<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
-------------------------
NUCENTRIX BROADBAND NETWORKS, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 4841 73-1435149
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) No.)
</TABLE>
<TABLE>
<S> <C>
CARROLL D. MCHENRY
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
NUCENTRIX BROADBAND NETWORKS, INC.
200 CHISHOLM PLACE, SUITE 200 200 CHISHOLM PLACE, SUITE 200
PLANO, TEXAS 75075 PLANO, TEXAS 75075
(972) 423-9494 (972) 423-9494
(Address, Including Zip Code, and Telephone (Name and Address, Including Zip Code, and
Number, Telephone
including Area Code, of Registrant's Principal Number, Including Area Code, of Agent For
Executive Offices) Service)
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Copies of All Communications to:
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<S> <C> <C>
RODNEY L. MOORE, ESQ. J. CURTIS HENDERSON, ESQ. VINCENT PISANO, ESQ.
VINSON & ELKINS L.L.P. NUCENTRIX BROADBAND NETWORKS, INC. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
2001 ROSS AVENUE, SUITE 3700 200 CHISHOLM PLACE, SUITE 200 L.L.P.
DALLAS, TEXAS 75201 PLANO, TEXAS 75075 919 THIRD AVENUE
TELEPHONE: (214) 220-7700 TELEPHONE: (972) 423-9494 NEW YORK, NEW YORK 10022-3897
FACSIMILE: (214) 220-7716 FACSIMILE: (972) 633-0074 TELEPHONE: (212) 735-3000
FACSIMILE: (212) 735-2000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- -------------------------------------------------------------------------------------------------------------------------
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Common Stock, $0.001 par value...... 2,300,000 $28.75 $66,125,000 $18,383
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(1) Includes 300,000 shares subject to an over-allotment option granted to the
underwriters by the registrant.
(2) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457(c), using the last sale price ($28.75) for
the common stock as reported on the over-the-counter bulletin board
quotation system on July 29, 1999.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
THEREAFTER SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 4, 1999
2,000,000 SHARES
[NUCENTRIX LOGO]
NUCENTRIX BROADBAND NETWORKS, INC.
COMMON STOCK
-------------------------
We are selling 2,000,000 shares of common stock.
The underwriters have an option to purchase a maximum of 300,000 additional
shares to cover over-allotments of shares.
Our common stock is quoted on the Nasdaq National Market under the symbol
"NCNX." On , 1999, the last reported sale price for our common stock
on the Nasdaq National Market was $ .
-------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 8.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS NUCENTRIX
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total.............................................. $ $ $
</TABLE>
---------------------
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON WASSERSTEIN PERELLA SECURITIES, INC.
The date of this prospectus is , 1999
<PAGE> 3
NUCENTRIX WIRELESS INTERNET NETWORK
[DIAGRAM OF NUCENTRIX'S INTERNET NETWORK]
Nucentrix provides two-way, high-speed Internet access by transmissions
between its base stations and transmit/receive equipment at the customer's
premises. Internet connectivity is maintained through two separate and diverse
connections to national Internet backbone providers.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY................... 2
RISK FACTORS......................... 8
FORWARD-LOOKING STATEMENTS........... 17
REORGANIZATION....................... 18
USE OF PROCEEDS...................... 20
PRICE RANGE OF COMMON STOCK AND
DIVIDEND POLICY.................... 21
CAPITALIZATION....................... 22
DILUTION............................. 23
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA..................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 27
</TABLE>
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PAGE
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BUSINESS............................. 40
GLOSSARY............................. 63
MANAGEMENT........................... 65
CERTAIN TRANSACTIONS................. 71
SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT........ 72
DESCRIPTION OF CAPITAL STOCK......... 74
SHARES ELIGIBLE FOR FUTURE SALE...... 75
UNDERWRITING......................... 76
LEGAL MATTERS........................ 78
EXPERTS.............................. 78
WHERE YOU CAN FIND MORE
INFORMATION........................ 78
INDEX TO FINANCIAL STATEMENTS........ F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
ANY INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS
LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE
ACCURATE ON THE DATE OF THIS DOCUMENT.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information that we present in more detail in the
other portions of this prospectus. This summary may not contain all of the
information that is important to you in deciding whether to invest in our
company. To understand this offering fully, you should read the entire
prospectus carefully, including the "Risk Factors" and our financial statements
appearing elsewhere in this prospectus. Unless the context otherwise requires,
references in this prospectus to "Nucentrix," "us," "we" or "our" refer to
Nucentrix Broadband Networks, Inc., and its subsidiaries.
OVERVIEW OF OUR BUSINESS
GENERAL
We provide wireless broadband, or high capacity, network services in medium
and small markets in the central United States. We control up to 196 megahertz
("MHz") of radio spectrum in the 2.1 to 2.7 gigahertz ("GHz") band (commonly
referred to as Multichannel Multipoint Distribution Service, or "MMDS") licensed
by the Federal Communications Commission ("FCC") in 87 markets. We also lease
the rights to an additional 20 MHz of spectrum at 2.3 GHz in 19 markets.
Historically, we have used our spectrum to provide wireless subscription
television services, commonly referred to as "wireless cable." We currently are
the largest operator of wireless cable systems in the United States, with about
155,000 subscribers in 58 markets in nine states at June 30, 1999. Going
forward, our goal is to become a leading provider of wireless broadband services
in our markets, while expanding into additional medium markets through the
acquisition of additional MMDS spectrum licenses. We also intend to explore
acquisitions of, and strategic alliances with, other providers of Internet
access, broadband and telephony services, such as traditional Internet service
providers ("ISPs"), direct subscriber line ("DSL") providers, other fixed-
wireless providers in licensed or unlicensed frequencies and competitive local
exchange carriers ("CLECs").
We currently provide always-on, high-speed Internet access primarily to
medium-sized and small businesses in Austin and Sherman-Denison, Texas. We
market this service directly and through third parties such as value added
resellers ("VARs") and other ISPs. Customers use our high-speed Internet access
service to improve productivity, reduce costs, advertise and engage in
electronic commerce. We believe our high-speed Internet access service offers
superior value by providing access speeds ranging from 256 Kbps up to 1.54 Mbps,
or up to 25 times greater than the speeds typically available to our target
customer base, at prices comparable to or substantially lower than those
typically offered by our competitors. Subject to our ability to finalize
long-term supply sources and a technology platform for wireless modems by the
end of the first quarter of 2000, we currently plan to launch high-speed
Internet access in 18 additional markets by the end of 2001.
Our business strategy is designed to increase the value of our broadband
spectrum by growing our wireless high-speed Internet access business and adding
wireless local loop and Voice over Internet Protocol, or "VOIP" services. We
currently market our wireless broadband network services to medium-sized and
small businesses, small offices/home offices ("SOHOs") and telecommuters.
International Data Corporation ("IDC") estimates that Internet service provider
revenues are expected to grow from $10.7 billion in 1998 to $37.4 billion in
2003. We expect the demand for dedicated high-speed Internet access by
medium-sized and small businesses to grow faster than the total Internet access
market.
Two significant events occurred in 1998 that have provided us the
opportunity to exploit this growing demand for high-speed Internet access.
First, Nucentrix and several other MMDS companies successfully demonstrated the
commercial viability of providing high-speed Internet access using MMDS radio
spectrum. MMDS spectrum has the capability to serve customers within a 35-mile
radius from a single base station at aggregate data rates of up to 30 Mbps per
six-MHz channel and can be deployed in less time and at significantly less cost
than other broadband systems. Second, in September 1998 the FCC authorized the
full, two-way use of these frequencies for digital two-way communications
services. The FCC finalized its two-way rules in July 1999. Before September
1998, the FCC had limited the use of
2
<PAGE> 6
MMDS spectrum to one-way transmissions. The FCC authorization of two-way
communications across MMDS spectrum now allows us, for the first time, to
completely bypass the local telephone company in providing access to the
Internet and other telecommunications services.
We believe that these two developments position us to use our MMDS spectrum
to satisfy the growing demand for high-speed Internet access. We believe that
medium-sized and small businesses in our markets generally do not have competing
high-speed Internet access alternatives readily available or, if alternatives
are available, they have the following limitations:
- most ISPs traditionally have not offered access speeds comparable to
ours,
- in medium markets, new technology for existing telephone lines, such as
DSL service, often is limited in performance, if available at all,
- hardwire cable TV networks, which also offer Internet access services,
typically have been constructed to serve residential customers and offer
limited access to most businesses, and
- other wireless spectrum is not as cost effective in medium markets as
MMDS spectrum, primarily because of its distance limitations.
THE NUCENTRIX SOLUTION
Our wireless solution meets the growing demand for high-speed Internet
access in medium markets by providing:
Superior Value. We offer higher bandwidth digital connections than other
Internet access providers in our target markets at prices substantially lower
than or comparable to other alternatives. For business Internet users, our
mid-range Internet access services are two to three times the speed of
integrated services digital network ("ISDN") systems at monthly rates comparable
to prevailing ISDN rates. Our higher-end services offer speeds of 768 Kbps up to
1.54 Mbps, or the equivalent of a T1 telephone line, at rates substantially less
than prevailing T1 rates in our markets. Additionally, our customers can upgrade
their access speeds without adding additional hardware.
Always-On Service. Our Internet access networks provide 24-hour, always-on
connectivity, which dial-up modem, ISDN and alternative local area network
remote access systems do not provide.
Full Service 24-Hour Internet Access/Support. We are a full service 24-hour
ISP and, through third parties, provide ancillary value added services such as
e-mail, web design, web hosting and domain name maintenance. In the future we
expect to provide wireless local loop services, virtual private networking and
VOIP.
Reliability. We have engineered our wireless point to multipoint radio path
links to provide 99.99% reliability. We also offer two separate and diverse
routes to the nearest Internet backbone connection to ensure our customers
maximum network reliability.
Experienced Management Team. We are led and managed by a team of
professionals with extensive experience in information technology as well as
wireless, data, video and general telecommunications industries. Leading our
team is Carroll D. McHenry, President and Chief Executive Officer, who has 32
years experience in the telecommunications and information systems industries.
Customer Equipment Financing. As with most new technology, we expect the
cost of customer premises equipment ("CPE") to decline as demand increases.
While we intend to encourage our customers to buy the modems and other equipment
necessary for high-speed Internet access, we expect to offer a financing
solution to lower the cost of entry for our customers.
3
<PAGE> 7
OUR BUSINESS STRATEGY
Our goal is to become a leading provider of wireless broadband network
services in our markets. Our strategy includes the following key elements:
Exploit the increasing demand for affordable high-speed Internet
access. Our target customers are medium-sized and small businesses, SOHOs and
telecommuters, whose high-speed alternatives, if available, generally have
performance, distance or price limitations.
Achieve "first to market" status. We believe we can complete our facilities
and begin reaching our target customer base faster than our competitors. For
example, DSL technology generally requires arrangements with local exchange
carriers to co-locate in multiple central offices. Other fixed-wireless
providers at higher frequencies such as 24 GHz, 28 GHz and 38 GHz have much
shorter transmission paths and, therefore, require more base stations than we do
to cover an entire market. As a result, these technologies will require
additional time and capital expense to reach our target customers.
Take advantage of our existing high capacity and wide coverage
spectrum. Our spectrum is capable of transmitting at aggregate data rates of up
to 30 Mbps per six-MHz channel, or the equivalent of approximately 20 T1
telephone lines. We control an average of 27 six-MHz channels in our existing
markets. Our spectrum typically has a 35-mile coverage radius from a single base
station, or approximately 3,800 square miles, compared to a one to three-mile
radius, or three to 28 square miles, for other wireless broadband service
providers and a two to five-mile radius from the telephone company's central
office, or 13 to 80 square miles, for DSL.
Leverage our existing investment in MMDS infrastructure, including base
stations and other transmission facilities. We believe we can initially provide
high-speed Internet access service using a single base station design for each
market. As a result of our wireless cable business, a substantial portion of the
infrastructure necessary to launch high-speed Internet access service already
exists in 13 of our top 20 projected Internet markets. We also believe we can
use many of our existing organizational and operational systems established for
our wireless cable business to support our high-speed Internet access business.
Expand into residential market. As equipment prices decline, we plan to
actively market our high-speed Internet access services to residential
customers.
Offer telephony services. To enhance the value of our assets in the future,
we plan to offer wireless local loop and VOIP services, which can connect
customers directly to the public switched telephone network.
Expand through acquisitions and strategic alliances. We plan to pursue
strategic acquisitions of MMDS spectrum that increase our geographic service
areas and enable us to accelerate our market penetration and expand our customer
base. We also intend to explore acquisitions of, and strategic alliances with,
other providers of Internet access, broadband and telephony services in certain
markets, such as traditional ISPs, DSL providers, other fixed-wireless providers
in licensed and unlicensed frequencies and CLECs.
CORPORATE INFORMATION
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.
4
<PAGE> 8
THE OFFERING
Common stock offered....... 2,000,000 shares
Over-allotment option...... Up to 300,000 shares
Common stock to be
outstanding after this
offering(1).............. 12,057,460 shares
Use of proceeds............ We plan to use the net proceeds from the offering
to further develop our Internet access networks and
services; acquire MMDS spectrum rights in
additional markets; pursue acquisitions of, and
strategic alliances with, other providers of
Internet access, broadband and telephony services;
test and implement new telephony technologies and
services; and for general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market
symbol..................... "NCNX"
Risk Factors............... You should read the "Risk Factors" section
beginning on page 8 of this prospectus, as well as
the other cautionary statements throughout this
prospectus, to ensure that you understand the risks
associated with an investment in our common stock.
- ---------------
(1) Excludes shares subject to the underwriters' over-allotment option and (1)
754,500 shares of common stock issuable upon exercise of options outstanding
under our 1999 Share Incentive Plan, of which options to purchase 429,480
shares currently are exercisable at an exercise price of $12.50 per share,
(2) 93,000 additional shares of common stock available for issuance under
our 1999 Share Incentive Plan, (3) 825,000 shares of common stock issuable
upon exercise of outstanding warrants, all of which currently are
exercisable at an exercise price of $27.63 per share, subject to downward
adjustment in the event of a sale of our company, (4) 275,000 shares of
common stock reserved for issuance, also at an exercise price of $27.63 per
share, subject to downward adjustment in the event of a sale of our company,
pursuant to warrants that we are obligated to issue under our plan of
reorganization and (5) additional shares of common stock, which we believe
will not exceed 75,000, that we may become obligated to issue to settle
certain claims under our plan of reorganization. See "Reorganization."
5
<PAGE> 9
SUMMARY FINANCIAL AND OTHER DATA
The following table presents (1) summary historical financial and other
data for Nucentrix and (2) summary pro forma financial data giving effect to the
consummation of our plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code and the adoption of Fresh Start Reporting as if each occurred as
of January 1, 1998, for statement of operations data and as of March 31, 1999,
for balance sheet data. See "Reorganization." Historically, we have used our
spectrum only to deliver subscription television services. Therefore, our
historical results are not necessarily indicative of our future results as we
implement our business strategy as described in "Business." You should read the
information set forth below together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements, including the notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA(1)
------------------------
THREE
YEAR THREE MONTHS YEAR MONTHS
ENDED ENDED MARCH 31, ENDED ENDED
DECEMBER 31, ----------------------- DECEMBER 31, MARCH 31,
1998 1999 1998 1998 1999
------------ ---------- ---------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 73,989 $ 18,086 $ 19,099 $ 73,989 $18,086
Operating expenses:
System operations............................. 35,790 8,599 9,315 35,790 8,599
Selling, general and administrative........... 36,367 9,156 9,126 36,367 9,156
Depreciation and amortization................. 39,550 5,953 11,300 17,133 5,968
Impairment of long-lived assets(2)............ 105,791 -- -- -- --
---------- ---------- ---------- -------- -------
Total operating expenses........................ 217,498 23,708 29,741 89,290 23,723
---------- ---------- ---------- -------- -------
Operating loss.................................. (143,509) (5,622) (10,642) (15,301) (5,637)
Interest income (expense), net................ (34,436) 102 (9,184) 1,224 102
Equity in losses of affiliates................ (30,340) -- (5,376) (30,340) --
Other income (expense)........................ (10) 2 -- (10) 2
---------- ---------- ---------- -------- -------
Loss before reorganization costs................ (208,295) (5,518) (25,202) (44,427) (5,533)
Reorganization costs(3)......................... (3,266) (2,311) -- -- --
---------- ---------- ---------- -------- -------
Net loss........................................ $ (211,561) $ (7,829) $ (25,202) $(44,427) $(5,533)
========== ========== ========== ======== =======
Loss per share -- basic and diluted(4).......... $ (10.72) $ (0.40) $ (1.28) $ (4.44) $ (0.55)
========== ========== ========== ======== =======
OTHER DATA:
EBITDA(5)....................................... $ 1,832 $ 331 $ 658
Net cash provided by (used in) operating
activities.................................... (8,377) (98) 1,536
Net cash used in investing activities........... (2,038) (2,412) (3,024)
Net cash used in financing activities........... (1,730) (576) (356)
Capital expenditures............................ 13,473 2,550 3,024
OPERATING DATA (END OF PERIOD)(6):
Number of markets in operation.................. 57 57 58
Number of System EBITDA positive markets(7)..... 48 53 48
Estimated total households(8)................... 8,461,000 8,461,000 8,461,000
Video subscribers............................... 160,000 157,000 175,000
</TABLE>
<TABLE>
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AS OF MARCH 31, 1999
AS OF ------------------------ PRO FORMA
DECEMBER 31, 1998 ACTUAL(2) PRO FORMA(1) AS ADJUSTED(9)
----------------- --------- ------------ --------------
(DOLLARS IN THOUSANDS)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 30,676 $ 27,590 $ 27,590 $ 81,337
Restricted assets.................................. 1,011 1,011 1,011 1,011
System and equipment, net.......................... 61,037 59,513 56,596 56,596
License and leased license investment, net......... 79,703 78,088 78,088 78,088
Total assets....................................... 186,032 180,517 176,652 230,399
Long-term debt, including current portion.......... 16,277 15,701 15,701 15,701
Liabilities subject to compromise(3)............... 322,781 322,781 -- --
Total stockholders' equity (deficit)............... (165,090) (172,919) 145,997 199,744
</TABLE>
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(1) See unaudited pro forma condensed consolidated financial information and the
notes thereto appearing elsewhere in this prospectus.
(2) During the second and third quarters of 1998, in accordance with 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 3 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 of reorganization 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, and March 31,
1999. See Note 8 to the consolidated financial statements. Expenses related
to our reorganization, such as professional fees and administrative
expenses, are classified as "Reorganization Costs."
(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." See
Note 1(n) to the consolidated financial statements.
(5) "EBITDA" represents earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness.
However, EBITDA is not a financial measure determined under 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
from operations as a measure of funds available for discretionary or other
liquidity purposes. EBITDA may be calculated differently from company to
company.
(6) All operating data and references to subscribers refer to our television
video subscription business. We do not currently have a sufficient number of
Internet access customers to provide meaningful information on this business
segment.
(7) "System EBITDA" means net income (loss) plus interest expense, income tax
expense, depreciation and amortization expense and all other non-cash
charges, less any non-cash items which have the effect of increasing net
income or decreasing net loss, for a system. System EBITDA includes all
selling, general and administrative expenses attributable to employees
employed in that system, and, to more accurately reflect operations at the
system level, we also allocate to each operating system expenses related to
billing, collections, telemarketing, our call center and information
systems.
(8) Represents our estimates of the approximate number of total households in
our service areas. We calculated this information using a commercially
available population software program, which is based on 1990 Census Bureau
data. Excludes 160,163 households in Shreveport, Louisiana that could be
served with our 2.3 GHz spectrum. See "Business -- Existing and
Unconstructed Markets."
(9) Adjusted to give effect to our receipt of approximately $53,746,617 of net
proceeds from the assumed sale of 2,000,000 shares of common stock pursuant
to this offering, at an assumed public offering price of $28.75 per share.
7
<PAGE> 11
RISK FACTORS
The value of an investment in Nucentrix will be subject to the significant
risks inherent in our business. You should consider carefully the risks and
uncertainties described below and the other information included in this
prospectus before you decide to purchase any shares of our common stock. 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.
WE ARE PURSUING A NEW BUSINESS THAT WE HAVE NOT PREVIOUSLY OPERATED. WE MAY NOT
BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY OR CORRECT OUR HISTORY
OF LOSSES.
We historically have used our spectrum to provide wireless subscription
television services and sustained substantial operating and net losses from
these operations. While we plan to maintain subscription television services in
our existing markets for the foreseeable future, the principal focus of our
business strategy is to expand the use of our radio spectrum to provide wireless
broadband network services, such as high-speed Internet access. We have launched
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. We intend to
increase our capital expenditures to develop and launch wireless broadband
services in additional markets, and we expect operating expenses from our
wireless broadband 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 we can develop, market and expand our wireless broadband
network services in the two initial markets or any additional markets to the
extent necessary to successfully compete in the broadband network services
industry. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Future Cash Requirements," and our consolidated
financial statements, including the notes thereto, appearing elsewhere in this
prospectus.
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 market, we will be forced to
compete with numerous service providers, including the following:
- other ISPs,
- incumbent and competitive local exchange carriers,
- inter-exchange carriers,
- enhanced copper wire-based providers, such as DSL service providers,
- cable modem service providers, and
- other fixed-wireless and satellite data service providers.
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. 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. We
have not obtained significant market share in either of the markets where we
currently offer high-speed Internet access services. We cannot assure you that
we will be able to compete effectively in any of our markets. Our failure to
establish a significant number of Internet access customers in our markets would
adversely affect our ability to successfully implement our business strategy.
See "Business -- Competition."
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WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR 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 wireless broadband network
services over MMDS spectrum has not been widely deployed on a commercial basis.
The success of our 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 lack of consumer acceptance, difficulty in obtaining
financing, competition from providers using more traditional and commercially
proven sources for these services, advances in competing technologies and
changes in laws and regulations. We have launched our high-speed Internet access
service in only two of our existing markets, and we cannot assure you that
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 VOIP
services over our spectrum. We have had discussions with several prospective
manufacturers of network platforms for our spectrum that would be capable of
delivering both high-speed Internet access and telephony services. 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.
LIMITED SUPPLY OF CUSTOMER PREMISES MODEMS FOR HIGH-SPEED INTERNET SERVICE MAY
RESTRICT OR DELAY OUR GROWTH.
Our business strategy assumes substantial growth of high-speed Internet
access services over our spectrum. Hybrid Networks, Inc. currently is the
primary supplier of high-speed modems necessary for MMDS wireless Internet
access. In January 1999, Hybrid notified us that to ensure sufficient cash to
continue operations, customer support and product availability, Hybrid would
begin allocating the supply of modems. In June 1999, Hybrid resumed shipments of
modems without allocation restrictions. We also have identified other suppliers
that we believe will become additional sources of modems by the end of 1999.
Additionally, we believe that the recent announcements by MCI WORLDCOM, Inc. and
Sprint Corporation of the acquisition of MMDS spectrum covering over 51 million
total homes will accelerate production of wireless modems from multiple vendors,
and we intend to analyze the technology platforms that we believe will be
announced by these companies before finalizing our long-term source of supply
for wireless modems. If one or more additional vendors do not come to market
with a reliable supply of wireless modems on satisfactory terms and conditions
or MCI WORLDCOM or Sprint does not announce a wireless modem technology platform
before the end of the first quarter of 2000, then the lack of available modems
will delay our planned launch of additional high-speed Internet markets, which
could have a material adverse effect on our ability to implement our business
plan in a timely manner. See "Business -- Suppliers -- Internet Access
Equipment."
OUR NETWORK SCALABILITY, SPEED AND INFRASTRUCTURE FOR INTERNET ACCESS SERVICE IS
UNCERTAIN. IF WE ARE UNABLE TO PROVIDE RELIABLE HIGH-SPEED INTERNET ACCESS, THEN
DEMAND FOR OUR SERVICES AND OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY COULD
BE ADVERSELY AFFECTED.
Due to the limited deployment of our high-speed Internet access service,
the ability of our wireless systems to connect and manage a substantial number
of on-line subscribers at high transmission speeds is uncertain. The actual
channel capacity and data transmission speeds will depend on a variety of
factors, including content, Internet traffic, the number of active customers on
a channel, the number of channels that we can use to provide our service, the
capability of high-speed modems used, the capacity and service quality of
third-party Internet backbone providers and a customer's system configuration.
We can not assure you that we will be able to expand or adapt our network
infrastructure to respond to a growth in the number of customers served, an
increased demand to transmit larger amounts of data or changes to our customers'
product and service requirements. Our failure to achieve or maintain reliable
high-speed data transmission capabilities could significantly reduce consumer
demand for our services.
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AN INABILITY TO EFFECTIVELY MANAGE OUR RAPID GROWTH COULD ADVERSELY AFFECT OUR
OPERATIONS.
Our business strategy contemplates rapid expansion in the foreseeable
future. This growth will increase our operating complexity and require that we,
among other things:
- accurately assess the market for our new services,
- expand our employee base with highly-skilled personnel,
- develop additional financial and management controls and systems,
- control expenses related to our business strategy, and
- obtain and maintain necessary regulatory approvals.
We cannot assure you that we will be able to successfully undertake or
manage these activities or determine the effect that our failure to do so may
have on our operations.
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 and maintain MMDS spectrum licenses, which
are 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 the effect of 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.
See "Business -- Government Regulation" for a further discussion of the
regulations applicable to our operations.
Aside from the use of spectrum, the FCC has held that the terms and
conditions of providing Internet and Internet access services are not subject to
FCC regulation. Nevertheless, the FCC has held that the provision of Internet
access is an interstate service subject to FCC jurisdiction. 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 local loop
services, we will be subject to FCC and state regulation of our interstate and
intrastate services, respectively.
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:
- the FCC will renew our licenses as their initial terms expire,
- our channel lessors will continue to hold valid licenses for their
channels,
- we will be able to renew our channel leases on terms acceptable to us, or
- 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
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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:
- serve our existing Internet access and subscription television customer
base,
- serve increasing customer demand for high-speed Internet access service,
and
- add services such as VOIP or wireless local loop services.
We cannot assure you that we will be able to obtain replacement MMDS spectrum or
other acceptable alternatives in a market if we lose an FCC license or channel
lease in that market. See "Business -- MMDS Licenses and Leases" and
"Business -- Government Regulation."
In addition, the majority of our channel leases do not currently
contemplate two-way use of our spectrum. We intend to initially use licenses
that we own for our Internet access customers. We plan to negotiate amendments
to certain of our channel leases to provide for two-way use of the leased
channels to the extent we determine that we need additional channel capacity. We
cannot assure you that we will be able to negotiate amendments to those leases
to permit two-way Internet or other two-way services on terms and conditions
that are acceptable to us.
TWO-WAY SYSTEMS REQUIRE REGULATORY APPROVAL. WE WILL BE REQUIRED TO OBTAIN
REGULATORY APPROVAL FOR OUR CURRENT AND ALL 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 September 1998 the FCC approved broad authority for flexible two-way use
of MMDS spectrum. This spectrum previously could be used only for one-way
transmissions. The new rules require the filing with the FCC of applications to
receive authorization for two-way use of our MMDS spectrum. We expect the first
opportunity to file these applications, or "filing window," to occur in the
fourth quarter of 1999. The application process will require us to engineer a
network configuration and channel-use plan for the use of our frequencies in
each market where we intend to launch a two-way system, including Austin and
Sherman-Denison, Texas, which we currently operate under temporary developmental
authorizations from the FCC. The applications must meet FCC interference
protection rules or contain the consent of other MMDS licensees in these markets
and adjacent markets. We cannot assure you that:
- we will be able to complete the necessary processes to enable us to file
two-way applications for each of our markets,
- applications filed will not be preempted or otherwise limited by
previously or concurrently filed applications of other operators, or
- 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. See "Business -- Government Regulation."
ACQUISITION OF ADDITIONAL MMDS SPECTRUM DEPENDS ON FCC APPROVAL TO THE TRANSFER
OR ASSIGNMENT OF MMDS LICENSES TO US.
From time to time we acquire channel rights and licenses through
acquisitions and joint ventures. The FCC must consent to the assignment or
transfer of control of FCC licenses. The FCC's failure to approve the transfer
or assignment of licenses to us could adversely affect our growth and our
ability to implement our business strategy. See "Business -- Government
Regulation."
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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, $14.4 million in principal amount of which remains
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
our signal in the BTA is capable of reaching 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, then the BTA authorization for the portion
of the BTA that is not capable of being served may be subject to forfeiture.
Constructing MMDS channels capable of providing service to the required
population in unconstructed BTAs could require substantial capital expenditures.
See "Business -- Government Regulation -- BTA Auction and Service Requirements."
WE DEPEND ON CERTAIN KEY PERSONNEL, AND WILL REQUIRE ADDITIONAL KEY PERSONNEL TO
IMPLEMENT OUR BUSINESS STRATEGY. IF WE LOSE OUR CHIEF EXECUTIVE OFFICER OR ARE
NOT ABLE TO HIRE AND RETAIN EMPLOYEES WITH THE REQUIRED TECHNICAL SKILLS, OUR
ABILITY TO DEVELOP AND LAUNCH HIGH-SPEED INTERNET ACCESS AND RELIABLE SERVICE
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.
We also believe that our future success will depend in large part on our
ability to hire and retain highly skilled, knowledgeable and qualified
managerial, professional, technical and sales personnel with skills and talents
required to develop and operate our wireless broadband network services. To
implement our business strategy and manage our planned growth successfully, we
will need to hire and retain a substantial number of additional employees. We
have experienced significant competition in attracting and retaining personnel
who possess the skills that we are seeking. As a result of this competition, we
may experience a shortage of qualified personnel.
PURSUING ACQUISITION OR OTHER STRATEGIC OPPORTUNITIES WILL INVOLVE MANAGEMENT
TIME AND EXPENSE AND COULD ADVERSELY AFFECT OUR OPERATIONS.
Part of our growth strategy involves acquiring additional MMDS spectrum
licenses to increase our scale and geographic service area. We also intend to
explore alliances with traditional ISPs, DSL providers, other fixed-wireless
providers and CLECs. The pursuit of acquisition or other strategic opportunities
will place significant demands on the time and attention of our senior
management and will involve considerable financial and other costs relating to
identifying and investigating acquisition candidates or strategic partners,
negotiating acquisition or other agreements, integrating acquired businesses
with our existing operations and operating new technologies. In addition,
employees and customers of acquired businesses may sever their relationship with
these businesses during or after such an acquisition. We cannot assure you that
we will be able to successfully consummate any acquisitions or successfully
integrate into our operations any business or assets which we may acquire.
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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 also is 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 hardwire or franchised cable operators, direct to home/direct
broadcast satellite providers and private cable operators. Wireless cable
providers, including our subscription television service, have only
approximately a 1.3% 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 and expand this subscriber base could adversely affect our
results of operations. We cannot assure you that we will be able to maintain or
expand 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 growth of our DIRECTV offerings, either
independently or in combination with our MMDS video offering. Because our
DIRECTV offerings generate more favorable returns than our stand-alone MMDS
offering, 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 single-family unit ("SFU") and multiple-dwelling
unit ("MDU") contracts with DIRECTV expire in April 2003 and October 2004,
respectively. A cancellation or nonrenewal of our contracts with DIRECTV could
have a material adverse effect on our ability to maintain or expand our wireless
cable subscriber base. See "Business -- Suppliers."
OUR WIRELESS BROADBAND 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 wireless broadband services require a direct line of sight between our
base station and the antenna at the customer's site. Our average coverage radius
of a single-cell base station is approximately 35 miles, depending on local
conditions. However, our 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 equipment 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. While
these costs may not be significant in all cases, they may cause our wireless
broadband services to become less economical in certain markets.
BUILDING OWNERS CONTROL ACCESS TO CERTAIN STRATEGIC RECEIVE SITES.
We may be required to obtain rights from building owners to install our
antennas and other equipment to provide service to our business customers. We
cannot assure you that we will be able to obtain, at costs or on terms
acceptable to us, the access 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
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undeployed methods of delivery of Internet access services will compete with our
services. We cannot assure you that:
- existing, proposed or undeveloped technologies will not render our
fixed-wireless systems less profitable or less viable,
- we will have the resources to acquire new technologies or to introduce
new services that could compete with future technologies, or
- we will be successful in responding to technological changes in a timely
and cost effective manner.
YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR OPERATIONS.
We depend heavily on information technology and other systems and functions
for all phases of our operations, including transmission of data and video
programming, billing and collections and customer service functions. Computer
software, hardware, microprocessor chips and other computer equipment use two
digits to identify a particular year and some of these may not recognize the
number "00" or may recognize it as a year prior to 1999. Unless these computer
equipment and software programs are modified or upgraded to correct these Year
2000 problems prior to January 1, 2000, errors and malfunctions could result. We
believe, based on information currently available and the current status of our
efforts to identify and correct Year 2000 problems, that the worst case
scenarios that could affect our operations as a result of Year 2000 problems are
an inability to:
- transmit and receive data,
- transmit and receive video programming, and
- produce and send invoices.
We are in the process of evaluating Year 2000 problems that may affect our
material suppliers, and anticipate completing our evaluation by August 31, 1999.
If a material supplier is adversely affected by Year 2000 problems and, as a
result is unable to provide services or materials to us, then our ability to (1)
provide Internet access or wireless cable services or (2) implement our business
strategy on a timely basis could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition -- The Year 2000."
VIRUSES, BREAK-INS AND OTHER SECURITY BREACHES COULD CAUSE INTERRUPTIONS, DELAYS
OR A CESSATION OF THE SERVICES WE PROVIDE TO OUR INTERNET CUSTOMERS.
Despite the implementation of network security measures, the core of any
Internet network infrastructure is vulnerable to computer viruses, break-ins and
similar disruptive problems. We may experience future interruptions in service
as a result of the actions of Internet users, current and former employees or
others. Unauthorized use could also potentially jeopardize the security of our
computer systems and the computer systems of our customers. Although we intend
to continue to implement security measures to prevent this, the possibility
exists that the measures we implement will be circumvented in the future. In
addition, eliminating such viruses and remedying such security problems may
cause interruptions, delays or cessation of service to our Internet customers.
If our security measures fail, we may lose customers or be sued, resulting in
additional expenses.
WE MAY BE LIABLE FOR INFORMATION SENT THROUGH OUR NETWORK.
The law relating to the liability of Internet access providers for
information carried on, stored on or disseminated through their network is
unsettled. Several private lawsuits seeking to impose liability upon Internet
access providers currently are pending. In addition, legislation has been
enacted and new legislation has been proposed that imposes liability for the
transmission of or prohibits the transmission of certain types of information on
the Internet, including sexually explicit and gambling information. While no one
has ever filed a claim against us relating to this issue, someone may file a
claim of that type in the
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future and may be successful in imposing liability on us. Although we carry
Internet liability insurance, it may not be adequate to compensate claimants or
may not cover us if we become liable for information carried on or disseminated
through our networks.
CONCENTRATION OF OWNERSHIP MAY AFFECT CORPORATE ACTIONS AND MARKET PRICE FOR OUR
COMMON STOCK.
Based on reports filed with the Securities and Exchange Commission, five
ownership groups will own or control approximately 52.4% of our outstanding
common stock after this offering. Two of these groups have a representative on
our Board of Directors and collectively will own or control approximately 25% of
our outstanding common stock after this offering. See "Security Ownership of
Principal Stockholders and Management." As a result of their stock ownership,
these groups may be able to influence the outcome of stockholder votes on
various matters, including the election of directors, extraordinary corporate
transactions and certain business combinations.
As of July 15, 1999, Cede & Co. was the sole record holder of our common
stock, although we believe there are over 1,000 beneficial owners of our common
stock. The small number of record owners could significantly impair the
liquidity and adversely affect the market price of our common stock. Other
investors in the public market may avoid making an investment in Nucentrix
because of such concentration of ownership.
SHARES ELIGIBLE FOR FUTURE SALE MAY AFFECT THE MARKET PRICE FOR OUR COMMON
STOCK.
Upon the closing of this offering, we will have approximately 12,057,460
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option. These shares will be freely tradeable under the
Securities Act unless held by "affiliates," as the Securities Act defines that
term. Shares held by affiliates also may be sold currently subject to compliance
with Rule 144 of the Securities Act, but without regard to the one-year holding
period prescribed thereunder. In addition, under our plan of reorganization, we
agreed to maintain a shelf registration statement for the benefit of certain
former holders of our old senior notes who received shares of our common stock
under our plan of reorganization and may be considered "affiliates" of
Nucentrix. The stockholders whose shares are covered by the shelf registration
statement collectively will own or control approximately 3,843,561 shares, or
31.9%, of our outstanding common stock after this offering. We anticipate that
the shelf registration statement will become effective simultaneously with or
shortly after this offering. After the shelf registration statement becomes
effective, up to 1,186,415 shares of our common stock will become eligible for
sale under the shelf registration statement without regard to Rule 144 and,
after the expiration of the 90 day lock-up agreements entered into by some of
our stockholders, 2,657,146 additional shares will become eligible for sale
under the shelf registration statement. Sales of substantial amounts of
securities, or the perception that such sales could occur, could adversely
affect the market price of our common stock. See "Reorganization" and "Shares
Eligible For Future Sale."
WE MAY ENCOUNTER DIFFICULTIES DUE TO OUR RECENT EMERGENCE FROM CHAPTER 11
PROCEEDINGS.
We emerged from reorganization under Chapter 11 of the U.S. Bankruptcy Code
on April 1, 1999. Our recent emergence from Chapter 11 may adversely affect our
ability to negotiate favorable trade terms with manufacturers and other vendors.
See "Reorganization."
WE DO NOT INTEND TO PAY CASH DIVIDENDS.
We anticipate that our earnings in the near term will be used to fund
current operations and costs and expenses incurred in developing and
implementing our business strategy. Accordingly, we do not anticipate paying
cash dividends in the foreseeable future. Our future dividend policy will depend
on our earnings, capital requirements, financial condition, restrictions that
may be imposed under future bank or other credit facilities and other factors
considered relevant by the Board of Directors.
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OUR ABILITY TO ISSUE "BLANK CHECK" PREFERRED STOCK MAY DELAY OR PREVENT A
POTENTIAL CHANGE IN CONTROL OF NUCENTRIX AND MAY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK.
Our Amended and Restated Certificate of Incorporation authorizes our Board
of Directors, without any further vote or action by our stockholders, to issue
up to 15,000,000 shares of preferred stock from time to time in one or more
series upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine at the time of issuance.
The rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of preferred stock that may be
issued in the future. Any such issuance also could have the effect of delaying,
deferring or preventing a change in control of Nucentrix and could make the
removal of the present management of Nucentrix more difficult. Any future
issuances of preferred stock, as well as the availability of authorized and
unissued shares of preferred stock, also could adversely affect the market price
of the common stock. See "Description of Capital Stock -- Preferred Stock."
COMMITMENTS FOR FUTURE ISSUANCES OF COMMON STOCK CREATE THE POTENTIAL FOR
DILUTION.
There are outstanding warrants and options to purchase an aggregate of
1,579,500 shares of our common stock and we will issue warrants to purchase
another 275,000 shares of our common stock under our plan of reorganization.
Substantially all of the shares of common stock underlying these securities will
be freely tradeable when issued. The exercise or conversion of outstanding
warrants and stock options will dilute the percentage ownership of our other
stockholders. In addition, any sales in the public market of shares of our
common stock issuable upon the exercise or conversion of these warrants and
stock options, or the perception that such sales could occur, may adversely
affect the prevailing market price of our common stock. See "Reorganization" and
"Shares Eligible For Future Sale."
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price is substantially higher than the net tangible
book value per share of our common stock after giving effect to our plan of
reorganization and the adoption of Fresh Start Reporting. Therefore, you will
incur immediate dilution in net tangible book value of $18.86 per share based on
an offering price of $28.75 per share. If the book value of our wireless
licenses and leased licenses was included in the calculation of net tangible
book value, dilution per share would be $12.35. You may incur additional
dilution if holders of stock options, whether currently outstanding or
subsequently granted, exercise their options or if warrant holders exercise
their warrants to purchase common stock. See "Reorganization" and "Dilution."
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FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
our financial condition, results of operations, business strategy and financial
needs. The words "may," "will," "expect," "believes," "plans," "intends,"
"anticipates," "estimates," "continue" and similar expressions, as they relate
to us, as well as discussions of strategy, are intended to identify
forward-looking statements. Such statements reflect our current view with
respect to 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:
- business and economic conditions in our existing markets,
- competitive technologies, products and services,
- regulatory and interference issues, including grant of two-way
transmission authorizations,
- the emergence of one or more national manufacturers of customer premises
equipment for MMDS spectrum, and
- those matters discussed specifically under "Risk Factors" and elsewhere
herein.
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 prospectus. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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REORGANIZATION
On December 4, 1998, we filed a voluntary, prenegotiated plan of
reorganization 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
reorganization plan with the pre-petition 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 of
reorganization, which received the support of the holders of 99% in principal
amount of the Old Senior Notes voting on the plan. All classes of claims that
voted on the plan of reorganization approved the plan. The plan of
reorganization became effective on April 1, 1999 (the "Effective Date"), when we
changed our name from Heartland Wireless Communications, Inc., to Nucentrix
Broadband Networks, Inc.
As of the Effective Date:
- all previously issued and outstanding common stock, options granted under
our stock option plans, warrants and any other equity interests in
Nucentrix were canceled,
- holders of the Old Senior Notes received 9,700,000 shares of newly issued
common stock, and
- 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.
We also are obligated under the plan of reorganization to issue warrants to
acquire an additional 275,000 shares of common stock at an exercise price of
$27.63 per share. 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 "Business -- 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 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 "Business -- Legal Proceedings -- Securities Litigation."
If we merge with another company or sell all or substantially all of our
assets or stock before April 1, 2004, in exchange for (1) cash or (2) cash and
notes, the exercise price of all of the 1,100,000 warrants will be adjusted
downward according to the following schedule:
<TABLE>
<CAPTION>
DATE OF TRANSACTION EXERCISE PRICE
- ------------------- --------------
<S> <C>
from April 1, 1999 until April 1, 2000...................... $12.37
from April 2, 2000 until April 1, 2001...................... $15.46
from April 2, 2001 until April 1, 2002...................... $18.56
from April 2, 2002 until April 1, 2003...................... $21.65
from April 2, 2003 until April 1, 2004...................... $24.74
after April 1, 2004......................................... $27.63
</TABLE>
18
<PAGE> 22
If we merge with another company or sell all or substantially all of our assets
or stock before April 1, 2004, in exchange for a combination of cash or notes
and other consideration, each warrant will be divided into an "A warrant" and a
"B warrant." The number of shares of common stock that may be purchased under
the A warrant and the B warrant will be allocated pro rata based on the value of
the transaction represented by cash and the value represented by other
consideration. The A warrant will be exercisable at the reduced exercise price
listed above to purchase that portion of the common stock covered by the
original warrant equal to the portion of the value of the transaction
represented by the cash or notes. The B warrant will be exercisable to purchase
the remaining shares of common stock covered by the original warrant at an
exercise price of $27.63.
Also under the plan of reorganization, we adopted a new 1999 Share
Incentive Plan and terminated our 1994 Employee Stock Option Plan and our 1994
Stock Option Plan for Non-Employee Directors. See "Management -- Compensation of
Executive Officers -- 1999 Share Incentive Plan."
Finally, we may be required to issue additional shares of common stock to
settle miscellaneous unsecured claims under our plan of reorganization, 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 July 15, 1999, we had
issued 4,960 additional shares of our common stock to settle some of these
claims.
19
<PAGE> 23
USE OF PROCEEDS
We expect to receive approximately $53,746,617 million in net proceeds from
the sale of the 2,000,000 shares of common stock in this offering at an assumed
public offering price of $28.75 per share (approximately $61,854,117 if the
underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and offering expenses. We currently plan
to use the net proceeds of the offering to:
- further develop our wireless broadband network services, including:
- retrofitting base stations to provide high-speed Internet access
service capability in certain of our existing markets,
- constructing new base stations to launch high-speed Internet access
service in certain non-operating markets, and
- funding startup losses and customer equipment financing in new
high-speed Internet markets,
- acquire MMDS spectrum licenses in additional markets if available on
acceptable terms,
- pursue acquisitions of, and strategic alliances with, other providers of
Internet access, broadband and telephony services,
- test and implement new telephony technologies, wireless local loop and
VOIP services, and
- for general corporate purposes.
Allocation of our net proceeds among the uses described above will depend on the
timing and success of our launch of wireless broadband network services in our
target markets and the availability of acquisition or other alliance
opportunities. Depending on future events, we may determine at a later time to
use our net proceeds for different purposes. Pending such uses, we intend to
invest the net proceeds in short-term, interest-bearing, investment grade
instruments.
Although we currently are evaluating and from time to time engage in
discussions regarding various acquisition opportunities, we currently have no
plans, arrangements or understandings related to any specific acquisitions. We
believe that, based on our current business plan and related assumptions, the
net proceeds of this offering, cash on hand and cash generated by operations
will be sufficient to fund our operations and capital requirements until at
least the end of 2001. However, we may be required to seek additional sources of
capital if:
- our operating assumptions change or prove to be inaccurate,
- we consummate any acquisitions of significant businesses or assets,
including spectrum licenses, or
- we accelerate the implementation of our business strategy.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Cash Requirements" for a further discussion of our current
and future capital requirements and our belief regarding our ability to meet
those requirements.
20
<PAGE> 24
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
MARKET INFORMATION
As discussed under "Reorganization," all shares of our common stock
outstanding as of the April 1, 1999, Effective Date of our plan of
reorganization were canceled and we issued 10,000,000 shares of common stock to
certain creditors. Beginning April 8, 1999, our newly issued common stock began
trading on the over-the-counter bulletin board quotation system under the symbol
"NCNX." On , 1999, the common stock was approved for quotation on
the Nasdaq National Market, where it began trading on , 1999, under
the symbol "NCNX."
The low and high bid prices of the common stock on the over-the-counter
bulletin board quotation system for the period April 5, 1999, through August 3,
1999, were as follows:
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
April 5, 1999 -- June 30, 1999.............................. $13.00 $39.25
July 1, 1999 -- August 3, 1999.............................. $27.75 $30.25
</TABLE>
The low and high prices of the common stock as reported on the Nasdaq
National Market for the period , 1999, through , 1999,
were $ and $ , respectively. The last reported sale price of
the common stock on the Nasdaq National Market on , 1999, was
$ . In October 1998, our common stock, traded under the symbol HART,
was delisted from the Nasdaq National Market because of our failure to maintain
net tangible assets and bid price requirements under the NASD Marketplace Rules.
We have not provided market price information for periods prior to April 5,
1999, because, as a result of our reorganization, our capital structure and
financial condition prior to the Effective Date was substantially different than
after the Effective Date. We believe market price information prior to April 5,
1999, is not indicative of or comparable to the value of our common stock after
the Effective Date and is not material to investors.
The current concentration of ownership of our common stock, the shares of
common stock currently eligible for future sale and our commitments for future
issuances of common stock, could adversely affect the market price of our common
stock. See "Risk Factors -- Concentration of ownership may affect corporate
actions and market price for common stock," "Risk Factors -- Shares eligible for
future sale may affect the market price for our common stock" and "Risk
Factors -- Commitments for future issuances of common stock create the potential
for dilution."
HOLDERS
As of July 15, 1999, Cede & Co. was the sole record holder of common stock,
although we believe there are over 1,000 beneficial owners of our common stock.
DIVIDENDS
We 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.
21
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999, (1)
on a historical basis, (2) after giving effect to the consummation of our plan
of reorganization and adoption of Fresh Start Reporting as of March 31, 1999,
and (3) pro forma, as adjusted to reflect the sale of 2,000,000 shares of common
stock in this offering at an assumed price of $28.75 per share. You should read
this table together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our unaudited pro forma condensed
consolidated financial information and the notes thereto, and our consolidated
financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 27,590 $ 27,590 $ 81,337
========= ======== ========
Long-term debt
Liabilities subject to compromise........................ 322,781 -- --
Other long-term debt..................................... 13,855 13,855 13,855
--------- -------- --------
Total long-term debt less current portion........ 336,636 13,855 13,855
--------- -------- --------
Stockholders' equity
Common stock, $.001 par value; 50,000,000 shares
authorized, 19,795,521 shares issued and outstanding;
30,000,000 shares authorized, 10,004,960 shares issued
and outstanding, pro forma (2)........................ 20 10 12
Preferred stock, $.001 par value; 15,000,000 shares
authorized; none issued............................... -- -- --
Additional paid-in capital............................... 261,943 145,987 199,732
Retained earnings (loss)................................. (434,524) -- --
Treasury stock........................................... (358) -- --
--------- -------- --------
Total stockholders' equity (deficit)............. (172,919) 145,997 199,744
--------- -------- --------
Total capitalization............................. $ 163,717 $159,852 $213,599
========= ======== ========
</TABLE>
- ---------------
(1) We adopted Fresh Start Reporting on April 1, 1999, in accordance with
American Institute of Certified Public Accountants Statement of Position
90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code." Fresh Start Reporting results in a new reporting entity with assets
and liabilities adjusted to fair value and beginning retained earnings set
to zero. See "Reorganization."
(2) Pro forma shares issued and outstanding excludes (a) 52,500 shares of common
stock issued pursuant to stock options granted under our 1999 Share
Incentive Plan that were exercised after March 31, 1999, and (b) 2,022,500
additional shares subject to future issuance as follows: (1) 754,500 shares
of common stock issuable upon exercise of options outstanding under our 1999
Share Incentive Plan, of which options to purchase 429,480 shares currently
are exercisable at an exercise price of $12.50 per share, (2) 93,000
additional shares of common stock available for issuance under our 1999
Share Incentive Plan, (3) 825,000 shares of common stock issuable upon
exercise of outstanding warrants, all of which currently are exercisable at
an exercise price of $27.63 per share, subject to downward adjustment in the
event of a sale of our company, (4) 275,000 shares of common stock reserved
for issuance, also at an exercise price of $27.63 per share, subject to
downward adjustment in the event of a sale of our company, pursuant to
warrants that we are obligated to issue under our plan of reorganization,
and (5) additional shares of common stock, which we believe will not exceed
75,000, that we may become obligated to issue to settle certain claims under
our plan of reorganization. See "Reorganization."
22
<PAGE> 26
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less (1) intangible
assets and (2) total liabilities) by the number of outstanding shares of our
common stock.
The pro forma net tangible book value of Nucentrix at March 31, 1999, after
giving effect to the plan of reorganization and the adoption of Fresh Start
Reporting was $64,992,000, or $6.50 per share of common stock. See
"Reorganization." After giving effect to the sale of the 2,000,000 shares of
common stock at an assumed public offering price of $28.75 per share (less
estimated underwriting discounts and commissions and estimated expenses we
expect to pay in connection with this offering), the pro forma as adjusted net
tangible book value of Nucentrix at March 31, 1999, would be $118,739,000, or
$9.89 per share. This represents an immediate increase in the as adjusted pro
forma net tangible book value of $3.39 per share to existing stockholders and an
immediate dilution of $18.86 per share to new investors, or approximately 65.6%
of the public offering price of $28.75 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................. $28.75
Pro forma net tangible book value per share at March 31,
1999(1)................................................ $6.50
Increase per share attributable to new investors.......... 3.39
-----
Pro forma as adjusted net tangible book value per share
after this offering(1).................................... 9.89
------
Dilution per share to new investors(2)...................... $18.86
======
</TABLE>
- ---------------
(1) At March 31, 1999, our wireless licenses and leased licenses had an
aggregate book value of approximately $78,088,000 (or $6.51 per share). They
are treated as intangible assets and, accordingly, have been excluded from
the calculation of net tangible book value. If the book value of such assets
was included in the calculation of net tangible book value, dilution per
share to new investors would be $12.35, or approximately 43.0% of the public
offering price.
(2) If the underwriters' over-allotment option is exercised in full, dilution
per share to new investors will be $18.44. If the book value of our wireless
licenses and leased licenses was included in the calculation of net tangible
book value, dilution per share to new investors would be approximately
$12.00.
The above computations exclude the dilutive effects of 52,500 shares of
common stock issued pursuant to our 1999 Share Incentive Plan after March 31,
1999, and the potential dilutive effects of 2,022,500 additional shares of our
common stock subject to issuance, as described in note (2) of the table in
"Capitalization."
23
<PAGE> 27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents (1) selected historical financial data for
Nucentrix and (2) selected pro forma financial data for Nucentrix giving effect
to the consummation of our plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code and the adoption of Fresh Start Reporting as if each occurred as
of January 1, 1998, for statement of operations data and as of March 31, 1999,
for balance sheet data. See "Reorganization." The selected historical financial
data presented below as of and for each of the years ended December 31, 1998, is
derived from the audited consolidated financial statements of Nucentrix. The
selected historical financial data presented below as of and for each of the
periods ended March 31, 1999 and 1998, is derived from unaudited consolidated
financial statements of Nucentrix which, in the opinion of management, include
all adjustments, none of which were other than normal recurring adjustments,
necessary for a fair presentation of financial position and results of
operations for such periods. The financial information for the three months
ended March 31, 1999 and 1998, is not necessarily indicative of the results of
operations for subsequent periods or a full fiscal year. Historically, we have
used our spectrum only to deliver subscription television services and,
therefore, our historical results are not necessarily indicative of our future
results as we implement our business strategy as described in "Business." You
should read the financial data below together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with Nucentrix's
consolidated financial statements, including the notes thereto, included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA(1)
------------------------
THREE
THREE MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
------------------------------------------------------ ------------------ DECEMBER 31, MARCH 31,
1998 1997 1996 1995 1994 1999 1998 1998 1999
--------- --------- -------- -------- -------- ------- -------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 73,989 $ 78,792 $ 56,017 $ 15,300 $ 2,229 $18,086 $ 19,099 $ 73,989 $18,086
Operating expenses:
System operations...... 35,790 39,596 21,255 4,893 762 8,599 9,315 35,790 8,599
Selling, general and
administrative....... 36,367 42,255 42,435 11,887 4,183 9,156 9,126 36,367 9,156
Depreciation and
amortization(2)...... 39,550 65,112 39,323 6,234 1,098 5,953 11,300 17,133 5,968
Impairment of
long-lived
assets(3)............ 105,791 -- -- -- -- -- -- -- --
--------- --------- -------- -------- -------- ------- -------- -------- -------
Total operating
expenses............... 217,498 146,963 103,013 23,014 6,043 23,708 29,741 89,290 23,723
--------- --------- -------- -------- -------- ------- -------- -------- -------
Operating loss........... (143,509) (68,171) (46,996) (7,714) (3,814) (5,622) (10,642) (15,301) (5,637)
Interest income
(expense), net....... (34,436) (34,321) (18,166) (10,857) (210) 102 (9,184) 1,224 102
Equity in losses of
affiliates........... (30,340) (32,037) (18,612) (1,369) (387) -- (5,376) (30,340) --
Other income
(expense)............ (10) (54) 4,981 (247) (227) 2 -- (10) 2
--------- --------- -------- -------- -------- ------- -------- -------- -------
Loss before
reorganization costs,
income taxes and
extraordinary item..... (208,295) (134,583) (78,793) (20,187) (4,638) (5,518) (25,202) (44,427) (5,533)
Reorganization
costs(4)............... (3,266) -- -- -- -- (2,311) -- -- --
--------- --------- -------- -------- -------- ------- -------- -------- -------
Loss before income taxes
and extraordinary
item................... (211,561) (134,583) (78,793) (20,187) (4,638) (7,829) (25,202) (44,427) (5,533)
Income tax benefit....... -- -- 28,156 4,285 1,595 -- -- -- --
--------- --------- -------- -------- -------- ------- -------- -------- -------
Loss before extraordinary
item................... (211,561) (134,583) (50,637) (15,902) (3,043) (7,829) (25,202) $(44,427) $(5,533)
======== =======
Extraordinary
item............. -- -- (10,424) -- -- -- --
--------- --------- -------- -------- -------- ------- --------
Net loss................. $(211,561) $(134,583) $(61,061) $(15,902) $ (3,043) $(7,829) $(25,202)
========= ========= ======== ======== ======== ======= ========
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
PRO FORMA(1)
------------------------
THREE
THREE MONTHS MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
------------------------------------------------------ ------------------ DECEMBER 31, MARCH 31,
1998 1997 1996 1995 1994 1999 1998 1998 1999
--------- --------- -------- -------- -------- ------- -------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss per basic and
diluted share
Net loss before
extraordinary item... $ (10.72) $ (6.85) $ (2.74) $ (1.34) $ (0.30) $ (0.40) $ (1.28) $ (4.44) $ (0.55)
======== =======
Extraordinary item..... -- -- (0.57) -- -- -- --
--------- --------- -------- -------- -------- ------- --------
Net loss per
share(5)............. $ (10.72) $ (6.85) $ (3.31) $ (1.34) $ (0.30) $ (0.40) $ (1.28)
========= ========= ======== ======== ======== ======= ========
OTHER DATA:
EBITDA(6)................ $ 1,832 $ (3,059) $ (7,673) $ (1,480) $ (2,716) $ 331 $ 658
Net cash provided by
(used in) operating
activities............. (8,377) (41,646) (22,754) (6,474) 711 (98) 1,536
Net cash provided by
(used in) investing
activities............. (2,038) 6,826 (34,169) (96,703) (46,500) (2,412) (3,024)
Net cash provided by
(used in) financing
activities............. (1,730) (1,955) 113,376 114,334 56,960 (576) (356)
Capital expenditures..... 13,473 29,712 95,680 46,034 15,769 2,550 3,024
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
--------------------------------------
AS OF DECEMBER 31, PRO FORMA
---------------------------------------------------- PRO FORMA AS ADJUSTED
1998 1997 1996 1995 1994 ACTUAL (1) (7)
--------- -------- -------- -------- ------- --------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 30,676 $ 42,821 $ 79,596 $ 23,143 $11,986 $ 27,590 $ 27,590 $ 81,337
Restricted assets......... 1,011 10,333 30,007 18,739 -- 1,011 1,011 1,011
System and equipment,
net..................... 61,037 122,653 145,797 60,649 16,765 59,513 56,596 56,596
License and leased license
investment, net......... 79,703 123,369 129,725 60,421 16,740 78,088 78,088 78,088
Total assets........ 186,032 372,134 515,364 205,405 77,921 180,517 176,652 230,399
Long-term debt, including
current portion......... 16,277 308,196 303,538 141,652 40,506 15,701 15,701 15,701
Liabilities subject to
compromise(4)........... 322,781 -- -- -- -- 322,781 -- --
Total stockholders'
equity
(deficit)......... (165,090) 46,408 180,847 51,688 30,081 (172,919) 145,997 199,744
</TABLE>
- ---------------
(1) See unaudited pro forma condensed consolidated financial information and the
notes thereto appearing elsewhere in this prospectus.
(2) Nucentrix changed its 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. See Notes 1(g), 1(h) and 1(i) to the
consolidated financial statements.
(3) During the second and third quarters of 1998, in accordance with 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 3 to the consolidated
financial statements.
(4) We filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on December 4, 1998. Our plan of reorganization 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, and March 31,
1999. See Note 8 to the consolidated financial statements. Expenses related
to our reorganization, such as professional fees and administrative
expenses, are classified as "Reorganization Costs."
(5) 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. See Note 1(n) to the
consolidated financial statements.
25
<PAGE> 29
(6) "EBITDA" represents earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness.
However, EBITDA is not a financial measure determined under 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 be calculated differently from company to company.
(7) Adjusted to give effect to the receipt by Nucentrix of approximately
$53,746,617 of net proceeds from the assumed sale by us of 2,000,000 shares
of common stock pursuant to this offering, at an assumed public offering
price of $28.75 per share.
26
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our business strategy is to provide wireless broadband network services
using our high-capacity radio spectrum in medium and small markets. We presently
offer high-speed Internet access in two of our 87 markets. We launched our first
Internet market, Sherman-Denison, Texas, in June 1998 followed by our second
market, Austin, Texas, in May 1999. These two Internet markets have not yet had
a material impact on our historical results of operations.
Historically, we have used our spectrum to provide subscription television
services. Our business strategy contemplates moderate growth of this business,
with any resulting operating cash flow being used to help fund our expansion of
wireless broadband network services. Our historical results are not necessarily
indicative of our future results as we implement our business strategy as
described in "Business -- Business Strategy."
Reorganization. On April 1, 1999, we consummated a plan of reorganization
to convert, among other things, approximately $325 million of senior and
subordinated debt and accrued interest into common stock. See "Reorganization."
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. Unless the context requires otherwise, all
references to "subscribers" or "systems" are to our wireless cable subscribers
and systems.
System Operations Expenses. System operations expenses include wireless
cable programming costs, channel lease payments, labor and overhead, costs of
service calls and churn, transmitter site and tower rentals and certain repairs
and maintenance expenditures. Programming costs, with the exception of minimum
payments, and channel lease payments, with the exception of certain fixed
payments, are variable expenses based on the number of subscribers.
Depreciation and Amortization Expense. Depreciation and amortization
expense includes depreciation of systems and equipment, amortization of license
and leased license investment and amortization of the 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 and, prior to 1998, certain overhead charges and direct
commissions. These direct costs are capitalized as systems and equipment in the
condensed consolidated balance sheet included elsewhere in this prospectus.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1998
Revenues. Our revenues for the first quarter of 1999 were $18.1 million,
compared to $19.1 million for the first quarter of 1998. At March 31, 1999, we
had approximately 157,000 subscribers, compared to approximately 175,000
subscribers at March 31, 1998. Although we believe we continue to attract a
higher quality of subscribers, the number of subscribers has declined since the
first quarter of 1998 due to (1) stricter credit policies, (2) slower than
anticipated sales force hirings, (3) the delayed launch of our DIRECTV
offerings, and (4) changes in the conversion rate used to calculate MDU
subscribers. However, average monthly recurring revenue per subscriber increased
to $35.49 in the first quarter of 1999 from $33.47 in the first quarter of 1998.
This is due to:
- a greater percentage of our subscribers purchasing premium packages at
higher average subscription rates as lower priced packages are replaced
with upgraded offerings and
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- the price increase implemented November 1, 1998. This was our first
system-wide price increase for our subscription television service
offerings, and was implemented to partially offset our increased
programming costs.
System Operations Expense. System operations expense for the first quarter
of 1999 was $8.6 million, or 47.5% of revenues, compared to $9.3 million, or
48.8% of revenues, for the first quarter of 1998. The decrease in system
operations expense was primarily due to lower programming costs and lower
service call expense as a result of fewer subscribers. In addition, disconnect
expense was reduced as average monthly churn decreased to 2.9% in the first
quarter of 1999 from 3.5% in the first quarter of 1998. Service call expense as
a percentage of revenues decreased to 3.6% in 1999 from 4.6% in the prior
period.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the first quarter of 1999 increased to $9.2 million
from $9.1 million for the first quarter of 1998. As a percentage of revenues,
selling, general and administrative expense was 50.6% in the first quarter of
1999, compared to 47.8% for the first quarter of 1998, due primarily to lower
revenues in 1999 combined with increased expenditures for start-up marketing of
our Internet services.
Depreciation and Amortization. Depreciation and amortization expense was
$6.0 million for the first quarter of 1999, compared to $11.3 million for the
first quarter of 1998. The decrease in depreciation and amortization expense was
due to a write down of the related assets to estimated fair market value during
1998 in accordance with Statement of Financial Accounting Standards No. 121.
Operating Loss. We generated operating losses of $5.6 million for the first
quarter of 1999, compared to $10.6 million for the first quarter of 1998. This
improvement was primarily due to lower depreciation and amortization resulting
from the write down of assets to fair market value in 1998 and lower total
programming, service call and disconnect expense.
Interest Income. Interest income was $423,000 during the first quarter of
1999, compared to $816,000 for the first quarter of 1998. The decrease in
interest income 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 and higher average cash bank balances.
Interest Expense. Interest expense was $321,000 during the first quarter of
1999, compared to $10.0 million during the first quarter of 1998. Interest
expense decreased in 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." If interest had
continued to be accrued, total interest expense would have been $12.6 million
for the three months ended March 31, 1999.
Equity in Losses of Affiliates. We had equity in losses of affiliates of
$5.4 million for the first quarter of 1998 and zero during the first quarter of
1999. During the quarter ended March 31, 1998, we owned approximately 20% of the
outstanding common stock of Wireless One, Inc. and approximately 36% of the
outstanding common stock of CS Wireless Systems, Inc. Losses recorded for
Wireless One in November 1997 reduced our investment balance to zero. During the
second quarter of 1998, we wrote off $6.8 million of our excess cost in CS
Wireless and then we wrote off our remaining investment balance of $11.7 million
during the third quarter of 1998 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 first
quarter of 1999. See "Business -- Recent Transactions."
Reorganization Costs. During the first quarter of 1999 we incurred $2.3
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."
Net Loss. We have recorded net losses since our inception. We incurred net
losses of $7.8 million, or $.40 per basic and diluted common share, during the
first quarter of 1999, compared to $25.2 million, or $1.28 per basic and diluted
common share, during the first quarter of 1998.
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RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1998
Revenues. Our revenues were $74.0 million in 1998, $78.8 million in 1997
and $56.0 million in 1996, representing a 6% decrease in 1998 from 1997 and a
41% increase in 1997 from 1996. The decrease in revenues in 1998 was due
primarily to a decrease in average subscribers from 184,000 in 1997 to 170,000
in 1998. This decline in subscribers resulted from:
- stricter credit policies for approving new customers which, although
contributing to a decline in revenues, reduced churn and bad debt
expense,
- slower than anticipated sales force hirings,
- the delayed launch of our marketing plan for our combined DIRECTV
offerings until the third quarter of 1998,
- an increase as of January 1, 1998, and November 1, 1998, in our
equivalent basic unit or "EBU" conversion rate for calculating MDU
subscribers, and
- the transfer of one operating system, and its associated revenues, to CS
Wireless in December 1997.
Although total revenues and subscribers decreased from 1997 to 1998,
average monthly recurring revenue per subscriber increased to $33.95 in 1998,
from $33.52 in 1997 and $30.22 in 1996. This was due to a greater percentage of
our subscribers purchasing premium packages and pay-per-view services at higher
average subscription rates as lower-priced wireless cable packages were replaced
with upgraded offerings. At December 31, 1998, we had approximately 160,000
subscribers compared with approximately 187,000 at December 31, 1997, and
approximately 181,000 at December 31, 1996. We had 57 operating systems at
December 31, 1998, compared to 58 at December 31, 1997, and 54 at December 31,
1996.
The increase in revenues in 1997 from 1996 was primarily due to the
acquisition or launch of 20 net new operating systems during 1996, which had a
full year of operating results in 1997. We also were able to add and retain
subscribers at overall higher subscription rates, and we received increased
revenues for premium services from customers retained after the expiration of
certain free-service promotions.
System Operations Expense. System operations expenses were $35.8 million,
$39.6 million and $21.3 million for the years ended December 31, 1998, 1997 and
1996, respectively. As a percentage of revenues, system operations expenses were
48% in 1998, 50% in 1997 and 38% in 1996. The decrease in system operations
expense in 1998 from 1997 was due primarily to lower programming costs as a
percent of revenues as more subscribers migrated to our combination DIRECTV/MMDS
offering which has lower programming costs or to our DIRECTV-only offering which
has no programming costs. This decrease was slightly offset by programming rate
increases from certain providers. In addition, compared to 1998, we experienced
higher service call and disconnect expense during 1997 due to:
- installation corrections at certain subscriber households,
- recovery of equipment from disconnected subscribers, and
- higher churn in 1997.
System operations expenses increased in 1997 from 1996 due primarily to:
- increased programming costs resulting from expanded channel offerings in
certain markets,
- the promotion of special programming packages which carried lower margins
than our basic programming package,
- higher overall programming rates,
- increased service call expense related to installation corrections, and
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- a significant increase in labor and overhead expense related to our
attempts to recover equipment from disconnected subscribers.
Selling, General and Administrative Expense. Selling, general and
administrative expense was $36.4 million in 1998, $42.3 million in 1997 and
$42.4 million in 1996. As a percent of revenues, selling, general and
administrative expense was 49% for 1998, 54% for 1997 and 76% for 1996. The
decrease in selling, general and administrative expense since 1996 was due to:
- lower bad debt expense resulting from improved credit screening and
collections procedures, and
- labor savings and efficiencies realized from field operational
improvements and consolidation of management and staff in certain
markets.
Depreciation and Amortization. Depreciation and amortization expense was
$39.6 million in 1998, $65.1 million in 1997 and $39.3 million in 1996. The
substantially higher depreciation and amortization expense in 1997 compared to
1996 and 1998 is partially due to a nonrecurring charge to depreciation expense
of $9.0 million during the third quarter of 1997. This charge was comprised of
three components:
- $6.1 million related to the third quarter 1997 write-off of equipment not
recovered from subscriber homes,
- $1.7 million related to the write-off of obsolete subscriber equipment
that was not available for future use, and
- $1.2 million related to the effects of a reduction in the estimated
useful life of the nonrecoverable portion of subscriber installation
costs from four years in 1996 to three years in the third quarter of
1997.
Depreciation and amortization expense also increased in 1997 from 1996 as
we began amortizing the cost of the BTAs that were acquired in December 1996.
In addition to the reasons outlined above, depreciation and amortization
decreased in 1998 compared to 1997 as the carrying value of certain assets were
reduced by:
- an impairment charge of $17.7 million to write down the carrying value of
our undeveloped licenses to estimated fair market value during the second
quarter of 1998,
- an impairment charge of $6.8 million to reduce our excess basis in our
36% equity interest in CS Wireless during the second quarter of 1998,
- an impairment charge of $18.9 million to write down the carrying value of
our operating licenses and leased license investments to estimated fair
market value during the third quarter of 1998,
- an impairment charge of $44.5 million to write down the carrying value of
our systems and equipment to estimated fair market value during the third
quarter of 1998, and
- an impairment charge of $24.7 million to write down the carrying value of
our excess of cost over fair value to estimated fair market value during
the third quarter of 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations
for the Three Years Ended December 31, 1998 -- Impairment of Long-Lived
Assets" below.
The amortization periods related to the nonrecoverable portion of
installation costs for new subscribers over the periods presented reflect our
best estimates of the expected useful lives of such costs at the time of
implementation. Our original estimate of six years was based in part on the
assumption that a primarily rural operating strategy could contribute to
subscription terms that were significantly higher than the hard-wire industry,
because of a perceived higher degree of stability, lower amounts of transiency
and less competition for multichannel video programming alternatives in a rural
subscriber base. In the fourth quarter of 1996, we reassessed our policy and
determined, in light of increased disconnect rates in 1996, to
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reduce our estimate of useful lives to four years. In the third quarter of 1997,
we again reassessed our estimate of useful lives and reduced our estimate to
three years. We based this reduction primarily on cumulative results of
operation through September 30, 1997, that indicated a lower than anticipated
retention rate of subscribers in markets where we offered 20 channels or less
and in markets where prior promotional campaigns had begun to expire. A
three-year useful life is the equivalent of a 2.8% churn rate. We currently
believe that a consolidated monthly churn rate of 2.8% to 3.0% can be achieved
and maintained in our existing markets.
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. We adopted
SFAS No. 121 effective January 1, 1996. 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 including certain of the markets listed in the table
in "Business -- Existing and Unconstructed Markets" and concluded that:
- cash flows from operations would not be adequate to fund the capital
outlay required to build out such markets, and
- 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.
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 $143.5 million, $68.2
million and $47.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Interest Income. Interest income was $2.7 million in 1998, $5.5 million in
1997 and $3.8 million in 1996. The increase in interest income from 1996 to 1997
was due to higher interest earned on notes receivable and average cash and cash
equivalents subsequent to the receipt of approximately $53.3 million in cash
related to the formation of CS Wireless in February 1996 and the issuance of
$125.0 million of the Old 14% Notes in December 1996.
Interest income decreased from 1997 to 1998 due to higher interest earnings
during 1997 on larger escrowed balances segregated for the payment of interest
on the Old Senior Notes and higher interest earnings on a note receivable that
was partially repaid during the second and third quarters of 1997.
Interest Expense. We incurred interest expense of $37.1 million in 1998,
$39.9 million in 1997 and $22.0 million in 1996. The increase in interest
expense from 1996 to 1997 was due to increases in
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borrowed funds. Average borrowings increased from $176.0 million during 1996 to
$307.0 million during 1997. Interest expense during the periods presented
consisted primarily of :
- non-cash interest related to the Old Convertible Notes,
- interest on our Old 13% Notes issued March 1995,
- interest on our Old 14% Notes issued December 1996,
- interest related to a short-term senior secured credit facility repaid in
December 1996, and
- interest on debt incurred in conjunction with the BTA auction.
The slight decrease in interest expense from 1997 to 1998 resulted from our
filing of a voluntary petition for relief under Chapter 11 of the U.S.
Bankruptcy Code on December 4, 1998, at which time interest ceased to accrue on
the impaired debt (the Old Convertible Notes and the Old Senior Notes). See
"Reorganization." If interest had continued to be accrued, total interest
expense would have been $39.9 million for the year ended December 31, 1998.
Equity in Losses of Affiliates. During 1996, 1997 and part of 1998, we
owned approximately 36% of the outstanding common stock of CS Wireless, which we
acquired on February 23, 1996, and 20% of the outstanding common stock of
Wireless One, which we acquired in October 1995. We had equity in losses of
affiliates of $30.3 million in 1998, $32.0 million in 1997 and $18.6 million in
1996. The increase in losses from affiliates from 1996 to 1997 reflects actual
higher net losses incurred by CS Wireless and Wireless One during 1997. Losses
recorded for Wireless One reduced our investment balance to zero in November
1997. During the second quarter of 1998 we wrote off $6.8 million of our excess
basis in CS Wireless, and during the third quarter of 1998 we wrote off $11.7
million of our remaining investment in CS Wireless after learning in the third
quarter of 1998 that CS Wireless had recorded an asset impairment charge on its
financial statements of $46 million related to goodwill. In December 1998 we
sold our 36% equity interest in CS Wireless to CAI Wireless. See
"Business -- Recent Transactions."
Income Tax Benefit. At December 31, 1998, we had an estimated $324 million
net operating loss carry forward for income tax purposes. No income tax benefit
was recorded for the years ended December 31, 1997 and 1998. As discussed more
fully in Note 11 of the notes to the consolidated financial statements, we
recognized income tax benefits related to our losses before income taxes and
extraordinary items of $28.2 million for 1996.
Reorganization Costs. During 1998, we incurred $3.3 million in expenses
related to our plan of reorganization under Chapter 11 of the U.S. Bankruptcy
Code. See "Reorganization." These costs are for services of financial and legal
advisors, accountants and other consultants as well as printing and mailing
costs for documents relating to the plan of reorganization.
Extraordinary Item. In December 1996, we recognized an extraordinary loss
of $11.5 million, net of tax of $1.1 million. This extraordinary loss resulted
from a substantive modification of the terms of the Old 13% Notes upon the
issuance of the Old 14% Notes. For financial reporting purposes, the Old 13%
Notes were treated as extinguished and reissued at their fair market value upon
the sale of the Old 14% Notes. The extraordinary loss is comprised of the
associated write-off of $5.3 million debt issuance costs related to the Old 13%
Notes, the consent payments of $6.9 million, the decrease in the Old 13% Notes
by $1.1 million to reflect their estimated fair value and other costs of
$400,000.
Net Loss. We have recorded net losses since our inception. We incurred net
losses of $211.6 million, or $10.72 per basic and diluted common share, during
1998, $134.6 million or $6.85 per basic and diluted common share, during 1997
and $61.1 million, or $3.31 per basic and diluted common share, during 1996.
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.
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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.
System EBITDA refers to net income (loss) plus net interest expense, income
tax expense, depreciation and amortization expense and all other non-cash
charges, less any non-cash items which have the effect of increasing net income
or decreasing net loss, for a system. System EBITDA includes all selling,
general and administrative expenses attributable to employees employed in that
system and, to more accurately reflect operations at the system level, we also
allocate to each operating system expenses related to billing, collections,
telemarketing, our call center and information systems.
Although we have recorded net losses of $434.5 million since inception, 53
operating systems achieved positive System EBITDA for the three months ended
March 31, 1999, and 48 operating systems achieved positive System EBITDA for the
year ended December 31, 1998. Our remaining systems did not achieve positive
System EBITDA for the three months ended March 31, 1999, or the year ended
December 31, 1998, primarily as a result of the lower number of channels offered
by such systems, insufficient line of sight households and high fixed channel
lease payment requirements in relation to the number of subscribers in such
markets.
EBITDA was $331,000 for the first quarter of 1999 compared to $658,000 for
the first quarter of 1998. The decline in EBITDA in 1999 was due to lower
revenues resulting from fewer subscribers, slightly offset by lower programming
costs. EBITDA was $1.8 million for 1998, negative $3.1 million for 1997 and
negative $7.7 million in 1996. Despite the decreases in revenues from 1997 to
1998 resulting from fewer subscribers, EBITDA increased due primarily to
operational improvements and efficiencies in our operating markets and lower
total programming costs as a percent of revenue, as more wireless cable
subscribers migrated to our DIRECTV offering. Bad debt expense decreased from
$3.5 million in 1997 to $1.7 million in 1998 and our monthly churn rate
decreased from 4.6% in 1997 to 3.6% in 1998. This improvement is attributed to a
higher quality subscriber base resulting from improved credit screening and
collection procedures.
The improvement in EBITDA from 1996 to 1997 resulted from a 41% growth in
revenues combined with lower corporate overhead. EBITDA consistently increased
during 1997, improving from negative $2.6 million in the second quarter, to
negative $798,000 in the third quarter to a positive $279,000 in the fourth
quarter. We attributed this increase in EBITDA to operational improvements
implemented during 1997 as well as cost savings and efficiencies through
consolidation of management and staff in certain markets and reductions in
executive and corporate staff. In addition, bad debt expense decreased from $7.3
million in 1996 to $3.5 million in 1997, primarily as a result of improved
credit screening procedures and collection policies. We believe that these
improvements resulted in a higher quality subscriber base at year-end. Our
monthly churn rate decreased from 9.6% for the year ended December 31, 1996,
including the year-end subscriber write-off and change in methodology for
reporting MDU subscribers, to 4.6% for the year ended December 31, 1997.
Excluding the 1996 year-end subscriber write-off and methodology change, our
average monthly churn for 1996 was 4.1%. The increase in overall churn in 1997
is primarily attributable to the enforcement of more aggressive collections and
disconnect procedures during 1997.
BALANCE SHEET AS OF DECEMBER 31, 1998, COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 1997
Investment in Affiliates. As discussed above, we wrote off $18.5 million of
our investment in CS Wireless during the second and third quarters of 1998,
including $6.8 million of goodwill representing our basis in excess of its
equity in the net assets of CS Wireless, and $11.7 million of our share of asset
impairment charges recorded by CS Wireless, thus reducing its investment balance
to zero. In December 1998, we sold our investment in CS Wireless to CAI
Wireless. See "Business -- Recent Transactions," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results of
Operations for the Three Years Ended December 31, 1998 -- Equity in Losses of
Affiliates."
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Long-Lived Assets (Systems and Equipment, License and Leased License
Investment and Excess of Cost Over Fair Value of Net Assets Acquired). As
previously discussed, in accordance with the requirements of SFAS No. 121, we
evaluated all of our long-lived assets for impairment during the second and
third quarters of 1998. Based upon the results of a fair market valuation
performed by a third party, we recorded non-cash impairment charges of $105.8
million during 1998. The impairments included write-downs of systems and
equipment ($44.5 million), license and leased license investment ($36.6 million)
and the excess of cost over fair value of net assets acquired ($24.7 million).
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:
- at December 31, 1996, our EBU rate of $9.05 was increased to $17.95. This
resulted in a decrease of 26,300 reported subscribers,
- effective March 31, 1998, our EBU rate was increased to $24.99, resulting
in a decrease of approximately 4,000 reported subscribers, and
- on November 1, 1998, in conjunction with our first system-wide price
increase, the EBU rate was increased to $26.99, resulting in a decrease
of approximately 600 reported subscribers.
LIQUIDITY AND CAPITAL RESOURCES
The wireless broadband network 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 recent
approval by the FCC of the use of MMDS spectrum for digital two-way
communications services allows us to use our spectrum to provide wireless
broadband services such as high-speed Internet access services, VOIP and
wireless local loop 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 wireless broadband
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Future Cash Requirements," "Business -- Business
Strategy" and "Business -- Government Regulation."
We used cash in operations of $98,000 during the first quarter of 1999,
compared to cash provided by operations of $1.5 million during the first quarter
of 1998. This was due primarily to lower revenues resulting from fewer
subscribers, slightly offset by lower programming costs. Cash used in operations
was $8.4 million in 1998, $41.6 million in 1997 and $22.8 million in 1996. The
reduction in cash used in operations in 1998 compared to 1997 was primarily due
to:
- nonpayment in 1998 of accrued interest on the Old Senior Notes,
- lower programming costs as a result of fewer subscribers,
- improved subscriber receivable collection experience, and
- labor savings and efficiencies at the market level.
These reductions in cash were partially offset by lower revenues.
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The increase in cash used in operations in 1997 compared to 1996 was
primarily due to increased systems operations expense due to increased
subscribers and interest expense, partially offset by a 41% increase in
revenues.
Cash used in investing activities decreased to $2.4 million during the
first quarter of 1999 from $3.0 million during the same period in 1998. This
decrease was due primarily to lower capital expenditures resulting from fewer
subscriber installs in the first quarter of 1999, combined with lower equipment
purchases in 1998 related to channel construction in certain markets. Cash used
in investing activities was $2.0 million in 1998 and $34.2 million in 1996. Cash
provided by investing activities was $6.8 million in 1997. Cash provided by/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 wireless cable channel rights that are not a part of our strategic plan.
During 1998 cash used in investing activities included the sale of debt
securities held in our escrow account for payment of interest on the Old 14%
Notes, the sale of our equity interest in CS Wireless for $1.5 million,
purchases of subscriber equipment, the upgrade of transmission equipment and
purchases of new equipment for additional channels authorized by the FCC in
certain markets. During 1997, investing activities included receipt of
approximately $15.0 million in cash for payment on a note receivable from CS
Wireless, $3.5 million in cash from the sale of a partial interest in our
investment in a Mexican wireless cable company, sales of debt securities
totaling $19.9 million, and the acquisition of two operating systems in Oklahoma
for $1.6 million.
Our purchases of systems and equipment decreased from 1996 to 1997 due to
(1) the launch of 16 systems during 1996 compared to two systems in 1997, (2)
our acquisition of the Champaign, Illinois and Gainesville, Texas operating
systems and (3) payments related to the BTA auction and out-of-pocket expenses
related to the acquisition of the businesses of CableMaxx, Inc. and American
Wireless Systems, Inc., assets of Fort Worth Wireless Cable TV Associates,
Wireless Cable T.V. Associates #38 and certain of the wireless cable television
assets of Three Sixty Corp., formerly Technivision, Inc. (collectively, the
"CableMaxx Acquisitions"). These uses of cash were partially offset by the
receipt of approximately $58.3 million in cash from CS Wireless in connection
with our contribution of wireless cable assets to CS Wireless, and sale of
wireless cable channel rights in Tennessee, California, Texas, Illinois and
Georgia for total proceeds of approximately $23.8 million.
Net cash used in financing activities was $576,000 during the first quarter
of 1999 and $356,000 in the first quarter of 1998. This increase was due to the
commencement of quarterly principal payments on our $15.1 million in debt
incurred in connection with the acquisition of BTAs beginning in the fourth
quarter of 1998. Net cash used in financing activities was $1.7 million in 1998
and $2.0 million in 1997. Net cash provided by financing activities was $113.4
million in 1996. Cash used during 1998 and 1997 was primarily for principal
payments on obligations related to capital leases and various prior period cable
system acquisitions. As discussed more fully in Notes 7 and 9 of the notes to
the consolidated financial statements, cash provided by financing activities
during 1996 includes the net proceeds from the sale of $125 million of the Old
14% Notes and $15.0 million of the Old 13% Notes, partially offset by payments
on long-term debt assumed in the CableMaxx Acquisitions and the repayment of
certain short-term borrowings.
At May 31, 1999, we had approximately $25.0 million of unrestricted cash
and cash equivalents and $1.0 million 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 wireless broadband network
services in our markets. To implement our business strategy we intend to:
- launch high-speed Internet access service to medium-sized and small
businesses in 18 additional markets by the end of 2001,
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- offer telephony services including wireless local loop and VOIP services,
- increase our geographic scope for wireless broadband network and other
access services by acquisitions, business combinations and strategic
alliances, and
- maintain or moderately grow the subscriber base in our wireless cable
business, which coupled with anticipated improvements in operating costs
would provide revenues sufficient to cover substantially all operating
costs of this business (excluding certain unallocated corporate overhead)
while we develop and expand other wireless broadband businesses.
We estimate that a launch of a new wireless broadband network system
providing high-speed Internet access in a typical non-operating market will
involve the initial expenditure of approximately $450,000 to $600,000 for base
station equipment depending upon the type and sophistication of the equipment,
assuming that we are able to lease transmission tower space rather than
constructing a new tower. We believe that incremental base station costs to
launch an Internet service in one of our existing systems will be $200,000 to
$400,000. In addition, incremental costs of approximately $1,100 per business
Internet subscriber, which will be partially offset by installation and/or other
up-front charges to the customer, for equipment, labor, overhead charges as well
as direct commission expenses are required. Other launch costs include the cost
of securing adequate space for marketing 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.
Based on our current business plan and related assumptions, the net
proceeds of this offering, cash on hand and cash generated by operations will be
sufficient to fund our operations and capital requirements until at least the
end of 2001. However, we may be required to seek additional sources of capital
if:
- our operating assumptions change or prove to be inaccurate,
- we consummate any acquisitions of significant businesses or assets,
including spectrum licenses, or
- we accelerate the implementation of our business strategy.
If we are required to seek additional sources of capital, we cannot assure
you that we will be able to obtain capital in a timely manner and on
satisfactory terms that will be sufficient to implement our business strategy
and grow our revenue base. If we are unable to obtain financing in a timely
manner and on acceptable terms, we may delay, reduce or eliminate the launch of
new broadband network systems, including high-speed Internet access systems and
reduce or eliminate other discretionary expenditures.
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, 1998, we
had approximately $324 million in net operating losses for U.S. federal income
tax purposes, expiring in years 2013 through 2018. We estimate that
approximately $38.0 million of the above losses relate to various acquisitions
and as such are subject to certain limitations.
Although the impact of the reorganization on various federal tax attributes
has not been fully determined, some portion of our net operating loss carry
forwards likely will be reduced and may be completely eliminated pursuant to our
bankruptcy discharge. Furthermore, the deductibility of net operating loss carry
forwards arising before the Effective Date of the plan of reorganization will be
limited by the product of the long-term tax exempt rate times our fair market
value after discharge of debt.
We adopted Fresh Start Reporting on the April 1, 1999, Effective Date of
our reorganization in accordance with American Institute of Certified Public
Accountants Statement of Position 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
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outstanding common stock was canceled and newly issued shares of common stock
distributed to certain creditors in satisfaction of their claims against us. See
our unaudited pro forma condensed consolidated balance sheet as of March 31,
1999, on page F-3.
THE YEAR 2000
We have established an employee team to identify and correct Year 2000
compliance issues. Information technology ("IT") systems with non-compliant code
are expected to be identified and modified or replaced with systems that are
Year 2000 compliant. Similar actions are being taken with respect to non-IT
systems, primarily systems embedded in office, communications and other
facilities. Progress of our team's efforts is being monitored by our senior
management and periodically is reported to the audit committee of our Board of
Directors.
We recognize the need to remediate and test our mission-critical systems to
ensure that individually the systems are Year 2000 compliant and that
collectively they operate in a manner that ensures Year 2000 functionality.
We evaluated our systems and have identified the following systems and
functions as mission-critical:
- headend equipment/addressable systems, related to the receipt and
transmission of programming and data,
- billing and collection systems, and
- telecommunications systems in our customer service facility.
Headend Equipment/Addressable Systems. We have completed the evaluation of
these systems and have identified certain features that are not Year 2000
compliant which are being remediated through software and hardware upgrades,
including all hardware and software related to satellite relays, which have been
represented by the suppliers of the upgrades to be Year 2000 compliant or, in
the case of one supplier, a temporary remediation has been provided and tested.
Upgrade installation is underway and testing is expected to be substantially
complete in the third quarter of 1999.
Billing and Collection Systems. We have verified Year 2000 compliance with
our billing and collections software vendor and we are performing additional
testing on this software, to be substantially complete in the third quarter of
1999.
Telecommunications System in Customer Care Facility. We are upgrading our
system software to be Year 2000 compliant and we have obtained documentation
from the software supplier verifying Year 2000 compliance.
Our failure to make mission-critical systems Year 2000 compliant by
year-end 1999 could adversely affect our ability to service our customers and
otherwise carry on our business. Although we expect that we will have identified
and remediated any Year 2000 problems in our internal systems prior to the end
of 1999, if any significant Year 2000 problems in our systems are not discovered
or are not remediated in a timely manner, significant failures of these
functions could occur and could have material adverse consequences for our
operations. We believe, based on information currently available and the current
status of our efforts to identify and correct Year 2000 problems, that the worst
case scenarios that could affect our operations as a result of Year 2000
problems are an inability to:
- transmit and receive data,
- transmit and receive video programming, and
- produce and send invoices.
While we are working to test our own mission-critical systems for Year 2000
problems, we do not control the systems of our suppliers. We are seeking
assurance from our suppliers regarding the Year 2000 readiness of their systems.
We also plan to conduct interoperability testing (where practical) to determine
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whether our suppliers' systems will accurately provide our systems with date,
data and functionality into and beyond the new millennium. We expect to complete
our evaluation by August 31, 1999. Notwithstanding these measures, there is some
risk that the interoperation of our systems with those of our suppliers may be
affected by the Year 2000 date change. Any such impact could have a material
adverse effect on our operations.
We also may consummate acquisitions prior to the end of 1999. The extent of
the Year 2000 problems associated with any acquired company and the cost and
timing of remediation will be evaluated during and after completion of any
acquisition process. However, we cannot assure you that the system of any
acquired company will be fully Year 2000 compliant when acquired or will be
capable of timely remediation.
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. Having identified our mission-critical and business-critical
systems of our key suppliers, and the associated risks of failure of those
systems to be Year 2000 compliant, we are in the process of devising contingency
plans which will be implemented if we determine that any of those systems will
not be made Year 2000 compliant in a timely manner. We are considering
alternative contingency plans that will be ready for implementation in the third
quarter of 1999.
We do not believe the costs related to our Year 2000 compliance project
will be material to our financial condition or results of operations. We did not
have any material expenditure prior to 1999 for Year 2000 compliance projects,
and have budgeted approximately $175,000 for Year 2000 compliance initiatives
during 1999, all of which has been spent or allocated for current projects. We
believe that we will be able to achieve Year 2000 compliance of our IT and
non-IT systems within our current budget. Costs and the date by which we plan to
complete Year 2000 modifications are based on our current best estimates, which
were derived using assumptions of future events including the current status of
internal testing and remediation efforts, the continuing availability of Year
2000 software and hardware upgrades, third party compliance plans and other
factors. Unanticipated failures by critical vendors, as well as the failure by
us to execute our own identification and remediation efforts, could have a
material adverse effect on the success and cost of the project, as well as its
estimated completion date. As a result, there can be no assurance that these
forward-looking results will be achieved, and the actual cost and effects on our
operations and financial condition could differ materially from these estimates.
COMMITMENTS AND CONTINGENCIES
Nucentrix is a co-defendant in one securities lawsuit. In addition, certain
current and former directors and officers of Nucentrix, to whom we may have
indemnity obligations, are defendants in two purported securities class action
lawsuits. These actions allege, among other things, various violations of
federal and state securities laws. Nucentrix also is a party to two purported
class action lawsuits alleging that Nucentrix overcharged its customers for
administrative late fees. Nucentrix intends 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 management does not expect such an adverse
outcome, an adverse outcome in one or more of such proceedings which exceeds or
otherwise is excluded from applicable insurance coverage could have a material
adverse effect on the financial condition or results of operations of Nucentrix.
See "Business -- Legal Proceedings."
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.
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RECENTLY ISSUED ACCOUNTING PRINCIPLES
On January 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
This Statement requires changes in disclosure only and it does not affect
results of operations or financial position. Comprehensive income (loss) for the
years ended December 31, 1998, 1997 and 1996, and for the three-month periods
ended March 31, 1999 and 1998, is equal to net income (loss) reported for such
periods.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
131 is effective for fiscal years beginning after December 31, 1997. This
statement establishes standards for the way that public companies report
information about segments in annual and interim financial statements. While the
effective adoption of SFAS No. 131 has not had a material impact on our
consolidated financial statements and related disclosures, segment disclosures
may become necessary as our Internet access business becomes significant.
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
No. 133 is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The adoption of SFAS No. 133 will not have an impact on our
results of operations, financial position or cash flow.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities."
Statement 98-5 provides guidance on the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. Statement 98-5 is effective for
fiscal years beginning after December 15, 1998. The adoption of Statement 98-5
will not have an impact on our results of operations, financial position or cash
flows.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not exposed to material future earnings or cash flow fluctuations
from changes in interest rates on long-term debt. A majority of our long-term
debt at December 31, 1998, which includes the Old Senior Notes and the Old
Convertible Notes, are considered to be eligible for compromise under our plan
of reorganization, and have been reclassified from Long-term Debt to Liabilities
Subject to Compromise on our consolidated balance sheet. Our remaining long-term
debt, which consists primarily of $15.1 million relating to the acquisition of
certain BTAs in March 1996, bears a fixed interest rate. To date, we have not
entered into any derivative financial instruments to manage interest rate risk
and are currently not evaluating the future use of any such financial
instruments.
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BUSINESS
OVERVIEW
We use our high-capacity radio spectrum to provide wireless broadband
network services in medium and small markets in the central United States. We
control up to 196 MHz of radio spectrum in the 2.1 to 2.7 GHz band licensed by
the FCC in 87 markets. We currently provide always-on, high-speed Internet
access service in two markets, primarily to medium-sized and small businesses,
small offices/home offices ("SOHOs") and telecommuters, and plan to expand this
service into 18 additional markets by the end of 2001. Historically, we have
used our spectrum to provide wireless subscription television services, commonly
referred to as "wireless cable," and currently provide these services in 58
markets in nine states. Going forward, our goal is to become a leading provider
of wireless broadband services in our markets, while expanding into additional
medium markets through the acquisition of additional MMDS spectrum rights. We
also intend to explore acquisitions of, and strategic alliances with, other
providers of Internet access, broadband and telephony services, such as
traditional ISPs, DSL providers, other fixed-wireless providers in licensed or
unlicensed frequencies and CLECs.
We use our spectrum to transmit and receive signals between a base station
and transmit/receive equipment at each customer's location. Our radio spectrum,
commonly and collectively referred to as "MMDS," is comprised of the following
channels:
- MDS (Multipoint Distribution Service) -- 2 channels in the 2150-2160 MHz
band and 3 channels in the 2650-2680 MHz band,
- ITFS (Instructional Television Fixed Service) -- 20 channels in the
2500-2686 MHz band, and
- MMDS (Multichannel Multipoint Distribution Service) -- 8 channels in the
2596-2644 MHz band.
Our MMDS spectrum has demonstrated capability to transmit at aggregate data
rates of up to 30 Mbps per six-MHz channel and, unlike other fixed-wireless
providers, covers a service area radius of 35 miles from a single base station.
We also lease the rights to 20 MHz of Wireless Communications Service ("WCS")
spectrum at 2.3 GHz in 19 markets.
We presently have television transmission facilities constructed and
operating in 58 of our 87 markets. We currently are the largest operator of
wireless cable systems in the United States, with about 155,000 subscribers at
June 30, 1999, including about 17,000 subscribers who receive DIRECTV
programming sold by us, either alone or with our MMDS programming. We have added
high-speed Internet access service in two of our 58 markets and plan to add this
service to 11 additional operating markets and to seven of our 29 non-operating
markets by the end of 2001.
INDUSTRY OVERVIEW AND MARKET OPPORTUNITY
Internet access is one of the fastest growing segments of the
telecommunications industry. International Data Corporation ("IDC") estimates
that the number of Internet users worldwide has increased substantially over the
last several years, reaching nearly 159 million in 1998 with expected growth of
26% per year over the next five years. IDC reports that Internet service
provider revenues are forecasted to grow from $10.7 billion in 1998 to $37.4
billion in 2003, with business access comprising 62% of the total access revenue
base.
Data communication capabilities provided by the Internet allow medium-sized
and small businesses to streamline e-commerce and communications among
employees, customers and suppliers. To fully take advantage of the efficiency
provided by the Internet's capabilities, businesses need high-speed Internet
connectivity. We also expect the demand for high-speed Internet access from
SOHOs and telecommuters to increase as companies encourage an increasing number
of employees to work in remote offices or their homes. Management believes there
are approximately 45-50 million telecommuters and SOHO-based workers in the
United States, approximately 60% of which need access to corporate networks, the
Internet
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or both for a variety of applications, including e-mail databases and corporate
intranets. Management also believes the annual growth rate for this market will
be 12% to 15% over the next three years.
Traditionally, medium-sized and small businesses, telecommuters and SOHOs
have relied on low-speed Internet access using existing telephone lines. Most
telephone networks today are fiber, capable of high-capacity and high-speed
transporting of data. However, the portion of the networks that ultimately
connects to the customer premises, commonly referred to as the "local loop" or
"last mile," generally is narrowband copper wire with service speeds limited to
56-128 Kbps. This limitation currently constrains the capacity and speed of the
Internet to most users. As a result, users are seeking affordable higher-speed
access alternatives.
The higher speed Internet access alternatives offered by our competitors
have the following limitations:
- T1 service, at 1.54 Mbps, is a fast but relatively expensive solution,
typically available at approximately $2,000 per month in our markets,
plus installation and equipment costs of approximately $3,000.
- DSL service is delivered across the incumbent local exchange carrier's
("ILEC") existing copper wire system. While this service is capable of
delivering very high speeds, DSL suffers performance limitations the
farther the customer premises are from the central office of the ILEC.
Distances are limited to about four to five miles from a central office
for the lowest speed solutions and 10,000 feet or less for the fastest.
- High-speed cable networks may be capable of high-speed data transmission.
However, we estimate that cable passes only 40% of businesses in our
markets and, therefore, does not serve a large portion of our targeted
customer base. In addition, we believe that a majority of existing cable
systems in our markets have not been retrofitted to enable two-way
high-speed data transmission. Moreover, cable is a shared medium and the
more subscribers loaded on the network, the slower the per subscriber
speed becomes.
- Other high-speed wireless providers, such as those using 24 GHz, 28 GHz
and 38 GHz spectrum, have concentrated on the more densely populated
urban areas because of transmission distance limitations. Signals using
these radio frequencies are generally limited to a one to three-mile
radius, or three to 28 square miles, which makes application in less
densely populated areas less economical.
- Satellite networks, such as direct broadcast satellite, currently offer
only one-way Internet access, with upstream access limited to existing
copper telephone lines.
THE NUCENTRIX SOLUTION
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 MMDS spectrum to
one-way transmissions. In September 1998, the FCC approved 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. With this approval,
we believe we will be able to meet the needs of business users in medium and
small markets by providing:
Superior Value. We offer higher bandwidth digital connections than
other Internet access providers in our target markets at prices
substantially lower than or comparable to other alternatives. For business
Internet users, our mid-range Internet access services are two to three
times the speed of ISDN systems at monthly rates approximately equivalent
to prevailing ISDN rates. Our higher-end services offer speeds of 768 Kbps
up to 1.54 Mbps, or the equivalent of a T1 telephone line, at rates
substantially less than prevailing T1 rates in our markets. Additionally,
our customers can upgrade their access speeds at any time without adding
additional hardware.
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Always-On Service. Our Internet access networks provide 24-hour,
always-on connectivity, which dial-up modem, ISDN and alternative local
area network remote access systems do not provide.
Full Service 24-Hour Internet Access/Support. We are a full service
24-hour ISP and, through third parties, provide ancillary value added
services such as e-mail, web design, web hosting and domain name
maintenance. In the future, we expect to provide additional services like
wireless local loop services, virtual private networking and VOIP.
Reliability. We have engineered our wireless point to multipoint radio
path links to provide 99.99% reliability. We also offer two separate and
diverse routes to the nearest Internet backbone connection to ensure our
customers maximum network reliability.
Experienced Management Team. We are led and managed by a team of
professionals with extensive experience in information technology as well
as wireless, data, video and general telecommunications industries. Leading
our team is Carroll D. McHenry, President and Chief Executive Officer, who
has 32 years experience in the telecommunications and information systems
industries.
Customer Equipment Financing. As with most new technology, we expect
the cost of customer premises equipment to decline as demand increases.
While we intend to encourage our customers to buy the modems and other
equipment necessary for high-speed Internet access, we expect to offer a
financing solution to lower the cost of entry for our customers.
BUSINESS STRATEGY
Our goal is to become a leading primary provider of high-speed wireless
broadband network services in our markets. Our strategy includes the following
key elements:
Exploit the increasing demand for affordable high-speed Internet
access. We plan to focus initially on medium-sized and small businesses,
SOHOs and telecommuters in medium markets, where we believe the demand for
high-speed Internet access is the greatest and alternatives, if available,
have performance or distance limitations or are relatively expensive.
Achieve "first to market" status. We believe that a significant
percentage of our target business customers currently are unpassed by
broadband cable or fiber network providers. Even considering the time to
build out a non-operating market, we believe we can complete our facilities
and begin reaching our target customer base faster than our competitors.
For example, DSL technology generally requires arrangements with local
exchange carriers to co-locate in multiple central offices. Other
fixed-wireless providers at higher frequencies such as 24 GHz, 28 GHz and
38 GHz have much shorter transmission paths than we do and, therefore,
require more base stations than we do to cover an entire market. As a
result, these technologies will require additional time and capital expense
to reach our target customers.
Take advantage of our existing high capacity and wide coverage
spectrum. We expect to benefit from our MMDS radio spectrum, which allows
us to provide broadband services over large geographic areas. Our MMDS
spectrum is capable of transmitting at aggregate data rates of up to 30
Mbps per six-MHz channel, or the equivalent of approximately 20 T1
telephone lines. We control an average of 27 six-MHz channels in our
existing markets. In addition, our MMDS spectrum has a typical coverage
radius for a single base station design of up to 35 miles for high-speed
Internet access service, or approximately 3,800 square miles compared to a
one to three-mile radius, or three to 28 square miles, for other wireless
broadband service providers and a two to a five-mile radius from the local
exchange carrier's central office, or 13 to 80 square miles, for DSL. This
will allow us to reach businesses in office parks, suburbs, strip shopping
centers and along interstate highways that other fixed wireless and DSL
providers currently may be unable to serve.
Leverage our existing investment in MMDS infrastructure, including
base stations and other transmission facilities. We believe that the
favorable characteristics of our spectrum discussed above
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initially will enable us to provide high-speed Internet access service
using a single base station design for each market. Thirteen of our
projected 20 Internet markets to be launched by the end of 2001 are fully
operational in the delivery of wireless cable service and, therefore, a
substantial portion of the capital required for Internet access delivery in
these markets already has been invested. The incremental cost to upgrade an
existing wireless cable headend facility to add Internet access service
capabilities is about $200,000 to $400,000 per base station and the time to
retrofit a base station is 30-60 days following receipt of necessary
regulatory approvals. We estimate the buildout of an unconstructed market
to deliver high-speed Internet access service will require an initial
expenditure of approximately $450,000 to $600,000 for base station
equipment for a single site, assuming that we are able to lease
transmission tower space rather than being required to construct a new
tower.
Expand into residential market. MCI WORLDCOM and Sprint recently have
announced acquisitions of MMDS spectrum covering approximately 51 million
total homes. As these companies build out their markets, we expect demand
for wireless modems and other customer premises equipment to increase,
putting downward pressure on the price of the equipment. As equipment
prices decline, we plan to actively market our high-speed Internet access
services to residential customers.
Offer telephony services. To enhance the value of our assets in the
future, we plan to implement telephony services over our MMDS spectrum in
selected markets. This will consist of wireless local loop and VOIP
services, which will connect customers directly to the public switched
telephone network.
Expand through acquisitions and strategic alliances. We plan to pursue
acquisitions of MMDS spectrum that increase our geographic service areas
and enable us to accelerate market penetration and expand our customer
bases. We also intend to explore acquisitions of, and strategic alliances
with, other providers of Internet access, broadband and telephony services
in certain markets, such as traditional ISPs, DSL providers, other
fixed-wireless providers in licensed and unlicensed frequencies and CLECs.
These strategic alliances may involve investment in or by us, and be in the
form of joint ventures, affiliation agreements, wholesale transport
agreements, cross-marketing and selling agreements or other arrangements.
WIRELESS BROADBAND 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
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 two-way Internet access services
over our MMDS spectrum.
We have 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 and SOHOs, which include:
- Internet access at speeds from 256 Kbps to 1.54 Mbps, or up to 53 times
faster than traditional dial-up speeds of 28.8 Kbps and up to 12 times
faster than ISDN speeds of 128 Kbps,
- technical support available 24 hours a day, 7 days a week,
- e-mail,
- Web design and hosting,
- domain name registration, and
- domain name and maintenance changes.
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The following table summarizes our service offerings:
<TABLE>
<CAPTION>
NO. OF 1-YR CONTRACT 2-YR CONTRACT
PRODUCT SPEED USERS MONTHLY PRICE MONTHLY PRICE
- ------- ------------------------- ------ ------------- -------------
<S> <C> <C> <C> <C>
Telecommuter Pack....... 256 Kbps w/o Web Hosting 1 $129.95 $114.95
SOHO Pack............... 256 Kbps with Web Hosting 1 $149.95 $134.95
SOHO Pack Plus.......... 384 Kbps with Web Hosting 1 $169.95 $154.95
Small Business 2-20 $149.95 $134.95
Package............... 128 Kbps
Cyber Wave M256K........ 256 Kbps 2-20 $249.95 $224.95
Cyber Wave M384K........ 384 Kbps 2-20 $399.95 $359.95
Cyber Wave M768K........ 768 Kbps to 1.54 Mbps 2-20 $899.95 $799.95
</TABLE>
Our current installation fees are $940 for single users and $1,160 for
multiple users.
We expect our customers' needs will evolve over time, resulting in demand
for faster connections. We can increase our customers' access speeds without
upgrading the equipment located at their premises. Remote upgrades allow
customers to improve performance without service interruptions or additional
equipment investment.
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, WGN,
WTBS, Discovery, the Nashville Network, 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.
Currently, wireless cable providers can offer a maximum of 33 channels of
analog video programming. Because we historically have not used equipment that
converts signals over the MDS-1 channel, and the MDS-2A channel will not
accommodate color video programming satisfactorily, we can offer a maximum of 31
channels of video programming in our markets. We have supplemented our analog
channel capacity by entering into cooperative marketing arrangements with
DIRECTV and DIRECTV distributors, which allow us to market up to 185 channels of
digital programming in 51 markets in combination with our MMDS offering or as a
stand-alone offering. See "Business -- Suppliers." Our 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 that we
intend to build out for Internet services.
MMDS LICENSES AND LEASES
We hold the licenses for approximately 75% of our MMDS and MDS channels. We
lease from third-party license holders the rights to (1) the remaining 25% 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 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
"Business -- Government Regulation." 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 MMDS or MDS channels. The terms of the 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 terms of the leases for MMDS and MDS channels typically
expire five to 10 years from the lease execution date. The remaining initial
terms of most of our operating channel leases range from two to six years,
although substantially all of these leases renew automatically or upon notice
from us. Although we do not believe that the termination of or failure to renew
a single channel lease would adversely affect us, several terminations or
failures to renew in one or more operating systems could have a material adverse
effect on our operations.
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EXISTING AND UNCONSTRUCTED MARKETS
The following tables provide information as of June 30, 1999, regarding the
87 markets in which we operate a wireless cable system or Internet business, own
the BTA authorization or have acquired, or expect to acquire, MMDS channel
rights. Certain of our channel rights are subject to pending applications for
new channel licenses or modifications to existing channel licenses, and must be
reviewed by the FCC's engineering and legal staff. We cannot assure you of the
number of applications that will be granted.
"Estimated Total Households" represents our current estimates of the
approximate number of households that may be served from existing or projected
tower sites. Total household information is based on 1990 census bureau data
from a commercially available population software program, and includes an
average annual growth rate of 1%, based on census bureau data released in March
1998. Historically, MMDS companies have provided information on total households
to present basic information about their markets. The following table does not
include information on the number of businesses in our markets. We estimate that
our wireless transmissions can be received by an average of 85% of the homes in
our markets using our current network design.
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<PAGE> 49
<TABLE>
<CAPTION>
ESTIMATED NUMBER OF VIDEO NUMBER OF
TOTAL SUBSCRIBERS CHANNELS
EXISTING MARKETS HOUSEHOLDS 6/30/99 AVAILABLE(1)
- ---------------- ---------- --------------- ------------
<S> <C> <C> <C>
Abilene, TX................................................. 63,808 2,821 22
Ada, OK..................................................... 48,591 3,044 32
Ardmore, OK................................................. 53,076 3,343 32
Austin, TX.................................................. 437,358 9,095 33
Beloit, KS.................................................. 20,481 561 33
Bucyrus, OH................................................. 236,856 833 21
Champaign, IL............................................... 104,533 2,579 23
Chanute, KS................................................. 56,155 4,124 33(2)
Corpus Christi, TX.......................................... 167,864 10,058 33(3)
Corsicana/Athens, TX........................................ 95,753 2,156 29
Enid, OK.................................................... 40,118 3,838 32
Freeport, IL................................................ 139,485 1,036 20
Gainesville, TX............................................. 40,444 1,018 33
George West, TX............................................. 23,237 2,126 23(4)
Greenville, PA.............................................. 339,291 621 20
Hamilton, TX................................................ 31,443 2,647 33
Jacksonville, IL............................................ 48,060 512 26
Jourdanton/Charlotte, TX.................................... 101,132 1,696 29
Kerrville, TX............................................... 37,046 423 33
Kingsville/Falfurrias, TX................................... 32,484 1,489 23(4)
Laredo, TX.................................................. 51,136 3,631 33
Lawton, OK.................................................. 81,960 5,730 33
Lindsay, OK................................................. 58,730 2,521 29
Lubbock, TX................................................. 112,235 3,124 33
Macomb/Walnut Grove, IL..................................... 84,209 1,768 20
Manhattan, KS............................................... 52,720 1,767 33(5)
Marion, KS.................................................. 55,069 932 21(6)
McAlester, OK............................................... 38,986 634 20
McLeansboro, IL............................................. 88,485 1,249 31
Medicine Lodge/Anthony, KS.................................. 30,022 1,265 22(7)
Midland, TX................................................. 118,372 5,446 33
Monroe City/Lakenan, MO..................................... 70,196 1,365 32(8)
Montgomery City, MO......................................... 91,080 698 23
Mt. Pleasant, TX............................................ 57,951 2,132 24
Muskogee, OK................................................ 79,972 907 20
O'Donnell, TX............................................... 66,006 571 22
Olney, IL................................................... 71,074 1,522 20
Olton, TX................................................... 27,333 720 33
Paragould, AR............................................... 142,470 2,239 20
Paris, TX................................................... 42,897 2,786 26
Peoria, IL.................................................. 204,681 1,641 29
Radcliffe/Story City, IA(9)................................. 75,788 1,630 27
Sherman/Denison, TX......................................... 110,559 7,925 29
Sikeston, MO................................................ 100,564 2,427 20
Sterling, KS................................................ 45,447 699 24(5)
Stillwater, OK.............................................. 81,586 5,367 33
Strawn/Ranger, TX........................................... 42,856 1,282 33
Taylorville, IL............................................. 166,567 1,481 20
Temple/Killeen, TX.......................................... 138,825 9,897 33(3)
Texarkana, TX............................................... 80,871 1,211 29
Tulsa, OK................................................... 324,859 9,985 33(3)
Uvalde/Sabinal, TX.......................................... 18,528 1,486 33
Vandalia, IL................................................ 93,998 1,544 20
Waco, TX.................................................... 113,247 5,180 33(10)
Watonga, OK................................................. 23,946 815 33(5)
Weatherford, OK............................................. 28,994 717 33
Wichita Falls, TX........................................... 65,257 4,544 33
Woodward, OK................................................ 14,180 2,288 33
--------- ------- ------
Total -- Existing Markets........................... 5,268,871 155,146 1,619
========= ======= ======
</TABLE>
- ---------------
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<PAGE> 50
(1) Unless otherwise noted, the number of channels available includes MMDS, MDS
and ITFS channels that are either licensed to us or leased to us from other
license holders. The number of channels available includes leased channels
that may not currently be available for two-way broadband wireless
services.
(2) Eight MMDS and two MDS 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.
(3) One MDS channel is available for license through our ownership of the BTA.
(4) We have leases with two prospective ITFS applicants for eight additional
ITFS channels that we believe will be available in the FCC's next ITFS
filing window.
(5) One MDS channel is subject to a pending application at the FCC that we
believe is available for grant.
(6) Four ITFS channels are subject to pending proceedings at the FCC and we
believe will be granted pursuant to an agreement with the wireless cable
operator of the adjacent Salina, Kansas market. We have the right to lease
one MDS channel that is subject to a pending application that we believe is
available for grant.
(7) We have the right to lease four ITFS channels which are subject to a
pending application that we believe is available for grant under a
settlement agreement with a competing ITFS applicant.
(8) Four MMDS channels are subject to a pending application at the FCC that we
believe are available for grant.
(9) We operate the Radcliffe/Story City, Iowa market under a management
arrangement with CS Wireless Systems, Inc. CS Wireless has agreed to assign
to us its rights to the assets and channel leases for this market upon FCC
approval of the assignment of certain other MMDS and WCS spectrum rights
and the closing of a master agreement with CS Wireless. See
"Business -- Recent Transactions -- CS Wireless Transaction."
(10) Two MDS channels are available for license through our ownership of the
BTA.
<TABLE>
<CAPTION>
TOTAL CHANNELS
UNCONSTRUCTED MARKETS HOUSEHOLDS EXPECTED(1)
- --------------------- ---------- -----------
<S> <C> <C>
Altus, OK................................................... 27,256 33
Amarillo/Borger, TX......................................... 132,984 29
Bartlesville/Ponca City, OK................................. 128,271 33
Burnet, TX.................................................. 50,850 32
Casper, WY.................................................. 31,242 13
Charleston, WV.............................................. 183,746 4
Cheyenne, WY................................................ 33,940 13
Columbia, MO................................................ 118,199 21
Des Moines, IA.............................................. 225,319 31
El Dorado, AR............................................... 79,031 16
El Paso, TX................................................. 235,243 29
Elk City, OK................................................ 26,010 25
Fischer, TX................................................. 439,639 25
Flagstaff, AZ............................................... 45,693 6
Forrest City, AR............................................ 172,317 20
Great Bend, KS.............................................. 53,865 33
Hays, KS.................................................... 29,040 33
Holdenville, OK............................................. 48,575 33
Kossuth, TX................................................. 71,964 33
Lake City, FL............................................... 51,277 16
Lenapah, OK................................................. 56,147 33
Lufkin, TX.................................................. 70,954 13
Magnolia, AR................................................ 58,421 22
Ottawa/LaSalle, IL.......................................... 238,510 16
Paducah/Mayfield, KY........................................ 76,393 33
Searcy, AR.................................................. 76,935 33
Springfield, MO............................................. 143,756 33
Topeka, KS.................................................. 112,540 33
Tyler, TX................................................... 174,025 21
--------- -----
Total -- Unconstructed Markets...................... 3,192,142 715
--------- -----
Total -- All Company Markets........................ 8,461,013 2,334
========= =====
</TABLE>
- ---------------
(1) The number of channels expected includes channels (a) that are either
licensed to us or leased to us from other license holders, (b) for which we
have filed or because of our BTA ownership have the exclusive right to file
license applications with the FCC which we expect to be granted in 1999, or
(c) to which we otherwise expect to acquire license or lease rights in 1999.
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<PAGE> 51
WCS SPECTRUM TO BE ACQUIRED FROM CS WIRELESS
<TABLE>
<CAPTION>
ESTIMATED
BANDWIDTH TOTAL
MARKETS(1) (MHZ) HOUSEHOLDS
- ---------- --------- ----------
<S> <C> <C>
Abilene, TX................................................. 20 63,808
Amarillo, TX................................................ 20 132,984
Austin, TX.................................................. 20 437,358
Gainesville, TX............................................. 20 40,444
Hamilton, TX................................................ 20 31,443
Longview/Marshall, TX....................................... 20 151,641
Lubbock, TX................................................. 20 112,235
Midland/Odessa, TX.......................................... 20 118,372
Mt. Pleasant, TX............................................ 20 57,951
O'Donnell, TX............................................... 20 66,006
Olton, TX................................................... 20 27,333
Paris, TX................................................... 20 42,897
Sherman/Denison, TX......................................... 20 110,559
Shreveport, LA.............................................. 20 160,163
Temple/Killeen, TX.......................................... 20 138,825
Texarkana, TX............................................... 20 80,871
Tyler, TX................................................... 20 174,025
Waco, TX.................................................... 20 113,274
Wichita Falls, TX........................................... 20 65,247
---------
Total............................................... 2,125,436
=========
</TABLE>
- ---------------
(1) CS Wireless and Nucentrix are parties to an agreement under which CS
Wireless agreed to assign the WCS spectrum listed above to us. 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 our
agreement with CS Wireless. See "Business -- Recent Transactions -- CS
Wireless Transaction."
NETWORKS
We transmit signals through the air via microwave frequencies from
transmission facilities, referred to as a "headend" or "base station," to an
antenna and other customer premises equipment at each customer's location. Each
base station includes a transmission tower, transmit and receive antennas,
transmitters, waveguide and other transmission equipment. A "point of presence,"
which may be located at the base station, houses other equipment related to our
Internet business. Each point of presence includes (1) a transceiver to transmit
and receive response or downstream data, (2) a wireless data converter that
converts a wireless signal to a wireline signal (and vice versa), (3) an
Ethernet switch that provides the electrical connection for electronic devices
at the base station or other point of presence and (4) a gateway router that
directs the traffic to the proper Internet address and connects to the Internet
backbone. Satellite reception equipment is required to receive video programming
if the headend serves our wireless cable business.
Microwave transmissions generally require direct, unobstructed
line-of-sight from the base station to the customer's transmit/receive equipment
because the microwave signals used will not pass through trees, hills, buildings
or other obstructions. However, certain signal blockages can be overcome with
the use of additional equipment. Our operating systems transmit at from 10 to
100 watts of power from a base station that has a typical coverage radius of 35
miles. We control up to 196 MHz of MMDS spectrum in each of our markets.
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 traffic,
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 an Ethernet hub. Upstream
and downstream transmission is provided
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<PAGE> 52
by two or more separate MMDS channels, and Internet connectivity is maintained
by our base stations through two separate and diverse connections to national
Internet backbone providers.
We initially plan to use a sectorized, single-cell design for our two-way
Internet access service. With traditional MMDS transmissions, the signal is
transmitted in a 360 degree omni-directional pattern. Our single-cell design
will divide our channel service areas into four 90 degree sectors. Sectorization
of our transmissions under this design will allow us to re-use each frequency in
every other sector two times, doubling the bandwidth capacity for each channel
used. For example, if we have two channels authorized for response
transmissions, and allocate each channel into every other sector of four
possible sectors, the first channel could be re-used for response transmissions
in sectors 1 and 3, while the second channel could be reused for response
transmissions in sectors 2 and 4. We have selected the single-cell over a
cellularized design because of design simplicity, lower infrastructure costs and
licensing issues. Cellularization of the channels in certain markets could
increase both the number of households our signal can reach and the market's
available bandwidth capacity. We intend to continue to research cellularized
designs and plans.
Wireless cable. Wireless cable 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 with 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 provide
Nucentrix-branded Internet customer service through a contract with ISP
Alliance, Inc. ("ISPA"), an Internet customer service provider in Atlanta,
Georgia, which allows us to deliver this customized service on a "pay as used"
basis. There is no additional charge to the customer beyond their monthly
service fee. ISPA's on line customer service system is available to us through
an Internet connection, and allows us to monitor the call volume and specific
service activity for remedial action. 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. ISPA provides us with an on-line customer
service call and resolution history, and post-help customer feedback through the
use of customer satisfaction questionnaires.
Our existing billing system is sufficient for our current Internet access
service offerings, and we expect that it will accommodate our anticipated
customer growth. We provide field and technical support to the Internet and
video business through our existing base of technical services personnel. We
provide our wireless cable subscribers support 24 hours a day, seven days a
week, through a centralized customer care center and our existing base of
technical services personnel.
SALES AND MARKETING
We attract customers by offering a range of affordably priced Internet
access and subscription television services and high quality customer care. We
market our services through a combination of direct sales, alternative sales
channels, direct marketing and traditional media advertising.
Internet Access Service. For our Internet access business, we use both a
direct sales team and indirect sales agents. Our direct sales team includes a
telemarketing sales group which makes outbound sales calls and pre-qualifies
leads for our direct sales force. The direct sales force provides more
customized sales contact with targeted prospects and larger businesses in each
market.
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<PAGE> 53
The indirect sales agents consist of other Internet service providers,
value added resellers ("VARs") and systems integrators. We believe other ISPs
will comprise an important part of our sales force as we provide a high-speed
alternative to their traditional narrowband connections over the last mile. VARs
are participating in our sales efforts because our service is complementary to
their business, which often includes the design and implementation of a LAN
(local area network), Web site or similar technical support activity. Systems
integrators perform many of the same functions as VARs, but they also implement
a broader solution designed for the customer who desires to use the Internet as
a core part of its business. In the markets we serve we believe that we are the
only ISP that will form partnerships with all three of these indirect sales
channels.
Our direct Internet marketing activities include establishing Nucentrix
brand recognition within each market and supporting our sales campaigns with
appropriate advertising, product launch promotions and supporting marketing
materials. Our marketing campaigns have been developed around a high-speed,
high-value and high-reliability theme. The campaigns include the use of targeted
direct mail and traditional media advertising in high technology magazines as
well as in business sections of local newspapers. We sponsor seminars covering
such topics as Introduction to the Internet for Small Business and Profiting
from the Internet to support our marketing efforts.
Subscription Television Service. Our subscription television service is
marketed under our "Heartland Cable Television" brand, often in association with
DIRECTV programming. Our marketing is designed to take advantage of DIRECTV's
national campaigns and heavy use of national media. Our campaigns include direct
mail and selected outdoor materials to link the Heartland Cable Television brand
with DIRECTV. All responses are directed to our national call center which
provides 24 hour a day, 7 days a week sales coverage. We also market the
Heartland/DIRECTV service through a direct sales force that works door-to-door.
SUPPLIERS
Internet Customer Service and Support. We have entered into an agreement
with ISPA, a leading supplier of systems and operational support for ISPs, to
provide 24 hours a day, seven days a week 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. ISPA also provides us with a network
monitoring system, a customer service tracking system and an administrative
management system for adding, deleting, modifying accounts and producing
reports. Our contract with ISPA expires in May 2000, unless both parties agree
to renew the contract.
Internet Access Equipment. Internet access equipment and CPE such as
routers, Ethernet switches, wireless data converters and transceivers currently
are available from a variety of sources such as Cisco Systems, Inc., Lucent
Technologies, Inc., Conifer Corporation and California Amplifier, Inc. Hybrid
Networks, Inc. currently is the primary provider of wireless Internet modems to
MMDS operators. In January 1999 Hybrid notified us that, to ensure sufficient
cash to continue operations, customer support and product availability, Hybrid
would begin allocating its supply of modems. In June 1999, Hybrid resumed
shipments without allocation restrictions. We intend to work with Hybrid and
others to pursue ways to resolve long-term supply needs. We have identified
other suppliers that we believe will become additional sources of modems by the
end of 1999. We also believe that the recent announcements by MCI WORLDCOM and
Sprint of the acquisition of substantial blocks of MMDS spectrum will accelerate
production of wireless modems from multiple vendors. We currently intend to
analyze the technology platforms that we believe will be announced by these
companies before finalizing our long-term source of supply for wireless modems.
We can provide no assurance, however, that these companies will announce a
technology platform for wireless modems or that additional vendors will come to
market with a reliable supply of wireless modems on satisfactory terms and
conditions in a timely manner. We believe there is adequate long-term supply for
all other equipment necessary to operate our Internet business.
Wireless Cable Equipment. We use subscriber and headend equipment for our
wireless cable and DIRECTV business from a variety of suppliers, including
California Amplifier, General Instrument
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<PAGE> 54
Corporation, Scientific-Atlanta, Inc., ADC Telecommunications, Inc., Conifer,
Passive Devices, Inc. and PerfectTen Satellite Distributing, Inc. We also use
subscriber and headend equipment supplied by Pacific Monolithics, Inc. in 22 of
our 58 operating markets. Pacific Monolithics filed for protection under Chapter
11 of the U.S. Bankruptcy Code on October 13, 1998, and has discontinued
production and service of such equipment. In response, we and ten other MMDS
wireless cable providers have negotiated an agreement with an alternate supplier
to provide the equipment, software and technical assistance necessary to support
the Pacific Monolithics systems. We expect to finalize this agreement by
September 30, 1999.
DIRECTV. In April 1998 we entered into a five-year agreement with DIRECTV
which allows us to market up to 185 channels of DIRECTV digital programming to
SFU subscribers, either alone or in combination with our local and premium MMDS
programming, referred to as a "combo" package. DIRECTV pays us a commission for
each SFU subscriber to whom we sell a DIRECTV programming package, as well as
equipment and marketing subsidies. We believe these subsidies materially reduce
the capital expenditure costs required for such new subscribers. We currently
market DIRECTV programming to SFU subscribers in 51 markets.
In October 1997 we entered into a seven-year agreement with DIRECTV to
provide DIRECTV programming to MDUs, such as apartment buildings and condominium
complexes. The MDU agreement is substantially similar to the SFU agreement for
this programming. We believe this additional programming offering will allow us
to target higher income properties and renegotiate existing and renewing
contracts with more advantageous economic terms. We currently offer DIRECTV
programming to residential MDUs in 50 markets. DIRECTV is a registered trademark
of DIRECTV, Inc., a subsidiary of the Hughes Electronics unit of General Motors
Corporation.
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, WGN, WTBS, Discovery, the Nashville Network, 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 will face competition
from many Internet access and service providers with significantly greater
financial resources, well-established brand names and large, existing customer
bases. Moreover, we expect the level of competition to intensify in the future.
We expect significant competition from:
ISPs. ISPs provide Internet access to residential and business customers.
These companies can:
- provide Internet access over ILECs' networks at or below ISDN speeds,
- offer DSL-based access using their own DSL services, or DSL services
offered by ILECs and others, and
- have significant and sometimes nationwide marketing presences and combine
these with strategic or commercial alliances with DSL-based competitive
carriers. Significant ISPs include Concentric Network Corporation,
Mindspring Enterprises, Inc., PSINet Inc. and Verio, Inc.
Incumbent Local Exchange Carriers. ILECs, such as SBC Communications, Inc.,
GTE Corp., Ameritech Corp. and US WEST, Inc. have existing metropolitan area
networks and circuit switched local access networks. Most incumbent carriers
have announced deployment of commercial DSL services in
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<PAGE> 55
certain areas and are combining their DSL service with their own Internet access
services. The incumbent carriers generally have an established brand name in
their service areas and possess sufficient capital to deploy DSL services
rapidly.
Inter-exchange Carriers. Many of the inter-exchange carriers, such as AT&T
Corp., MCI WORLDCOM, Inc. and Sprint Corp., are expanding their capabilities 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. In March 1999, AT&T merged with TeleCommunications, Inc., the
largest cable operator in the United States, and in April 1999 announced plans
to acquire MediaOne Group, Inc., one of the largest cable operators in the
United States. We expect companies such as these to offer combined data, voice
and video services. They also could deploy DSL services in combination with
their current fiber networks.
Competitive Local Exchange Carriers. Certain CLECs, including NorthPoint
Communications, Inc., and Covad Communications Group, Inc., have begun offering
DSL-based data services. Other competitive carriers are likely to do so in the
future.
Cable Modem Service Providers. Cable modem service providers, like
Roadrunner, @Home Networks and @Work Networks and their cable partners,
currently offer to consumers and are preparing to offer to 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.
Other Wireless and Satellite Service Providers. We also may face
competition from other fixed-wireless services, including 24 GHz licensees such
as Teligent, Inc., 28 GHz licensees such as NEXTLINK Communications, Inc. and 38
GHz licensees such as Winstar Communications, Inc. We also may face competition
from satellite-based systems. Motorola Satellite Systems, Inc., Hughes
Communications, Inc. (a subsidiary of General Motors Corporation), Teledesic LLC
and others have filed applications with the FCC for global satellite networks
that can be used to provide ubiquitous two-way broadband voice and data services
to fixed locations.
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. Some of the
competitive factors we face include:
- transmission speed,
- reliability of service,
- ability to bundle services,
- price performance,
- customer support,
- brand recognition,
- operating experience, and
- capital availability.
Other Telephony Services
We also will face intense competition from other providers of telephony
transmission services as we implement VOIP and wireless local loop services.
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 regional Bell operating
companies and other local exchange carriers, have
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<PAGE> 56
significantly greater financial and other resources than us and better
established brand awareness in their service areas.
Subscription Television Competition
Hardwire Cable. Our principal subscription television competitors are
traditional hardwire cable operators such as TeleCommunications, Inc., and Time
Warner Entertainment. 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, to enhance their products.
Direct Broadcast Satellite ("DBS"). DBS service is available from DIRECTV,
Inc., which is a subsidiary of the Hughes Electronic unit of General Motors
Corporation, PrimeStar, Inc. and Echostar Communications Corporation. We compete
with many retail distributors of DIRECTV and other DBS service. 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 video
programming customers.
Inter-exchange Carriers. We expect that AT&T will combine its current
consumer long-distance, wireless and Internet services units with TCI's cable,
telecommunications and high-speed Internet access businesses. 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 multi-channel 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:
- issue, revoke, modify and renew station licenses,
- approve the assignment and/or transfer of control of such licenses,
- approve the location and technical parameters of MDS, MMDS and ITFS
transmission facilities (headends and base stations),
- regulate the kind, configuration and operation of equipment used by MDS,
MMDS and ITFS systems, and
- impose certain equal employment opportunity and other periodic reporting
requirements on MDS, MMDS and ITFS operators.
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. 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
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<PAGE> 57
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.
The FCC began the establishment of the 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 hard-wired 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.
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 non-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 their conflicts are
such that 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 MMDS authorization for each of the 493 basic
trading areas ("BTAs"). Each BTA authorization holder is permitted to apply for,
and following FCC grant, construct facilities to provide services over any non-
previously licensed MDS or MMDS channel within the BTA, and has preferred rights
to the available ITFS frequencies and ITFS lease agreements within the BTA. 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
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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. 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 incumbent 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
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. 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 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 MMDS spectrum applicants except in
those areas and on those channels for which there is an incumbent MDS or 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, 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 at a total cost of
approximately $19.8 million. Under the terms of the BTA auction, we remitted
approximately $4.0 million as down payments and deposits. The remaining $15.8
million bears interest at 9.5% and is being paid under 10-year installment notes
that began in the fourth quarter of 1996 with interest-only payments. Quarterly
payments of principal and interest began in the fourth quarter of 1998. 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 meet the above-described
installment payment schedule or 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 achieved, or will
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by the end of the BTA build-out period achieve, sufficient coverage capability
to retain 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 licensed to
us. Under this agreement, CS Wireless has agreed to reimburse us for all amounts
paid by us to the FCC for the BTAs leased to CS Wireless. The agreement also
provides CS Wireless the option to purchase the leased BTAs. See
"Business -- Recent Transactions -- CS Wireless Transaction."
WCS Licenses. In February 1997 the FCC reallocated and assigned the use of
the frequencies at 2305-2320 MHz and 2345-2360 MHz to the Wireless
Communications Services ("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. In December 1998, CS Wireless agreed
to assign to us 20 MHz of WCS spectrum in 19 markets. See "Business -- Recent
Transactions -- CS Wireless Transaction."
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. An ITFS
license holder generally is entitled to protection 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. Under the two-way rules, the FCC:
- permits MDS, MMDS and ITFS licensees to provide digital two-way
communications services,
- 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,
- simplifies and streamlines the licensing process for two-way
authorizations and ITFS major modifications, and
- modifies the ITFS programming requirements in the digital environment.
The two-way rules are intended to provide licensees and operators in the
MMDS 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
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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 to
"shift" required ITFS educational programming to any MDS, MMDS or ITFS channel
within the same operating system or, subject to certain limitations, "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 has stated that it will, by public notice, announce its plans to
hold a one-time, initial one-week filing window for two-way applications. We
expect the filing window to occur in the fourth quarter of 1999. 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. The FCC will issue a public notice of its receipt
of the filed applications, after which applicants will have 60 days to resolve
engineering conflicts and amend their applications. The FCC will then issue a
second public notice accepting the applications that also sets another 60-day
period for parties to file petitions to deny.
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, giving parties 60 days to file petitions to deny. If no
petitions to deny are filed, the applications are granted on the 61st day.
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. Although we do not anticipate that
compliance with these laws will have an adverse impact on us, 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 the terms and
conditions of providing Internet and Internet access services are not subject to
FCC regulation. However, the FCC has held that the provision of Internet access
is an interstate service subject to FCC jurisdiction. 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 local loop services, we
will be subject to FCC and state regulation of our interstate and intrastate
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 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 hard-wired
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.
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The Cable Act and the FCC's implementing regulations are intended to insure
wireless cable operators have access to cable programming in fair and
non-discriminatory terms. If a wireless cable operator is unable to obtain
programming 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 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. Congress currently is holding hearings to review this and
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.
Other Regulations. MMDS operators are subject to regulation by the FAA for
the construction, maintenance and lighting of transmission towers and by certain
local zoning regulations affecting construction of towers and other facilities.
There may also be restrictions imposed by local authorities.
RECENT TRANSACTIONS
CS Wireless Transaction. Effective December 2, 1998, Nucentrix, CAI
Wireless Systems, Inc. and CS Wireless signed a Master Agreement pursuant to
which CAI purchased our 36% equity interest in CS Wireless for $1.5 million. In
addition, CS Wireless agreed to assign to us channel rights to MDS-1 channels
(2150 MHz-2156 MHz) in Austin, Corpus Christi, El Paso and Killeen, Texas, and
WCS (2.3 GHz) frequencies in 19 markets, an operating wireless cable system in
Radcliffe/Story City, Iowa with approximately 1,600 subscribers, and certain
subscriber equipment. We also agreed to assign MMDS channel rights and related
equipment in Portsmouth, New Hampshire to CS Wireless. Following this
transaction, we retained no equity interest or corporate governance rights in CS
Wireless.
We have received FCC approval of the assignment to us of the MDS-1
channels. We have until September 3, 1999, to consummate this transfer. If we
have not consummated the transfer by that time, we intend to request an
extension. We also have agreed with CS Wireless, upon execution of a
comprehensive two-way interference coordination agreement, to file for FCC
approval of the assignment to us of the WCS spectrum. We have executed a
spectrum lease with CS Wireless giving us the exclusive right to use the MDS-1
channels, subject to certain pre-existing leasehold interests, and the WCS
spectrum pending FCC approval of these assignments. We expect the transfers and
assignments to occur following FCC approval, at which time we have agreed to
cancel a promissory note issued by CS Wireless to us, the outstanding balance of
which, prior to December 2, 1998, was approximately $2.3 million. Part or all of
these lease arrangements arguably may be terminated by CS Wireless if FCC
approval is not obtained by September 1999, in which case we would retain the
promissory note issued by CS Wireless. We also are operating the Radcliffe/Story
City market under a management arrangement with CS Wireless, which either party
may terminate on 30 days notice.
Sale and Leaseback of Towers. In June 1999 we signed a letter of intent to
sell 34 towers owned by us. As part of the transaction, the purchaser will lease
space on the towers back to us for future operations.
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The transaction is subject to customary conditions, including the execution of a
definitive purchase and sale agreement and antenna site agreement, satisfactory
due diligence and board approvals.
TRADEMARKS
We own common law rights in, and have federal registrations pending in the
United States for, the marks NUCENTRIX BROADBAND NETWORKS and NUCENTRIX TELECOM,
which we use in connection with our wireless broadband network services. We
intend to use these trademarks in connection with the implementation of our
business strategy and consider these intellectual property rights important to
our business. We also own common law trademark rights in, and have federal
registrations pending in the United States for, the stylized mark HEARTLAND. We
also own common law trademark rights in and have federal registrations on the
trademarks HEARTLAND WIRELESS COMMUNICATIONS, HEARTLAND WIRELESS and design and
HEARTLAND CABLE TELEVISION in the United States. Because of the recognition of
these trademarks in the subscription television markets in which we operate, we
consider these intellectual property rights important to our business.
LEGAL PROCEEDINGS
Chapter 11 Proceeding. On December 4, 1998, we filed a plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. On March 15, 1999,
the bankruptcy court confirmed the plan, which became effective on April 1,
1999. On that date, we also changed our name to Nucentrix Broadband Networks,
Inc., from Heartland Wireless Communications, Inc. See "Reorganization."
Securities Litigation. Nucentrix was a co-defendant in a stockholder action
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 Nucentrix against Nucentrix
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 misrepresented Nucentrix's financial condition in various press
releases and public filings. The plaintiffs seek unspecified damages, costs and
expenses, including attorneys' and experts' fees. On November 2, 1998, the court
granted the defendants' motion to dismiss the plaintiffs' complaint for failure
to state a claim. The plaintiffs filed an amended complaint on January 4, 1999.
On July 8, 1999, the court again granted defendants' motion to dismiss the
plaintiffs' complaint for failure to state a claim. The court's opinion permits
the plaintiffs to file an amended complaint by August 23, 1999.
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. Nucentrix originally was a named defendant in this
lawsuit, which is styled Thompson, et al. v. Heartland Wireless Communications,
Inc., et al. (98-371-D). The Thompson action seeks to represent a class
consisting of anyone who acquired the securities of Nucentrix between November
15, 1995, and March 20, 1997. On December 11, 1998, we removed the Thompson
action to the United States District Court for the Southern District of Texas
(98-CV-567). The plaintiff in the Thompson action asserts state securities laws
violations, misrepresentation, and civil conspiracy claims against Nucentrix and
three former officers and directors. The petition alleges that, during the
purported class period, Nucentrix and certain former officers and directors
misstated material facts concerning Nucentrix's subscriber base and omitted to
disclose the need for a material write-down of accounts receivable relating to
our wireless cable subscriber base. The plaintiff's action further claims that
Nucentrix violated generally accepted accounting principles ("GAAP") by
allegedly (1) failing to recognize revenue properly, (2) failing to adequately
reserve for doubtful accounts receivable and (3) using "unrealistic"
amortization periods. The plaintiff seeks 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. The plaintiff has alleged in a statement of the case that
his purported class damage models indicate retention damages of $35.4 million
and selling damages of $35.1 million, for total damages of $70.5 million. In May
1999, Nucentrix was dismissed as a named defendant from the Thompson lawsuit and
the lawsuit was remanded to State District Court. Three
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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 of reorganization as described below.
Our By-Laws as in effect prior to the April 1, 1999, effective date of our
plan of reorganization 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 current and
former directors and officers who are parties to the Coates or Thompson actions
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 of reorganization.
Under Section 11.5 of our plan of reorganization, 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 or Thompson
actions. We refer to our obligation under Section 11.5 of our plan of
reorganization 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 of officer derived any improper personal
benefit. Claims asserted by former directors and officers of Nucentrix 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
of reorganization. Under Section 4.6 of our plan of reorganization, 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 of Nucentrix who are defendants in
the 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 not, 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 of
reorganization 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, 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 of reorganization 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 of reorganization, 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 of reorganization, up to the
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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 of reorganization, 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 have vigorously defended the Coates and Thompson actions, and intend to
continue to defend the Coates action if plaintiffs file an amended complaint.
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, 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 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 purported class action
lawsuit filed in May 1998 and pending in State District Court in Brooks County,
Texas styled Garcia, et al. v. Heartland Wireless Communications, Inc. d/b/a
Heartland Cable Television (98-60898-1). The lawsuit alleges that the
administrative late fees charged by Nucentrix are not reasonably related to the
costs incurred by Nucentrix as a result of late payment of accounts. The
plaintiff seeks to certify a class to represent all persons receiving cable
service from Nucentrix or who have been charged a late fee by Nucentrix. The
plaintiff seeks a declaration that any contractual provisions for Nucentrix's
late fees are void or usurious, and seeks unspecified money damages, penalties,
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
of reorganization 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 notified
the plaintiff and the State District Court in which this matter is pending that
we intend to request the bankruptcy court to permanently enjoin and dismiss this
matter.
Nucentrix also is a party to a purported class action filed in December
1998 in State District Court in Nueces County, Texas styled Ysasi, et al. v.
Heartland Wireless Communications, Inc. (98-6430-B). The Ysasi action alleges
that certain provisions of our customer agreements are unconscionable, invalid
and illegal, and therefore unenforceable. The plaintiff also alleges that our
administrative late fees are "unreasonably large" and therefore unenforceable.
The plaintiff seeks to represent a class consisting of all persons who first
signed a customer agreement with Nucentrix after December 4, 1998, that
contained certain liquidated damages provisions. The plaintiff seeks (1) a
declaration that the liquidated damages provisions of our customer agreements
are invalid and illegal, (2) an injunction enjoining Nucentrix from enforcing
such provisions and (3) recovery of all amounts paid under such liquidated
damages provisions, penalties, attorneys' fees, prejudgment and post-judgment
interest and costs. The plaintiff in Ysasi has moved for summary judgment
against Nucentrix on grounds of usury. This motion is scheduled for hearing
September 2, 1999.
We intend to vigorously defend the late fee 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 with respect to these matters,
and while management does not expect such an adverse outcome, 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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Other. Nucentrix is 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 consolidated financial
position, results of operations or cash flows.
EMPLOYEES
As of July 15, 1999, we had approximately 700 employees. 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 operating systems.
PROPERTIES
We lease approximately 24,000 square feet of office space for our executive
offices in Plano, Texas. Approximately 1,900 square feet of this space is
subleased to CS Wireless. We lease approximately 6,300 square feet of space for
telemarketing, customer care operations and training facilities in Durant,
Oklahoma from an affiliate of Mr. L. Allen Wheeler, a former director of
Nucentrix, and Mr. David E. Webb, a former executive officer and director of
Nucentrix, under leases that expire March 1, 2000. We pay approximately $48,000
per year for the Durant space. 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 antennae, as
well as office space and base station and headend space. We lease office space
for our existing markets and may, in the future, purchase or lease additional
office space in other locations if we launch other systems. We also own
transmission towers or lease space on transmission towers located in our
markets. We believe that office space and space on transmission towers currently
is available on acceptable terms in the markets where we intend to operate.
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GLOSSARY
Set forth below are certain defined terms used in this prospectus.
Base stations -- Locations where wireless data transmitting and receiving
and headend equipment is installed for distribution of service to customers.
BTA or basic trading area -- Specified geographic areas used by the FCC for
purposes of allocating radio frequency spectrum. The United States is broken
down into 493 basic trading areas based on major trading areas for economic
purposes.
CLEC (Competitive Local Exchange Carrier) -- A local exchange service
provider (carrier) that competes on a selective basis for, among other things,
local exchange, long distance, data transport and/or Internet access services.
CLECs lease local loops from the ILECs at wholesale rates for resale to end
users.
CPE (Customer Premises Equipment) -- Equipment located at a customer's home
or office that is used to receive and transmit wireless communications or
wireless cable television programming.
DBS (Direct Broadcast Satellite programming) -- A satellite system which
enables the transmission of an encoded signal directly from a satellite to the
subscriber's home.
DSL (Digital Subscriber Lines) -- Digital service technology that allows
two-way communications to and from individual subscribers through an ILEC's
existing telephone lines.
Fixed wireless -- wireless data transmission from a fixed transmission
facility to a fixed reception facility.
GHz (Gigahertz) -- See "Hertz, Megahertz and Gigahertz."
Headend -- Equipment necessary to receive video programming via satellite
transmission and combine the signals into a channel lineup for distribution.
Hertz, Megahertz and Gigahertz -- The dimensional unit for measuring the
frequency with which an electromagnetic signal cycles through the zero-value
state between lowest and highest states. One hertz (abbreviated Hz) equals one
cycle per second. MHz (Megahertz) stands for millions of Hertz. GHz (Gigahertz)
stands for billions of Hertz.
ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that
was the monopoly carrier prior to the opening of local exchange services to
competition.
Internet -- A global collection of interconnected computer networks which
use a specific communications protocol.
IP (Internet protocol) -- A set of networking protocols that provide
communications access across interconnected networks. IP includes standards for
how computers communicate and conventions for connecting networks and routing
traffic.
ISDN (Integrated Services Digital Network) -- An information transfer
standard for transmitting digital voice and data over telephone lines at speeds
up to 128 KB per second.
ISP (Internet Service Provider) -- A service provider that provides access
to the Internet by sharing communications lines and equipment.
ITFS (Instructional Television Fixed Service) -- 20 radio frequency
channels in the 2500-2686 MHz band.
Kbps (Kilobits) per second -- A transmission rate. One kilobit equals 1,024
bits of information.
LEC (Local Exchange Carrier) -- Any telephone service provider offering
local exchange services. LECs include ILECs, RBOCs and CLECs.
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LMDS (Local Multipoint Distribution Service) -- A wireless point to
multipoint communications service.
Mbps (Megabits) per second -- A transmission rate. One megabit equals 1,024
kilobits.
MHz (Megahertz) -- See "Hertz, Megahertz and Gigahertz."
MDS (Multipoint Distribution Service) -- Two radio frequency channels in
the 2150-2160 MHz range and 3 channels in the 2650-2680 MHz band.
MDU (Multiple Dwelling Unit) -- High density residential complexes such as
apartment buildings, condominiums, cooperatives, townhouses and mobile home
communities.
MMDS (Multichannel Multipoint Distribution Service) -- Eight channels in
the 2596-2644 MHz band. Also refers in general to a wireless point to multipoint
distribution system using microwave transmitting and receiving equipment using
MDS, MMDS and ITFS channels.
Modem -- Short for modulator/demodulator, a device for transmitting
information over a standard telephone line.
RBOC (Regional Bell Operating Company) -- ILECs created by the divestiture
of the local exchange business of AT&T. These include BellSouth, Bell Atlantic,
Ameritech, US WEST and SBC Communications.
SFU (Single Family Unit) -- A residence typically consisting of one family.
SOHO -- Small office/home office.
T1 -- A high-speed digital circuit typically linking high volume customer
locations to long distance carriers or other customer locations. T1 service
accommodates transmission speeds of up to 1.544 Mbps per second, which is
equivalent to 24 voice grade equivalent circuits.
VOIP (Voice over Internet Protocol) -- Technology designed to support voice
communications over packet networks such as the Internet.
WCS (Wireless Communications Services) -- A service licensed to provide
fixed, mobile and radiolocation services throughout its 2.3 GHz band.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Nucentrix and their ages as of the
date of this prospectus are given below. Each director took office as of the
Effective Date and will serve until a successor is elected and qualified or
until his earlier resignation or removal.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Carroll D. McHenry.................... 56 Chairman of the Board, President, Chief Executive
Officer and Director
Marjean Henderson..................... 48 Senior Vice President and Chief Financial Officer
Alexander R. Padilla.................. 57 Senior Vice President -- Business Development
J. Curtis Henderson................... 37 Senior Vice President, General Counsel and Secretary
Frank H. Hosea........................ 50 Senior Vice President -- Video Operations
Richard B. Gold....................... 44 Director
Terry S. Parker....................... 54 Director
Mark G. Schoeppner.................... 38 Director
Neil S. Subin......................... 34 Director
R. Ted Weschler....................... 38 Director
</TABLE>
Carroll D. McHenry joined Nucentrix as Chairman of the Board, President,
Chief Executive Officer and Acting Chief Financial Officer in April 1997. Mr.
McHenry currently serves as Chairman of the Board, President and Chief Executive
Officer. Prior to joining Nucentrix, Mr. McHenry was a senior executive at
Alltel, Inc., a national communications holding company, most recently serving
as President of Alltel's Communications Services Group, and serving as President
of Alltel Mobile Communications, Inc., from July 1992 to May 1995. From 1991 to
1992, Mr. McHenry was Vice President of Cellular Business Development at
Qualcomm, Inc. From 1989 to 1991, Mr. McHenry was President, Chief Executive
Officer and Chairman of the Board of Celluland, Inc., a franchisor of cellular
telephone stores. From 1980 to 1989, Mr. McHenry served in various capacities
with Mobile Communications Corporation of America ("MCCA") and as President and
Chief Executive Officer of American Cellular Communications, a joint venture
between MCCA and BellSouth. Mr. McHenry is currently a director of Wireless One,
Inc.
Marjean Henderson joined Nucentrix in August 1997 as Senior Vice President
and Chief Financial Officer. Ms. Henderson was appointed Assistant Secretary in
December 1997. From April 1996 to April 1997, Ms. Henderson served as Senior
Vice President and Chief Financial Officer for Panda Energy International, Inc.,
a global energy concern. From December 1993 to October 1995, Ms. Henderson
served as Senior Vice President and Chief Financial Officer for Nest
Entertainment, Inc., a home video and movies concern. From October 1987 to
December 1993, Ms. Henderson served as Vice President, Chief Financial Officer
and Treasurer for RCL Enterprises, the Lyons Group, Lyrick Studios and Big Feet
Productions. Ms. Henderson currently is a director of Wireless One.
Alexander R. Padilla joined Nucentrix in July 1998 as Senior Vice
President -- Business Development. From January 1997 to July 1998, Mr. Padilla
was Manager of Business Development for KPMG LLP's Enterprise Integration
Services Group. From February 1995 to December 1996, Mr. Padilla was Director of
Sales for Pinpoint Communications, a start-up wireless communications concern.
From October 1989 to December 1994, Mr. Padilla was District Manager of Network
Equipment Technologies, a manufacturer of wide area network telecommunications
products.
J. Curtis Henderson joined Nucentrix in May 1996 as Vice President, General
Counsel and Secretary. In September 1998, Mr. Henderson was appointed Senior
Vice President. From July 1994 to April 1996, Mr. Henderson was Senior Vice
President, General Counsel and Secretary of ZuZu, Inc., a restaurant and
franchising company in Dallas, Texas. Prior to his employment at ZuZu, Mr.
Henderson was an associate with the Dallas law firm of Locke Purnell Rain
Harrell.
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Frank H. Hosea joined Nucentrix in November 1998 as Senior Vice
President -- Video Operations. From June 1996 to November 1998, Mr. Hosea was
Senior Vice President and Chief Operating Officer for CS Wireless. From July
1995 to June 1996, Mr. Hosea was a marketing and operations consultant for Time
Warner. From February 1990 to July 1995, Mr. Hosea was Vice President of Sales
Field Marketing for KBLCOM, Inc., a division of Time Warner and Houston
Industries.
Richard B. Gold has been the President and Chief Executive Officer of GenOA
Corporation, a privately-held optical communications equipment company, since
January 1999. Between November 1991 and December 1998, Mr. Gold held various
senior-level executive positions with Pacific Monolithics, Inc., a supplier of
wireless communications equipment, including Vice President -- Engineering,
Chief Operating Officer, and from January 1997 through December 1998, President
and Chief Executive Officer. From 1987 through 1991, Mr. Gold was Executive
Director of the Massachusetts Microelectronics Center, a non-profit education
and research consortium. On October 13, 1998, Pacific Monolithics filed a
voluntary Chapter 11 bankruptcy petition. Mr. Gold is a member of the Audit
Committee of the Board of Directors.
Terry S. Parker became a director of Nucentrix in April 1998. Mr. Parker
currently is an independent consultant in the telecommunications industry. From
March 1995 to July 1996, Mr. Parker was President and Chief Operating Officer
for CellStar Corporation, a domestic cellular telecommunications distributor.
From October 1993 to March 1995, Mr. Parker was Senior Vice President for GTE
Personal Communications Services, GTE's cellular telecommunications division.
From August 1990 to October 1993, Mr. Parker was President of GTE
Telecommunications Products and Services, a diversified telecommunications
services and systems division of GTE. Mr. Parker currently is a director of
CellStar Corporation, Illinois Super Conductor, Inc., a superconductor
technology firm for the wireless telecommunications industry, and Highway Master
Corporation, which sells mobile, data and voice technology products to long-haul
trucking companies. Mr. Parker is a member of the Compensation Committee of the
Board of Directors.
Mark G. Schoeppner has been president of Quaker Capital Management Corp.
("Quaker Capital"), an investment management firm, since 1985. Mr. Schoeppner is
a chartered financial analyst, a member of the Pittsburgh Society of Financial
Analysts and a member of the Wireless Communications Association International.
Mr. Schoeppner is a member of the Audit Committee of the Board of Directors.
Neil S. Subin founded and has been the Managing Director and President of
Trendex Capital Management ("Trendex") since 1991. Trendex is a private hedge
fund focusing primarily on financially distressed companies. Prior to forming
Trendex, Mr. Subin was a private investor from 1988 to 1991 and was an associate
with Oppenheimer & Co. from 1986 to 1988. Mr. Subin is a member of the
Compensation Committee of the Board of Directors.
R. Ted Weschler has been an executive officer of Quad-C, Inc. ("Quad-C")
since its formation in 1989. Quad-C is a Charlottesville, Virginia-based
investment firm that primarily engages in the acquisition of businesses in
partnership with company management. Mr. Weschler is currently a member of the
Board of Directors of WSFS Financial Corporation, a thrift holding company based
in Wilmington, Delaware; Deerfield Healthcare Corporation, a provider of adult
day care; Collins & Aikman Floorcoverings, a manufacturer of commercial
carpeting, Virginia National Bank, a national banking association, NWS Holdings,
a national furniture retailer, and Service Partners, a distributor of insulation
materials. Mr. Weschler previously served as director of American Quality Cable,
Applied Video Technologies and Wireless Cable of Atlanta, all of which were
involved in the MMDS industry. Prior to the formation of Quad-C, Mr. Weschler
was employed by W. R. Grace & Co. as a special projects assistant to both the
Vice Chairman and Chief Executive Officer of Grace, focusing on acquisition and
divestiture activities associated with Grace's restaurant, retailing,
healthcare, natural resources and chemical operations. Mr. Weschler is a member
of the Compensation Committee of the Board of Directors.
Executive officers of Nucentrix are appointed by the Board of Directors and
serve at the discretion of the Board. Employment agreements with the executive
officers are described in "Management -- Employment Agreements and Change in
Control Arrangements." There are no family relationships between members of the
Board of Directors or any executive officers of Nucentrix.
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Board Compensation
Cash Compensation. Each non-employee director receives an annual retainer
of $5,000 for service as a director, and reimbursement of all ordinary and
necessary expenses incurred in attending any meeting of the Board or any
committee of the Board. Employees of Nucentrix who also serve as members of the
Board of Directors do not receive any additional compensation for service as a
director, but are reimbursed for expenses.
Stock Option Awards. Members of the Board are eligible to participate in
the 1999 Share Incentive Plan at the discretion of the Board and on terms and
conditions as established by the Board. Effective April 1, 1999, each of the
five non-employee directors was granted options to purchase 2,000 shares of
common stock at an exercise price of $12.50 per share. As of May 12, 1999, all
stock options granted to the non-employee directors on April 1, 1999, were fully
vested and exercisable. See "Management -- 1999 Share Incentive Plan."
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the total compensation awarded to, earned by
or paid by Nucentrix to its Chief Executive Officer and its four most highly
compensated executive officers who were serving as executive officers at the end
of Nucentrix's last completed fiscal year (collectively, the "Named Executive
Officers") for services rendered in all capacities to Nucentrix during
Nucentrix's fiscal years ended December 31, 1998 and 1997. Except for Mr.
Henderson, none of the Named Executive Officers were employees of Nucentrix at
any time during 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------ -------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
COMPENSATION AWARD(S) OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) ($) (#) ($)(2)
- --------------------------- ---- --------- -------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Carroll D. McHenry.......... 1998 300,000 150,000(3) -- -- 100,000 4,384
Chairman, President and 1997 205,768(4) 204,326 -- 154,688(5) 350,000 54,364(6)
Chief Executive Officer
Marjean Henderson........... 1998 195,385 31,500(3) -- -- -- 2,000
Senior Vice President and 1997 60,923(7) 20,000 -- 14,375(8) 100,000 --
Chief Financial Officer
J. Curtis Henderson......... 1998 146,892 24,885(3) -- -- -- --
Senior Vice President, 1997 105,992 24,469 -- -- 40,000 --
General Counsel and
Secretary 1996 56,423(9) -- -- -- 50,000(10) --
Alexander R. Padilla........ 1998 80,769(11) -- -- -- -- --
Senior Vice President --
Business Development
Frank H. Hosea.............. 1998 22,500(12) -- -- -- -- --
Senior Vice President --
Video Operations
</TABLE>
- ---------------
(1) While the Named Executive Officer may have received certain perquisites for
such year, such perquisites did not exceed the lesser of $50,000 or 10% of
his or her salary and bonus for such year.
(2) Represents Nucentrix's 401(k) Retirement Plan contributions, except as
noted in (6) below.
(3) Paid under Nucentrix's 1998 Performance Incentive Compensation Plan.
(4) Mr. McHenry was first employed by Nucentrix on April 25, 1997, at an annual
base salary of $300,000.
(5) Restricted stock grant of 75,000 shares of common stock granted to Mr.
McHenry in connection with his hiring. The closing price of the common
stock on the Nasdaq National Market on April 23, 1997 (the day before
hiring) was $2.0625. Pursuant to the plan of reorganization, all shares of
common stock outstanding immediately prior to the Effective Date were
canceled on the Effective Date. See "Reorganization."
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(6) Includes $53,347 in relocation expenses paid in 1997 in connection with Mr.
McHenry's hiring.
(7) Ms. Henderson was first employed by Nucentrix on August 27, 1997, at an
annual base salary of $180,000.
(8) Restricted stock grant of 10,000 shares of common stock granted to Ms.
Henderson. The closing price of the common stock on the Nasdaq Stock
Market's National Market on January 22, 1998 (the date of grant) was
$1.4375. Pursuant to the plan of reorganization, all shares of common stock
outstanding immediately prior to the Effective Date were canceled on the
Effective Date. See "Reorganization."
(9) Mr. Henderson was first employed by Nucentrix on May 20, 1996 at an annual
base salary of $90,000.
(10) Exchanged in August 1997 for options to purchase 12,500 shares of common
stock in connection with repricing of such options.
(11) Mr. Padilla was first employed by Nucentrix on July 13, 1998, at an annual
base salary of $175,000.
(12) Mr. Hosea was first employed by Nucentrix on November 2, 1998, at an annual
base salary of $150,000.
The following table provides information regarding stock options granted
during the fiscal year ended December 31, 1998, to each of the Named Executive
Officers. No stock appreciation rights were granted during 1998. Pursuant to
Nucentrix's plan of reorganization, the following options were canceled on the
Effective Date. See "Reorganization."
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF PERCENT POTENTIAL REALIZABLE VALUE
SECURITIES OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS/SARS EXERCISE STOCK PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO OR BASE OPTION TERM(1)
GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Carroll D. McHenry........ 100,000(2) 76.92 1.4375 1/20/2005 58,520.69 136,378.08
</TABLE>
- ---------------
(1) Potential realizable value is based on the assumption that the price of the
common stock appreciates at the annual rate shown, compounded annually, from
the date of grant until the end of the five-year option term. The values are
calculated in accordance with rules promulgated by the Securities and
Exchange Commission and do not reflect Nucentrix's estimate of future stock
price appreciation.
(2) Options granted pursuant to Nucentrix's 1994 Employee Stock Option Plan at
an exercise price equal to the fair market value on the date of grant.
The following table provides information with respect to stock options held
by the Named Executive Officers during and as of the end of fiscal year 1998.
Pursuant to Nucentrix's plan of reorganization, the following options were
canceled on the Effective Date. See "Reorganization."
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE(1)
- ---- --------------------- ---------------------
<S> <C> <C>
Carroll D. McHenry..................................... 70,000/380,000 0/0
Marjean Henderson...................................... 20,000/80,000 0/0
J. Curtis Henderson.................................... 13,000/39,500 0/0
</TABLE>
- ---------------
(1) The last sale price of the common stock on December 31, 1998, as reported on
the Over-the-Counter Bulletin Board Quotation System, was $0.02, which was
less than the exercise price of the options reported.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Carroll D. McHenry. Nucentrix entered into an employment agreement with
Carroll D. McHenry for a term of three years, effective as of March 6, 1998.
Under the employment agreement, Nucentrix has agreed to pay Mr. McHenry an
annual base salary of not less than $300,000. On each anniversary of the
effective date of the agreement, the term is automatically extended for one
additional year unless Nucentrix or Mr. McHenry elects to forego any such
extension by giving notice to the other party at least
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90 days before the applicable anniversary of the effective date. Under the
employment agreement, if Mr. McHenry's employment is terminated by Nucentrix
other than for cause, as defined in the employment agreement, or on account of
Mr. McHenry's death or permanent disability, or if Mr. McHenry resigns for good
reason, as defined in the employment agreement, then Nucentrix has agreed to pay
Mr. McHenry a severance payment equal to his then-current annual base salary
(excluding any bonuses) for the balance of the term of his employment agreement.
Other Named Executive Officers. Nucentrix also has entered into employment
agreements with each of Marjean Henderson, Alexander R. Padilla, J. Curtis
Henderson and Frank H. Hosea. Ms. Henderson's and Mr. Henderson's employment
agreements became effective on April 8, 1998. Mr. Padilla's employment agreement
became effective on July 13, 1998. Mr. Hosea's employment agreement became
effective on November 3, 1998. Each of these employment agreements are for a
term of two years from their respective effective dates. Under the employment
agreements, Nucentrix has agreed to pay each officer an annual base salary of
not less than: Ms. Henderson -- $200,000, Mr. Padilla -- $175,000, Mr.
Henderson -- $144,000, Mr. Hosea -- $150,000.
On each anniversary of the effective date of each employment agreement, the
term is automatically extended for one additional year unless Nucentrix or the
respective officer elects to forego any such one-year extension by giving notice
to the other party at least 90 days before such anniversary of the effective
date. Under each employment agreement, if an officer's employment is terminated
by Nucentrix other than for cause (as defined in each employment agreement) or
on account of the officer's death or permanent disability, or if the officer
resigns for good reason (as defined in each employment agreement), then
Nucentrix is required to pay the officer a severance payment equal to his or her
then-current annual base salary (excluding any bonuses) for the balance of the
term of the officer's employment agreement.
None of the employment agreements discussed above provide for a bonus
payment in addition to the officer's annual base salary. The officers are
eligible, independent of the employment agreements, to participate in and
receive bonuses or awards under Nucentrix's Performance Incentive Compensation
Plan and the 1999 Share Incentive Plan.
1999 SHARE INCENTIVE PLAN
The 1999 Share Incentive Plan provides for the granting of stock options
and stock appreciation rights for non-employee directors, officers and key
employees of, and consultants to, Nucentrix and its subsidiaries. On April 1,
1999, Nucentrix granted nonqualified stock options to purchase 300,000 shares of
common stock to Carroll McHenry, 70,000 shares to Marjean Henderson and 70,000
shares to J. Curtis Henderson. 200,100 of the 300,000 options granted to Mr.
McHenry, 46,690 of the 70,000 options granted to Ms. Henderson and 46,690 of the
70,000 options granted to Mr. Henderson currently are exercisable. Twenty
percent of the remainder of the options will become exercisable on each
anniversary of the date of grant for five years following the date of grant. See
"Security Ownership of Principal Stockholders and Management."
Pursuant to the 1999 Share Incentive Plan, upon a "Change in Control" of
Nucentrix all outstanding benefits will immediately vest and become exercisable
and all performance targets relating to outstanding benefits shall be deemed to
have been satisfied as of the time of a Change in Control. The Committee, in its
discretion, also may determine that, upon the occurrence of a Change in Control
of Nucentrix, each option outstanding under the 1999 Share Incentive Plan shall
terminate within a specified number of days after notice to the holder, and such
holder shall receive with respect to each share of New Common Stock that is
subject to an Option an amount equal to the excess of the fair market value of
such share of New Common Stock immediately prior to the occurrence of such
Change in Control over the exercise price per share of such Option. For the
purposes of the 1999 Share Incentive Plan, a "Change in Control" occurs upon any
of four situations: (1) any person (other than an employee benefit plan of
Nucentrix) acquires 50% or more of the combined voting power of Nucentrix's
outstanding securities then entitled to vote for the election of directors; (2)
during any period of two consecutive years, the individuals who at the beginning
of such period constitute the Board or any individuals who would be "Continuing
Directors" (as
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defined below) cease for any reason to constitute at least a majority of the
Board; (3) Nucentrix's stockholders approve a sale of all or substantially all
of the assets of Nucentrix; or (4) Nucentrix's stockholders approve any merger,
consolidation, or like business combination or reorganization of Nucentrix, the
consummation of which would result in the occurrence of any event described in
clauses (1) or (2) above, and such transaction shall have been consummated.
"Continuing Directors" means (x) the directors of Nucentrix in office on the
Effective Date and (y) any successor to any such director and any additional
director who after the Effective Date was nominated or selected by a majority of
the Continuing Directors in office at the time of his or her nomination or
selection.
OTHER COMPENSATION PLANS
Performance Incentive Compensation Plan. Effective January 1, 1998,
Nucentrix adopted a Performance Incentive Compensation Plan. The Performance
Incentive Compensation Plan provides incentive compensation opportunities to
Nucentrix's executive officers and other key employees based solely on
achievement of predetermined financial goals (such as EBITDA) as well as
quantitative individual objectives, such as improvements in churn, collections
and service calls. Not more than 50% of a target award may be based on
individual objectives. Under the Performance Incentive Compensation Plan, target
awards for the Chief Executive Officer may range from 25% to 75% of his or her
annual salary, and between 12.5% and 52.5% of other participants' salaries.
Performance Incentive Compensation Plan bonuses are in addition to any amounts
paid under the employee retention program described below.
Employee Retention Program. Effective April 8, 1998, the Board of Directors
of Nucentrix approved an employee retention program for executive officers and
other key employees as designated by the Chief Executive Officer. Under the
employee retention program, Nucentrix offered a retention bonus of between 15%
and 25% of a participant's annual base salary if the individual remained an
employee of Nucentrix through March 31, 1999. Pursuant to this plan, in March
1999, Nucentrix paid an aggregate of $728,000 to 96 employees. No further
payments will be made under this Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the following individuals served on the Compensation Committee
of the Board of Directors: Max E. Bobbit, Jack R. Crosby, John A. Sprague and L.
Allen Wheeler. Mr. Bobbit resigned from the Board and Compensation Committee on
March 6, 1998. Mr. Crosby resigned from the Board and Compensation Committee on
June 25, 1998. Mr. Sprague is the managing partner of Jupiter Partners L.P.,
which held substantially all of the Old Convertible Notes. Mr. Sprague resigned
from the Board and Compensation Committee on February 22, 1999. Mr. Wheeler
co-founded Nucentrix, held in excess of 10% of the common stock prior to the
reorganization, and was a member of the Board until November 24, 1998, when he
resigned from the Board and Compensation Committee.
At December 31, 1998, Nucentrix leased an aggregate of approximately 63,000
square feet for its operations, billing, purchasing, warehouse, administrative,
telemarketing and customer call center in Durant, Oklahoma and for office space
in Lindsay, Oklahoma from affiliates of Mr. Wheeler at an annual rent of
approximately $205,000. Nucentrix believes that such rents are at or below
market rates and the terms of such leases are at least as favorable as those
Nucentrix would be able to otherwise obtain through arms-length negotiation with
an unaffiliated third party. Effective March 31, 1999, Nucentrix terminated
approximately 56,000 square feet of these leases in connection with the plan of
reorganization. Claims of the lessors for damages will be treated as
miscellaneous unsecured claims under our plan of reorganization. See
"Reorganization."
Nucentrix continues to lease approximately 6,300 square feet of space for
telemarketing, customer care operations and training facilities in Durant from
an affiliate of Mr. Wheeler under leases that expire March 1, 2000. Nucentrix
pays approximately $48,000 per year for such space.
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<PAGE> 74
CERTAIN TRANSACTIONS
Pursuant to the terms of a Registration Rights Agreement, dated the
Effective Date, among Nucentrix and certain of the stockholders of Nucentrix, we
filed with the Securities and Exchange Commission a shelf registration statement
registering the offer and sale by the selling stockholders of 3,843,561 shares
of our common stock received by them under our plan of reorganization. The shelf
registration statement was filed with the Securities and Exchange Commission on
June 17, 1999, and we anticipate that the shelf registration statement will
become effective simultaneously with or shortly after this public offering. We
are obligated to use our commercially reasonable best efforts to keep the shelf
registration statement continuously effective for up to three years from the
date of its effectiveness, subject to our right to suspend the use of the
prospectus for designated corporate purposes specified in the Registration
Rights Agreement. We also will pay substantially all of the expenses incident to
the registration, offer and sale of the shares of common stock pursuant to the
shelf registration statement other than commissions and discounts of
underwriters, dealers or agents. Under the Registration Rights Agreement, the
selling stockholders will be indemnified by us against certain civil
liabilities, including liabilities under the Securities Act of 1933.
During 1996, Nucentrix paid to Unity Hunt, Inc., an affiliate of Hunt
Capital Group, L.L.C., management consulting fees of $120,000 for services
provided to Nucentrix by J.R. Holland Jr. Hunt Capital owned approximately 20%
of Nucentrix's outstanding common stock in 1996 and Mr. Holland, who served as
Chairman of the Board of Directors of Nucentrix from October 1993 until March
1997, was President of Hunt Capital in 1996.
During 1996 and 1997, Nucentrix paid approximately $97,000 and $95,000,
respectively, to an accounting firm controlled by David E. Webb for subscriber
and payroll services provided to Nucentrix. Mr. Webb served as a member of the
Board of Directors and as Chief Executive Officer of Nucentrix in 1996 and 1997
until his resignation as President and Chief Executive Officer in January 1997
and his resignation from the Board of Directors in March 1997. Mr. Webb also
owned approximately 7.1% of Nucentrix's outstanding common stock.
In 1996 and 1997, Nucentrix leased an aggregate of approximately 51,345
square feet for its operating and marketing offices and warehouse space in
Durant and Lindsay, Oklahoma from affiliates of Messrs. Webb and Wheeler at an
annual rent of $139,452 in 1996 and $156,000 in 1997. In addition, Nucentrix
leased approximately 12,430 square feet for its installation and operating
offices in Durant, Oklahoma from an affiliate of Messrs. Webb, Wheeler and
Robert R. Story, who served as Senior Vice President of Nucentrix in 1996, at an
annual rent of $62,000. In October 1996 Nucentrix purchased a paging franchise
and paging assets from an affiliate of Messrs. Webb and Wheeler for $123,250 for
multiple-site paging for Nucentrix employees.
The terms of the leases described above were determined by the parties
thereto, and Nucentrix believes that such transactions involving affiliates were
on terms no less favorable to Nucentrix than could have been obtained from
unaffiliated third parties.
In February 1997, Nucentrix, CS Wireless, Wireless One and CAI Wireless
Systems formed Wireless Programming Cooperative, LLC. This company changed its
name in August 1997 to Wireless Enterprises, LLC ("Wireless Enterprises").
Carroll D. McHenry is one of four managers of Wireless Enterprises. Wireless
Enterprises is a programming cooperative that negotiates programming and
marketing services with suppliers of programming. In 1997 and 1998, Nucentrix
paid approximately $15.5 million and 24.5 million, respectively, to Wireless
Enterprises as reimbursement of programming expenses and for other
administrative services.
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<PAGE> 75
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Based upon information known to Nucentrix as of July 15, 1999, the
following table sets forth the ownership of the shares of common stock issued
and outstanding as of such date by (a) each person or group or group that is the
beneficial owner of more than 5% of such shares on such date, (b) each director
or executive officer of Nucentrix on such date and (c) all directors and
executive officers of Nucentrix as a group on such date. Unless otherwise
indicated, to Nucentrix's knowledge each person holds sole voting and investment
power over the shares shown.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
NAME OF OWNER OWNED CLASS(1)
- ------------- ------------ -------------
<S> <C> <C>
Wayland Investment Fund, L.L.C.............................. 1,649,794(2) 16.4%
12700 Whitewater Drive
Minnetonka, Minnesota 55343
Terrence D. Daniels......................................... 1,557,997(3) 15.5%
Quad-C, Inc.
Quad-C IV, LLC
Quad-C Partners IV, L.P.
230 East High Street
Charlottesville, Virginia 22902
Quaker Capital Management Corporation....................... 1,460,709(4) 14.5%
401 Wood Street
1300 Arrott Building
Pittsburgh, Pennsylvania 15222-1824
Stephen Feinberg............................................ 999,366(5) 9.9%
450 Park Avenue, 28th Floor
New York, New York 10002
Richard Reiss, Jr. ......................................... 651,832(6) 6.5%
Georgica Advisors LLC
1114 Avenue of the Americas, 38th Floor
New York, New York 10036
Carroll D. McHenry.......................................... 200,100(7) 2.0%
Marjean Henderson........................................... 46,690(7) *
Alexander R. Padilla........................................ 25,000(7) *
J. Curtis Henderson......................................... 46,690(7) *
Frank H. Hosea.............................................. 25,000(7) *
Richard B. Gold............................................. 2,000(7) *
Terry S. Parker............................................. 2,000(7) *
Mark G. Schoeppner.......................................... 85,046(8) *
Neil S. Subin............................................... 80,799(9) *
R. Ted Weschler............................................. 167,615(10) 1.7%
All executive officers and directors as a group (consisting
of 10 people)............................................. 680,940(11) 6.8%
</TABLE>
- ---------------
* Less than 1%.
(1) Based on 10,057,460 shares of common stock outstanding.
(2) Based on information set forth in Schedule 13G dated April 13, 1999, as
amended by Amendment No. 1 to Schedule 13G dated April 23, 1999, and
Amendment No. 2 to Schedule 13G dated April 26, 1999, and Form 4 dated July
9, 1999.
(3) Based on information set forth in Schedule 13G dated April 10, 1999 (the
"Quad-C Schedule 13G") filed by Terrence D. Daniels, Quad-C, Inc.
("Quad-C"), Quad-C IV, L.L.C. ("QCLLC"), and Quad-C Partners IV, L.P. ("QCP
IV"). Includes (A) an aggregate of 1,514,585 shares held of record by
Quad-C Partners II, L.P. ("QCP II") (287,057), Quad-C Partners III, L.P.
("QCP III") (410,078) and QCP IV (817,450), (B) 32,569 shares held directly
by Terrence D. Daniels and (C) 10,843 shares held by the Terrence Daniels
Trust. The Quad-C Schedule 13G reflects that (w) Quad-C is the sole general
partner of QCP II and is a party to management agreements with QCP III and
QCP IV and, as such, may be deemed to
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<PAGE> 76
beneficially own the 1,514,585 shares of common stock held by QCP II, QCP
III and QCP IV, (x) QCLLC is the sole general partner of QCP IV and, as
such, may be deemed to beneficially own the 817,450 shares of common stock
held directly by QCP IV, (y) each of Quad-C, QCLLC and QCP IV has sole
voting and dispositive power with respect to the shares held directly by
QCP IV, and (z) Quad-C also has sole voting and dispositive power over the
shares held directly by QCP II and QCP III. R. Ted Weschler, Vice President
of Quad-C, is a member of the Board of Directors of Nucentrix.
The Quad-C Schedule 13G also reflects that Terrence D. Daniels (A) is the
sole manager and a controlling stockholder of QCLLC, the sole director and
majority stockholder of Quad-C, the sole manager of Quad-C II, L.L.C.
(which is the sole general partner of QCP III), and, as such, may be deemed
to beneficially own the 1,514,585 shares of common stock held directly by
QCP II, QCP III and QCP IV, (B) is the direct beneficial owner of 32,569
shares of common stock, (C) may be deemed to beneficially own 10,843 shares
of common stock through his interest in the Terrence Daniels Trust and (D)
has sole voting and dispositive power over an aggregate of 1,557,997 shares
of common stock.
(4) Based on information set forth in Schedule 13G/A dated June 30, 1999 (the
"Quaker Schedule 13G"), filed by Quaker Capital Management Corporation
("Quaker Capital"), Quaker Capital Partners I, L.L.P. ("Quaker I") and
Quaker Premiere, L.P. ("Quaker Premiere"). The Quaker Schedule 13G reflects
that (A) Quaker I is the direct beneficial owner of 897,637 shares of
common stock, Quaker Premiere is the sole general partner of Quaker I and
Quaker Capital is the sole general partner of Quaker Premiere, (B) each of
Quaker I, Quaker Premiere and Quaker Capital has sole voting and
dispositive power over the 897,637 shares of common stock beneficially
owned directly by Quaker I, (C) Quaker Capital also has sole voting and
dispositive power over an additional 83,046 shares of common stock and (D)
Quaker Capital may be deemed to beneficially own, and has shared voting and
dispositive power over, 480,026 shares of common stock which are held by a
variety of Quaker Capital's investment advisory clients.
(5) Based on information set forth in Schedule 13D dated April 28, 1999 (the
"Feinberg Schedule 13D"), filed by Stephen Feinberg. The Feinberg Schedule
13D reflects that (A) Cerberus Partners L.P. ("Cerberus") is the holder of
231,200 shares of common stock, (B) Cerberus International, Ltd.
("International") is the holder of 463,500 shares of common stock, (C)
Cerberus Institutional Partners, L.P. ("Institutional") is the holder of
66,466 shares of common stock, (D) certain private investment funds (the
"Feinberg Funds") hold, in the aggregate, 238,200 shares of common stock
and (E) Mr. Feinberg possesses sole power to vote and direct the
disposition of all shares of common stock held by each of Cerberus,
International, Institutional and the Feinberg Funds.
(6) Based on information set forth in Schedule 13G dated June 15, 1999 (the
"Reiss 13D"), filed by Richard Reiss, Jr. and Georgica Advisors LLC
("Georgica"). According to the Reiss 13G, Mr. Reiss and Georgica have
shared voting and dispositive power over an aggregate of 651,832 shares of
common stock. Mr. Reiss is the managing member of Georgica.
(7) Consists solely of shares of common stock issuable upon the exercise of
options granted under the 1999 Share Incentive Plan which currently are
exercisable.
(8) Consists of (A) 41,523 shares held by Mr. Schoeppner, as Trustee for Trust
of Carol S. Schoeppner FBO Mark G. Schoeppner, (B) 41,523 shares of common
stock held by Ridgeview Partners, a partnership controlled by Mr.
Schoeppner and (C) 2,000 shares of common stock issuable upon the exercise
of options granted to Mr. Schoeppner under the 1999 Share Incentive Plan
which currently are exercisable. Mr. Schoeppner also is President of Quaker
Capital. See note (4) above.
(9) Consists of (A) 78,799 shares of common stock held by Condor Partners IV,
L.L.C. ("Condor") and (B) 2,000 shares of common stock issuable upon the
exercise of options granted to Mr. Subin under the 1999 Share Incentive
Plan which currently are exercisable. As Managing Director of Trendex
Capital Management, the investment advisor to Condor, Mr. Subin may be
deemed to beneficially own the 78,799 shares held by Condor.
(10) Consists of (A) 165,615 shares held directly by Mr. Weschler and (B) 2,000
shares issuable upon the exercise of options granted to Mr. Weschler under
the 1999 Share Incentive Plan which currently are exercisable. Mr. Weschler
also serves as Vice President of Quad-C. See note (3) above.
(11) Includes an aggregate of 353,480 shares of common stock issuable upon the
exercise of options granted under the 1999 Share Incentive Plan which
currently are exercisable.
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<PAGE> 77
DESCRIPTION OF CAPITAL STOCK
The Amended and Restated Certificate of Incorporation of Nucentrix
authorizes us to issue up to 30,000,000 shares of common stock, par value $.001
per share, and 15,000,000 shares of preferred stock, par value $.001 per share.
The following summary of certain provisions of our common stock does not purport
to be complete and is subject to, and qualified in its entirety by, the
provisions of the Nucentrix's Amended and Restated Certificate of Incorporation,
which is included as an exhibit to the Registration Statement of which this
prospectus is a part, and by the provisions of applicable law.
As of July 15, 1999, (1) 10,057,460 shares of common stock were issued and
outstanding, (2) 1,254,480 shares of common stock were subject to, and reserved
for issuance upon the exercise of, warrants and options outstanding and
exercisable and (3) no shares of preferred stock were issued or outstanding. The
outstanding shares of our common stock are duly authorized, legally issued,
fully paid and nonassessable.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. The shares of common
stock have no preemptive or conversion rights, redemption rights or sinking fund
provisions. Holders of common stock are entitled to receive ratably such
dividends as may be declared by our Board of Directors out of funds legally
available therefor. In the event of liquidation or dissolution, holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and liquidation preference of preferred stock. Holders of a
plurality of the shares of common stock voting for the election of directors can
elect all of the directors since the holders of the common stock will not have
cumulative voting rights. Nucentrix's Amended and Restated Certificate of
Incorporation provides that Nucentrix shall have the authority to create and
issue rights and options entitling the holders of such rights and options to
purchase shares of common stock or any other class or series of capital stock of
Nucentrix.
PREFERRED STOCK
Our Board of Directors is authorized, without further action by our
stockholders, to issue preferred stock from time to time in one or more series
and to fix, as to any such series, the voting rights applicable to such series
and such other designations, preferences and special rights as the Board of
Directors may determine, including dividend, conversion, redemption and
liquidation rights and preferences. Upon completion of this offering, there will
be no shares of preferred stock outstanding. The issuance of shares of preferred
stock under certain circumstances could have the effect of delaying or
preventing a change in control of Nucentrix or other corporate actions. Any such
issuances of preferred stock, as well as the availability of authorized and
unissued preferred stock, also could adversely affect the market price of our
common stock. See "Risk Factors -- Our ability to issue "blank check" preferred
stock may delay or prevent a potential change in control of Nucentrix and may
affect the market price of our common stock."
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the common stock and preferred stock
is Harris Trust and Savings Bank, 311 West Monroe, 11th Floor, Chicago, IL
60690-2388.
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<PAGE> 78
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the common stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the common stock in the
public market following this offering. Upon completion of this offering, we will
have 12,057,460 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option. This number includes the 2,000,000 shares
to be issued in this offering and 10,057,460 shares issued under our plan of
reorganization and upon the exercise of options granted under our 1999 Share
Incentive Plan as described below.
Under our plan of reorganization we:
- issued 10,000,000 shares of common stock as of the Effective Date,
- issued warrants to purchase an additional 825,000 shares of common stock,
- are obligated to issue warrants to purchase an additional 275,000 shares
of common stock, and
- are obligated to issue additional shares of common stock, which we
believe will not exceed 75,000, to satisfy miscellaneous unsecured claims
that may be allowed by the bankruptcy court; as of July 15, 1999, we had
issued 4,960 shares of our common stock to satisfy some of these claims.
See "Reorganization."
We also have issued options to purchase 807,000 shares of common stock under the
1999 Share Incentive Plan, of which options to purchase 52,500 shares of common
stock have been exercised and options to purchase 429,480 shares of common stock
currently are exercisable at an exercise price of $12.50 per share.
All of the shares of common stock sold in this offering will be freely
tradeable under the Securities Act, unless purchased by our "affiliates," as the
Securities Act defines that term. All of the shares of common stock issued or to
be issued under our plan of reorganization, including the shares that may be
issued under the warrants, also are freely tradeable under the Securities Act
unless held by our affiliates or by an "underwriter" as defined in the U.S.
Bankruptcy Code. We have registered under the Securities Act the shares of
common stock to be issued pursuant to the 1999 Share Incentive Plan and,
therefore, all shares acquired upon the exercise of options granted under the
1999 Share Incentive Plan also are, or will be, freely tradeable under the
Securities Act unless purchased by our affiliates.
Shares held by our affiliates may be sold subject to compliance with Rule
144 of the Securities Act without regard to the prescribed holding period under
Rule 144, as described below. In general, under Rule 144, a person, or persons
whose shares are aggregated, who has beneficially owned common stock for at
least one year is entitled to sell in any three-month period a number of shares
that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding, or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which the notice of sale is filed with the Securities and
Exchange Commission.
Sales under Rule 144 are subject to certain requirements relating to manner
of sale, notice and availability of current public information about Nucentrix.
However, because none of our currently outstanding shares of common stock, and
none of the shares to be issued upon the exercise of outstanding warrants or
options, are "restricted securities" as defined in Rule 144, the shares may be
sold by our affiliates under Rule 144 without regard to the one-year holding
period.
We have agreed to maintain for three years a shelf registration statement
for the benefit of certain persons who received shares of common stock pursuant
to our plan of reorganization and who may be considered our affiliates or may be
deemed an underwriter as defined in the Bankruptcy Code. These stockholders,
collectively, own or control 3,843,561 shares, or 31.9%, of our outstanding
common stock that
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<PAGE> 79
are subject to the shelf registration statement. We expect the shelf
registration statement to become effective under the Securities Act either at
the same time as this public offering or immediately afterwards. After the shelf
registration statement becomes effective, up to 1,186,415 shares of our common
stock will become eligible for sale under the shelf registration statement
without regard to the volume limitations imposed by Rule 144 and, after
expiration of the lock-up agreements discussed in the next paragraph, 2,657,146
additional shares of our common stock will become eligible for sale under the
shelf registration statement. See "Risk Factors -- Concentration of ownership
may affect corporate actions and market price for our common stock" and "Certain
Transactions."
Some of our stockholders and our executive officers and directors have
agreed with the underwriters that, until 90 days after the date of this
prospectus, they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any additional shares of common stock or
securities convertible or exchangeable or exercisable for any shares of our
common stock, without the prior written consent of Credit Suisse First Boston
Corporation, subject to certain exceptions. 2,657,146 shares of our common
stock, all of which are covered by the shelf registration statement, are subject
to these agreements and, therefore, may not be sold, under the shelf
registration statement or otherwise, until the expiration of this 90-day period.
We will also agree that we will not offer, sell, contract to sell, announce
our intention to sell, pledge or otherwise dispose of, directly or indirectly,
or file with the Securities and Exchange Commission a registration statement
under the Securities Act relating to, any additional shares of common stock or
securities convertible or exchangeable or exercisable for any shares of our
common stock for a period of 90 days after the date of this prospectus, without
the prior written consent of Credit Suisse First Boston Corporation, subject to
certain limited exceptions, including issuance by us under a registration
statement of common stock under our 1999 Share Incentive Plan.
The lock-up agreements may be released at any time as to all or any portion
of the shares subject to such agreements at the sole discretion of Credit Suisse
First Boston Corporation. Upon the expiration of these lock-up agreements, which
will occur 90 days after the date of this prospectus, 2,657,146 shares of common
stock will become eligible for sale, subject to compliance with Rule 144 unless
sold pursuant to the shelf registration statement in which case Rule 144 would
not apply.
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1999, we have agreed to sell to the
underwriters named below, for whom Credit Suisse First Boston Corporation and
Wasserstein Perella Securities, Inc., are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Wasserstein Perella Securities, Inc.........................
-------
Total.............................................
=======
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 300,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
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<PAGE> 80
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
-------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions paid by
us............................................ [$] [%] $ $
Expenses payable by us.......................... [$] [%] $ $
</TABLE>
Nucentrix, our executive officers and directors, and some stockholders have
agreed that, subject to certain exceptions, we will not offer, sell, contract to
sell, announce our intention to sell, pledge or otherwise dispose of, directly
or indirectly, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to, any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any of our common stock without the prior written consent of
Credit Suisse First Boston Corporation for a period of 90 days after the date of
this prospectus. Credit Suisse First Boston Corporation in its sole discretion
may release any of the securities subject to these lock-up agreements at any
time without notice. See "Shares Eligible for Future Sale."
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
The shares of common stock have been approved for listing on The Nasdaq
Stock Market's National Market under the symbol "NCNX."
Wasserstein Perella & Co., Inc., an affiliate of Wasserstein Perella
Securities, Inc., has provided financial advisory services to us in the past and
received compensation in connection with those services. In particular,
Wasserstein Perella & Co., Inc. acted as our financial advisor in connection
with the reorganization, for which it received usual and customary compensation.
The representatives, may engage in over-allotment, stabilizing
transactions, syndicate covering transactions, penalty bids and "passive" market
making in accordance with Regulation M under the Exchange Act.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
- In "passive" market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common stock until the
time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
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<PAGE> 81
LEGAL MATTERS
Certain legal matters in connection with the offering of the common stock
hereby will be passed upon for Nucentrix by Vinson & Elkins L.L.P., 2001 Ross
Avenue, Suite 3700, Dallas, Texas. Certain legal matters in connection with the
offering will be passed upon for the underwriters by Skadden, Arps, Slate,
Meagher & Flom, 919 Third Avenue, New York, New York.
EXPERTS
The consolidated financial statements and financial statement schedule of
Nucentrix as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (together
with all amendments and exhibits, referred to as the "Registration Statement")
under the Securities Act of 1933 with respect to the common stock covered by
this prospectus. This prospectus, which forms a part of the Registration
Statement, omits selected information contained in the Registration Statement,
and you should refer to the Registration Statement for further information with
respect to Nucentrix and the common stock covered by this prospectus. Statements
contained in this prospectus concerning the provisions or contents of any
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC. We are subject to the information requirements of the
Securities Exchange Act of 1934, and in accordance therewith file periodic
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information, as well as the registration statement,
including the exhibits and schedules thereto, may be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the SEC located at 7 World Trade Center, 13th Floor, New York, New York 10048
and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from such offices, upon payment of the fees
prescribed by the SEC. The SEC maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, such as Nucentrix that submit electronic filings to the
SEC. Our common stock is listed on the Nasdaq National Market System, and such
reports, proxy and information statements and certain other information also can
be inspected at the office of Nasdaq Operations, 1735 K Street, NW, Washington,
DC 20006.
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<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1999......................................... F-3
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1998........... F-4
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the three months ended March 31, 1999...... F-5
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-6
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
Independent Auditors' Report................................ F-7
Consolidated Balance Sheets as of December 31, 1998 and 1997
and March 31, 1999
(unaudited)............................................... F-8
Consolidated Statements of Operations for the three years
ended December 31, 1998, and for the three months ended
March 31, 1999 and 1998 (unaudited)....................... F-9
Consolidated Statements of Stockholders' Equity (Deficit)
for the three years ended December 31, 1998, and for the
three months ended March 31, 1999 (unaudited)............. F-10
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998, and for the three months ended
March 31, 1999 and 1998 (unaudited)....................... F-11
Notes to Consolidated Financial Statements.................. F-12
Schedule II Valuation and Qualifying Accounts............... S-1
</TABLE>
F-1
<PAGE> 83
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Financial
Information of Nucentrix Broadband Networks, Inc. (formerly Heartland Wireless
Communications, Inc.) and subsidiaries (collectively, "Nucentrix") consists of
an Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31,
1999, and Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the year ended December 31, 1998, and the three months ended March 31, 1999
(together, the "Pro Forma Statements"). The Unaudited Pro Forma Condensed
Consolidated Balance Sheet presents adjustments to the historical financial
information of Nucentrix to give effect to Nucentrix's plan of reorganization
under Chapter 11 of the U.S. Bankruptcy Code (the "Plan"), which became
effective on April 1, 1999 (the "Effective Date"), and the adoption of Fresh
Start Reporting as if each occurred on March 31, 1999, and the Unaudited Pro
Forma Condensed Consolidated Statements of Operations presents adjustments to
the historical financial information of the Company to give effect to the Plan
and the adoption of Fresh Start Reporting as if each occurred at January 1,
1998.
On December 4, 1998, Nucentrix filed a voluntary, prenegotiated Plan under
Chapter 11 of the U.S. Bankruptcy Code. Nucentrix emerged from bankruptcy on the
Effective Date. Under the Plan, on the Effective Date, all previously issued and
outstanding common stock, stock options and warrants (collectively, the "Old
Common Stock") were canceled, and Nucentrix issued new common stock and warrants
to purchase shares of common stock. The holders of Nucentrix's 13% Senior Notes
due 2003 and 14% Senior Notes due 2004 (collectively, the "Old Senior Notes")
received 9,700,000 shares of the common stock and the holders of the Company's
9% Convertible Notes ("Old Convertible Notes") received 300,000 shares of the
common stock and warrants to purchase 825,000 shares of common stock in exchange
for cancellation of the notes. Further, on the Effective Date, 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." Fresh Start Reporting resulted in a
new reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Additionally, Liabilities Subject to
Compromise were adjusted to zero in connection with their discharge under the
Plan of Reorganization.
The Pro Forma Financial Information should be read in conjunction with the
historical financial statements of Nucentrix and the notes thereto. The Pro
Forma Financial Statements do not purport to represent what Nucentrix's results
of operations actually would have been if the aforementioned transactions or
events occurred on the dates specified, or to project Nucentrix's results of
operations for any future periods. The pro forma adjustments are based upon
available information and certain adjustments that management believes are
reasonable.
F-2
<PAGE> 84
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets......................................... $ 33,931 $ 33,931
Systems & equipment, net............................... 59,513 (2,917)(B) 56,596
License and leased license investment, net............. 78,088 78,088
Note and lease receivables............................. 3,763 3,763
Other assets, net...................................... 5,222 (4,750)(A) 4,274
3,802(B)
--------- --------- --------
Total Assets................................. $ 180,517 $ (3,865) $176,652
========= ========= ========
Current liabilities.................................... $ 16,651 $ 16,651
Long-term debt, less current portion................... 13,855 13,855
Minority interest in subsidiaries...................... 149 149
Liabilities subject to compromise...................... 322,781 (322,781)(A) --
Stockholders' equity(deficit):
Old common stock..................................... 20 (20)(B) --
Additional paid-in capital........................... 261,943 (261,943)(B) --
Accumulated deficit.................................. (434,524) 318,031(A) --
116,493(B)
Treasury stock, 13,396 shares at cost................ (358) 358(B) --
New common stock..................................... -- 10(B) 10
New preferred stock.................................. -- --
New additional paid-in capital....................... -- 145,987(B) 145,987
--------- --------- --------
Total stockholders' equity (deficit)......... (172,919) 318,916 145,997
--------- --------- --------
Total Liabilities and Stockholders' Equity... $ 180,517 $ (3,865) $176,652
========= ========= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
F-3
<PAGE> 85
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues............................................... $ 73,989 $ 73,989
--------- --------
Operating expenses:
System operations.................................... 35,790 35,790
Selling, general and administrative.................. 36,367 36,367
Depreciation and amortization........................ 39,550 (22,417)(C) 17,133
Impairment of long-lived assets...................... 105,791 (105,791)(E) --
--------- --------- --------
Total operating expenses..................... 217,498 (128,208) 89,290
--------- --------- --------
Operating loss....................................... (143,509) 128,208 (15,301)
Other income (expense):
Interest income...................................... 2,659 2,659
Interest expense..................................... (37,095) 35,660(F) (1,435)
Equity in losses of affiliates....................... (30,340) (30,340)
Other income (expense), net.......................... (10) (10)
--------- --------- --------
Total other income (expense)................. (64,786) 35,660 (29,126)
--------- --------- --------
Loss before reorganization costs..................... (208,295) 163,868 (44,427)
Reorganization costs................................... (3,266) 3,266(D) --
--------- --------- --------
Net loss..................................... $(211,561) $ 167,134 $(44,427)
========= ========= ========
Net loss per common share -- basic and diluted......... $ (10.72) $ (4.44)
========= ========
Average shares outstanding -- basic and diluted........ 19,735 10,000
========= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
F-4
<PAGE> 86
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues.................................................... $18,086 $18,086
Operating expenses:
System operations......................................... 8,599 8,599
Selling, general and administrative....................... 9,156 9,156
Depreciation and amortization............................. 5,953 15(C) 5,968
------- ------- -------
Total operating expenses.......................... 23,708 15 23,723
------- ------- -------
Operating loss............................................ (5,622) (15) (5,637)
Other income (expense):
Interest income........................................... 423 423
Interest expense.......................................... (321) (321)
Other income (expense), net............................... 2 2
------- ------- -------
Total other income (expense)...................... 104 -- 104
------- ------- -------
Loss before reorganization costs.................. (5,518) (15) (5,533)
Reorganization costs........................................ (2,311) 2,311(D) --
------- ------- -------
Net loss.......................................... $(7,829) $ 2,296 $(5,533)
======= ======= =======
Net loss per common share -- basic and diluted.............. $ (.40) $ (.55)
======= =======
Average shares outstanding -- basic and diluted............. 19,782 10,000
======= =======
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
F-5
<PAGE> 87
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
(A) Reflects the discharge of debt and write-off of related debt issuance costs
in connection with Nucentrix's Plan.
(B) Reflects the issuance of common stock to the holders of the Old Senior
Notes and the Old Convertible Notes, the adjustment to record the
allocation of the resulting reorganization value to Nucentrix's assets, and
the adjustments to eliminate Nucentrix's Old Common Stock and to reset
beginning retained earnings to zero in accordance with Fresh Start
Reporting.
(C) Reflects the adjustment to depreciation of systems and equipment and
amortization of intangible assets as a result of the adjustment to record
the allocation of the reorganization value to net assets under Fresh Start
Reporting. Systems and equipment is depreciated over estimated useful lives
ranging from three to twenty years. Intangible assets are comprised
primarily of license and leased license investment, which is being
amortized over the average remaining useful life of 12.5 years.
(D) Reflects the adjustment to eliminate reorganization costs incurred by
Nucentrix prior to the Effective Date of the Plan.
(E) Reflects the adjustment to eliminate the non-cash charge for impairment of
long-lived assets recorded by Nucentrix during the year ended December 31,
1998. Under Fresh Start Reporting, the long-lived assets, along with the
rest of Nucentrix's assets and liabilities are adjusted to reorganization
value upon the Effective Date of the Plan (assumed to be January 1, 1998,
for purposes of the pro forma condensed consolidated statement of
operations).
(F) Reflects the adjustment to eliminate interest expense related to the Old
Senior Notes and Old Convertible Notes discharged in connection with
Nucentrix's Plan.
F-6
<PAGE> 88
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Nucentrix Broadband Networks, Inc. (formerly Heartland Wireless Communications,
Inc.):
We have audited the accompanying consolidated balance sheets of Nucentrix
Broadband Networks, Inc. (formerly Heartland Wireless Communications, Inc.) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 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 and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Nucentrix
Broadband Networks, Inc. (formerly Heartland Wireless Communications, Inc.) and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Dallas, Texas
March 31, 1999, except as to Notes 1(a), 1(b)
and 1(q), 7, 8, 10(a), 13 and 17
which are as of April 1, 1999
F-7
<PAGE> 89
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------- AS OF MARCH 31,
1998 1997 1999
--------- --------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 30,676 $ 42,821 $ 27,590
Restricted assets -- investment in debt and other
securities........................................... 1,011 10,333 1,011
Subscriber receivables, net of allowance for doubtful
accounts of $348, $340 and $366, respectively........ 2,872 2,198 3,826
Prepaid expenses and other.............................. 1,563 1,390 1,504
--------- --------- ---------
Total current assets............................ 36,122 56,742 33,931
--------- --------- ---------
Investments in affiliates, at equity (Notes 2 and 9)...... -- 34,167 --
Systems and equipment, net (Notes 3 and 4)................ 61,037 122,653 59,513
License and leased license investment, net (Notes 3 and
5)...................................................... 79,703 123,369 78,088
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $3,685 in 1997 (Notes 3
and 9).................................................. -- 26,226 --
Note receivable from affiliate (Note 9)................... 3,901 2,069 3,763
Other assets, net......................................... 5,269 6,908 5,222
--------- --------- ---------
Total Assets.................................... $ 186,032 $ 372,134 $ 180,517
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Not Subject to Compromise:
Current liabilities:
Accounts payable and accrued liabilities (Note 6).... $ 11,915 $ 17,381 $ 14,805
Current portion of long-term debt (Note 7)........... 2,019 1,358 1,846
--------- --------- ---------
Total current liabilities....................... 13,934 18,739 16,651
--------- --------- ---------
Long-term debt, less current portion (Note 7)............. 14,258 306,838 13,855
Minority interests in subsidiaries (Note 16).............. 149 149 149
Liabilities subject to compromise (Note 8)................ 322,781 -- 322,781
Stockholders' equity (Note 10):
Common stock, $.001 par value; authorized 50,000,000
shares, issued 19,795,521, 19,688,527 and 19,795,521
shares, respectively................................. 20 20 20
Additional paid-in capital.............................. 261,943 261,880 261,943
Accumulated deficit..................................... (426,695) (215,134) (434,524)
Treasury stock at cost, 13,396 shares................... (358) (358) (358)
--------- --------- ---------
Total stockholders' equity (deficit)............ (165,090) 46,408 (172,919)
--------- --------- ---------
Commitments and contingencies (Notes 5 and 13)
Total Liabilities and Stockholders' Equity...... $ 186,032 $ 372,134 $ 180,517
========= ========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-8
<PAGE> 90
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1998 1997 1996 1999 1998
--------- --------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 73,989 $ 78,792 $ 56,017 $18,086 $ 19,099
Operating expenses:
System operations.................... 35,790 39,596 21,255 8,599 9,315
Selling, general and
administrative.................... 36,367 42,255 42,435 9,156 9,126
Depreciation and amortization........ 39,550 65,112 39,323 5,953 11,300
Impairment of long-lived assets (Note
3)................................ 105,791 -- -- -- --
--------- --------- -------- ------- --------
Total operating expenses..... 217,498 146,963 103,013 23,708 29,741
--------- --------- -------- ------- --------
Operating loss....................... (143,509) (68,171) (46,996) (5,622) (10,642)
Other income (expense):
Interest income...................... 2,659 5,546 3,811 423 816
Interest expense..................... (37,095) (39,867) (21,977) (321) (10,000)
Equity in losses of affiliates (Notes
2 and 9).......................... (30,340) (32,037) (18,612) -- (5,376)
Other income (expense), net (Note
9)................................ (10) (54) 4,981 2 --
--------- --------- -------- ------- --------
Total other income
(expense).................. (64,786) (66,412) (31,797) 104 (14,560)
--------- --------- -------- ------- --------
Loss before reorganization costs,
income taxes and extraordinary
item.............................. (208,295) (134,583) (78,793) (5,518) (25,202)
Reorganization costs (Note 1).......... (3,266) -- -- (2,311) --
--------- --------- -------- ------- --------
Loss before income taxes and
extraordinary item................ (211,561) (134,583) (78,793) (7,829) (25,202)
Income tax benefit (Note 11)........... -- -- 28,156 -- --
--------- --------- -------- ------- --------
Loss before extraordinary item....... (211,561) (134,583) (50,637) (7,829) (25,202)
Extraordinary item -- loss on
extinguishment of debt, net of tax
(Note 7)............................. -- -- (10,424) -- --
--------- --------- -------- ------- --------
Net loss..................... $(211,561) $(134,583) $(61,061) $(7,829) $(25,202)
========= ========= ======== ======= ========
Loss per common share -- basic and
diluted:
Loss before extraordinary item....... $ (10.72) $ (6.85) $ (2.74) $ (.40) $ (1.28)
Extraordinary item................... -- -- (.57) -- --
--------- --------- -------- ------- --------
Net loss..................... $ (10.72) $ (6.85) $ (3.31) $ (.40) $ (1.28)
========= ========= ======== ======= ========
Average shares outstanding -- basic
and diluted....................... 19,735 19,649 18,473 19,782 19,683
========= ========= ======== ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-9
<PAGE> 91
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------- PAID-IN ACCUMULATED ----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
---------- ------ ---------- ----------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995........ 12,611,131 $13 $ 71,165 $ (19,490) -- $ -- $ 51,688
Issuance of common stock for
acquisitions (Note 9)........... 6,934,040 7 184,840 -- (10,252) (274) 184,573
Exercise of stock options,
warrants and other, including
tax benefit..................... 49,310 -- 658 -- -- -- 658
Gain on equity investment, net of
taxes of $2,931 (Note 9)........ -- -- 4,989 -- -- -- 4,989
Net loss.......................... -- -- -- (61,061) -- -- (61,061)
---------- --- -------- --------- ------- ----- ---------
BALANCE, DECEMBER 31, 1996........ 19,594,481 20 261,652 (80,551) (10,252) (274) 180,847
Issuance of common stock to
officer (Note 10)............... 75,000 -- 159 -- -- -- 159
Issuance of common stock for
401(k) Plan..................... 19,046 -- 69 -- -- -- 69
Acquired shares from escrow....... -- -- -- -- (3,144) (84) (84)
Net loss.......................... -- -- -- (134,583) -- -- (134,583)
---------- --- -------- --------- ------- ----- ---------
BALANCE, DECEMBER 31, 1997........ 19,688,527 20 261,880 (215,134) (13,396) (358) 46,408
Issuance of common stock to
officer (Note 10)............... 10,000 -- 14 -- -- -- 14
Issuance of common stock for
401(k) Plan..................... 96,994 -- 49 -- -- -- 49
Net loss.......................... -- -- -- (211,561) -- -- (211,561)
---------- --- -------- --------- ------- ----- ---------
BALANCE, DECEMBER 31, 1998........ 19,795,521 20 261,943 (426,695) (13,396) (358) (165,090)
Net loss (Unaudited).............. -- -- -- (7,829) -- -- (7,829)
---------- --- -------- --------- ------- ----- ---------
BALANCE, MARCH 31, 1999
(UNAUDITED)..................... 19,795,521 $20 $261,943 $(434,524) (13,396) $(358) $(172,919)
========== === ======== ========= ======= ===== =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-10
<PAGE> 92
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------------
1998 1997 1996 1999 1998
--------- --------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(211,561) $(134,583) $(61,061) $(7,829) $(25,202)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 39,550 65,112 39,323 5,953 11,300
Deferred income tax benefit....................... -- -- (29,240) -- --
Debt accretion and debt issuance cost
amortization.................................... 5,686 4,985 4,331 -- 1,506
Equity in losses of affiliates.................... 30,340 32,037 18,612 -- 5,376
Compensation expense related to issuance of common
stock........................................... 63 228 -- -- 14
Gain on sale of assets............................ -- -- (5,279) -- --
Write-down of assets due to impairment............ 105,791 -- -- -- --
Extraordinary item -- debt extinguishment......... -- -- 4,253 -- --
Changes in operating assets and liabilities, net
of acquisitions:
Subscriber receivables.......................... (674) 3,194 (2,568) (954) 577
Prepaid expenses and other...................... (132) 830 (414) (158) (599)
Accounts payable, accrued expenses and other
liabilities.................................. 22,560 (13,449) 9,289 2,890 8,564
--------- --------- -------- ------- --------
Net cash provided by (used in) operating
activities................................. (8,377) (41,646) (22,754) (98) 1,536
--------- --------- -------- ------- --------
Cash flows from investing activities:
Investments and advances to affiliates.............. -- -- (3,050) -- --
Proceeds from note receivable -- affiliate.......... 366 18,749 58,340 -- --
Proceeds from sale of investment in affiliate....... 1,534 -- -- -- --
Proceeds from sale of assets........................ 236 126 24,139 -- --
Purchases of systems and equipment.................. (13,473) (29,402) (93,298) (2,534) (3,024)
Expenditures for licenses and leased licenses....... -- (310) (2,382) (16) --
Purchases of other investments...................... -- (900) -- -- --
Purchase of debt securities......................... (69) -- (24,550) -- --
Proceeds from sale of debt securities............... 9,368 19,935 14,250 -- --
Acquisitions, net of cash acquired.................. -- (1,622) (7,618) -- --
Collections of note receivable...................... -- 250 -- 138 --
--------- --------- -------- ------- --------
Net cash provided by (used in) investing
activities................................. (2,038) 6,826 (34,169) (2,412) (3,024)
--------- --------- -------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt........................ -- -- 141,350 -- --
Payment of debt issuance costs and consent fees..... -- (597) (12,973) -- --
Payments of long-term debt.......................... (327) -- (13,017) (335) --
Proceeds from other notes payable................... -- -- 6,700 -- --
Payments on short-term borrowings and other notes
payable........................................... (1,403) (1,358) (9,233) (241) (356)
Other............................................... -- -- 549 -- --
--------- --------- -------- ------- --------
Net cash provided by (used in) financing
activities................................. (1,730) (1,955) 113,376 (576) (356)
--------- --------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents......................................... (12,145) (36,775) 56,453 (3,086) (1,844)
Cash and cash equivalents at beginning of period...... 42,821 79,596 23,143 30,676 42,821
--------- --------- -------- ------- --------
Cash and cash equivalents at end of period............ $ 30,676 $ 42,821 $ 79,596 $27,590 $ 40,977
========= ========= ======== ======= ========
Cash paid for interest................................ $ 10,416 $ 31,017 $ 14,434 $ 391 $ 1,875
========= ========= ======== ======= ========
Cash paid for reorganization costs.................... $ 2,921 $ -- $ -- $ 422 $ --
========= ========= ======== ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-11
<PAGE> 93
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Nucentrix Broadband Networks, Inc. (formerly Heartland Wireless
Communications, Inc.) ("Nucentrix") provides wireless broadband network and
multichannel subscription television services in the 2.1 to 2.7 gigahertz
("GHz") range of the radio spectrum, primarily in medium and small markets in
the central United States. Nucentrix owns the basic trading area ("BTA")
authorizations, or otherwise licenses or leases MDS/MMDS/ITFS ("MMDS") spectrum,
in 87 markets.
Currently, Nucentrix provides wireless subscription television service in
57 markets, including an offering of up to 185 digital channels from DIRECTV,
Inc. ("DIRECTV") and its distributors in 51 of the 57 markets in combination
with Nucentrix's service or as a stand-alone offering. Nucentrix also provides
two-way high-speed Internet access services primarily to businesses and small
offices/home offices ("SOHOs") in Sherman/Denison, Texas and is constructing a
similar system in Austin, Texas. Nucentrix, through national independent
contractors, also offers technical support, e-mail, Web design and hosting, and
domain name registration and maintenance in connection with its high-speed
Internet access business.
(b) Financial Restructuring
In January 1998, Nucentrix retained Wasserstein Perella & Co. ("WP&Co.") to
assist in evaluating options to finance Nucentrix's business plan and service
its debt. In consultation with WP&Co., Nucentrix did not make the April 15, 1998
interest payment on its 13% Senior Notes ("Old 13% Notes" -- See Note 7).
Subsequently, Nucentrix began negotiating with holders of the Old 13% Notes and
holders of Nucentrix's 14% Senior Notes ("Old 14% Notes" -- See Note 7)
(collectively, "the Old Senior Notes") to restructure its debt. Nucentrix did
not make the October 15, 1998 interest payments on the Old Senior Notes. On
December 4, 1998, Nucentrix filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan") under Chapter 11 of the U.S. Bankruptcy Code, with
the prepetition support from holders of more than 70% in principal amount of the
Old Senior Notes.
On April 1, 1999, Nucentrix canceled all issued and outstanding common
stock, stock options, and warrants (collectively, the "Old Common Stock") and
issued new common stock ("New Common Stock") and warrants. Holders of the Old
Senior Notes and holders of Nucentrix's 9% Convertible Notes ("Old Convertible
Notes" -- See Note 7) received 97% and 3% of the New Common Stock, respectively.
The holders of the Old Convertible Notes received warrants to purchase up to
7.5% of New Common Stock on a diluted basis. The holders of Nucentrix's Old
Common Stock will receive warrants to purchase up to 2.5% of New Common Stock on
a diluted basis. The warrants proposed to be issued to holders of Old Common
Stock are subject to certain securities litigation claims as set forth in the
Plan.
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 Sheet as of December
31, 1998, and March 31, 1999 (See Note 8). 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, which was subject to certain conditions. All conditions to
effectiveness of the Plan have been satisfied or duly waived, and Nucentrix
consummated the Plan on April 1, 1999, at which time the reorganized
F-12
<PAGE> 94
company emerged from bankruptcy. Nucentrix changed its name to Nucentrix
Broadband Networks, Inc., and restructured its business into four wholly-owned
subsidiaries: Nucentrix Internet Services, Inc., Nucentrix Telecom Services,
Inc., Nucentrix Spectrum Resources, Inc., and Heartland Cable Television, Inc.
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. The consolidated
balance sheet of the reorganized company is expected to reflect approximately
$34.0 million in current assets, $57.0 million in systems and equipment, $86.0
million in other assets, $17.0 million in current liabilities, $14.0 million in
long term debt and 146.0 million in stockholders' equity.
The impact of the bankruptcy reorganization on various Federal tax
attributes has not been fully determined; however, some portion of Nucentrix's
net operating loss carryforwards likely will be reduced and may be completely
eliminated pursuant to its bankruptcy discharge. Furthermore, the deductibility
of net operating loss carryforwards arising prior to discharge in bankruptcy
will be limited by the product of the long-term tax exempt rate times the fair
market value of Nucentrix after discharge of debt.
(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.
Nucentrix anticipates that additional sources of capital will be required
to fully implement its long-term business strategy, which encompasses expanding
the use of its spectrum through the delivery of broadband network services such
as high-speed Internet access and Internet Protocol (IP), telephony services as
well as the acquisition of additional spectrum in other medium-sized markets in
the United States for such use. Accordingly, Nucentrix is evaluating and will
continue to evaluate additional sources of capital, including the sale or
exchange of debt or equity securities, borrowings under secured or unsecured
loan arrangements and sales of assets, including MMDS subscription systems and
channel rights.
There can be no assurance that Nucentrix will be able to obtain additional
capital in a timely manner and on terms satisfactory to Nucentrix that will be
necessary to implement its business strategy. If Nucentrix is unable to obtain
financing in a timely manner and on acceptable terms, management has developed
and intends to implement a plan that allows Nucentrix to continue to operate in
the normal course of business at least into 2000. More specifically, this plan
would include delaying, reducing or eliminating the launch of new broadband
network systems (including high-speed Internet systems), reducing or eliminating
new video subscriber installations and related marketing expenditures and
reducing or eliminating other discretionary expenditures.
(d) Principles of Consolidation
The consolidated financial statements include the accounts of Nucentrix and
its majority-owned subsidiaries. Investments in 20% to 50% owned affiliates are
accounted for on the equity method and investments in less than 20% owned
affiliates are accounted for on the cost method. 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-13
<PAGE> 95
(f) Investments in Securities
Investments in debt and other securities are widely diversified and
principally consist of certificates of deposit, money market deposits, U.S.
government agency securities and rated commercial paper 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.
(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 4). 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.
Equipment awaiting installation consists primarily of accessories, parts and
supplies for subscriber installations and is stated at the lower of average cost
or market.
The direct costs of subscriber installations include reception materials
and equipment on subscriber premises, installation labor and overhead charges
which are amortized over the useful life of the asset (presently seven 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. The amortization period of the
nonrecoverable portion of subscriber installation costs was reduced from six
years to four years and from four to three years in the fourth quarter of 1996
and in the third quarter of 1997, respectively, to correspond to Nucentrix's
estimate of average subscription term. The effects of these changes in estimate
were to increase 1997 and 1996 depreciation expense by $1.2 million and $2.9
million, respectively, and increase 1997 and 1996 net loss by $1.2 million and
$1.9 million ($.04 and $.10 per basic common share), respectively. In the third
quarter of 1997, Nucentrix charged operations for $6.1 million for the write-off
of installed subscriber equipment which was deemed unrecoverable from lost
subscribers and $1.7 million for the write-off of obsolete subscriber equipment.
(h) License and Leased License Investment
License and leased license investment includes costs incurred to acquire
and/or develop wireless broadband channel rights and are amortized over 15 years
beginning with inception of service in each market.
In the fourth quarter of 1996, Nucentrix reduced its estimated useful life
of license and leased license investment from 20 years to 15 years. The effect
of this change increased 1996 amortization expense by $400,000 and increased
1996 net loss by $260,000 ($.01 per basic common share). During the third
quarter of 1998, Nucentrix wrote down the value of its operating licenses to
estimated fair market value in accordance with SFAS No. 121 (See Note 3). The
re-valued licenses are being amortized over the average remaining life of 12.5
years.
(i) Excess of Cost over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired is amortized on a
straight-line basis, generally over 15 years. Nucentrix assesses the
recoverability of this asset by determining whether the amortization of the
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows. The
assessment for the recoverability of excess of cost over fair value of net
assets acquired will be impacted if estimated future operating cash flows are
not achieved. (See Note 3). In the fourth quarter of 1996, Nucentrix reduced its
estimate of the useful life of its excess of cost over fair value of net assets
acquired from 20 years to 15 years. The effect of this change in estimate was to
increase 1996 amortization expense by $100,000 and increase 1996 net loss by
$65,000 (no material effect on a per basic common share basis).
F-14
<PAGE> 96
(j) Impairment of Long Lived Assets
In January, 1996, Nucentrix adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). 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 3).
(k) Investments in Affiliated Companies
Investments in affiliated companies are accounted for by the equity method.
The excess cost of the affiliates' stock over Nucentrix's share of their net
assets at the acquisition date is amortized on a straight-line basis over 15
years.
(l) Revenue Recognition
Revenues from subscribers are recognized as service is provided. Amounts
paid in advance are recorded as deferred revenue.
(m) 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.
(n) Net Loss Per Common Share -- Basic and Diluted
Nucentrix adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128") in the fourth quarter of 1997 as required
by this Statement. Accordingly, Nucentrix has presented basic loss per share,
computed on the basis of the weighted average number of common shares
outstanding during the year, and 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 year. All prior period loss per share
amounts have been restated in accordance with this Statement.
(o) 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 the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-15
<PAGE> 97
(p) Concentrations of Credit Risk and Accounts Receivable
Nucentrix's subscribers and the related accounts receivable are primarily
residential subscribers that are concentrated in eight states in the central
United States. Nucentrix establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific subscribers, historical
trends and other information. In the opinion of management, the allowance for
doubtful accounts is adequate and subscriber receivables are presented at net
realizable value.
(q) Other Assets
Other assets consists principally of debt issuance costs related to the
issuance of Nucentrix's long-term debt. These costs are amortized,
straight-line, over the term of the related indebtedness. Nucentrix discontinued
the amortization of deferred debt issuance costs upon filing the Plan on
December 4, 1998. The carrying value of these costs was adjusted to zero when
Nucentrix adopted Fresh Start Reporting on April 1, 1999.
(r) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(s) Comprehensive Income
Effective January 1, 1998, Nucentrix adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes
standards for reporting and display of comprehensive income in a full set of
general-purpose financial statements. Comprehensive income includes net income
and other comprehensive income which is generally comprised of changes in the
fair value of available-for-sale marketable securities, foreign currency
translation adjustments and adjustments to recognize additional minimum pension
liabilities. For each of the years in the three years ended December 31, 1998
and the three months ended March 31, 1999 and 1998 presented in the accompanying
consolidated statements of operations, comprehensive income and net income are
the same amount.
(t) Segment Reporting
In January 1998, Nucentrix adopted Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS 131 requires that public companies report
operating segments based upon how management allocates resources and assesses
performance. Based on the criteria outlined in SFAS No. 131, Nucentrix is
comprised of a single reportable segment -- distribution of wireless
multichannel video programming. No additional disclosure is required by
Nucentrix to conform to the requirements of SFAS No. 131.
(u) Interim Financial Data
The interim financial data as of March 31, 1999 and for the periods ended
March 31, 1999 and 1998 has been prepared by Nucentrix and is unaudited;
however, in the opinion of Nucentrix, the interim data includes all adjustments,
consisting only of normal recurring adjustments necessary for a fair statement
of the results of operations and cash flows for the interim periods. Results for
interim periods are not necessarily indicative of the results to be expected for
the full fiscal year.
(2) INVESTMENTS IN AFFILIATES
Investments in affiliates was $0 and $34.2 million at December 31, 1998 and
1997, respectively. At December 31, 1997, Investments in affiliates consisted of
approximately 20% of the outstanding common stock of Wireless One, Inc.
("Wireless One") and 36% of the outstanding common stock of CS Wireless Systems,
Inc. ("CS Wireless"). During 1997, Nucentrix recorded its equity interest in
losses from Wireless One to the extent that its investment balance was reduced
to zero. During 1998, Nucentrix recorded its equity interest in losses from CS
Wireless, wrote off $6.8 million of its excess basis in
F-16
<PAGE> 98
CS Wireless in the second quarter, and wrote off its remaining investment
balance of $11.7 million during the third quarter based on impairment charges
recorded by CS Wireless related to its goodwill. In December 1998, Nucentrix
sold its 36% equity interest in CS Wireless to CAI Wireless Systems, Inc.
("CAI"). (See Note 9.)
(3) 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.
Throughout the second and third quarters of 1998, Nucentrix analyzed
various recapitalization and restructuring alternatives with the assistance of
WP&Co., 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). 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, along with the $17.7
million impairment charge discussed above, resulted in a non-cash impairment
charge during 1998 of $105.8 million, as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF WRITE-DOWNS
- --------------------------
<S> <C>
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
========
</TABLE>
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. As a
result, the carrying amounts of long-lived assets could be reduced by additional
amounts which would be material to Nucentrix's financial position and results of
operations.
(4) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Equipment awaiting installation............................. $ 4,233 $ 5,812
Subscriber premises equipment and installation costs........ 26,309 102,892
Transmission equipment and system construction costs........ 31,170 45,961
Office furniture and equipment.............................. 1,813 8,811
Buildings and leasehold improvements........................ 461 1,786
------- --------
63,986 165,262
Accumulated depreciation and amortization................... 2,949 42,609
------- --------
$61,037 $122,653
======= ========
</TABLE>
(See Note 3 for discussion of systems and equipment written down in
September 1998.)
F-17
<PAGE> 99
(5) OPERATING LEASES AND FCC LICENSES
Nucentrix depends on leases with third parties for some of its channel
rights. Under FCC rules, the base term of each lease cannot exceed the term of
the underlying FCC license. FCC licenses generally must be renewed every ten
years, and there is no automatic renewal of such licenses. The remaining initial
terms of most of Nucentrix's operating channel leases range from 2 to 6 years,
although substantially all of these leases renew automatically or upon notice
from Nucentrix. Channel lease agreements generally require payments based on the
greater of specified minimums or amounts based upon various 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 $3.0 million, $3.6 million and $3.3 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Nucentrix also has other operating leases for office space, equipment and
transmission tower space. Rent expense incurred in connection with these leases
was $4.2 million, $3.4 million and $3.5 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Future minimum lease payments due under noncancellable leases at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CHANNEL OPERATING
DECEMBER 31 LEASES LEASES
- ----------- ------- ---------
<S> <C> <C>
1999........................................................ $2,855 $3,206
2000........................................................ 2,990 1,478
2001........................................................ 2,950 1,136
2002........................................................ 2,387 945
2003........................................................ 1,854 692
</TABLE>
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consists of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accounts payable............................................ $ 319 $ 261
Accrued interest............................................ 112 6,873
Accrued programming......................................... 2,798 2,937
Subscriber deposits......................................... 730 386
Deferred income............................................. 1,041 943
Accrued sales, property and franchise taxes................. 2,260 2,166
Accrued compensation........................................ 681 1,011
Other accrued expenses and other liabilities................ 3,974 2,804
------- -------
$11,915 $17,381
======= =======
</TABLE>
As of December 31, 1998, accrued interest on the Old Senior Notes and Old
Convertible Notes has been reclassified to Liabilities Subject to Compromise.
(See Notes 1 and 8).
F-18
<PAGE> 100
(7) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Subordinated Convertible Notes due 2004..................... $ -- $ 52,678
13% Senior Notes due 2003................................... -- 112,111
14% Senior Notes due 2004................................... -- 125,000
Other notes payable......................................... 16,277 18,407
------- --------
16,277 308,196
Less current portion........................................ 2,019 1,358
------- --------
$14,258 $306,838
======= ========
</TABLE>
Debt Cancellation Under the Plan
On April 1, 1999 under the terms of the Plan, the Old Senior Notes and Old
Convertible Notes were canceled. The holders of the Old Senior Notes and Old
Convertible Notes received 97% and 3%, respectively, of the New Common Stock in
exchange for cancellation of their debt. The holders of the Old Convertible
Notes also received warrants to purchase up to 7.5% of New Common Stock on a
diluted basis. Accordingly, the Old Senior Notes and Old Convertible Notes are
considered eligible for compromise and have been reclassified from Long Term
Debt to Liabilities Subject to Compromise on the Consolidated Balance Sheet at
December 31, 1998. (See Note 8). As of December 4, 1998, Nucentrix discontinued
the accrual of interest and amortization of deferred debt issue 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
three months ended March 31, 1999.
The following discussion of the Old Senior Notes and Old Convertible Notes
relates to the balances at December 31, 1997 and to amounts outstanding during
1998 prior to filing the Plan.
Old Convertible Notes
On November 30, 1994, Nucentrix consummated the $40.1 million private
placement of Old Convertible Notes. The Old Convertible Notes accreted at a rate
of 9%, compounded semiannually, to an aggregate principal amount of $62.4
million at November 30, 1999, with interest accruing and payable thereafter.
Old 13% Notes
In April 1995, Nucentrix consummated a private placement of $100.0 million
of Old 13% Notes and 600,000 warrants to purchase an equal number of shares of
Old Common Stock at an exercise price of $19.525 per share. For financial
reporting purposes, the warrants were valued at $4.2 million. In March 1996,
Nucentrix consummated a private placement of an additional $15.0 million of Old
13% Notes. Interest on the notes was payable semiannually on April 15 and
October 15.
In October 1996, by consent of a portion of the holders of the Old 13%
Notes, certain covenants and definitions were amended to provide for the
issuance of the Old 14% Notes. As a result of a substantive modification of the
terms of the debt, the Old 13% Notes were treated as extinguished and reissued
(at their estimated fair value) upon the consummation of the offering of the Old
14% Notes. The write-off of debt issuance costs of $5.3 million, consent
payments and certain other costs of $7.3 million, and a fair value adjustment of
$1.1 million related to the Old 13% Notes have been recorded as an extraordinary
loss in 1996 of $11.5 million, net of tax of $1.1 million.
F-19
<PAGE> 101
Old 14% Notes
In December 1996, Nucentrix consummated a private placement of $125.0
million of Old 14% Notes. Nucentrix placed $22.0 million of the net proceeds
from the sale into an escrow account to fund the first three interest payments.
As of December 31, 1997, the escrow account amounted to $8.0 million, and was
used to make the April 15, 1998 interest payment.
In April 1997, Nucentrix consummated an exchange of $125.0 million of Old
14% Notes for a new series containing identical terms, except that the Old 14%
Notes were registered under the Securities Act of 1933, as amended.
Other Notes Payable
Other notes payable at December 31, 1998 and 1997 includes $15.1 million
and $15.8 million, respectively, relating to the acquisition of certain basic
trading areas ("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 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, 1998, the amount of FCC debt related to the
CS Wireless Leased BTAs totaled $3.5 million and has been recorded as a
receivable.
In September 1997, Nucentrix entered into lease and purchase option
agreements with People's Choice TV Corp. ("PCTV") for two BTAs. Under these
agreements, PCTV has reimbursed Nucentrix for all amounts paid to the FCC for
the two BTAs. In September 1998, PCTV assumed the FCC debt related to the two
BTAs, the lease agreement was terminated, and the receivable and related debt
were removed from Nucentrix's financial records.
Aggregate maturities of long-term debt as of December 31, 1998, that are
not subject to compromise for the five years ending December 31, 2003 are as
follows: 1999 -- $2.0 million; 2000 -- $1.8 million; 2001 -- $1.9 million;
2002 -- $2.0 million; and 2003 -- $2.0 million.
(8) LIABILITIES SUBJECT TO COMPROMISE
As more fully discussed in Note 7, on April 1, 1999, holders of the Old
Senior Notes received New Common Stock and the holders of the Old Convertible
Notes received New Common Stock and Warrants in exchange for cancellation of
their debt. These amounts are considered eligible for compromise under the Plan
and have been reclassified as Liabilities Subject to Compromise on Nucentrix's
Consolidated Balance Sheet at December 31, 1998, and March 31, 1999. Liabilities
Subject to Compromise are comprised of the following:
<TABLE>
<S> <C> <C>
Old 13% Notes: Principal Balance................................... $115,000
Accrued Interest.................................... 16,943
Unamortized Discount................................ (2,384)
Old 14% Notes: Principal Balance................................... 125,000
Accrued Interest.................................... 11,083
Old Convertible Notes: Principal Balance and Accreted Interest............. 57,139
--------
$322,781
========
</TABLE>
(9) ACQUISITIONS/DISPOSITIONS
(a) CableMaxx, AWS and Technivision Acquisitions
Effective February 23, 1996, Nucentrix acquired all the assets and
liabilities of American Wireless Systems, Inc. and CableMaxx, Inc. and acquired
substantially all of the assets and certain of the liabilities
F-20
<PAGE> 102
of Fort Worth Wireless Cable T.V. Associates, Wireless Cable TV Associates #38
and Three Sixty Corp. for an aggregate of 6,757,000 shares of Nucentrix's Old
Common Stock (the above five transactions are collectively referred to as the
"CableMaxx Acquisitions").
(b) CS Wireless Transaction
Immediately following the closing of the CableMaxx Acquisitions, Nucentrix,
CAI and CS Wireless consummated an agreement in which Nucentrix contributed a
substantial portion of the assets received in the CableMaxx Acquisitions and
certain other assets to CS Wireless and CAI contributed certain wireless cable
television assets to CS Wireless.
In exchange for the contributed assets, Nucentrix received (i) 36% of the
outstanding shares of CS Wireless common stock, (ii) approximately $28.3 million
in cash, (iii) a $25 million promissory note (which has been repaid) and (iv) a
$15 million promissory note payable ten years from closing and prepayable from
asset sales (the "Long Note").
Effective December 2, 1998, Nucentrix, 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. In addition, CS Wireless agreed to assign certain
MDS-1 channel rights, 20 MHz of Wireless Communications Service ("WCS")
frequencies and an MMDS subscription television operating system in Radcliffe,
Iowa to Nucentrix. Nucentrix agreed to assign channel rights and related
equipment in Portsmouth, New Hampshire to CS Wireless. The transfers and
assignments will occur following FCC approval, at which time Nucentrix will
cancel the Long Note issued by CS Wireless to Nucentrix. The carrying value of
this Long Note on Nucentrix's Consolidated Balance Sheet at December 31, 1998,
was $435,000. No gain or loss was recorded on this transaction.
(c) Other Acquisitions/Dispositions
During 1996, Nucentrix acquired four MMDS subscription television operating
systems in three separate purchase transactions for $2.1 million; $350,000 plus
126,601 shares of Old Common Stock; and $1.0 million plus $1.4 million in notes,
respectively. Also in 1996, Nucentrix sold two operating and two non-operating
systems for $5.4 million and $2.2 million, respectively. Nucentrix also sold
channel rights in two transactions for $9.0 million plus $750,000 in notes and
deferred payments in one transaction and $7.2 million in the other. The deferred
payments were made after December 31, 1996. The total gain recognized on these
sales transactions was $5.2 million.
In September 1997, Nucentrix sold a 39% equity interest in Television
Interactiva del Norte, S.A. de C.V. ("Telinor") for approximately $915,000 to CS
Wireless. In addition, Nucentrix sold to CS Wireless two promissory notes
payable by Telinor for approximately $2.6 million representing principal and
accrued interest payable under such notes. Following this transaction, Nucentrix
retained a 10% equity interest in Telinor.
All acquisitions have been accounted for as purchases, and operations of
the companies and businesses acquired have been included in the accompanying
Consolidated Financial Statements from their respective dates of acquisition.
There were no material acquisitions by Nucentrix in 1998.
F-21
<PAGE> 103
Nucentrix allocated the purchase prices of the acquisitions consummated in
1997 and 1996 discussed above to the assets acquired and liabilities assumed
based on estimated fair values of such assets and liabilities as follows:
<TABLE>
<CAPTION>
1997 1996
------ --------
<S> <C> <C>
Working capital (deficit)................................... $ 10 $(19,790)
Assets held for sale........................................ -- 11,819
Systems and equipment....................................... 1,241 19,489
License and leased license investment and goodwill.......... 371 88,292
Deferred income taxes....................................... -- (24,851)
------ --------
Total purchase price.............................. $1,622 $ 74,959
====== ========
</TABLE>
(d) Pro Forma Information
Pro forma disclosure relating to the 1997 acquisitions/transactions
discussed in (c) above is not presented, as the impact on Nucentrix's financial
position or results of operations is immaterial.
Summarized below is the unaudited pro forma information for the year ended
December 31, 1996 as if the acquisitions/transactions discussed above had been
consummated as of the beginning of 1996, after giving effect to certain
adjustments, including amortization of intangibles and selected income tax
effects. The pro forma information does not purport to represent what
Nucentrix's results of operations actually would have been had such transactions
or events occurred on the dates specified, or to project Nucentrix's results of
operations for any future period.
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenues................................................. $ 58,353
Net loss................................................. $(82,594)
Net loss per basic and diluted common share.............. $ (4.17)
</TABLE>
(10) STOCKHOLDERS' EQUITY
(a) Stock Options
The 1994 Employee Stock Option and Non-Employee Director Plans
(collectively, the "Old Stock Option Plans") provide for the granting of options
to purchase a maximum of 1,950,000 and 50,000 shares of Old Common Stock,
respectively. Options are granted at exercise prices of not less than 100% of
the fair market value of the Old Common Stock on the date of grant. Options
typically vest over a five-year period.
At December 31, 1998, there were 469,217 additional shares available for
grant under the Old Stock Option Plans. The per share weighted average fair
value of stock options granted during fiscal years 1998, 1997 and 1996 was
$1.16, $1.70 and $10.82, respectively, on the dates of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield................................... 0% 0% 0%
Stock price volatility.................................... 131% 80% 36%
Risk-free interest rate................................... 5.5% 6.0% 6.5%
Expected option term...................................... 5 years 5 years 5 years
</TABLE>
Nucentrix applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recorded for its stock
options in the Consolidated Financial Statements. Had
F-22
<PAGE> 104
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:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Net loss attributable to Common Stockholders:
As reported...................................... $(211,561) $(134,583) $(61,061)
Pro forma SFAS No. 123........................... $(213,077) $(137,126) $(64,349)
Net loss per share -- Basic and Diluted:
As reported...................................... $ (10.72) $ (6.85) $ (3.31)
Pro forma for SFAS No. 123....................... $ (10.80) $ (6.98) $ (3.48)
</TABLE>
Pro forma net loss reflects only options granted in 1998, 1997, 1996 and
1995. Compensation cost is reflected over the options' vesting period of three
to five years.
A summary of option activity during 1996, 1997 and 1998 follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995........................... 743,000 $13.64
Granted.................................................. 514,000 $25.09
Exercised................................................ (40,000) $10.50
Canceled................................................. (16,000) $24.41
---------
Outstanding at December 31, 1996........................... 1,201,000 $18.50
Granted.................................................. 867,000 $ 2.49
Canceled................................................. (711,000) $22.03
---------
Outstanding at December 31, 1997........................... 1,357,000 $ 6.42
Granted.................................................. 165,000 $ 3.33
Canceled................................................. (72,000) $ 7.19
---------
Outstanding at December 31, 1998........................... 1,450,000 $ 6.03
=========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE 12/31/98 PRICE
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.125 to $3.1875.............. 892,000 5.3 years $ 2.05 184,000 $ 2.15
$9.375 to $14.25............... 541,000 2.4 years 12.07 519,000 12.02
$22.125 to $29.25.............. 17,000 2.2 years 22.96 16,000 22.57
--------- -------
$1.125 to $29.25............... 1,450,000 4.2 years $ 6.03 719,000 $ 9.73
========= =======
</TABLE>
At December 31, 1997 and 1996, the number of options exercisable and the
weighted average exercise prices of those options were 552,000 and 396,200 and
$11.27 and $12.51, respectively.
On April 1, 1999, the effective date of the Plan, the Old Stock Option
Plans were canceled and a new share incentive plan was adopted.
(b) Old Common Stock to Officers
In April 1998 and April 1997, Nucentrix issued 10,000 shares and 75,000
shares, respectively, to officers of Nucentrix. The quoted market price of the
shares on the grant date has been expensed in the accompanying Consolidated
Financial Statements.
F-23
<PAGE> 105
(11) INCOME TAXES
In addition to the income tax benefit related to continuing operations of
$28.2 million for the year ended December 31, 1996, a deferred income tax
benefit of $1.1 million was allocated to the extraordinary item for the year
ended December 31, 1996.
Income tax benefit for the years ended December 31, 1998, 1997 and 1996,
differed from the amount computed by applying the U.S. federal income tax rate
of 35% to loss before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax benefit...................... $(73,890) $(47,104) $(27,578)
Amortization and write-down of goodwill.............. 9,300 738 521
Loss for which no tax benefit was recognized......... 68,812 49,058 28,156
State income tax..................................... (4,222) (2,692) (1,099)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997, are presented below:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 119,709 $ 61,555
Investments in affiliates................................. -- 9,303
Subscriber receivables.................................... 129 96
Debt restructuring........................................ 906 1,172
Asset impairment.......................................... 29,992 3,543
Systems and equipment..................................... 4,779 --
Other..................................................... 1,247 1,091
--------- --------
Total gross deferred tax assets................... 156,762 76,760
Less valuation allowance.................................... (151,253) (68,697)
--------- --------
Net deferred tax assets........................... 5,509 8,063
Deferred tax liabilities:
License and leased license investment..................... (5,509) (8,063)
--------- --------
Net deferred tax liability........................ $ -- $ --
========= ========
</TABLE>
The net changes in the total valuation allowance for the years ended
December 31, 1998, 1997 and 1996, were increases of $82.6 million, $48.6 million
and $16.0 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 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 of December 31, 1998, Nucentrix has approximately $324.0 million of
federal income tax loss carryforwards which expire in years 2013 through 2018.
Nucentrix estimates that approximately $38.0 million of the above carryforwards
relate to various acquisitions and are subject to certain limitations. (see Note
1).
F-24
<PAGE> 106
(12) RELATED PARTY TRANSACTIONS
At December 31, 1998, Nucentrix leased office space from entities owned by
certain current and former officers and directors of Nucentrix for which the
expense amounted to approximately $205,000 in 1998, $171,000 in 1997 and
$187,000 in 1996. In connection with its restructuring, Nucentrix terminated
approximately 56,000 square feet of such leases. Nucentrix continues to lease
approximately 6,300 square feet of space for telemarketing and customer care
operations, for which Nucentrix pays approximately $48,000 per year.
Nucentrix paid and/or accrued $181,000 in 1997 and $97,000 in 1996 to an
affiliate of a former officer and director of Nucentrix for certain
administrative services.
In 1997, Nucentrix, CS Wireless, Wireless One and CAI formed Wireless
Enterprises, LLC ("Wireless Enterprises"). Wireless Enterprises is a programming
cooperative that negotiates programming and marketing services with suppliers of
programming. In 1998 and 1997, Nucentrix paid approximately $24.5 million and
$15.5 million, respectively, to Wireless Enterprises as reimbursement of
programming expenses and for other administrative services.
In 1996, in exchange for the delivery of certain equipment and receipt of a
promissory note in the principal amount of $400,000, Nucentrix acquired a 10%
interest in a limited liability company formed to acquire and operate channel
rights and operating systems in Chile. An affiliate of a former employee of
Nucentrix holds a 22% interest in such limited liability company.
(13) COMMITMENTS AND CONTINGENCIES
Nucentrix is a co-defendant in one securities lawsuit. In addition, certain
current and former directors, officers and/or employees of Nucentrix, to whom we
may have indemnity obligations, are defendants in two purported securities class
action lawsuits. These actions allege, among other things, various violations of
federal and state securities laws.
Nucentrix also is a party to three purported class action lawsuits alleging
that Nucentrix overcharged its customers for administrative late fees.
These matters were stayed during Nucentrix's reorganization proceedings
and, as of the April 1, 1999, Effective Date of the Plan, this stay was lifted.
Nucentrix intends 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,
management believes that an adverse outcome in one or more of such proceedings
which exceeds or otherwise is excluded from applicable insurance coverage could
have a material adverse effect on the financial condition or results of
operations of Nucentrix.
Nucentrix also is a party to other legal proceedings, a majority of which
are incidental to its business. In the opinion of management, and after
consideration for amounts recorded in the accompanying Consolidated Financial
Statements, the ultimate effects of such other matters are not expected to have
a material adverse effect on the consolidated financial condition or results of
operations of Nucentrix.
Nucentrix has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through 2000.
The agreements generally require monthly payments based upon the number of
subscribers to Nucentrix's systems, subject to certain minimums.
F-25
<PAGE> 107
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of Nucentrix's financial instruments at December 31, 1998 and 1997. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Restricted assets -- investments in
U.S. Treasury securities............ $ 1,011 $ 1,011 $ 10,333 $ 10,194
Note receivable from affiliate........ 3,901 3,901 2,069 2,069
Old Senior Notes...................... (237,616) (57,616) (237,111) (83,250)
Old Convertible Notes and other Notes
payable............................. (73,416) (18,354) (71,085) (23,500)
</TABLE>
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 fair value of U.S. Treasury securities are based on quoted market
prices at the reporting date for those investments. 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 Old Senior Notes
are based on market quotes obtained from WP&Co. The fair values of the Old
Convertible Notes and other notes payable are based on management's estimate
derived from market quotes obtained from WP&Co.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited financial data of Nucentrix for each
quarter of fiscal years 1998 and 1997.
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues..................................... $ 19,099 $ 18,622 $ 18,213 $ 18,055
Operating loss............................... (10,642) (27,412) (101,329) (4,126)
Net loss..................................... (25,202) (50,641) (123,000) (12,718)
Net loss per common share -- basic and
diluted................................... (1.28) (2.57) (6.23) (.64)
</TABLE>
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Revenues..................................... $ 19,185 $ 19,741 $ 19,890 $ 19,976
Operating loss............................... (11,067) (19,098) (25,053) (12,953)
Net loss..................................... (27,573) (35,791) (41,847) (29,372)
Net loss per common share -- basic and
diluted................................... (1.41) (1.82) (2.13) (1.49)
</TABLE>
During the second quarter of 1998, Nucentrix recorded an impairment charge
of $17.7 million to write down the value of its non-operating licenses to fair
market value and wrote off $6.8 million of its excess basis in its investment in
CS Wireless. During the third quarter of 1998, Nucentrix recorded an impairment
of charge of $88 million related to the write down of its operating assets to
estimated fair market value and wrote off $11.7 million of its remaining
investment in CS Wireless. During the fourth quarter of 1998, Nucentrix recorded
$2.1 million in reorganization costs related to its restructuring and Chapter 11
filing.
(16) MINORITY INTERESTS
In connection with the development of certain wireless cable television
markets, Nucentrix sold stock in certain of its subsidiary companies principally
for cash. In addition to providing a portion of the cash
F-26
<PAGE> 108
necessary for market development, the sales of subsidiary stock were intended to
provide local community involvement and ownership.
(17) SUBSEQUENT EVENTS
On February 11, 1999, Wireless One, a 20% owned affiliate of Nucentrix (see
Note 2), filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. On February 25, 1999, Nucentrix requested that Wireless
One consider an alternative plan of reorganization to be co-proposed by
Nucentrix. The principal terms of the proposal included, among other things, a
merger of Wireless One with and into Nucentrix and a material change in the
composition of the Board of Directors of Wireless One. On March 8, 1999,
Nucentrix filed the proposal on Schedule 13D pursuant to rule 13d-101 of the
Securities Exchange Act of 1934. As of March 31, 1999, Nucentrix was continuing
discussions regarding such proposal with Wireless One and/or its
representatives.
On March 15, 1999, the Plan was approved by all classes of creditors voting
on the Plan and was confirmed by the United States Bankruptcy court for the
District of Delaware. Nucentrix emerged from bankruptcy on April 1, 1999 (the
"Effective Date").
Under the Plan, as of the Effective Date, all the Old Common Stock was
canceled and Nucentrix issued 10 million shares of New Common Stock. Holders of
the Old Senior Notes and holders of the Old Convertible Notes received 9,700,000
and 300,000 shares of the New Common Stock, respectively. The holders of the Old
Convertible Notes also received warrants to purchase 825,000 shares of New
Common Stock at a per share exercise price of $27.63, subject to adjustment in
the event of certain sales of stock or assets of Nucentrix.
Holders of Old Common Stock were granted the right to receive warrants to
purchase 275,000 shares of New Common Stock at a per share exercise price of
$27.63, subject to adjustment in the event of certain sales of stock or assets
of Nucentrix, subject to certain pending securities litigation claims as set
forth in the Plan.
(18) SUBSEQUENT EVENTS (UNAUDITED)
In May 1999, Nucentrix launched two-way high-speed Internet access services
in Austin, Texas. In May 1999 Nucentrix also began providing wireless
subscription television service in one additional market -- Radcliffe/Story
City, Iowa -- through a management arrangement with CS Wireless Systems, Inc. CS
Wireless has agreed to assign its rights to the assets and channel leases for
this market to Nucentrix upon FCC approval of the assignment of certain other
MMDS and WCS spectrum rights and the closing of a master agreement with CS
Wireless.
On July 8, 1999, the securities lawsuit referred to in Note (13) in which
Nucentrix was a co-defendant was dismissed, without prejudice, for plaintiffs'
failure to state a claim. The court in this lawsuit has granted plaintiffs
permission to file an amended complaint on or before August 23, 1999. On July
12, 1999, the plaintiff in one of the two purported securities class action
lawsuits referred to in Note (13) voluntarily dismissed the lawsuit against all
defendants, without prejudice.
On July 15, 1999, the court in one of the three purported class action
lawsuits alleging that Nucentrix overcharged its customers for administrative
late fees granted plaintiff's motion for non-suit and dismissed all claims
against Nucentrix.
In July 1999, Wireless One announced that it would amend its proposed plan
of reorganization in accordance with a term sheet negotiated with MCI WORLDCOM,
Inc. Under the amended plan, Wireless One will become a wholly-owned subsidiary
of MCI WORLDCOM.
F-27
<PAGE> 109
SCHEDULE II
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts... $ 340 1,649 -- (1,641)(a) $ 348
======= ===== ====== ====== ========
Valuation allowance for deferred
tax assets..................... $68,697 -- 73,828(b) -- $142,525
======= ===== ====== ====== ========
Year ended December 31, 1997:
Allowance for doubtful accounts... $ 5,468 3,465 -- (8,593)(a) $ 340
======= ===== ====== ====== ========
Valuation allowance for deferred
tax assets..................... $20,011 -- 48,686(b) -- $ 68,697
======= ===== ====== ====== ========
Year ended December 31, 1996:
Allowance for doubtful accounts... $ 961 7,295 169(c) (2,957)(a) $ 5,468
======= ===== ====== ====== ========
Valuation allowance for deferred
tax assets..................... $ 3,981 -- 16,030(b) -- $ 20,011
======= ===== ====== ====== ========
</TABLE>
- ---------------
(a) Accounts written off.
(b) Recognized as a component of deferred tax assets.
(c) Allocation of assets from the CableMaxx Acquisitions.
S-1
<PAGE> 110
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by Nucentrix Broadband Networks, Inc. (the
"registrant") in connection with the registration of the common stock offered
hereby, other than underwriting discounts and expenses, are as follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 18,383
"Blue Sky" fees and expenses................................ --
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 100,000
Accounting fees and expenses................................ 50,000
Transfer agent and registrar fees........................... --
Miscellaneous expenses...................................... 10,000
--------
Total............................................. $303,383
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Generally, Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") permits a corporation to indemnify certain persons made a
party to an action, by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or enterprise. In the case of an action by or in the right of the
corporation, no indemnification may be made in respect of any matter as to which
such person was adjudged liable for negligence or misconduct in the performance
of such person's duty to the corporation unless the Delaware Court of Chancery
or the court in which such action was brought determines that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for proper expenses. To the extent such person has been successful in
the defense of any matter, such person shall be indemnified against expenses
actually and reasonably incurred by him.
Section 102(b)(7) of the DGCL enables a Delaware corporation to include a
provision in its certificate of incorporation limiting a director's liability to
the corporation or its stockholders for monetary damages for breaches of
fiduciary duty as a director. The registrant's Amended and Restated Certificate
of Incorporation and By-laws provide for indemnification of its officers and
directors to the full extent permitted under Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Effective April 1, 1999, the registrant issued 10,000,000 shares of common
stock and warrants to purchase 825,000 shares of common stock of the registrant
(the "Issued Securities") pursuant to the registrant's plan of reorganization
under Chapter 11 of the U.S. Bankruptcy Code (the "Plan"). The registrant also
is 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 the registrant, 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
II-1
<PAGE> 111
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 the
registrant. See "Reorganization."
Effective June 2, 1999, the registrant issued 4,960 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 April 25, 1997, the registrant issued 75,000 shares of its common stock
to Carroll D. McHenry in connection with his appointment by the registrant to
serve as President, Chief Executive Officer and Acting Chief Financial Officer
of the registrant. On January 22, 1998, the registrant issued 10,000 shares of
its common stock to Marjean Henderson. Each of these issuances was made pursuant
to Section 4(2) of the Securities Act and, therefore was exempt from the
registration requirements of Section 5 of the Securities Act. The shares of
common stock were canceled pursuant to the Plan as of April 1, 1999.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.1 -- Underwriting Agreement.
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
April 16, 1999 (incorporated by reference to Exhibit 2.2
to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission (the
"SEC") on June 17, 1999, Registration No. 333-80929 (the
"June 1999 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 June 1999 Form S-1).
*4.2 -- Registration Rights Agreement, dated as of April 1, 1999,
between the Registrant and the selling stockholders named
therein.
*5.1 -- Legal Opinion of Vinson & Elkins L.L.P, dated as of
, 1999.
10.1 -- Registrant's First Amended and Restated 1999 Share
Incentive Plan (the "New Share Incentive Plan")
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 filed
with the SEC on June 3, 1999, Registration No. 333-79913
(the "Form S-8")).
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")).
</TABLE>
II-2
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.3 -- Sublease Agreement, dated June 14, 1996, between the
Registrant and CS Wireless Systems, Inc. (incorporated by
reference to Exhibit 10.2 to the June 1996 Form 10-Q).
10.4 -- Cooperative Marketing Agreement, dated November 12, 1997,
between the Registrant and DIRECTV, 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")).
10.5 -- Agreement between DIRECTV and the Registrant, dated April
5, 1998 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.6 -- Registrant's Performance Incentive Compensation Plan
(incorporated by reference to Exhibit 10.17 to the 1997
Form 10-K).
10.7 -- 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).
10.8 -- Employment Agreement between the Registrant and J. Curtis
Henderson, dated as of April 8, 1998 (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
(the "June 1998 Form 10-Q")).
10.9 -- Employment Agreement between the Registrant and Marjean
Henderson, dated as of April 8, 1998 (incorporated by
reference to Exhibit 10.5 to the June 1998 Form 10-Q).
10.10 -- Employment Agreement between the Registrant and Alexander
R. Padilla, dated as of July 13, 1998 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998).
10.11 -- 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 (the "1998 Form 10-K")).
10.12 -- 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 June
1999 Form S-1).
10.13 -- Nonqualified Stock Option Agreement between Registrant
and Marjean Henderson, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.16 to the June
1999 Form S-1).
10.14 -- 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 June
1999 Form S-1).
10.15 -- Nonqualified Stock Option Agreement between Registrant
and Alexander R. Padilla, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.18 to the June
1999 Form S-1).
10.16 -- 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 June
1999 Form S-1).
10.17 -- Registrant's Warrant Agreement, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.1 to the March
1999 Form 10-Q).
</TABLE>
II-3
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
+10.18 -- Master Agreement, dated as of December 2, 1998, among the
Registrant, CS Wireless Systems, Inc. and CAI Wireless
Systems, Inc.
+21.1 -- List of Subsidiaries.
*23.1 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1).
+23.2 -- Consent of KPMG LLP.
+24.1 -- Powers of Attorney (included in the signature pages
hereto).
</TABLE>
- ---------------
+ Filed herewith.
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of Nucentrix pursuant to the provisions in Item 14 above, or otherwise,
Nucentrix has been advised that in the opinion of the Securities and Exchange
Commission (the "Commission") such indemnification is against public policy as
expressed in such act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Nucentrix of expenses incurred or paid by a director or officer or controlling
person of Nucentrix in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, Nucentrix will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in such act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in information set forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) To include any material information with respect to the Plan
of Distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 3rd day of August, 1999.
NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ CARROLL D. MCHENRY
------------------------------------
Carroll D. McHenry
Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
Each officer or director whose signature appears below hereby appoints each
of Carroll D. McHenry and Marjean Henderson as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to sign on his behalf, as an individual and in the capacity stated below, any
amendment or post-effective amendment to this Registration Statement, and any
Registration Statement relating to an offering made in connection with the
Offering contemplated by this Registration Statement, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
which such attorney-in-fact and agent may deem appropriate or necessary, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the date set
forth below, in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CARROLL D. MCHENRY Chairman of the Board, President and August 3, 1999
- ------------------------------------------ Chief Executive Officer (Principal
Carroll D. McHenry Executive Officer)
/s/ MARJEAN HENDERSON Senior Vice President and Chief August 3, 1999
- ------------------------------------------ Financial Officer (Principal Financial
Marjean Henderson Officer)
/s/ AMY E. MANNING Controller (Principal Accounting August 3, 1999
- ------------------------------------------ Officer)
Amy E. Manning
/s/ RICHARD B. GOLD Director August 2, 1999
- ------------------------------------------
Richard B. Gold
/s/ TERRY S. PARKER Director August 3, 1999
- ------------------------------------------
Terry S. Parker
/s/ MARK G. SCHOEPPNER Director August 3, 1999
- ------------------------------------------
Mark G. Schoeppner
/s/ NEIL S. SUBIN Director August 3, 1999
- ------------------------------------------
Neil S. Subin
/s/ R. TED WESCHLER Director August 3, 1999
- ------------------------------------------
R. Ted Weschler
</TABLE>
II-5
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.1 -- Underwriting Agreement.
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
April 16, 1999 (incorporated by reference to Exhibit 2.2
to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission (the
"SEC") on June 17, 1999, Registration No. 333-80929 (the
"June 1999 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 June 1999 Form S-1).
*4.2 -- Registration Rights Agreement, dated as of April 1, 1999,
between the Registrant and the selling stockholders named
therein.
*5.1 -- Legal Opinion of Vinson & Elkins L.L.P, dated as of
, 1999.
10.1 -- Registrant's First Amended and Restated 1999 Share
Incentive Plan (the "New Share Incentive Plan")
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 filed
with the SEC on June 3, 1999, Registration No. 333-79913
(the "Form S-8")).
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 -- Sublease Agreement, dated June 14, 1996, between the
Registrant and CS Wireless Systems, Inc. (incorporated by
reference to Exhibit 10.2 to the June 1996 Form 10-Q).
10.4 -- Cooperative Marketing Agreement, dated November 12, 1997,
between the Registrant and DIRECTV, 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")).
10.5 -- Agreement between DIRECTV and the Registrant, dated April
5, 1998 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.6 -- Registrant's Performance Incentive Compensation Plan
(incorporated by reference to Exhibit 10.17 to the 1997
Form 10-K).
10.7 -- 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).
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8 -- Employment Agreement between the Registrant and J. Curtis
Henderson, dated as of April 8, 1998 (incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998
(the "June 1998 Form 10-Q")).
10.9 -- Employment Agreement between the Registrant and Marjean
Henderson, dated as of April 8, 1998 (incorporated by
reference to Exhibit 10.5 to the June 1998 Form 10-Q).
10.10 -- Employment Agreement between the Registrant and Alexander
R. Padilla, dated as of July 13, 1998 (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998).
10.11 -- 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 (the "1998 Form 10-K")).
10.12 -- 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 June
1999 Form S-1).
10.13 -- Nonqualified Stock Option Agreement between Registrant
and Marjean Henderson, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.16 to the June
1999 Form S-1).
10.14 -- 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 June
1999 Form S-1).
10.15 -- Nonqualified Stock Option Agreement between Registrant
and Alexander R. Padilla, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.18 to the June
1999 Form S-1).
10.16 -- 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 June
1999 Form S-1).
10.17 -- Registrant's Warrant Agreement, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.1 to the March
1999 Form 10-Q).
+10.18 -- Master Agreement, dated as of December 2, 1998, among the
Registrant, CS Wireless Systems, Inc. and CAI Wireless
Systems, Inc.
+21.1 -- List of Subsidiaries.
*23.1 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1).
+23.2 -- Consent of KPMG LLP.
+24.1 -- Powers of Attorney (included in the signature pages
hereto).
</TABLE>
- ---------------
+ Filed herewith.
* To be filed by amendment.
<PAGE> 1
EXHIBIT 10.18
MASTER AGREEMENT
AMONG
HEARTLAND WIRELESS COMMUNICATIONS, INC.,
CS WIRELESS SYSTEMS, INC.
AND
CAI WIRELESS SYSTEMS, INC.
DATED AS OF DECEMBER 2, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Preamble......................................................................................... 1
Section 1 - Defined Terms........................................................................ 2
Section 2 - CS Wireless Common Stock............................................................. 4
Section 3 - Transfers of Assets and Leases of Spectrum Rights
at the Stage I Closing......................................................... 5
Section 4 - Cancellation of Heartland Long-Term Note and
Related Transactions at the Stage II Closing................................... 7
Section 5 - Stage I and Stage II Closing Dates................................................... 7
Section 6 - FCC Cooperation and Related Spectrum Matters......................................... 8
Section 7 - Conditions to All of the Parties' Obligations........................................ 9
Section 8 - Representations and Warranties of the Parties........................................ 13
Section 9 - Covenants of All of the Parties...................................................... 20
Section 10 - Covenants of Heartland.............................................................. 21
Section 11 - Covenants of CS Wireless............................................................ 23
Section 12 - Releases and Indemnification........................................................ 24
Section 13 - Termination........................................................................ 26
Section 14 - Further Assurances.................................................................. 27
Section 15 - No Waiver........................................................................... 27
Section 16 - Miscellaneous....................................................................... 27
</TABLE>
<PAGE> 3
Exhibits
Exhibit A - Resignation of Heartland Directors and Heartland Independent
Director
Exhibit B - CS Wireless FCC Assets Spectrum Lease
Exhibit C - Heartland FCC Assets Spectrum Lease
Exhibit D - Amendment to BTA Lease and Option Agreement
Exhibit E - BTA Lease and Option Agreement
Exhibit F - Form of CS Wireless Senior Noteholder Consent
Schedules
3(a)(i) - Customer Premises Equipment
3(a)(ii) - CS Wireless FCC Assets
3(b) - Heartland FCC Assets
4(a)(i) - CS Leases
4(a)(ii) - Radcliffe Non-FCC Assets
4(b)(i) - Heartland Leases
4(b)(ii) - Portsmouth Non-FCC Assets
8(a)(ii) - Title to Heartland Assets
8(a)(v) - Heartland Compliance with Laws
8(a)(vi) - Heartland leased FCC Assets
8(a)(vii) - Heartland Litigation
8(a)(x) - Condition of Portsmouth Non-FCC Assets
8(b)(ii) - Title to CS Wireless Assets and Leases
8(b)(v) - CS Compliance with Laws
8(b)(vi) - Construction Completion Dates
8(b)(vii) - CS Wireless Litigation
8(b)(x) - Condition of CPE and Radcliffe Non-FCC Assets
8(c)(iii) - CAI Litigation
<PAGE> 4
MASTER AGREEMENT
Master Agreement dated as of the 2nd day of December, 1998 (this
"Agreement") by and among Heartland Wireless Communications, Inc., a Delaware
corporation having its principal place of business located at 200 Chisholm
Place, Suite 200, Plano, Texas 75075 ("Heartland"), CAI Wireless Systems, Inc.,
a Connecticut corporation having its principal place of business located at 18
Corporate Woods Boulevard, Third Floor, Albany, New York 12211 ("CAI") and CS
Wireless Systems, Inc., a Delaware corporation having its principal place of
business located at 1101 Summit Avenue, Plano, Texas 75074 ("CS Wireless").
R E C I T A L S
WHEREAS, the parties hereto are parties to that certain Participation
Agreement (as defined herein), pursuant to which each of Heartland and CAI
contributed wireless cable assets or the stock of entities owning wireless cable
assets to CS Wireless in exchange for CS Common Stock (as defined herein); and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, Heartland received 3,578,834 shares
of CS Wireless Common Stock, which amount was subsequently increased to
3,836,035 shares of CS Wireless Common Stock as a result of the issuance by CS
Wireless to Heartland of an additional 257,201 shares of CS Wireless Common
Stock in satisfaction of that certain true-up obligation owed to Heartland under
Section 9.6(a) of the Participation Agreement; and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, CS Wireless issued to Heartland the
Heartland Long-Term Note (as defined herein) in the principal amount of
$15,000,000, which promissory note matures on February 21, 2006; and
WHEREAS, there is $2,335,276.00 outstanding on the Heartland Long-Term
Note as of November 30, 1998; and
WHEREAS, simultaneously with the consummation of the transactions
contemplated by the Participation Agreement, the parties hereto entered into
that certain Stockholders' Agreement (as defined herein), which agreement
requires, among other things, that Heartland and CAI vote their shares of CS
Wireless Common Stock in favor of a board of directors comprised of four members
designated by CAI and three members designated by Heartland, and that
significant decisions affecting CS Wireless requires the approval of at least
70% of the directors of CS Wireless so that neither CAI nor Heartland can
unilaterally make significant decisions affecting CS Wireless; and
WHEREAS, the parties have disagreed about various matters regarding the
operations, valuation, governance and future of CS Wireless; and
<PAGE> 5
2
WHEREAS, with due regard to their respective fiduciary duties to
various constituencies including the respective stockholders and creditors of CS
Wireless, CAI and Heartland, the parties wish to terminate Heartland's ongoing
participation in the governance of CS Wireless on a basis that after prolonged
negotiation, investigation and consultation with advisors, the parties believe
to be fair and in the best interests of the parties and their respective
constituents while ensuring that the future operations of Heartland and CS
Wireless and their respective successors can be separated without unnecessary
disruption to either party; and
WHEREAS, CAI desires to purchase from Heartland and Heartland desires
to sell to CAI all of the 3,836,035 shares of CS Wireless Common Stock owned by
Heartland, on and subject to the terms and conditions set forth herein; and
WHEREAS, CS Wireless desires to assign and transfer to Heartland
certain MDS-1 channels, all assets relating to the Radcliffe, Iowa market, WCS
Spectrum in 19 markets and certain other equipment, and Heartland desires to
assign and transfer to CS Wireless any and all ownership and leasehold interests
in MMDS and MDS channels in the Portsmouth, New Hampshire market, including, but
not limited to, the MMDS E Group and MDS H1 - 3 channels, together with any and
all assets used by Heartland in the Portsmouth market; and
WHEREAS, the parties hereto desire to cooperate with each other with
respect to proposed two-way use of their MMDS, MDS and ITFS spectrum in
contiguous and adjacent markets, including, but not limited to, reaching an
agreement with respect to a comprehensive two-way frequency utilization plan,
cooperation with respect to the implementation of such, timely provision of
requisite interference consent agreements and such other actions as may be
consistent with supporting each other's necessary or desirable filings at the
FCC (as defined herein) in connection with two-way applications; and
WHEREAS, the parties hereto desire to settle certain claims they have
against each other; and
WHEREAS, the parties shall continue to own and lease spectrum rights in
contiguous and adjacent markets, the value of which rights would be materially
adversely affected absent agreement with respect to interference and related
uses arising out of the contemplated two-way applications of such spectrum.
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, each of the parties hereto agree as follows.
Section 1. Defined Terms. As used in this Agreement, the following
terms shall have the respective meanings set forth below:
"Bankruptcy Code" means the United States Bankruptcy Code, as
heretofore and hereafter amended, and as codified as 11 U.S.C. Sections 101 et
seq.
<PAGE> 6
3
"BTA" means Basic Trading Area, as such term is used by the FCC to
denote geographic areas in connection with the public auction of available
spectrum in the Multipoint and/or Multichannel Distribution Service.
"BTA Lease and Option Agreement" means that certain BTA Lease and
Option Agreement dated October 31, 1997 by and between CS Wireless and
Heartland.
"CPE" means Customer Premises Equipment listed on Schedule 3(a)(i)
attached hereto.
"Communications Act" means the Communications Act of 1934, as amended,
47 U.S.C. Sections 151 et seq.
"CS Leases" means the spectrum leases listed on Schedule 4(a)(i)
attached hereto.
"CS Senior Notes" means $400,000,000 aggregate principal amount of
Series B 11-3/8% Senior Notes due 2006 of CS Wireless Systems, Inc.
"CS Wireless Common Stock" means the common stock, par value $.001 per
share, of CS Wireless.
"CS Wireless FCC Assets" means the FCC licenses owned by CS Wireless
and listed on Schedule 3(a)(ii) attached hereto.
"Encumbrance" shall have the meaning given to such term in Section
8(a)(i).
"FCC Approvals" shall have the meaning given to such term in Section
3(b).
"Governmental Authority" means (a) the government of (i) the United
States of America or any State or other political subdivision thereof, or (ii)
any jurisdiction in which any party hereto or any of such party's subsidiaries
conducts all or any part of its business, or which has jurisdiction over any
properties of any party hereto, as the case may be, or (b) any entity exercising
executive, legislative, judicial, regulatory or administrative functions of, or
pertaining to, any such government.
"Heartland FCC Assets" means the FCC licenses owned by Heartland and
listed on Schedule 3(b) attached hereto.
"Heartland Leases" means the spectrum leases listed on Schedule 4(b)(i)
attached hereto.
"Heartland Long-Term Note" means that certain Subordinated Promissory
Note dated February 23, 1996 and issued by CS Wireless to Heartland in the
principal amount of $15,000,000.
"Hosea" means Frank H. Hosea.
<PAGE> 7
4
"Participation Agreement" means the Participation Agreement dated as of
December 12, 1995 by and among CAI, Heartland and CS Wireless, as amended by
Amendment No.1 to the Participation Agreement dated as of February 23, 1996
among the parties thereto.
"Portsmouth Non-FCC Assets" means all assets owned by Heartland and
used in connection with the operation of the channels pursuant to the Heartland
FCC Assets and Heartland Leases, including, without limitation, the assets
listed on Schedule 4(b)(ii) attached hereto.
"Radcliffe Non-FCC Assets" means all assets owned by CS Wireless and
used in connection with the Radcliffe, IA wireless cable system, including,
without limitation, the assets listed on Schedule 4(a)(ii) attached hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Agreement" means that certain Administrative Services
Agreement dated as of February 23, 1996 by and between Heartland and CS
Wireless.
"Stage I Closing" shall have the meaning given to such term in Section
5(a).
"Stage I Closing Date" shall have the meaning given to such term in
Section 5(a).
"Stage I Transactions" shall have the meaning given to such term in
Section 5(a).
"Stage II Closing" shall have the meaning given to such term in Section
5(b).
"Stage II Closing Date" shall have the meaning given to such term in
Section 5(b).
"Stage II Transactions" shall have the meaning given to such term in
Section 5(b).
"Stockholders' Agreement" means that certain Stockholders' Agreement
dated as of February 23, 1996 by and among CS Wireless, CAI and Heartland.
Section 2. CS Wireless Common Stock.
(a) At the Stage I Closing (as defined below), Heartland shall sell,
assign, transfer, convey and deliver to CAI, and CAI shall purchase, accept and
assume from Heartland, all of Heartland's right, title and interest in and to
3,836,035 shares of CS Wireless Common Stock owned by Heartland, which shares
represent the entire equity interest in CS Wireless owned by Heartland as of the
date hereof.
(b) The parties hereto agree that upon the consummation of the Stage I
Transactions (as defined below), Heartland shall cease to have any equity
interest in CS Wireless and the Stockholders' Agreement shall, without further
action by the parties, permanently and
<PAGE> 8
5
irrevocably lapse and terminate with no further force or effect, and each of the
parties thereto shall be relieved of their obligations thereunder, with the same
force and effect and as if the parties had never entered into such agreement.
Upon such Stage I Closing, the resignation of each of the Heartland Directors
and the Heartland Independent Director (as such terms are defined in the
Stockholders' Agreement) from the Board of Directors of CS Wireless, in the form
attached hereto as Exhibit A, shall become immediately effective without further
action by the parties; provided, however, that any indemnification obligations
of CS Wireless to each of the Heartland Directors, the Heartland Independent
Directors and Hosea under CS Wireless' certificate of incorporation, by-laws,
contracts, insurance policies (to the extent applicable) or otherwise existing
as of the date hereof shall survive such resignation, and CS Wireless expressly
agrees to assume any such indemnification obligation in any bankruptcy
proceeding filed by or against CS Wireless.
Section 3. Transfers of Assets and Leases of Spectrum Rights at the
Stage I Closing.
At the Stage I Closing:
(a) CS Wireless shall, in partial satisfaction of the Heartland
Long-Term Note, which shall cease to accrue interest from and after the Stage I
Closing Date:
(i) sell, assign, transfer, convey and deliver to Heartland,
and Heartland shall purchase, accept and assume from CS Wireless, all
of CS Wireless' right, title and interest in and to the CPE listed on
Schedule 3(a)(i);
(ii) lease to Heartland, and Heartland shall lease from CS
Wireless all of CS Wireless' right, title and interest in and to the CS
Wireless FCC Assets. The CS Wireless FCC Assets shall be leased
pursuant to the Lease Agreement set forth as Exhibit B attached hereto.
Within ten (10) business days of the signing of this Agreement, CS
Wireless and Heartland together shall file with the FCC the necessary
applications for the consent of the assignment of the CS Wireless FCC
Assets; and
(iii) pay Heartland Three Hundred Sixty-six Thousand and
00/100 Dollars ($366,000.00), payable in immediately available funds by
wire transfer in accordance with written wire transfer instructions
previously delivered by Heartland to CS Wireless;
(b) Heartland shall lease to CS Wireless, and CS Wireless shall lease
from Heartland all of Heartland's right, title and interest in and to the
Heartland FCC Assets. The Heartland FCC Assets shall be leased pursuant to the
Lease Agreement set forth as Exhibit C attached hereto. Within ten (10) business
days of the signing of this Agreement, CS Wireless and Heartland together shall
file with the FCC the necessary applications for the consent of the assignment
of the Heartland FCC Assets (such consent, together with the consent of the FCC
contemplated by Section 3(a)(ii) above, the "FCC Approvals");
<PAGE> 9
6
(c) CAI shall pay Heartland One Million Five Hundred Thirty-four
Thousand and 00/100 Dollars ($1,534,000.00), payable in immediately available
funds by wire transfer in accordance with written wire transfer instructions
previously delivered by Heartland to CAI; and
(d) Heartland and CS Wireless shall execute and deliver an amendment to
the BTA Lease and Option Agreement in the form attached hereto as Exhibit D,
which amendment shall correct certain ground elevation parameters of Heartland's
Sherman, Texas market to reflect a previously proposed or licensed facility and
correct certain operating parameter of CS Wireless' Fort Worth, Texas market.
The parties acknowledge that it is impracticable for Heartland to inspect, test
and select the CPE before the Stage I Closing. Accordingly, CS Wireless shall
make the CPE available for inspection by Heartland representatives during normal
business hours and Heartland shall inspect, test and select the CPE on or before
the Stage II Closing. CS Wireless shall make available for inspection at CS
Wireless' offices or warehouse facilities the CPE listed on Schedule 3(a)(i) at
the following locations:
(Model 8607 BN55) Scientific Atlanta San Antonio
converter boxes (with remote)
(Model 5508 W or WP) Tocom converter boxes Dallas
(with remote)
(Cal Amp 2040\011 or PacMono 3191i Dallas
or 3192i) Dipoles, PCS filtered and tested
In the event that CS Wireless does not make available for delivery to Heartland
on or before the Stage II Closing the CPE listed on Schedule 3(a)(i), CS
Wireless shall immediately pay to Heartland cash in an amount equal to the
difference between $354,000 and the value (as established pursuant to Schedule
3(a)(i)) of the CPE made available for delivery at the Stage II Closing.
For a period of One Hundred Eighty (180) days following the earlier of the (i)
Stage II Closing or (ii) the date on which Heartland accepts a unit of CPE made
available by CS Wireless, Heartland shall have the right to return such unit of
CPE which is not in good working order for the purpose for which it was
intended. Upon timely receipt of any returned unit, CS Wireless shall
immediately (i) pay to Heartland cash in an amount equal to the value of such
item as established in Schedule 3(a)(i) or (ii) repair or replace such unit. If
CS Wireless elects to repair or replace such unit, Heartland shall have a period
of Forty-five (45) days to determine whether such repaired or replacement unit
is in good working order for the purpose for which it was intended. Except as
provided herein, CS Wireless hereby disclaims all warranties, express or
implied, including without limitation any warranties under the UCC or otherwise
implied by law. CS Wireless shall use all reasonable commercial efforts to
assist Heartland in enforcing the terms of
<PAGE> 10
7
any manufacturer's warranty applicable to any unit of CPE delivered to Heartland
pursuant to the terms hereof.
Section 4. Cancellation of Heartland Long-Term Note and Related
Transactions at the Stage II Closing.
At the Stage II Closing:
(a) CS Wireless shall sell, assign, transfer, convey and deliver to
Heartland, and Heartland shall purchase, accept and assume from CS Wireless, all
of CS Wireless' right, title and interest in and to the CS Wireless FCC Assets,
the lessee's interest under the CS Leases and the Radcliffe Non-FCC Assets;
(b) Heartland shall sell, assign, transfer, convey and deliver to CS
Wireless, and CS Wireless shall purchase, accept and assume from Heartland, all
of Heartland's right, title and interest in and to the Heartland FCC Assets, the
lessee's interest under the Heartland Leases and the Portsmouth Non-FCC Assets;
(c) CS Wireless shall pay Heartland One Hundred Thousand and 00/100
Dollars ($100,000.00), payable by wire transfer in immediately available funds
in accordance with written wire instructions previously delivered by Heartland
to CS Wireless; and
(d) Heartland shall cancel the Heartland Long-Term Note and deliver
such cancelled promissory note to CS Wireless.
CS Wireless acknowledges and agrees that Heartland shall not assume any
liabilities, obligations or commitments of CS Wireless or any affiliates thereof
relating to or arising out of the operation of the CS Wireless FCC Assets, the
CS Leases or Radcliffe Non-FCC Assets prior to the Stage II Closing Date
including, without limitation, any liabilities associated with employees arising
prior to the Stage II Closing Date who are hired by Heartland from and after the
Stage II Closing Date.
Heartland acknowledges and agrees that CS Wireless shall not assume any
liabilities, obligations or commitments of Heartland or any affiliate thereof
relating to or arising out of the operation of the Heartland FCC Assets,
Heartland Leases or Portsmouth Non-FCC Assets prior to the Stage II Closing
Date.
Section 5. Stage I and Stage II Closing Dates.
(a) The sale and transfer of the CS Wireless Common Stock by Heartland
to CAI, and the sale and transfer of the CPE, the cash payments by each of CS
Wireless and CAI to Heartland contemplated under Section 3, the lease from CS
Wireless to Heartland of the CS Wireless FCC Assets and the lease from Heartland
to CS Wireless of the Heartland FCC Assets (collectively, the "Stage I
Transactions") shall occur at the offices of Heartland, 200 Chisholm Place,
Suite 200, Plano, Texas 75075, at 11:30 a.m., at a closing (the "Stage I
<PAGE> 11
8
Closing") on December 2, 1998, or at such other time as the parties hereto may
agree (the "Stage I Closing Date").
(b) The sale and transfer of the CS Wireless FCC Assets, the CS Leases,
the Radcliffe Non-FCC Assets, the Heartland FCC Assets, the Heartland Leases and
the Portsmouth Non-FCC Assets, the cash payment by CS Wireless to Heartland
contemplated under Section 4 and the cancellation and delivery of the Heartland
Long-Term Note (collectively, the "Stage II Transactions") shall occur at the
offices of Heartland, 200 Chisholm Place, Suite 200, Plano, Texas 75075, at
11:30 a.m., at a closing (the "Stage II Closing") on January 30, 1999 or, if
later, 3 business days after receipt of the final FCC Approvals, or at such
other time as the parties hereto may agree (the "Stage II Closing Date").
Section 6. FCC Cooperation and Related Spectrum Matters. As a material
inducement to each of the parties to enter into this Agreement and as additional
consideration for the transactions contemplated by Sections 2, 3 and 4 above,
the parties hereto agree as follows:
(a) The parties hereto will cooperate with each other to the maximum
extent possible in agreeing to enter into interference agreements requested by
the other party that are necessary to facilitate the FCC's grant of applications
filed or sponsored by the other party, as more fully described in Article V of
the BTA Lease and Option Agreement, dated October 31, 1997 by and between
Heartland and CS Wireless and their affiliates (hereinafter the "BTA Lease and
Option Agreement"), which agreement is attached hereto as Exhibit D and
incorporated herein by this reference. Heartland and CS Wireless hereby
expressly agree to abide by the BTA Lease and Option Agreement, and that the BTA
Lease and Option Agreement, together with this Agreement, supersedes any other
agreements to the contrary; provided, however, that neither Heartland nor CS
Wireless shall be required to breach any pre-existing agreements with third
parties as a result of this Agreement, or pay monetary or other consideration
not otherwise due.
(b)(i) With respect to markets in which Heartland and CS
Wireless have contiguous or adjacent interests, including, without
limitation, Dallas and Fort Worth, Texas, Heartland and CS Wireless
agree to give high priority to resolving issues surrounding CS
Wireless' developmental application for two-way authority in
Dallas/Fort Worth, Texas and to cooperate in an expeditious manner so
as to permit the other party to file two-way transmission applications
in such markets during the first FCC filing window (with priority given
to CS Wireless' Dallas/Fort Worth market) to (A) agree on a
comprehensive two-way frequency utilization plan, (B) implement such
plan and (C) provide the other party with requisite interference
consent agreements in support of such party's two-way applications, as
long as such applications meet each party's mutually agreed upon
technical parameters, consistent with FCC rules.
(ii) Notwithstanding anything to the contrary, CS Wireless and
Heartland agree that the preferred use of the MDS-1 and MDS-2 channels,
as well as the WCS Spectrum, shall be for upstream transmissions, and
that both parties will take all
<PAGE> 12
9
reasonable and appropriate steps to accommodate the other party's
applications for and the use of such spectrum so long as such
applications meet the mutually agreed upon technical parameters,
consistent with FCC rules.
(c) Notwithstanding anything in the FCC's rules to the contrary, for
purposes of this Agreement, the interference protection criteria applicable to
the WCS Spectrum shall be governed by the FCC rules in 47 C.F.R. Part 21, as
such rules are amended from time to time, applicable to MMDS spectrum licensed
pursuant to BTA authorizations. For example, the maximum power flux density
application to the WCS Spectrum shall be equal to or less than - 73 dbw/m2 at
the BTA or partitioned service area boundary(ies), or as otherwise provided in
any successor rule or regulation of the FCC for MMDS spectrum licensed pursuant
to BTA authorizations.
(d) Heartland hereby acknowledges its obligation to cooperate with CS
Wireless in resolving a dispute with the licensee of the G group channels in
Grand Rapids, Michigan, Call Sign WLS-950, including, but not limited to,
assigning the lease to CS Wireless on an expeditious basis and permitting CS
Wireless to negotiate and execute an excess capacity lease agreement directly
with the licensee. Notwithstanding anything to the contrary, nothing in this
Section 6(d) shall require Heartland to pay any amount of consideration to the
licensor of such channels or to CS Wireless, or to expend any other amounts
related to such channels, including, without limitation, construction, tower
lease, engineering, legal or other fees.
Section 7. Conditions to All of the Parties' Obligations.
(a) The respective obligations of Heartland, CAI and CS Wireless to
consummate the Stage I Transactions, as appropriate, are subject to the
fulfillment prior to or on the Stage I Closing Date of the following conditions
(each of which may be waived in whole or in part by the party being benefitted
thereby in its sole discretion):
(i) Representations and Warranties. The representations and
warranties of Heartland, CAI and CS Wireless contained in this
Agreement shall be complete and correct in all material respects when
made and at the Stage I Closing Date.
(ii) Compliance. Each of Heartland, CAI and CS Wireless shall
have performed and complied in all material respects with all
agreements and conditions contained in this Agreement required to be
performed or complied with by each of them prior to or on the Stage I
Closing Date.
(iii) Compliance Certificates. Each of Heartland, CAI and CS
Wireless shall have delivered to the other an Officer's Certificate
dated the Stage I Closing Date, certifying (A) that the conditions
specified in subsections (i) and (ii) of this Section 7(a), solely as
such conditions relate to the certifying party, have been fulfilled,
(B) as to resolutions adopted by the Board of Directors of Heartland,
CAI and CS Wireless, as the case may be, which certificate shall have
attached thereto a copy of such
<PAGE> 13
10
resolutions, and (C) as to such other corporate proceedings relating to
the authorization, execution and performance of the transactions
contemplated hereby.
(iv) Board Authorizations. The Board of Directors of each of
Heartland, CAI and CS Wireless shall have approved this Agreement and
the transactions contemplated hereby, and shall have authorized,
empowered and directed any or all of their corporate officers to
execute and deliver this Agreement and such agreements, certificates,
instruments and other documents and to take any and all other actions
that may be deemed necessary or desirable by the officer taking such
action to give effect to this Agreement and the transactions
contemplated hereby.
(v) Transactions Permitted under Applicable Law. On the Stage
I Closing Date, the Stage I Transactions contemplated by this Agreement
shall (A) be permitted by the laws and regulations of each jurisdiction
or Governmental Authority, including, without limitation, the FCC, to
which Heartland, CAI or CS Wireless or any of their respective
affiliates, as the case may be, is subject, and (B) not violate any
applicable law or regulation.
(vi) Certain Proceedings and Regulatory Matters. At the Stage
I Closing, none of the parties hereto shall be subject to any judgment,
writ, order, decree or injunction of any court of competent
jurisdiction which restrains, enjoins or otherwise prohibits the
consummation of the Stage I Transactions, nor shall there be pending
any suit, action, investigation, inquiry or other proceeding by any
person (including, without limitation, any Governmental Authority) that
(A) seeks injunctive or other relief or remedies in connection with
such transactions or that makes consummation of the Stage I
Transactions subject to significant uncertainty, (B) could prevent or
make illegal the consummation of the Stage I Transactions contemplated
hereby, or (C) imposes or would be reasonably expected to impose any
remedy, condition or restriction on a party hereto which, in its
reasonable judgment, is material and adverse to such party.
(vii) Third Party Authorization, Consent, etc. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities, if
any, and any lender to any of the parties hereto, in connection with
the transactions contemplated hereby shall have been obtained,
including, without limitation, the consent of the holders of at least a
majority of aggregate principal amount of the CS Senior Notes, which
consent shall be in substantially the form of Exhibit F attached
hereto.
(viii) Bankruptcy Proceedings. In the event that Heartland or
CS Wireless shall have commenced a case under title 11 of the United
States Code (the "Bankruptcy Code"), the court(s) having jurisdiction
over such case(s) shall have entered an order (or orders, if both
Heartland and CS Wireless are debtors under the Bankruptcy Code) (a)
authorizing the assumption of this Agreement and the BTA Lease
Agreement and (b) approving the transactions contemplated herein, and
such order(s) shall become
<PAGE> 14
11
final and non-appealable; provided, however, nothing herein shall
preclude the parties from consummating the transactions contemplated
herein if the parties, in their discretion, waive the requirement that
such order(s) be final and non-appealable. No notice of such waiver of
this or any other condition to CAI's obligations to consummate the
transactions contemplated hereby need be given except to Heartland, as
explicitly required in this Agreement, it being the intention of the
parties hereto that CAI shall be entitled to, and is not waiving, the
protections of Section 363(m) of the Bankruptcy Code, the mootness
doctrine, and any similar statute or body of law if either or both of
the Stage I and Stage II Closings occurs in the absence of a final and
non-appealable order.
(ix) Proceedings and Documents. All corporate and other
proceedings in connection with the Stage I Transactions contemplated by
this Agreement and all documents and instruments incident to such
transactions shall be reasonably satisfactory to Heartland, CAI and CS
Wireless, as the case may be, and each party hereto shall have received
all such counterpart originals or certified or other copies of such
documents as it may reasonably request.
(b) The obligations of Heartland and CS Wireless to consummate the
Stage II Transactions are subject to the fulfillment prior to or on the Stage II
Closing Date of the following conditions (each of which may be waived in whole
or in part by the party being benefitted thereby in its sole discretion):
(i) Consummation of Stage I Transactions. The Stage I
Transactions shall have been consummated.
(ii) Representations and Warranties. The representations and
warranties of Heartland and CS Wireless contained in this Agreement
shall be complete and correct in all material respects when made and at
the Stage II Closing Date (except to the extent that such
representations and warranties relate specifically to an earlier date).
(iii) Compliance. Each of Heartland and CS Wireless shall have
performed and complied in all material respects with all agreements and
conditions contained in this Agreement required to be performed or
complied with by each of them prior to or on the Stage II Closing Date.
(iv) Compliance Certificates. Each of Heartland and CS
Wireless shall have delivered to the other an Officer's Certificate
dated the Stage II Closing Date, certifying that (A) the conditions
specified in subsections (i) through (iii) of this Section 7(b), solely
as such conditions relate to the certifying party, have been fulfilled,
(B)(1) resolutions adopted by the Board of Directors of Heartland and
CS Wireless delivered at the Stage I Closing, and (2) such other
corporate proceedings relating to the authorization, execution and
performance of the transactions contemplated hereby are still in full
force and effect and have not been rescinded, modified or amended.
<PAGE> 15
12
(v) Transactions Permitted under Applicable Law. On the Stage
II Closing Date, the Stage II Transactions shall (A) be permitted by
the laws and regulations of each jurisdiction or Governmental
Authority, including, without limitation, the FCC, to which Heartland
or CS Wireless or any of their respective affiliates, as the case may
be, is subject, and (B) not violate any applicable law or regulation.
(vi) Certain Proceedings and Regulatory Matters. At the Stage
II Closing, none of the parties hereto shall be subject to any
judgment, writ, order, decree or injunction of any court of competent
jurisdiction which restrains, enjoins or prohibits the consummation of
the Stage II Transactions contemplated by this Agreement, nor shall
there be pending any suit, action, investigation, inquiry or other
proceeding by any person (including, without limitation, any
Governmental Authority) that (A) seeks injunctive or other relief or
remedies in connection with such transactions or that makes
consummation of the Stage II Transactions subject to significant
uncertainty, (B) could prevent or make illegal the consummation of the
Stage II Transactions contemplated hereby, of (C) imposes or would be
reasonably expected to impose any remedy, condition or restriction on a
party hereto which, in its reasonable judgment, is material and adverse
to such party.
(vii) Third Party Authorization, Consent, etc. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities, if
any, and any lender to any of the parties hereto, in connection with
the Stage II Transactions contemplated hereby shall have been obtained.
(viii) Proceedings and Documents. All corporate and other
proceedings in connection with the Stage II Transactions contemplated
by this Agreement and all documents and instruments incident to such
transactions shall be reasonably satisfactory to Heartland, CAI and CS
Wireless, as the case may be, and each party hereto shall have received
all such counterpart originals or certified or other copies of such
documents as it may reasonably request.
(ix) Due Diligence Complete. Each of Heartland and CS Wireless
shall have completed their business and legal due diligence
investigation of the assets to be transferred under Section 4, the
results of which shall be reasonably acceptable to the party performing
such investigation.
(c) The obligations of CAI and CS Wireless to consummate the Stage I
Transactions are subject to the fulfillment prior to or on the Stage I Closing
Date, of the following condition (which may be waived in whole or in part by the
party being benefitted thereby in its sole discretion):
(i) Resignation of Heartland Directors. The Heartland
Directors and the Heartland Independent Director shall have resigned
from the Board of Directors of CS Wireless, and all committees thereof
effective as of the Stage I Closing Date.
<PAGE> 16
13
Section 8. Representations and Warranties of the Parties.
(a) Heartland Representations and Warranties. As a material inducement
to CAI and CS Wireless to enter into this Agreement and effect the transactions
contemplated hereby, Heartland hereby represents and warrants that:
(i) Title to CS Wireless Common Stock Held by Heartland.
Heartland has and, subject to the terms and conditions of this
Agreement, will sell, assign, transfer, convey and deliver, good and
indefeasible title to 3,836,035 shares of CS Wireless Common Stock,
which shares comprise Heartland's entire equity interest in CS
Wireless, free and clear of any security interest, claim, lien, pledge,
option, encumbrance, charge, agreement, voting trust, proxy or other
restriction (each, an "Encumbrance"), other than those Encumbrances
created or existing by virtue of the Stockholders' Agreement.
(ii) Title To Heartland Assets Transferred Hereunder. Except
as set forth on Schedule 8(a)(ii) attached hereto, Heartland has and,
subject to the terms and conditions of this Agreement, will sell,
assign, transfer, convey and deliver, good and indefeasible title to
(or a valid leasehold interest in) all of the Heartland FCC Assets, the
Heartland Leases and the Portsmouth Non-FCC Assets transferred
hereunder, free and clear of any and all Encumbrances.
(iii) Organization and Qualification. Heartland is a
corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation and is duly qualified as
a foreign corporation and in good standing in each other jurisdiction
in which the ownership, lease or operation of its property and assets
or the conduct of its business requires such qualification. Heartland
has all corporate and other necessary power and authority, and the
legal right, to own or to hold under lease the properties it purports
to own or hold under lease and to transact the business it transacts
and proposes to transact. Heartland has all corporate and other
necessary power and authority, and the legal right, to execute and
deliver this Agreement, and each of the other documents contemplated
hereby to which it is or is to be a party, and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
(iv) Authorization. The execution, delivery and performance of
this Agreement by Heartland does not and will not (A) conflict with or
result in a breach of the terms, conditions or provisions of, (B)
constitute a default under, (C) result in the creation of any
Encumbrance upon any of the Heartland FCC Assets or Heartland Leases
pursuant to, (D) give any third party the right to modify, terminate or
accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action
by or notice or declaration or filing with any Governmental Authority
or any other Person (other than as has been duly made or obtained)
pursuant to, the charter or bylaws of Heartland, or any law, statute,
rule or
<PAGE> 17
14
regulation to which Heartland or any of its assets is subject, or any
agreement, instrument, order, judgment or decree to which Heartland or
any of its assets is subject.
(v) Compliance with Laws. Except as set forth on Schedule
8(a)(v), Heartland is in compliance in all material respects with all
laws, rules and regulations applicable to the Portsmouth Non-FCC
Assets, the Heartland FCC Assets and Heartland Leases (including
obtaining all authorizations, consents, approvals, orders, licenses,
exemptions from, and making all filings or registrations or
qualifications with, any Governmental Authority), the noncompliance
with which reasonably could have a material adverse effect on such
assets or the use thereof, and Heartland is in compliance in all
material respects with all provisions of applicable FCC licenses
including, without limitation, any build-out requirements and other
obligations, and with all leases, subleases and sublicenses to it of
MMDS or MDS channels comprising the Heartland FCC Assets or the
Heartland Leases, as the case may be. The FCC licenses and channel
leases comprising the Heartland FCC Assets and Heartland Leases conform
in all material respects to all applicable laws, ordinances, codes,
licensing requirements, rules and regulations, and Heartland has not
received any notice to the contrary. Except as set forth on Schedule
8(a)(v), there are no proceedings or complaints or, to the best of
Heartland's knowledge, investigations pending before or by any
Governmental Authority which could reasonably be expected to have a
material adverse effect on any FCC license or channel lease comprising
the Heartland FCC Assets or Heartland Leases. All applications,
reports, fees, filings and other submissions required under the
Communications Act relating to the Heartland FCC Assets and Heartland
Leases have been made or paid in a timely fashion.
(vi) FCC Licenses. Schedule 3(b) attached hereto correctly
sets forth all of the FCC licenses comprising the Heartland FCC Assets
and correctly sets forth the termination date of each such FCC license,
and Schedule 4(b)(i) attached hereto identifies all FCC licenses and
the owner thereof with respect to each of the leased channels
comprising the Heartland Leases. Each FCC license comprising the
Heartland FCC Assets or the Heartland Leases allowing the construction
or the operation of radio station facilities by a lessor of channel
capacity who is obligated to lease the capacity of the radio station
(in whole or in part) under a lease agreement or management/option
agreement listed on Schedules 3(b) or 4(b)(i) attached hereto is in
full force and effect, and, to the best of Heartland's knowledge,
neither the licensee of such FCC license nor the FCC license is subject
to any complaint, investigation or proceeding by or before the FCC, or
on appeal from the FCC, which looks toward or would result in the
revocation, modification or non-renewal of the FCC license. Except as
set forth on Schedule 8(a)(vi), each of such FCC licenses for an MMDS
or MDS station has a construction completion date which has not elapsed
or, if such date has elapsed, a request to the FCC to extend that date
for at least six (6) months has been properly filed and is pending, or
an application for certification or completion of construction has been
properly filed. Except as set forth on Schedule 8(a)(vi), the FCC has
granted one or more FCC licenses to each lessor of the channel capacity
subject to the lease and lease/option agreements comprising the
Heartland FCC Assets or the Heartland Leases
<PAGE> 18
15
allowing that lessor to construct and/or operate each radio station
required for the lessor to provide to lessee under each such agreement
executed by such lessor the channel capacity subject to that agreement.
(vii) Litigation. Except as set forth on Schedule 8(a)(vii),
there is no action, suit, proceeding, arbitration, litigation or
government proceeding (including, without limitation, those related to
FCC, environmental or similar matters), or inquiry or investigation by
any Governmental Authority known to Heartland, in each case domestic or
foreign, pending against, or involving the Heartland FCC Assets, the
Heartland Leases or the Portsmouth Non-FCC Assets or the use thereof
which (A) questions the validity of this Agreement or any action taken
or to be taken by Heartland pursuant to or in connection with this
Agreement, (B) is required to be, and has not been, so disclosed in the
filings with the SEC by Heartland (and such proceedings as are
summarized in such SEC filings are accurately described in all material
respects), or (C) could reasonably be expected to materially adversely
affect the FCC licenses or channel leases comprising the Heartland FCC
Assets and the Heartland Leases or the operation of the channels and
transmission facilities relating thereto.
(viii) No Violation, etc. Heartland has not violated any law
or any governmental regulation or requirement which violation has had
or would reasonably be expected to have a material adverse effect upon
the financial condition, operating results, assets, operations or
business prospects of Heartland relating to the Heartland FCC Assets,
the Heartland Leases or the Portsmouth Non-FCC Assets, and Heartland
has not received notice of any such violation. Heartland is not subject
to, or has reason to believe it may become subject to, any material
liability (contingent or otherwise) or corrective or remedial
obligation arising under any environmental law, rule or regulation
relating to the Heartland FCC Assets, the Heartland Leases or the
Portsmouth Non-FCC Assets.
(ix) Copyright Matters. Heartland has submitted all requisite
notices (if any are required) under the Copyright Act for the carriage
of all Broadcast Stations as currently carried over any of the
Heartland FCC Assets. Heartland has filed in a timely manner with the
Copyright Office all required documents, instruments and statements of
account and have remitted payments of all required royalty fees with
respect to compulsory licenses provided for in Section III of the
Copyright Act for the carriage of broadcast signals in connection with
the Heartland FCC Assets. Heartland is not liable to any Person for
copyright infringement under the Copyright Act as a result of its
business operations relating to the Heartland FCC Assets and the
Heartland Leases. There have been no inquiries received from the
Copyright Office or any other party, which questioned such statements
of account or any copyright royalty payments made by Heartland with
respect to the Heartland FCC Assets or Heartland Leases, and no claim,
action or demand for copyright infringement or for non-payment of
royalties is pending or, to the knowledge of Heartland, threatened
against Heartland with respect to the Heartland FCC Assets or Heartland
Leases.
<PAGE> 19
16
(x) Condition of Portsmouth Non-FCC Assets. Except as set
forth on Schedule 8(a)(x) and except for ordinary wear and tear, the
Portsmouth Non-FCC Assets are in good working order for the purpose for
which they were intended. All transmitters included in the Portsmouth
Non-FCC Assets used in the Portsmouth market meet all material
applicable FCC acceptance and frequency stability requirements.
(xi) No Interference Caused by Portsmouth Market. With respect
to its Portsmouth market, Heartland has not received any written
complaint that it, or any channels used in its Portsmouth market, is
causing interference to any reception, transmission or detection
system.
(b) CS Wireless Representations and Warranties. As a material
inducement to Heartland and CAI to enter into this Agreement and effect the
transactions contemplated hereby, CS Wireless hereby represents and warrants
that :
(i) Title to CPE and Radcliffe Non-FCC Assets. CS Wireless has
and, subject to the terms and conditions of this Agreement, will sell,
assign, transfer, convey and deliver, good and indefeasible title to
the CPE and Radcliffe Non-FCC Assets, free and clear of any and all
Encumbrances.
(ii) Title to CS Wireless FCC Assets and CS Leases Transferred
Hereunder. Except as set forth on Schedule 8(b)(ii) attached hereto, CS
Wireless has and, subject to the terms and conditions of this
Agreement, will sell, assign, transfer, convey and deliver, good and
indefeasible title to (or a valid leasehold interest in) all of the CS
Wireless FCC Assets and CS Leases transferred hereunder, free and clear
of any and all Encumbrances.
(iii) Organization and Qualification. CS Wireless is a
corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation and is duly qualified as
a foreign corporation and in good standing in each other jurisdiction
in which the ownership, lease or operation of its property and assets
or the conduct of its business requires such qualification. CS Wireless
has all corporate and other necessary power and authority, and the
legal right, to own or to hold under lease the properties it purports
to own or hold under lease and to transact the business it transacts
and proposes to transact. CS Wireless has all corporate and other
necessary power and authority, and the legal right, to execute and
deliver this Agreement, and each of the other documents contemplated
hereby to which it is or is to be a party, and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
(iv) Authorization. The execution, delivery and performance of
this Agreement by CS Wireless does not and will not (A) conflict with
or result in a breach of the terms, conditions or provisions of, (B)
constitute a default under, (C) result in the creation of any
Encumbrance upon any of the CPE, the Radcliffe Non-FCC Assets, the CS
Leases or the CS Wireless FCC Assets pursuant to, (D) give any third
party the
<PAGE> 20
17
right to modify, terminate or accelerate any obligation under, (E)
result in a violation of, or (F) require any authorization, consent,
approval, exemption or other action by or notice or declaration or
filing with any Governmental Authority or any other Person (other than
as has been duly made or obtained) pursuant to, the charter or bylaws
of CS Wireless, or any law, statute, rule or regulation to which CS
Wireless or any of its assets is subject, or any agreement, instrument,
order, judgment or decree to which CS Wireless or any of its assets is
subject.
(v) Compliance with Law. Except as set forth on Schedule
8(b)(v), CS Wireless is in compliance in all material respects with all
laws, rules and regulations applicable to the CPE, the Radcliffe
Non-FCC Assets, the CS Leases and the CS Wireless FCC Assets (including
obtaining all authorizations, consents, approvals, orders, licenses,
exemptions from, and making all filings or registrations or
qualifications with, any Governmental Authority), the noncompliance
with which reasonably could have a material adverse effect on such
assets or the use thereof, and CS Wireless is in compliance in all
material respects with all provisions of applicable FCC licenses
including, without limitation, any build-out requirements and other
obligations, and with all leases, subleases and sublicenses to it of
MMDS, MDS, or ITFS channels comprising the CS Wireless FCC Assets and
CS Leases, as the case may be. The FCC licenses and channel leases
comprising the CS Wireless FCC Assets and CS Leases conform in all
material respects to all applicable laws, ordinances, codes, licensing
requirements, rules and regulations, and CS Wireless has not received
any notice to the contrary. Except as set forth on Schedule 8(b)(v),
there are no proceedings or complaints or, to the best of CS Wireless'
knowledge, investigations pending before or by any Governmental
Authority which could reasonably be expected to have a material adverse
effect on any FCC license or channel lease comprising the CS Wireless
FCC Assets or CS Leases. All applications, reports, fees, filings and
other submissions required under the Communications Act relating to the
CS Wireless FCC Assets and CS Leases have been made or paid in a timely
fashion.
(vi) FCC Licenses. Schedule 3(a)(ii) attached hereto correctly
sets forth all of the FCC licenses comprising any portion of the CS
Wireless FCC Assets and correctly sets forth the termination date of
each such FCC license, and Schedule 4(a)(i) identifies all FCC licenses
and the owner thereof with respect to each of the leased channels
comprising the CS Leases. Each FCC license comprising the CS Wireless
FCC Assets or CS Leases allowing the construction or the operation of
radio station facilities by a lessor of channel capacity who is
obligated to lease the capacity of the radio station (in whole or in
part) under a lease agreement or management/option agreement listed on
Schedules 3(a)(ii) or 4(a)(i) attached hereto is in full force and
effect, and, to the best of CS Wireless' knowledge, neither the
licensee of such FCC license nor the FCC license is subject to any
complaint, investigation or proceeding by or before the FCC, or on
appeal from the FCC, which looks toward or would result in the
revocation, modification or non-renewal of the FCC license. Except as
set forth on Schedule 8(b)(vi), each of such FCC licenses for an ITFS,
MMDS or MDS station has a construction completion date which has not
elapsed or, if such date has elapsed, a
<PAGE> 21
18
request to the FCC to extend that date for at least six (6) months has
been properly filed and is pending, or an application for certification
of completion of construction has been properly filed. Except as set
forth on Schedule 8(b)(vi), the FCC has granted one or more FCC
licenses to each lessor of the channel capacity subject to the lease
and lease/option agreements comprising the CS Wireless FCC Assets or
the CS Leases allowing that lessor to construct and/or operate each
radio station required for the lessor to provide to lessee under each
such agreement executed by such lessor the channel capacity subject to
that agreement.
(vii) Litigation. Except as set forth on Schedule 8(b)(vii),
there is no action, suit, proceeding, arbitration, litigation or
government proceeding (including, without limitation, those related to
FCC, environmental or similar matters), or inquiry or investigation by
any Governmental Authority known to CS Wireless, in each case domestic
or foreign, pending against (or circumstances that may give rise to the
same), or involving the CPE, the CS Wireless FCC Assets, the CS Leases
or the Radcliffe Non-FCC Assets or the use thereof which (A) questions
the validity of this Agreement or any action taken or to be taken by CS
Wireless pursuant to or in connection with this Agreement, (B) is
required to be, and has not been, so disclosed in the filings with the
SEC by CS Wireless (and such proceedings as are summarized in such SEC
filings are accurately described in all material respects), or (C)
could reasonably be expected to materially adversely affect the FCC
licenses or channel leases comprising the CS Wireless FCC Assets or CS
Leases or the operation of the channels and transmission facilities
relating thereto.
(viii) No Violation, etc. CS Wireless has not violated any law
or any governmental regulation or requirement which violation has had
or would reasonably be expected to have a material adverse effect upon
the financial condition, operating results, assets, operations or
business prospects of CS Wireless relating to the CPE, the CS Wireless
FCC Assets, the CS Leases or the Radcliffe Non-FCC Assets, and CS
Wireless has not received notice of any such violation. CS Wireless is
not subject to, or has reason to believe it may become subject to, any
material liability (contingent or otherwise) or corrective or remedial
obligation arising under any environmental law, rule or regulation
relating to the CPE, the CS Wireless FCC Assets, the CS Leases or the
Radcliffe Non-FCC Assets.
(ix) Copyright Matters. CS Wireless has submitted all
requisite notices (if any are required) under the Copyright Act for the
carriage of all Broadcast Stations as currently carried over any of the
CS Wireless FCC Assets. CS Wireless has filed in a timely manner with
the Copyright Office all required documents, instruments and statements
of account and have remitted payments of all required royalty fees with
respect to compulsory licenses provided for in Section III of the
Copyright Act for the carriage of broadcast signals in connection with
the CS Wireless FCC Assets. CS Wireless is not liable to any Person for
copyright infringement under the Copyright Act as a result of its
business operations relating to the CS Wireless FCC Assets and CS
Leases. There have been no inquiries received from the Copyright Office
or any other
<PAGE> 22
19
party, which questioned such statements of account or any copyright
royalty payments made by CS Wireless with respect to the CS Wireless
FCC Assets or CS Leases, and no claim, action or demand for copyright
infringement or for non-payment of royalties is pending or, to the
knowledge of CS Wireless, threatened against CS Wireless with respect
to the CS Wireless FCC Assets or CS Leases.
(x) Condition of CPE and Radcliffe Non-FCC Assets. Except as
set forth on Schedule 8(b)(x) and except for ordinary wear and tear,
the CPE and the Radcliffe Non-FCC Assets are in good working order for
the purpose for which they were intended. All transmitters included in
the Radcliffe Non-FCC Assets used in the Radcliffe market meet all
material applicable FCC acceptance and frequency stability
requirements.
(xi) No Interference Caused by Radcliffe Market, CS Wireless
FCC Assets or CS Leases. With respect to its Radcliffe market, CS
Wireless has not received any written complaint that it, or any
channels used in its Radcliffe market or otherwise comprising CS
Wireless FCC Assets and CS Leases, is causing interference to any
reception, transmission or detection system.
(c) As a material inducement to Heartland and CS Wireless to enter into
this Agreement and effect the transactions contemplated hereby, CAI hereby
represents and warrants that as of the date hereof:
(i) Organization and Qualification. CAI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which
the ownership, lease or operation of its property and assets or the
conduct of its business requires such qualification. CAI has all
corporate and other necessary power and authority, and the legal right,
to own or to hold under lease the properties it purports to own or hold
under lease and to transact the business it transacts and proposes to
transact. CAI has all corporate and other necessary power and
authority, and the legal right, to execute and deliver this Agreement,
and each of the other documents contemplated hereby to which it is or
is to be a party, and to perform its obligations hereunder and
thereunder and to consummate the transactions contemplated hereby and
thereby.
(ii) Authorization. The execution, delivery and performance of
this Agreement by CAI does not and will not (A) conflict with or result
in a breach of the terms, conditions or provisions of, (B) constitute a
default under, (C) give any third party the right to modify, terminate
or accelerate any obligation under, (D) result in a violation of, of
(E) require any authorization, consent, approval, exemption or other
action by or notice or declaration or filing with any Governmental
Authority or any other Person (other than as has been duly made or
obtained) pursuant to, the charter or bylaws of CAI, or any law,
statute, rule or regulation to which CAI or any of its assets
<PAGE> 23
20
in subject, or any agreement, instrument, order, judgment or decree to
which CAI or any of its assets is subject.
(iii) Litigation. Except as set forth on Schedule 8(c)(iii),
there is no action, suit, proceeding, arbitration, litigation or
government proceeding (including, without limitation, those related to
FCC, environmental or similar matters), or inquiry or investigation by
any Governmental Authority known to CAI, in each case domestic or
foreign, pending against or involving CAI which (A) questions the
validity of this Agreement or any action taken or to be taken by CAI
pursuant to or in connection with this Agreement or (B) is required to
be, and has not been, so disclosed in the filings with the SEC by CAI
(and such proceedings as are summarized in such SEC filings are
accurately described in all material respects).
(iv) No Violation, etc. CAI has not violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the
financial condition, operating results, assets, operations or business
prospects of CAI, and CAI has not received notice of any such
violation. CAI is not subject to, or has reason to believe it may
become subject to, any material liability (contingent or otherwise) or
corrective or remedial obligation arising under any environmental law,
rule or regulation.
(v) Investment Representation. CAI is purchasing the CS
Wireless Common Stock for its own account and not with a view to the
public distribution thereof. CAI acknowledges that the CS Wireless
Common Stock has not been registered under the Securities Act , and
that such shares may be resold only if registered pursuant to the
provisions of the Securities Act, or if an exemption from registration
is available.
Section 9. Covenants of All of the Parties.
(a) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially
reasonable efforts to bring about the fulfillment of the conditions
precedent to the Stage I Closing.
(ii) Subject to the terms and conditions provided herein, each
of the parties hereto agrees to (A) use commercially reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable law
and regulation to consummate and make effective the Stage I
Transactions in accordance with the terms of this Agreement, perform
each of its obligations hereunder, including without limitation, the
obligations of the parties set forth in Section 6 hereof, and (B)
cooperate following the Stage I Closing in the taking of any actions
necessary or desirable in order to effect the purposes of this
Agreement with respect to the Stage I Transactions.
<PAGE> 24
21
(iii) Each party hereto shall promptly inform each of the
other parties hereto of any circumstance or set of circumstances which
could reasonably be expected to impair such party's ability to perform
any of its obligations under this Agreement.
(b) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially
reasonable efforts to bring about the fulfillment of the conditions
precedent to the Stage II Closing.
(ii) Subject to the terms and conditions provided herein, each
of the parties hereto agrees to (A) use commercially reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable law
and regulation to consummate and make effective the Stage II
Transactions in accordance with the terms of this Agreement and (B)
cooperate following the Stage II Closing in the taking of any actions
necessary or desirable in order to effect the purposes of this
Agreement with respect to the Stage II Transactions.
(iii) Each party hereto shall promptly inform each of the
other parties hereto of any circumstance or set of circumstances which
could reasonably be expected to impair such party's ability to perform
any of its obligations under this Agreement.
Section 10. Covenants of Heartland. In addition to the covenants set
forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing, Heartland shall:
(i) Retain and safeguard the CS Wireless Common Stock held by
it, and maintain such CS Wireless Common Stock free and clear of any
and all Encumbrances and shall not allow, permit or suffer to exist any
Encumbrance, sale, assignment, lease, waiver of rights or granting of a
proxy with respect to, voting agreement or trust affecting other than
the Stockholders' Agreement, or otherwise transfer or dispose of the CS
Wireless Common Stock held by Heartland.
(ii) Within three business days of its commencement of a case
under the Bankruptcy Code, if prior thereto the Stage I Closing has not
occurred, (a) file with the bankruptcy court a motion (together with
appropriate supporting papers) requesting the bankruptcy court to
enter, an order in form and substance reasonably acceptable to CAI and
CS Wireless (1) authorizing Heartland to assume this Agreement, (2)
approving the transactions contemplated herein, and (3) authorizing
Heartland to assume the BTA Lease Agreement, and (b) seek a hearing on
such motion to be held within 20 days of the date of the filing
thereof.
(b) Between the date hereof and the Stage II Closing, Heartland shall:
<PAGE> 25
22
(i) Use its reasonable efforts (A) to cause to be maintained
in full force and effect, and (B) to cause the holders to renew when
required to prevent the lapse of, all FCC-issued licenses, conditional
licenses and authorizations comprising any portion of the Heartland FCC
Assets or Heartland Leases.
(ii) Use reasonable efforts to perform each and every
obligation of the lessee under any and all excess channel capacity
lease agreements or MDS transmission capacity lease agreements
comprising any portion of the Heartland FCC Assets or Heartland Leases.
(iii) Use reasonable efforts to cause each of its lessors to
prosecute in good faith and diligently pursue each MDS application and
ITFS application for facilities subject to a lease agreement with
Heartland that comprise any portion of the Heartland FCC Assets or
Heartland Leases.
(iv) Operate the Heartland FCC Assets in the ordinary course
of business in accordance with past practices for such operation
(except where such conduct would conflict with any covenant or other
obligation of Heartland under this Agreement).
(v) Promptly notify CAI and CS Wireless in writing of any
unusual or material developments with respect to the business or
operations of any of the Heartland FCC Assets or Heartland Leases and
of any material changes in any of the information contained in
Heartland's representation and warranties contained in this Agreement.
(vi) Subsequent to its commencement of a case under the
Bankruptcy Code, seek bankruptcy court approval of, and use its best
efforts to obtain, an order in form and substance reasonably acceptable
to CAI and CS Wireless (1) authorizing the assumption of this
Agreement, (2) approving the transactions contemplated herein, and (3)
authorizing Heartland to assume the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, Heartland shall
not allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on
any of the Heartland FCC Assets or Heartland Leases.
(ii) The sale, assignment, lease, waiver of rights with
respect to, sublease or other transfer or disposal of any and all
FCC-issued licenses, conditional licenses and authorizations, or the
lessee's leasehold interest in any excess channel capacity lease
agreements or MDS transmission capacity lease agreements comprising any
portion of the Heartland FCC Assets or Heartland Leases.
<PAGE> 26
23
(iii) Any material action, or material failure to act under
excess channel capacity lease agreements or MDS transmission capacity
lease agreements comprising any portion of the Heartland FCC Assets or
Heartland Leases, which would constitute a default or a potential
default thereunder (assuming that any requirements of notice or lapse
of time have occurred).
Section 11. Covenants of CS Wireless. In addition to the covenants set
forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing,
(i) CS Wireless shall retain and safeguard the CS Wireless
Non-FCC Assets and the CS Wireless FCC Assets held by it, and maintain
such CS Wireless Non-FCC Assets free and clear of all Encumbrances and
shall not allow, permit or suffer to exist any Encumbrance, sale,
assignment, lease, waiver of rights with respect to, or otherwise
transfer or dispose of the CS Wireless Non-FCC Assets and the CS
Wireless FCC Assets held by CS Wireless; and
(ii) Within three business days of its commencement of a case
under the Bankruptcy Code, if prior thereto the Stage I Closing has not
occurred, (a) file with the bankruptcy court a motion (together with
appropriate supporting papers) requesting the bankruptcy court to
enter, an order in form and substance reasonably acceptable to
Heartland and CAI (1) authorizing CS Wireless to assume this Agreement,
(2) approving the transactions contemplated herein, and (3) authorizing
CS Wireless to assume the BTA Lease Agreement, and (b) seek a hearing
on such motion to be held within 20 days of the date of the filing
thereof.
(b) Between the date hereof and the Stage II Closing, CS Wireless
shall:
(i) Use its reasonable efforts (A) to cause to be maintained
in full force and effect, and (B) to cause the holders to renew when
required to prevent the lapse of, all FCC-issued licenses, conditional
licenses and authorizations comprising any portion of the CS Wireless
FCC Assets or CS Leases.
(ii) Use reasonable efforts to perform each and every
obligation of the lessee under any and all excess channel capacity
lease agreements or MDS transmission capacity lease agreements
comprising any portion of the CS Wireless FCC Assets or CS Leases.
(iii) Use reasonable efforts to cause each of its lessors to
prosecute in good faith and diligently pursue each MDS application and
ITFS application for facilities subject to a lease agreement with CS
Wireless that comprise any portion of the CS Wireless FCC Assets or CS
Leases.
<PAGE> 27
24
(iv) Operate the CS Wireless FCC Assets in the ordinary course
of business in accordance with past practices for such operation
(except where such conduct would conflict with any covenant or other
obligation of CS Wireless under this Agreement).
(v) Promptly notify Heartland and CAI in writing of any
unusual or material developments with respect to the business or
operations of any of the CS Wireless FCC Assets or CS Leases and of any
material changes in any of the information contained in CS Wireless'
representation and warranties contained in this Agreement.
(vi) Subsequent to its commencement of a case under the
Bankruptcy Code, seek bankruptcy court approval of, and use its best
efforts to obtain, an order in form and substance reasonably acceptable
to Heartland (1) authorizing the assumption of this Agreement, (2)
approving the transactions contemplated herein, and (3) authorizing CS
Wireless to assume the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, CS Wireless shall
not allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on
any of the CS Wireless FCC Assets or CS Leases.
(ii) The sale, assignment, lease, waiver of rights with
respect to, sublease or other transfer or disposal of any and all
FCC-issued licenses, conditional licenses and authorizations, or the
lessee's leasehold interest in any excess channel capacity lease
agreements or MDS transmission capacity lease agreements comprising any
portion of the CS Wireless FCC Assets or CS Leases.
(iii) Any material action, or material failure to act under
excess channel capacity lease agreements or MDS transmission capacity
lease agreements comprising any portion of the CS Wireless FCC Assets
or CS Leases, which would constitute a default or a potential default
of the lessee thereunder (assuming that any requirements of notice or
lapse of time have occurred).
Section 12. Releases and Indemnification. As further consideration for
the transactions contemplated hereby, the parties agree as follows:
(a) At the Stage I Closing, without further action by the parties, CS
Wireless shall release and forever discharge Heartland, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees, successors and
assigns from any and all actions claims, liabilities, damages, demands,
responsibility and accountability of every nature whatsoever ("Claims"), whether
known or unknown, which CS Wireless ever had, then has or may have for, upon or
by reason of any matter, cause or thing whatsoever against Heartland arising out
of that certain Administrative Services Agreement dated as of February 23, 1996
(the "Services Agreement")
<PAGE> 28
25
by and between Heartland and CS Wireless, including, without limitation, CS
Wireless Systems, Inc. v. Heartland Wireless Communications, Inc.; Cause No.
98-CI-15104; 225th District Court, Bexar County, Texas, from the beginning of
the world to the Stage I Closing Date, or which CS Wireless may from and after
the Stage I Closing Date have against Heartland by reason of any matter, act,
omission, cause or event arising solely out of the Services Agreement, which has
occurred or which has been done or suffered to be done before the Stage I
Closing Date. CS Wireless hereby agrees to withdraw, with prejudice, CS Wireless
Systems, Inc. v. Heartland Wireless Communications, Inc.; Cause No. 98-CI-15104;
225th District Court, Bexar County, Texas on or before the Stage I Closing.
(b) At the Stage I Closing, without further action by the parties,
Heartland shall release and forever discharge CS Wireless, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees, successors and
assigns from any and all Claims, whether known or unknown, which Heartland ever
had, then has or may have for, upon or by reason of any matter, cause or thing
whatsoever against CS Wireless arising out of the Services Agreement and any
Claim capable of being asserted in connection therewith from the beginning of
the world to the Stage I Closing Date, or which Heartland may hereafter have
against CS Wireless by reason of any matter, act, omission, cause or event
arising solely out of the Services Agreement, which has occurred or which has
been done or suffered to be done before the Stage I Closing Date.
(c) At the Stage I Closing, without further action by the parties, each
of the parties hereto shall release and forever discharges the other parties
hereto, their respective subsidiaries, affiliates, stockholders, officers,
directors, agents, employees, successors and assigns from any and all Claims,
whether known or unknown, which each such party ever had, then has or may have
for, upon or by reason of any matter, cause or thing whatsoever against the
other parties hereto arising solely out of the Participation Agreement or the
Stockholders' Agreement from the beginning of the world to the Stage I Closing
Date, or which each such party may hereafter have against the other parties
hereto by reason of any matter, act, omission, cause or event arising solely out
of the Participation Agreement or the Stockholders' Agreement, which has
occurred or which has been done or suffered to be done before the date hereof.
(d) CS Wireless acknowledges and ratifies the terms and conditions of
that certain Separation Agreement dated as of October 19, 1998 (the "Separation
Agreement") by and between Frank H. Hosea ("Hosea") and CS Wireless. CS Wireless
acknowledges that (i) Hosea has been employed by Heartland as Senior Vice
President - Video Operations and (ii) Hosea's employment by Heartland does not
violate or breach the Non-Compete Restrictions as defined and set forth in
Section 5 of the Separation Agreement or any non-disclosure covenants contained
in Paragraph 9(a) of the Employment Agreement dated as of April 2, 1997 or the
Non-Disclosure Agreement dated as of April 2, 1997 between Hosea and CS
Wireless. Notwithstanding anything to the contrary set forth in this Section
12(d), CS Wireless' acknowledgment set forth herein shall not modify or
constitute a waiver of CS Wireless' rights to enforce Hosea's non-disclosure
covenants relating to any person or entity other than Heartland or its existing
wholly-owned subsidiaries set forth in Section 2 of the Separation Agreement or
Hosea's obligations relating to any person or entity other than Heartland or its
existing wholly-owned subsidiaries under the Employment Agreement and
Non-Disclosure Agreement referred to above CS Wireless
<PAGE> 29
26
expressly agrees to assume the Separation Agreement described above in any
bankruptcy proceeding filed by or against CS Wireless.
(e) Notwithstanding anything to the contrary, CAI shall indemnify and
hold Heartland harmless from any and all Claims arising from or in connection
with CAI's purchase from Heartland of the CS Wireless Common Stock at the Stage
I Closing pursuant to Section 2 of this Agreement, including any such Claims
arising from, in connection with, or related to any subsequent disposition or
transfer of the CS Wireless Common Stock by CAI; provided, however, any
liability of CAI to Heartland arising by operation of this Section 12(e) arising
from, in connection with, or related to a subsequent disposition or transfer of
the CS Wireless Common Stock by CAI to CS Wireless shall be deemed fully
satisfied by CAI with the return to CS Wireless of any and all consideration
received by CAI from CS Wireless for such disposition or transfer, and
thereafter, Heartland shall no longer have any claim for indemnification against
CAI under this Section 12(e).
(f) In the event CS Wireless commences a bankruptcy proceeding, CAI
shall use its best efforts in its capacity as a stockholder of CS Wireless, and
shall cause the CAI Directors and CAI Independent Directors (each as defined in
the Stockholders' Agreement) to use their best efforts, recognizing and taking
into consideration the various fiduciary duties owed by such directors to
various CS Wireless constituencies, to cause (i) CS Wireless to fulfill its
obligations to the Heartland Directors, the Heartland Independent Directors and
Hosea, and (ii) CS Wireless to treat its indemnity obligations to the Heartland
Directors, the Heartland Independent Directors and Hosea no less favorably than
CS Wireless treats its indemnity obligations to any other person who has served,
is serving or may hereafter serve as a member of the board of directors of CS
Wireless.
Section 13. Termination.
(a) This Agreement may be terminated at any time prior to the Stage I
Closing by mutual written consent of the parties hereto.
(b) This Agreement shall terminate (without further action or notice
(in writing or otherwise) by any of the parties hereto), unless CAI and
Heartland shall have extended in writing date or the period set forth in this
Section 13 (or any of the extended dates or periods), if the Stage I Closing
shall not have occurred by December 4, 1998.
(c) In the event of a termination of this Agreement in accordance with
this Section 13, this Agreement shall forthwith become void and of no further
force and effect, and there shall be no liability hereunder on the part of any
party or its affiliates, directors, officers, shareholders, agents or other
representatives; provided, however, that Sections 2(b), 13, 15 and 16,
inclusive, shall survive any termination of this Agreement, and (ii) nothing
herein shall relieve any party from liability for any breach of this Agreement;
provided further, however, that if the Stage I Closing shall have occurred prior
to the termination of this Agreement, Section 12 shall survive and nothing
contained herein shall limit, abridge or otherwise affect,
<PAGE> 30
27
or relieve any party from, the continuing rights and obligations arising out of
such Stage I Closing.
Section 14. Further Assurances. The parties hereto agree to take all
actions necessary or advisable, in the opinion of the party taking such action,
to effect the terms of the provisions hereof.
Section 15. No Waiver. Failure by any party hereto to insist on strict
performance or observance of any provision of this Agreement or to exercise any
right or remedy shall not be construed as a waiver of any right or remedy with
respect to any existing or subsequent breach or default.
Section 16. Miscellaneous.
(a) Entire Agreement. This Agreement and the exhibits and schedules
attached hereto and the BTA Lease and Option Agreement, as amended, constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersedes any and all previous agreements, representations and
understandings among the parties hereto with respect to such matters whether
oral or in writing.
(b) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, without regard to the
principles of conflicts of laws thereof.
(c) Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validly or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
(d) No Third Party Beneficiaries. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns. Except for the persons not parties to this Agreement who
are being released or indemnified pursuant to Section 12, nothing in this
Agreement shall create or be deemed to create any third party beneficiary rights
in any person not party to this Agreement, including, without limitation, (i)
any receiver appointed for any party hereto, or (ii) any trustee, responsible
officer or other person or entity appointed to manage business or property of
any party hereto in such party's case under any chapter of the Bankruptcy Code.
(e) Amendments. This Agreement may be amended, supplemented or
modified, and any provision hereof may be waived, only pursuant to a written
instrument making specific reference to this Agreement signed by each of the
parties hereto.
(f) Expenses. Each of the parties hereto shall be solely responsible
for its fees and expenses incurred in connection with the negotiation,
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
<PAGE> 31
28
(g) Counterparts. This Agreement may be executed by facsimile and in
any number of counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
(h) Public Announcements. The parties hereto will agree upon the timing
and content of an initial press release to be issued describing the transactions
contemplated by this Agreement, and will not make any public announcement
thereof prior to reaching such agreement unless required to do so by applicable
law or regulation.
(i) Names, Captions, etc. The name assigned this Agreement and the
section captions used herein are for convenience or reference only and shall not
affect the interpretation or construction thereof.
(j) No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of
authorship of any of the provisions of this Agreement.
(k) Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any provision of this Agreement was not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce the terms and
provisions hereof in any state or federal court in the State of Delaware, this
being in addition to any other remedy to which they are entitled at law or in
equity.
[The balance of this page intentionally left blank.]
<PAGE> 32
29
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
through their duly authorized representatives on the day and year first above
written.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By: /s/ MARJEAN HENDERSON
--------------------------------------
Name: Marjean Henderson
Title: Sr. VP & CFO
CS WIRELESS SYSTEMS, INC.
By: /s/ DAVID E. WEBB
--------------------------------------
Name: David E. Webb
Title: Chief Executive Officer
CAI WIRELESS SYSTEMS, INC.
By: /s/ ILLEGIBLE
--------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAMES UNDER WHICH
SUBSIDIARY STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS
---------- ---------------------- ------------------------
<S> <C> <C>
Heartland Cable Television, Inc. Delaware Heartland Cable Television, Inc.
Nucentrix Internet Services, Inc. Delaware Nucentrix Internet Services, Inc.
Nucentrix Spectrum Resources, Inc. Delaware Nucentrix Spectrum Resources, Inc.
</TABLE>
Note: We have omitted 34 wholly-owned subsidiaries which carry on the same line
of business as Nucentrix. All of these subsidiaries operate in the United
States.
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Nucentrix Broadband Networks, Inc.
(formerly Heartland Wireless
Communications, Inc.):
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Dallas, Texas
August 3, 1999
