for 2001. The Company
believes that of its significant accounting policies, the following may involve
a higher degree of judgment and complexity.
Revenues consist primarily of monthly fees paid by wireless cable
subscribers for basic programming, premium programming, equipment rental, and
other miscellaneous fees, and revenues from our agency relationship with DIRECTV
(which include revenues from DIRECTV from the conversion program discussed above
in "Overview"). Revenues also include fees generated from Internet operations in
Austin and Sherman-Denison, Texas.
Subscription revenues from wireless cable subscribers and continuing
monthly service fees from DIRECTV for each DIRECTV customer generated are
recognized as service is provided. If the Company does not meet minimum
subscriber benchmarks each year, the DIRECTV continuing monthly service fee will
be reduced.
Wireless cable and DIRECTV installation revenue, and revenue received from
our agency relationship with
16
DIRECTV (except for continuing monthly service fees, which are recognized as
received), is recognized to the extent of direct selling costs incurred, and the
remainder is deferred and amortized to income over the expected subscriber
relationship period of one year for wireless cable revenue and three years for
DIRECTV installation and agency revenue. A chargeback reserve is recorded for
all DIRECTV contingencies.
The direct costs of wireless cable installations include reception
materials and equipment on subscriber premises and installation labor, which are
capitalized as systems and equipment and amortized over the estimated remaining
life of 12 months. The non-recoverable portion of the cost of a wireless cable
installation becomes fully depreciated upon disconnection of the subscriber.
License and leased license investment includes costs incurred to acquire and/or
develop MMDS and ITFS spectrum rights. These costs are capitalized and amortized
over the estimated remaining life of 10 years.
The direct incremental costs incurred in generating a customer
relationship with DIRECTV, comprised of material, equipment and labor, are
recorded as an asset. This asset, referred to as "subscriber acquisition costs,"
is amortized as a component of SG&A expense over the expected subscriber
relationship period of three years.
Our revenue recognition for wireless cable and DIRECTV installation
revenue, amortization of the recoverable portion of direct costs of wireless
cable installations, and subscriber acquisition costs for DIRECTV subscribers is
based on assumptions regarding our estimated subscriber term. The estimated
subscriber term of one year for wireless cable installations is based on the
Company's expected conversion of wireless cable subscribers to programming
provided by DIRECTV, Pegasus and Time Warner Cable. The estimated subscriber
term of three years for DIRECTV subscribers is based on historic subscriber
churn rates. If different estimated subscriber terms were used, the revenue
amounts reported could be materially different than amounts reported in this
report, and if the estimated subscriber terms change in future years, the
amounts reported in future years would not be comparable to the years reported
in this report.
Our long-term operating assets, which include headend and base station
equipment, are recorded at cost and amortized on a straight-line basis over the
estimated remaining life of 12 months. Our licenses and leased license
investments, which include costs incurred to acquire and/or develop MMDS and
ITFS spectrum rights, are amortized from the inception of service in each market
over the estimated remaining life of 10 years. In August 2001, the FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. While SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets
to be Disposed Of," it retains many of the fundamental provisions of that
statement. SFAS 144 becomes effective for fiscal years beginning after December
15, 2001, and has been adopted by the Company effective January 1, 2002. The
adoption of SFAS 144 did not have a material impact on the Company's
consolidated financial condition, results of operations or cash flows.
COMMITMENTS AND CONTINGENCIES
We are a party to several purported class action lawsuits alleging that we
overcharged our customers for administrative late fees. We believe the lawsuits
are 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
we do not expect such an adverse outcome, we believe that an adverse outcome in
one or more of these proceedings could have a material adverse effect on our
consolidated financial condition, results of operations or cash flows. For a
more detailed discussion of legal matters, see Item 3, "Legal Proceedings."
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 $6.0 million in
common stock and assumption of BTA debt. In October 2001, the FCC dismissed the
BTA owner's application for consent to assign the Rockford BTA to the Company.
As a result, the Company or the BTA owner may terminate the purchase agreement,
or the parties may determine to modify the agreement. In November 2001, the BTA
owner filed a Petition for Reconsideration of the FCC's decision. If the parties
determine to proceed, the transaction will be subject to other customary closing
conditions including due diligence.
CONTRACTUAL OBLIGATIONS
17
The Company's contractual obligations include long-term debt (primarily
related to BTA installment notes), capital lease obligations (primarily related
to tower leases), operating leases (primarily related to spectrum leases), and
other long-term obligations (purchase installments for spectrum license
acquisitions and settlement payments), as summarized below.
Payments Due by Year
(in thousands)
Total 2002 2003-2004 2005-2006 After 2006
----- ---- --------- --------- ----------
Long-term debt ............ $ 9,808 $ 1,393 $ 4,119 $ 4,296 $ --
Capital lease obligations . 3,837 229 954 1,013 1,641
Operating leases .......... 51,320 2,909 9,593 8,235 30,583
Other long-term obligations 572 347 225 -- --
------- ------- ------- ------- -------
$65,537 $ 4,878 $14,891 $13,544 $32,224
======= ======= ======= ======= =======
In May 2002, we suspended payment to the FCC on installment notes covering
27 non-strategic BTAs. The total outstanding principal balance on these notes is
approximately $2.0 million. Quarterly payments of principal and interest due
under these notes are approximately $140,000. FCC rules provide for a grace
period of six months to make overdue installment payments, subject to payment of
a late fee of between 5%-10% of the installment that is owed. Accordingly, we do
not expect that the FCC would consider these notes in default until November 30,
2002. The suspension of payments on these 27 non-strategic BTAs and any
subsequent disposition or default will not affect our rights under our other
BTAs or spectrum licenses or leases. We currently are in the process of
attempting to sell or assign these BTAs. If we are unable to sell or assign the
BTAs, we intend to discuss the disposition of the BTAs with the FCC. The
outstanding principal balance continues to be reflected in the long-term debt
portion of the above table, pending the sale or assignment of these BTAs, our
discussions with the FCC or the expiration of the FCC's grace period.
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.
TRANSACTIONS
In April 2002, the Company signed a letter of intent to acquire the MMDS
incumbent licenses and ITFS spectrum leases in Beaumont/Port Arthur, Texas in a
Chapter 11 bankruptcy proceeding, for $300,000 in common stock of the Company as
of the date of closing. In August 2002, the parties mutually agreed to terminate
the letter of intent.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in marketable securities (which
consist of certificates of deposit). At June 30, 2002, our marketable securities
were recorded at a fair value of approximately $23,000, with an overall weighted
average return of approximately 2% and an overall weighted average life of less
than one 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 20 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 June 30, 2002. The fair value of our long-term
debt at June 30, 2002, is estimated to be $9.8 million based on the overall rate
of the long-term debt of 9.5% and an overall maturity of four years compared to
terms and rates currently available in long-term financing markets. To date we
have not entered into any
18
derivative financial instruments to manage interest rate risk and currently are
not evaluating the future use of any such financial instruments.
We do not currently have any exposure to foreign currency transaction
gains or losses. All other business transactions are in U.S. dollars.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in certain legal proceedings as described in note (6) of
the notes to condensed consolidated financial statements included in Part I,
Item 1 of this report, which is incorporated herein by reference, in Item 3
"Legal Proceedings" in our Annual Report on Form 10-K for 2001 and in Part II,
Item 1, "Legal Proceedings," in our Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002.
Nucentrix is a party to several purported class action lawsuits alleging
that we overcharged our customers for administrative late fees. These lawsuits
were filed by the same plaintiff's attorney in various state courts in Texas.
Management believes these actions to be without merit and intends to vigorously
defend them. Developments in these and other lawsuits during the second quarter
2002 are discussed below.
- - In June 2002, the U.S. District Court for the Southern District of Texas,
Corpus Christi Division, dismissed with prejudice the plaintiff's claims
that we violated the notice and privacy provisions of the Cable
Communications Act in Santellana v. Nucentrix Broadband Networks, Inc. and
DIRECTV, Inc. (C-02-079).
- - In June 2002, the U.S. Circuit Court of Appeals for the 5th Circuit
affirmed the U.S. District Court's dismissal of the plaintiff's claims
that the collection of late fees violated the federal Racketeering
Influenced and Corrupt Organizations Act, or RICO, in Nolen, et al. v.
Nucentrix Broadband Networks, Inc., et al. (L-00CV134).
- - In May 2002, the Court of Appeals for the 13th District of Texas denied
the plaintiff's appeal of the lower court's dismissal of her claims that
we violated various federal and state warranty laws in Santellana v.
Nucentrix Broadband Networks, Inc. (S-01-6109-CV-B).
- - In April 2002, the U.S. District Court for the Southern District of Texas,
Corpus Christi division, dismissed with prejudice the plaintiff's claims
that we violated federal consumer lease and credit laws in Ysasi and
Garcia v. Nucentrix Broadband Networks, Inc., DIRECTV, Inc., et al.
(C-02-001), and dismissed the plaintiff's similar state law claims (which
were supplemental to the federal claims) without prejudice.
- - In April 2002, the plaintiff in Torres v. Nucentrix Broadband Networks,
Inc. (01-61022-1), County Court at Law No. 1, Nueces County, Texas,
voluntarily withdrew this lawsuit regarding late fees.
19
While it is not feasible to predict or determine the final outcome of the
remaining proceedings or to estimate the amounts or potential range of loss with
respect to such 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 the Company's financial
condition, results of operations or cash flows.
We also are a party, from time to time, to routine litigation incident to
our business. We do not believe that any other pending litigation matter will
have a material adverse effect on our financial condition, results of operations
or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2002, we issued warrants ("Warrants") to
purchase 274,635 shares of our common stock to the holders of equity interests
of our predecessor, Heartland Wireless Communications, Inc. ("Heartland"). Each
Warrant entitles the holder to purchase one share of our common stock, par value
$.001 per share, in exchange for an exercise price of $27.63 per Warrant,
subject to downward adjustment from $24.74 to $21.65 per Warrant in the event of
a sale or merger of the Company. The Warrants expire in October 2007. In
addition, during the quarter ended June 30, 2002, we issued 1,629 shares of
common stock to the holder of certain prepetition claims against Heartland in
satisfaction of such claims.
These securities were issued pursuant to Heartland's Plan of
Reorganization ("Plan") under Section 1145(a) of the U.S. Bankruptcy Code
("Bankruptcy Code") and, accordingly, are exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended ("Securities
Act"). However, under 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on June 28,
2002, for the purpose of electing a board of directors and ratifying the
appointment of independent auditors. Proxies for the meeting were solicited
under Regulation 14A of the Securities Exchange Act of 1934 and there was no
solicitation in opposition to the board of directors' solicitations.
All of the nominees for directors as listed in the Proxy Statement dated
May 30, 2002, were elected with the following vote:
Shares Voted Shares Broker
"For" "Withheld" Non-Votes
------------ ------------ ------------
Richard B. Gold 8,765,780 6,668 -0-
Carroll D. McHenry 8,655,961 116,487 -0-
Steven D. Scheiwe 8,765,780 6,668 -0-
Neil S. Subin 8,765,780 6,668 -0-
R. Ted Weschler 8,765,780 6,668 -0-
The appointment of King Griffin & Adamson P.C. as independent auditors for 2002
was ratified by the following vote:
Shares Voted Shares Voted Shares
"For" "Against" Abstaining Broker Non-Votes
- --------------- ------------- ------------ -----------------
8,765,833 4,929 1,686 -0-
20
ITEM 5. OTHER INFORMATION
SPECTRUM ALLOCATION PROCEEDINGS FOR ADVANCED WIRELESS SERVICES
In the fourth quarter of 2000, the FCC and other government organizations
initiated proceedings to study, identify and authorize additional radio
frequencies for advanced wireless services, including 3G mobile wireless
services. Several frequency bands were studied in this process. One of the
frequency bands under consideration for such services was the 2.5 GHz band, in
which we hold substantially all of our MDS/MMDS/ITFS wireless FCC licenses and
spectrum leases. In September 2001, the FCC adopted an order not to relocate
incumbent license holders and operators in the 2.5 GHz band, such as Nucentrix,
to other frequency bands. The FCC also added a flexible use allocation to the
2.5 GHz band, making this band available for advanced mobile services, including
3G wireless systems.
The 2.1 GHz band, however, remains under consideration for relocation for
3G services. In July 2002, the Commerce Department's National Telecommunications
and Information Administration ("NTIA"), in conjunction with the FCC, Department
of Defense, and other federal government agencies, issued a report on the
viability of making all or a portion of the 1710-1770 MHz and 2110-2170 MHz
bands available for 3G services. This report concluded that 90 MHz of this
spectrum can be allocated for 3G services to meet increasing demand for new
services without disrupting communications systems critical to national
security. The report proposed that 90 MHz would come from the 1710-1755 MHz band
and a matching 45 MHz from the 2110-2170 MHz band.
We currently use spectrum at 2150-2160 MHz for upstream transmissions in
our existing wireless networks. In an effort to remove the uncertainty
surrounding the 2.1 GHz band, in July 2002, prior to the issuance of the NTIA
report discussed above, the Company and the other major holders of MDS spectrum
in the United States (BellSouth Corporation, Sprint Corporation and WorldCom,
Inc.), along with the Wireless Communications Association International, filed a
proposal for a compromise solution with the FCC. The proposal provides that the
holders of MDS spectrum at 2.1 GHz would agree to relocate to spectrum at
1910-1916 MHz and 1990-1996 MHz, with the costs of relocation to be borne by the
winners of the 1.7/2.1 GHz band auction. We are not able to predict whether this
proposal will be accepted, or determine at this time the impact that relocation
to another band would have on our operations; however, relocation of operations
to another frequency band could require new or additional equipment, raise
operating costs, delay the provision of service, or render service uneconomic in
certain areas.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K dated
January 19, 1999).
2.2 Order Confirming the Plan of Reorganization Under
Chapter 11 of the U.S. Bankruptcy Code, dated as of
March 15, 1999 (incorporated by reference to Exhibit
2.2 to the Company's Registration Statement on Form
S-1 filed with the SEC on June 17, 1999, No.
333-80929).
3.1 Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.1
to the Company'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 the Company (incorporated by
reference to Exhibit 3.2 to the March 1999 Form
10-Q).
10.1* Amendment to Sales Agency Agreement between the
Company and Pegasus Satellite Television, Inc. dated
May 21, 2002.
99.1* Certification pursuant to 18 U.S.C.Section 1350
(Chief Executive Officer and Acting Chief Financial
21
Officer).
- --------------------------------
*Filed herewith
(b) REPORTS ON FORM 8-K
(1) On April 17, 2002, the Company filed a Current Report
on Form 8-K regarding the filing of the Company's
Annual Report on Form 10-K for 2001.
(2) On May 16, 2002, the Company filed a Current Report
on Form 8-K regarding a change in the Company's
certifying accountant.
(3) On May 21, May 31 and June 6, 2002, the Company filed
amendments on Form 8-K/A regarding the change in the
Company's certifying accountant.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 9, 2002 NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ Carroll D. McHenry
---------------------------------------
Carroll D. McHenry
Chairman of the Board, President and
Chief Executive Officer, Acting Chief
Financial Officer (Principal Executive
Officer and Principal Financial Officer)
23
Index to Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Plan of Reorganization under Chapter 11 of the U. S. Bankruptcy Code
(incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated January 19, 1999).
2.2 Order Confirming the Plan of Reorganization Under Chapter 11 of the
U.S. Bankruptcy Code, dated as of March 15, 1999 (incorporated by
reference to Exhibit 2.2 to the Company's Registration Statement on
Form S-1 filed with the SEC on June 17, 1999, No. 333-80929).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company'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 the Company (incorporated by reference to Exhibit
3.2 to the March 1999 Form 10-Q).
10.1* Amendment to Sales Agency Agreement between the Company and Pegasus
Satellite Television, Inc. dated May 21, 2002.
99.1* Certification pursuant to 18 U.S.C.Section 1350 (Chief Executive
Officer and Acting Chief Financial Officer).
- --------------------------------
*Filed herewith