<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 0-23694
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Nucentrix Broadband Networks, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 73-1435149
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 Chisholm Place, Suite 200, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code (972) 423-9494
----------------------------
N/A
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares Outstanding
Class as of August 6, 1999
----- --------------------
<S> <C>
Common Stock, $.001 par value 10,057,460
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
---------------- ----------------
JUNE 30, DECEMBER 31,
1999 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,820 $ 30,676
Restricted assets - investment in debt securities 785 1,011
Subscriber receivables, net of allowance for
doubtful accounts of $445 and $348, respectively 1,195 1,560
Other receivables 1,495 1,312
Prepaid expenses and other 1,380 1,563
---------------- ----------------
Total current assets 31,675 36,122
Systems and equipment, net 55,548 61,037
License and leased license investment, net 76,455 79,703
Note and lease receivables 3,374 3,901
Other assets, net 3,747 5,269
---------------- ----------------
Total assets $ 170,799 $ 186,032
================ ================
Liabilities not subject to compromise:
Current liabilities:
Accounts payable and accrued expenses $ 14,032 $ 11,915
Current portion of long-term debt 1,790 2,019
---------------- ----------------
Total current liabilities 15,822 13,934
---------------- ----------------
Long-term debt, less current portion 13,411 14,258
Minority interest in subsidiaries 149 149
Liabilities subject to compromise -- 322,781
Stockholders' equity:
Common stock, $.001 par value; authorized
50,000,000 shares, 19,795,521 shares outstanding at
December 31, 1998, all canceled as of April 1, 1999 -- 20
Common stock, $.001 par value; authorized
30,000,000 shares, 10,046,960 shares outstanding as
of June 30, 1999 10 --
Preferred stock, $.01 par value; 15,000,000 shares
authorized; none issued -- --
Additional paid-in capital 146,512 261,943
Accumulated deficit (5,105) (426,695)
Treasury stock, at cost, 13,396 shares at December 31, 1998,
all canceled as of April 1, 1999 -- (358)
---------------- ----------------
Total stockholders' equity 141,417 (165,090)
---------------- ----------------
Commitments and contingencies (note 7) $ 170,799 $ 186,032
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NUCENTRIX BROADBAND NETWORKS, INC.
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Successor (note 2) Predecessor (note 2)
-------------- ---------------------------------
Period from Three
Effective Date to Months Ended
June 30, June 30,
1999 Effective Date 1998
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES $ 16,811 $ -- $ 18,622
-------------- -------------- --------------
OPERATING EXPENSES:
System operations 8,187 -- 8,969
Selling, general and administrative 8,852 -- 8,862
Depreciation and amortization 5,493 -- 11,153
Impairment of undeveloped licenses -- -- 17,696
-------------- -------------- --------------
Total operating expenses 22,532 -- 46,680
-------------- -------------- --------------
Operating loss (5,721) -- (28,058)
OTHER INCOME (EXPENSE):
Interest income 368 -- 675
Interest expense (309) -- (9,965)
Equity in losses of affiliates -- -- (13,283)
Other income (expense), net 700 -- (10)
-------------- -------------- --------------
Total other income (expense) 759 -- (22,583)
-------------- -------------- --------------
Loss before reorganization costs
and extraordinary item (4,962) -- (50,641)
Reorganization costs (143) -- --
-------------- -------------- --------------
Loss before extraordinary item (5,105) -- (50,641)
Extraordinary item: --
Gain on debt forgiveness -- 173,783 --
-------------- -------------- --------------
NET INCOME (LOSS) $ (5,105) $ 173,783 $ (50,641)
============== ============== ==============
BASIC AND DILUTED NET LOSS PER NEW COMMON SHARE $ (0.51) N/A N/A
============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 10,009,000
==============
</TABLE>
<TABLE>
<CAPTION>
Successor (note 2) Predecessor (note 2)
-------------- ----------------------------------
Period from Period from Six
Effective Date to January 1, 1999 to Months
June 30, Effective Ended June 30,
1999 Date 1998
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES $ 16,811 $ 18,086 $ 37,721
-------------- -------------- --------------
OPERATING EXPENSES:
System operations 8,187 8,599 18,284
Selling, general and administrative 8,852 9,156 17,988
Depreciation and amortization 5,493 5,953 22,453
Impairment of undeveloped licenses -- -- 17,696
-------------- -------------- --------------
Total operating expenses 22,532 23,708 76,421
-------------- -------------- --------------
Operating loss (5,721) (5,622) (38,700)
OTHER INCOME (EXPENSE):
Interest income 368 423 1,491
Interest expense (309) (321) (19,965)
Equity in losses of affiliates -- -- (18,659)
Other income (expense), net 700 2 (10)
-------------- -------------- --------------
Total other income (expense) 759 104 (37,143)
-------------- -------------- --------------
Loss before reorganization costs
and extraordinary item (4,962) (5,518) (75,843)
Reorganization costs (143) (2,311) --
-------------- -------------- --------------
Loss before extraordinary item (5,105) (7,829) (75,843)
Extraordinary item:
Gain on debt forgiveness -- 173,783 --
-------------- -------------- --------------
NET INCOME (LOSS) $ (5,105) $ 165,954 $ (75,843)
============== ============== ==============
BASIC AND DILUTED NET LOSS PER NEW COMMON SHARE $ (0.51) N/A N/A
============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 10,009,000
==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
-------------- ----------------------------------
PERIOD FROM
PERIOD FROM JANUARY 1, 1999
EFFECTIVE DATE TO TO SIX MONTHS ENDED
JUNE 30, 1999 EFFECTIVE DATE JUNE 30, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (5,105) $ 165,954 $ (75,843)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Extraordinary gain on debt forgiveness -- (173,783) --
Depreciation and amortization 5,493 5,953 22,453
Debt accretion and debt issuance cost amortization -- -- 3,270
Equity in losses of affiliates -- -- 18,659
Impairment of undeveloped licenses -- -- 17,696
Other -- -- 45
Changes in assets and liabilities:
Restricted assets - investment in debt securities 226 -- --
Subscriber and other receivables 1,136 (954) 364
Prepaid expenses and other 305 (158) (1,692)
Accounts payable and accrued expenses (773) 2,890 8,784
-------------- -------------- --------------
Net cash provided by (used in) operating activities 1,282 (98) (6,264)
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of systems and equipment (2,155) (2,534) (6,271)
Proceeds from sale of debt securities -- -- 8,731
Proceeds from note and lease receivables 78 138 --
Other -- (16) --
-------------- -------------- --------------
Net cash provided by (used in) investing activities (2,077) (2,412) 2,460
-------------- -------------- --------------
Cash flows from financing activities:
Payments on short-term borrowings and notes payable (157) (241) (614)
Payments on long-term debt (343) (335) --
Proceeds from exercise of stock options 525 -- --
-------------- -------------- --------------
Net cash provided by (used in) financing activities 25 (576) (614)
-------------- -------------- --------------
Net decrease in cash and cash equivalents (770) (3,086) (4,418)
Cash and cash equivalents at beginning of period 27,590 30,676 42,821
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 26,820 $ 27,590 $ 38,403
============== ============== ==============
Cash paid for interest $ 220 $ 391 $ 9,610
============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE> 5
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
(1) Description of Business
Nucentrix Broadband Networks, Inc. (the "Company"), formerly Heartland
Wireless Communications, Inc., provides wireless broadband network and
multichannel subscription television services using up to 196 megahertz
("MHz") of radio spectrum in the 2.1 gigahertz ("GHz") to 2.7 GHz
range, primarily in medium and small markets in the central United
States. The Company owns the basic trading area ("BTA") authorization,
or otherwise licenses or leases spectrum allocated by the Federal
Communications Commission ("FCC") as Multichannel Multipoint
Distribution Service ("MMDS"), Multipoint Distribution Service ("MDS")
and Instructional Television Fixed Service ("ITFS"), in 87 markets.
This spectrum collectively is commonly referred to as "MMDS" and,
unless otherwise noted, is referred to in this Form 10-Q as MMDS. The
Company also leases 20 MHz of Wireless Communications Service ("WCS")
spectrum from CS Wireless Systems, Inc. ("CS Wireless") in 19 markets.
The Company provides two-way high-speed Internet access services,
primarily to businesses and small offices/home offices ("SOHOs"). The
Company currently offers Internet access in Austin and Sherman/Denison,
Texas. The Company also provides multichannel subscription television
service in 58 markets, including one market operated under a management
arrangement with CS Wireless. The Company's video offerings include its
own service in 58 markets and up to 185 digital channels from DIRECTV,
Inc. ("DIRECTV") and its distributors in 51 of the 58 markets, in
combination with the Company's service or as a stand-alone offering. At
July 31, 1999, the Company provided multichannel video service to
approximately 156,000 subscribers, including approximately 19,000
subscribers who received DIRECTV programming sold and serviced by
Heartland Cable Television, Inc., a wholly-owned subsidiary.
(2) Chapter 11 Reorganization
On December 4, 1998, the Company filed a voluntary, pre-negotiated Plan
of Reorganization (the "Plan" or "Plan of Reorganization") under
Chapter 11 of the U.S. Bankruptcy Code. On March 15, 1999, the
Bankruptcy Court confirmed the Plan, and the Company emerged from
Chapter 11 on April 1, 1999 (the "Effective Date").
The Company adopted Fresh Start Reporting as of the Effective Date, 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 results in a new reporting entity with assets and liabilities
adjusted to estimated fair value and beginning retained earnings set to
zero. Liabilities subject to compromise are adjusted to zero in
connection with their cancellation under the Plan. The effects of the
Plan and the application of Fresh Start Reporting on the Company's
condensed consolidated balance sheet at the Effective Date, are as
follows:
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<PAGE> 6
<TABLE>
<CAPTION>
PREDECESSOR BASIS FRESH START REPORTING SUCCESSOR BASIS
EFFECTIVE DATE ADJUSTMENTS EFFECTIVE DATE
-------------- -------------- --------------
(In thousands)
<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 (4,750)(A)
5,222 3,802 (B) 4,274
-------------- -------------- --------------
$ 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) --
Treasury stock - 13,396 shares at cost (358) 116,493 (B) --
New common stock -- 358 (B) --
New preferred stock -- 10 (B) 10
New additional paid-in capital -- 145,987 (B) 145,987
-------------- -------------- --------------
Total stockholders' equity (deficit) (172,919) 318,916 145,997
-------------- -------------- --------------
$ 180,517 $ (3,865) $ 176,652
============== ============== ==============
</TABLE>
(A) Reflects the discharge of debt (liabilities subject to compromise)
and write-off of related unamortized debt discounts and debt
issuance costs.
(B) Reflects the issuance of new shares of the Company's common stock to
the holders of senior notes and convertible notes, and the
allocation of reorganization value to identifiable tangible and
intangible assets, based on the estimated fair value of the assets,
and the adjustment to eliminate the Company's common stock
outstanding as of the Effective Date (which was canceled pursuant to
the Plan) and to reset beginning retained earnings of the Company to
zero in accordance with Fresh Start Reporting.
As a result of the application of Fresh Start Reporting, financial
information in the accompanying unaudited condensed consolidated
financial statements as of June 30, 1999, and for the period from the
Effective Date to June 30, 1999 (the "Successor Period"), is presented
on a different basis than the financial information as of December 31,
1998, and for the three and six months ended June 30, 1998, and for the
period January 1, 1999, to the Effective Date (the "Predecessor
Period"), and therefore such information is not comparable. The
Predecessor Period includes operations through March 31, 1999 plus the
gain on debt forgiveness recognized on the Effective Date. The
Successor Period includes operations for the Effective Date through
June 30, 1999.
As a result of the cancellation of the senior notes and convertible
notes and common stock outstanding at the Effective Date, and the
issuance of new shares of common stock and warrants in accordance with
the Plan, certain tax attributes of the Company must be permanently
reduced. These reductions may be applied to one or more tax items,
including but not limited to pre-bankruptcy net operating loss
carryforwards, the tax basis of certain assets and the tax basis of
subsidiary stock ("Tax Attribute Reduction"). Management is currently
considering the impact of alternatives available to the Company in
performing this Tax Attribute Reduction, but has not yet concluded
which alternative it will select. Accordingly, amounts allocated to the
Successor assets and liabilities at the Effective Date may be revised
and such revisions could be material. Management will endeavor to
select that Tax Attribute Reduction alternative which will best meet
its business objectives and
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<PAGE> 7
maximize future tax benefits. The cancellation of debt will not be
treated as taxable income under any of the alternatives.
In addition to the permanent Tax Attribute Reduction, the Company must
also limit the annual deduction of pre-bankruptcy net operating losses
and "built-in-deductions" to an amount no greater than the fair market
value of the Company immediately after the restructuring, multiplied by
the long-term tax exempt rate. This annual limit is currently estimated
to be approximately $7.3 million.
At the present time management has not yet determined how much, if any,
pre-bankruptcy net operating losses will be available to offset
post-bankruptcy income. In the current quarter, the Company has
continued to experience losses and does not believe that the
prospective Tax Attribute Reduction will have a material impact on the
Company's condensed consolidated financial statements.
In connection with the Plan, the Company recorded an extraordinary gain
of approximately $174 million related to the discharge of liabilities
subject to compromise. This extraordinary gain is not taxable to the
Company pursuant to Federal income tax law because it arose in
connection with the Company's recapitalization in connection with
Chapter 11 of the U.S. Bankruptcy Code. It will, however, result in an
as yet unmeasured permanent Tax Attribute Reduction.
(3) Liquidity and Capital Resources
The Company's condensed consolidated financial statements have been
presented on a going concern basis which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business.
The Company anticipates that additional sources of capital will be
required to fully implement its long-term business strategy, which
includes expanding its wireless broadband network services and pursuing
acquisitions and alliances. On August 4, 1999, the Company filed a
registration statement with the Securities and Exchange Commission
("SEC") relating to the proposed offering by the Company of 2 million
shares of common stock. The Company also granted the underwriters an
option to purchase an additional 300,000 shares solely to cover
overallotments, if any. If the Company consummates the offering,
management expects the proceeds of the offering, cash on hand and cash
generated by operations will be sufficient to fund operations and
capital requirements until at least the end of 2001. The Company may be
required to seek additional sources of capital if its operating
assumptions prove to be inaccurate, if it consummates significant
acquisitions or alliances or accelerates the implementation of its
business strategy, or if the common stock offering is not consummated.
There can be no assurance that the Company will be able to consummate
its proposed common stock offering or otherwise obtain the additional
capital that will be necessary to implement its business strategy. If
the Company is unable to obtain financing in a timely manner and on
acceptable terms, management has developed and intends to implement a
plan that allows the Company to continue to operate in the normal
course of business at least through June 30, 2000. More specifically,
this plan would include delaying, reducing or eliminating the launch of
new wireless 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.
(4) Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of
the Company and its majority-owned subsidiaries. Significant
intercompany balances and transactions between the entities have been
eliminated in consolidation.
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(5) Interim Financial Information
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all
adjustments, consisting only of those of a recurring nature, necessary
to present fairly the Company's financial position as of June 30, 1999
and the results of operations and cash flows for the period from
January 1, 1999 to the Effective Date, the Effective Date to June 30,
1999 and the three and six months ended June 30, 1998. These results
are not necessarily indicative of the results to be expected for the
full fiscal year. The accompanying financial statements are for interim
periods and should be read in conjunction with the audited Consolidated
Financial Statements of the Company for the year ended December 31,
1998, included in the Company's Form 10-K for the year ended December
31, 1998.
(6) Net Loss Per Common Share - Basic and Diluted
The Company has presented (1) basic loss per share, computed on the
basis of the weighted average number of common shares outstanding
during the period, and (2) diluted loss per share, computed on the
basis of the weighted average number of common shares and all dilutive
potential common shares outstanding during the period. Common stock
options (and other potentially dilutive equity securities) have not
been included in the calculation of diluted loss per share as their
effects are antidilutive. Earnings per share information has not been
presented for the Predecessor Period as the Company was recapitalized
on the Effective Date, in connection with the Plan, and accordingly,
per share amounts are not comparable between the Predecessor and
Successor Periods.
(7) Commitments and Contingencies
At June 30, 1999, the Company and certain of its former directors and
officers, to whom the Company may have indemnity obligations, were
co-defendants in one securities lawsuit with two plaintiffs, and two
purported securities class action lawsuits. See Part II, Item 1 "Legal
Proceedings." These actions allege, among other things, various
violations of federal and state securities laws. The Company also was a
party to three purported class action lawsuits alleging, among other
things, that the Company overcharged its customers for administrative
late fees.
On July 8, 1999, the securities lawsuit involving two plaintiffs was
dismissed without prejudice for the second time for plaintiffs' failure
to state a claim. The court again granted plaintiffs permission to file
an amended complaint, which must be filed on or before August 23, 1999.
On July 12, 1999, the plaintiff in one of the two remaining purported
securities class action lawsuits voluntarily dismissed the lawsuit
against all defendants, without prejudice.
On July 15, 1999, the court in one of the three purported late fee
class action lawsuits granted plaintiff's motion for non-suit and
dismissed all claims against Nucentrix. In addition, on July 22, 1999,
the Company notified the plaintiff and the court in one of the two
remaining purported late fee class action lawsuits that the Company
intended to request the Bankruptcy Court to permanently enjoin and
dismiss this matter because of the plaintiff's failure to file a proof
of claim in the Company's Chapter 11 proceedings.
The Company intends to vigorously defend the above matters that remain
pending. 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 that exceeds or otherwise is excluded from
applicable insurance coverage could have a material adverse effect on
the Company's consolidated financial position or results of operations.
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<PAGE> 9
The Company is also a party to other legal proceedings, a majority of
which are incidental to its business. In the opinion of management, and
after consideration of 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
Company's consolidated financial condition or results of operations.
The Company 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 the Company's systems, subject to
certain minimums.
(8) NASDAQ Listing
On August 10, 1999, the Nasdaq - Amex Market Group approved the
Company's application to list its common stock on the Nasdaq National
Market. The Nasdaq National Market began listing the Company's common
stock on August 12, 1999, under the symbol "NCNX."
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and notes thereto.
OVERVIEW
The Company provides wireless broadband, or high capacity, network and
multichannel subscription television services using up to 196 MHz of radio
spectrum in the 2.1 GHz to 2.7 GHz range, primarily in medium and small markets
in the central United States. The Company owns the BTA, or otherwise licenses or
leases MMDS, MDS and ITFS spectrum in 87 markets. The Company also leases 20 MHz
of WCS spectrum from CS Wireless in 19 markets. CS Wireless has agreed to
transfer this spectrum to the Company. The closing of this agreement is subject
to approval by the FCC and the execution by CS Wireless and the Company of a
comprehensive agreement on two-way frequency coordination in adjacent markets.
Historically, the Company has used its spectrum to provide wireless
multichannel subscription television services, commonly referred to as "wireless
cable." Through the Company's wholly-owned subsidiary, Heartland Cable
Television, Inc. ("Heartland Cable"), the Company currently is the largest
operator of wireless cable systems in the United States, in terms of
subscribers. Going forward, the Company's goal is to became a leading provider
of wireless broadband services in its markets, while expanding into additional
medium-sized markets through acquisition of additional MMDS spectrum licenses.
The Company also intends to explore acquisitions of, and strategic alliances
with, other providers of Internet access, broadband and telephony services, such
as traditional Internet service providers or "ISPs," direct subscriber line or
"DSL" providers, other fixed-wireless service providers in licensed or
unlicensed frequencies and competitive local exchange carriers or "CLECS."
Heartland Cable provides an average of 25 analog channels of cable
television and local broadcast network programming to 58 operating markets in
the central United States, including one market operated under a management
arrangement with CS Wireless, pending consummation of an agreement to assign
this market to the Company. Heartland Cable also offers up to 185 channels of
digital direct broadcast satellite ("DBS") programming from DIRECTV and its
distributors in 51 of its operating markets. At July 31, 1999, the Company had
wireless cable channel rights in 87 markets and provided wireless multichannel
video service to approximately 156,000 subscribers, including approximately
19,000 subscribers who received DIRECTV programming sold and serviced by
Heartland Cable.
The Company also provides two-way high-speed wireless Internet access
services primarily to businesses and SOHOs. The Company currently offers
high-speed Internet access under temporary developmental FCC licenses in Austin
and Sherman/Denison, Texas. The Company, 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. Revenues and expenses related to this new line of
business were not material for the six months ended June 30, 1999.
In connection with the FCC's rules on MMDS two-way communications
services that were adopted in September 1998 and finalized in July 1999, the FCC
has stated that it will announce a one-week "filing window" for applications for
two-way authorizations. The Company expects the FCC to open this window in the
fourth quarter of 1999, at which time the Company intends to file two-way
applications for a number of its markets, including Austin and Sherman/Denison.
All such applications must meet FCC interference protection rules or contain the
consent of co-channel and adjacent channel licensees in the Company's markets
and neighboring markets. All complete applications that have not been opposed
within 120 days after the close of the filing window will be granted. Although
the Company believes it will be able to file for and receive two-way
authorizations to replace its developmental authorizations in Austin and
Sherman/Denison, there can be no assurance that it will receive such
authorizations in these or other markets.
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<PAGE> 11
EBITDA
"EBITDA," or earnings before interest, taxes, depreciation and
amortization, is widely used by analysts, investors and other interested parties
in the Internet, cable television and telecommunications industries. EBITDA is
also a widely accepted financial indicator of a company's ability to 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 operating activities as a measure of funds available for discretionary or
other liquidity purposes. In addition, EBITDA as presented by the Company is not
necessarily consistent with the presentation of EBITDA by other companies.
FORWARD-LOOKING STATEMENTS
Certain statements in this report relating to the Company's operating
results, and plans and objectives of management for future operations, including
plans or objectives relating to the Company's business strategy and financing
needs, are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "intends,"
"will," "should," "anticipates," "plans" or comparable terminology or by
discussions of strategy. Such statements reflect the Company's current view
relating to future events and are based on an assessment of, and are subject to,
a variety of factors, contingencies, risks, assumptions and uncertainties deemed
relevant by management, including (i) the need for additional financing to fund
the Company's build-out and operation of additional wireless broadband systems
such as high-speed Internet access systems, (ii) the continued supply of
wireless broadband customer premises and transmission equipment for two-way
Internet, data, wireless local loop and Internet protocol or "IP" telephony
services provided over MMDS spectrum, (iii) the ability to obtain two-way
authorizations by the FCC for Internet and other wireless broadband services,
(iv) business and economic conditions in the Company's existing markets, and (v)
competitive products and services, as well as those matters discussed
specifically elsewhere herein. As a result, the actual results realized by the
Company could differ materially from the statements made herein. Investors are
cautioned not to place undue reliance on the forward looking statements made in
this report.
FINANCIAL RESTRUCTURING
On December 4, 1998, the Company filed a voluntary, pre-negotiated Plan
of Reorganization (the "Plan" or "Plan of Reorganization") under Chapter 11 of
the U.S. Bankruptcy Code. The Plan was confirmed by the Bankruptcy Court on
March 15, 1999, and became effective on April 1, 1999 (the "Effective Date").
Pursuant to the Plan, on the Effective Date the Company's senior notes,
convertible notes and all outstanding shares of common stock, options and
warrants were canceled and (i) in exchange for the senior notes, the Company
distributed pro rata to the holders thereof 9.7 million shares of common stock,
and (ii) in exchange for the convertible notes, the Company distributed pro rata
to the holders thereof 300,000 shares of common stock and warrants to acquire
825,000 shares of common stock at a per share exercise price of $27.63, subject
to adjustment to between $12.37 and $24.74 in the event of a purchase of all of
the Company's common stock or assets for cash and other consideration on or
before April 1, 2004. The term of the warrants is eight and one-half years from
the Effective Date.
The Company also is obligated under the Plan to issue (i) warrants to
acquire an additional 275,000 shares of common stock, and (ii) additional shares
of common stock, which the Company does not believe will exceed 75,000, to
satisfy certain miscellaneous unsecured claims that may be allowed by the
Bankruptcy Court, including claims related to contract disputes, lease rejection
claims, tort claims (except for personal injury or wrongful death claims) and
indemnity claims. As of July 31, 1999, none of the 275,000 warrants had been
issued, and 4,960 shares of common stock had been issued to settle miscellaneous
unsecured claims. The 275,000 warrants will be allocated first to holders of
pre-petition bondholder litigation claims, to the extent any such claims are
allowed by the Bankruptcy Court and exceed available corporate liability
insurance proceeds; second, pro rata among holders of pre-petition stockholder
litigation claims, to the extent any such claims are allowed by the Bankruptcy
Court and exceed any available corporate liability
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insurance proceeds; and third, pro rata among pre-petition holders of common
stock.
Also under the Plan, the Company's old employee and nonemployee
director stock option plans were terminated, and the Company adopted a new Share
Incentive Plan ("New Stock Option Plan"). The Company is authorized to grant
awards for a total of 900,000 shares of common stock under the New Stock Option
Plan. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Recent Events."
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999, COMPARED
TO THE THREE AND SIX MONTHS ENDED MARCH 31, 1998
As a result of the application of Fresh Start Reporting, financial
information in the accompanying unaudited condensed consolidated financial
statements as of June 30, 1999, and for the period from the Effective Date, to
June 30, 1999 (the "Successor Period") is presented on a different basis than
the financial information as of December 31, 1998, and for the three and six
months ended June 30, 1998, and for the period January 1, 1999 through the
Effective Date (the "Predecessor Period"). Accordingly, such information is not
comparable. However, for purposes of comparison discussions below, the six
months ended June 30, 1999 represents the combined amounts for the period of
January 1, 1999 through the Effective Date, and the period from the Effective
Date through June 30, 1999, and the three months ended June 30, 1999 represents
the period of the Effective Date through June 30, 1999. The Predecessor Period
includes operations through March 31, 1999 plus the gain on debt forgiveness
recognized on the Effective Date. The Successor Period includes operations for
the Effective Date through June 30, 1999. The most significant impact of Fresh
Start Reporting on the Company's operating results is decreased depreciation,
amortization and interest expense.
Revenues; Subscribers. The Company's revenues consist of monthly fees
paid by multichannel video subscribers for basic programming, equipment rental
and other miscellaneous fees. The Company's revenues for the second quarter of
1999 were $16.8 million, compared to $18.6 million for the second quarter of
1998. Revenues for the six months ended June 30, 1999, were $ 34.9 million,
compared to $37.7 million for the same period last year. The number of average
video subscribers for the three months ended June 30, 1999, was 156,970 compared
to 172,630 for the same period of 1998. For the six months ended June 30, 1999,
the number of average subscribers was 157,800 compared to 171,150 for the six
months ended June 30, 1998. The decline in subscribers is related primarily to
(i) the Company's first system-wide price increase in the fourth quarter of
1998, (ii) the Company's revision of its equivalent basic unit ("EBU") that it
uses to compute subscriber count in multiple dwelling units ("MDUs") (see "MDA -
Changes in Method for Reporting Subscribers"), (iii) decreased emphasis on
marketing MMDS subscription television services and increased emphasis on
selling DIRECTV offerings, which have a higher margin but are more expensive to
install and, accordingly, more difficult to sell, and (iv) a loss of subscribers
in Austin, which resulted from a technology conversion that caused some existing
subscribers to fall outside of the coverage range of the new technology. The
Company began offering high-speed Internet access services in Austin during the
second quarter of 1999. Related revenues were not material for the quarter and
year-to-date periods.
The Company began operating an additional market on behalf of CS
Wireless in May 1999, which added approximately 1,650 subscribers and $97,000 in
additional revenue for the second quarter. On a per subscriber basis, average
monthly recurring revenue per video subscriber was $33.54 for the quarter ended
June 30, 1999, compared to $33.62 for the same quarter of 1998. The decrease was
caused by the growing number of DIRECTV subscribers in the Company's subscriber
base, which generate lower average revenues than MMDS subscribers. However,
DIRECTV offerings have a lower programming cost, which results in an overall
higher margin than MMDS offerings, and the Company intends to continue to focus
its video marketing and sales efforts on DIRECTV sales. Average monthly
recurring revenue per subscriber was $34.00 for the six months ended June 30,
1999, compared to $33.54 for the same period last year. Year-to-date average
revenue per subscriber is still higher than the prior year-to-date period due to
a greater percentage of customers purchasing premium services as lower priced
packages are replaced with upgraded offerings. This increase is somewhat offset
by the higher proportion of DIRECTV customers.
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System Operations Expense. Systems operations expense includes
programming costs, channel lease payments, labor and overhead relating to
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. System
operations expense was $8.2 million, or 48.7% of revenues, for the second
quarter of 1999, compared to $9.0 million, or 48.2% of revenues, for the second
quarter of 1998. For the six months ended June 30, 1999, system operations
expense was $16.8 million, or 48.1% of revenues, compared to $18.3 million, or
48.5% of revenues, for the comparable prior year period. System operations
expense decreased over both periods primarily due to lower programming expense
as a result of lower subscriber count and a larger proportion of DIRECTV
subscribers, which have lower programming costs. Disconnect expense was also
lower in the current year. Average monthly churn was 2.9% for both the quarter
and six months ended June 30, 1999, compared to 3.2% and 3.7% for the quarter
and six months ended June 30, 1998, respectively.
Selling, General and Administrative (SG&A) Expense. SG&A expense for
the second quarter of 1999 was $8.9 million, or 52.7% of revenues, compared to
$8.9 million, or 47.6% of revenues, for the same period last year. For the six
months ended June 30, 1999, SG&A expense was $18.0 million, or 51.6% of
revenues, compared to $18.0 million, or 47.7% of revenues, for the same period
in 1998. SG&A expense was the same for the current and prior year periods as
decreased marketing costs and savings from consolidation of certain market
offices and management, were offset by increased expenditures to improve service
at the Company's customer care center, enhance safety procedures in the markets,
and start-up costs for the Internet access business. SG&A increased as a percent
of revenue as market staffing levels were not decreased in proportion to
subscriber levels.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and amortization of license and
leased license investment. The Company's 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 overhead. These direct costs are capitalized as systems
and equipment in the accompanying condensed consolidated balance sheet.
Depreciation and amortization expense was $5.5 million and $11.4 million for the
three months and six months ended June 30, 1999, respectively, compared to $11.2
million and $22.5 million for the three months and six months ended June 30,
1998, respectively. The decrease in depreciation expense over the periods
presented 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. The Company generated operating losses of $5.7 million
and $11.3 million for the three and six months ended June 30, 1999,
respectively, compared to $28.1 million and $38.7 million for the three and six
months ended June 30, 1998, respectively. The improvement in operating losses
was primarily due to lower programming costs, as well as lower depreciation
expense resulting from the write down of related assets to estimated fair market
value in 1998. Consolidated EBITDA was a negative $228,000 and a positive
$103,000 for the three and six months ended June 30, 1999, respectively,
compared to a positive $791,000 and $1.4 million for the three and six months
ended June 30, 1998, respectively. EBITDA decreased over the periods presented
due to lower revenues resulting from fewer subscription television subscribers.
Interest Income. Interest income was $368,000 and $791,000 for the
three and six months ended June 30, 1999, respectively, compared to $675,000 and
$1.5 million for the three and six months ended June 30, 1998, respectively. The
decrease in interest income was due to higher interest earnings in the first
three months of 1998 on larger escrowed balances segregated for the payment of
interest on senior notes, which were paid in April 1998, combined with lower
overall cash balances in the current year due to payment of reorganization
costs.
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Interest Expense. The Company incurred interest expense of $309,000 and
$630,000 for the three and six months ended June 30, 1999, respectively,
compared to $10.0 million and $20.0 million for the three and six months ended
June 30, 1998, respectively. Interest expense decreased in 1999 because the
Company discontinued the accrual of interest on its senior notes and convertible
notes upon filing its voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code on December 4, 1998. These notes were fully discharged upon confirmation of
the Company's Plan of Reorganization on March 15, 1999, and removed from the
Company's books in accordance with Fresh Start Reporting on April 1, 1999, the
Effective Date of the reorganization. Consequently, no interest expense was
incurred on these senior and convertible notes during 1999. If interest had
continued to be accrued, total interest expense would have been $12.6 million
for the period from January 1, 1999 through the Effective Date.
Equity in Losses of Affiliates. During the six months ended June 30,
1998, the Company owned approximately 20% of the outstanding common stock of
Wireless One, Inc. ("Wireless One") and approximately 36% of the outstanding
common stock of CS Wireless. Losses recorded in prior years for Wireless One
reduced the Company's investment balance to zero in November 1997. The Company
recorded equity in losses of affiliates of $5.4 million for the first quarter of
1998 and zero during 1999. During the second quarter of 1998, the Company
recorded losses from CS Wireless of $6.5 million and wrote off $6.8 million of
its excess cost in CS Wireless. During the third quarter of 1998, the Company
wrote off its remaining investment balance of $11.7 million based on losses
incurred by CS Wireless. In December 1998, the Company sold its 36% equity
interest in CS Wireless to CAI Wireless Systems, Inc. Accordingly, no losses
from affiliates were recorded in 1999.
Other Income. Other income increased during the three and six-month
periods as the result of cash settlements from certain litigation matters.
Reorganization Costs. During the first six months of 1999 the Company
incurred $2.4 million in expenses related to its reorganization under Chapter
11. These costs were for financial and legal advisors, accountants and
administrative costs.
Gain on Debt Forgiveness. In connection with the Plan, the Company
recorded an extraordinary gain of approximately $174.0 million reflecting the
extinguishment of liabilities subject to compromise in exchange for common stock
and warrants. On the Effective Date, the Company's senior notes and convertible
notes totaling approximately $318 million, including the interest accrued
thereon and associated unamortized discounts and debt issuance costs, were
canceled and exchanged for 10 million shares of newly-issued common stock, plus
warrants to acquire 825,000 shares of common stock with a combined fair value of
$144.2 million. This extraordinary gain is not taxable to the Company pursuant
to Federal income tax law because it arose in connection with the Company's
recapitalization in connection with Chapter 11 of the U.S. Bankruptcy Code. It
will, however, result in an as yet unmeasured permanent Tax Attribute Reduction.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Cash Requirements."
Net Loss. The Company has recorded net losses since inception.
Excluding the extraordinary gain on debt forgiveness discussed above, the
Company incurred net losses of $7.8 million for the Predecessor Period January
1, 1999 through the Effective Date, and net losses of $5.1 million for the
Successor Period. Per share amounts are not comparable between the Predecessor
and Successor Periods and, accordingly, are not presented or discussed for the
Predecessor Period.
LIQUIDITY AND CAPITAL RESOURCES
The wireless broadband network business is capital-intensive. Since
inception, the Company has expended funds to lease or otherwise acquire MMDS
channel rights in various markets and systems in operation, to construct
operating systems and to finance initial system operating losses. The Company's
primary sources of capital have been from subscription fees, debt financing, the
sale of common stock and the sale of MMDS channel rights that were not part of
the Company's strategic plan. The growth of the Company's business will require
substantial investment in capital expenditures for the development and launch of
wireless broadband services such as high-speed Internet, wireless
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local loop and IP telephony services. The recent approval by the FCC of flexible
two-way use of the Company's spectrum has made available these new applications
that the Company believes are necessary to maximize the value of its broadband
spectrum, but that will require additional capital resources to develop and
implement.
The Company estimates that a launch of a new wireless broadband network
system providing high-speed Internet access in a typical non-operating market
will involve an initial expenditure of approximately $450,000 to $600,000 for
base station equipment, depending upon the type and sophistication of the
equipment, assuming the Company is able to lease transmission tower space rather
than construct a new tower. The Company believes that incremental base station
costs to launch an Internet service business in one of the Company's existing
systems will be $200,000 to $400,000. In addition, incremental costs of
approximately $1,100 per medium-sized business Internet subscriber (up to 20
PCs), which may be partially offset by installation and other up-front charges,
as well as charges for equipment, labor, overhead charges and direct
commissions, are required. Other launch costs include the cost of securing
adequate space for marketing and warehouse 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.
Cash provided by operations was $1.2 million during the first six
months of 1999 compared to cash used in operations of $6.3 million during the
same period of 1998. During the second quarter of 1998, the Company paid $8.8
million in interest on its senior notes. No interest was paid on these notes
during 1999, as the Company discontinued accruing interest on its senior notes
when the Company filed its bankruptcy petition on December 4, 1998, and the debt
was discharged effective March 15, 1999, upon confirmation of the Company's
Plan. In addition, the Company received approximately $700,000 in settlement
payments for certain litigation matters. This increase in cash provided by
operations was partially offset by cash paid for reorganization costs of $1.5
million and lower revenues resulting from fewer subscribers in 1999, net of
savings from lower programming costs.
Cash used in investing activities was $4.5 million during the first six
months of 1999 compared to cash provided by investing activities of $2.5 million
during the first six months of 1998. Cash provided by investing activities
during 1998 included $8.7 million from the sale of debt securities held in the
Company's escrow account for payment of interest on its senior notes. Cash used
for the purchase of systems and equipment decreased $1.6 million during the
first six months of 1999, due to fewer subscriber installs in 1999, as well as
tower equipment purchases in 1998 related to channel construction in certain
markets.
Cash used in financing activities was $551,000 during the first six
months of 1999, compared to $614,000 during the comparable 1998 period. Payments
on long-term debt increased during the current year, due to the commencement
during the fourth quarter of 1998 of principal payments on the Company's $11.8
million in debt incurred in connection with the acquisition of BTAs, net of a
$3.3 million receivable due from CS Wireless for certain BTAs leased to CS
Wireless. This increase in cash required for debt payments was more than offset
during the current year by $525,000 in cash proceeds from the exercise of
employee stock options.
At August 5, 1999, the Company had approximately $25.0 million of
unrestricted cash and cash equivalents and $785,000 in restricted cash
representing collateral securing various outstanding letters of credit to
certain vendors of the Company.
FUTURE CASH REQUIREMENTS
The Company's goal is to become a leading provider of wireless
broadband network services in its markets. To implement this strategy, the
Company plans to (1) launch high-speed Internet access service to medium-sized
and small businesses in an additional 18 markets by the end of 2001, (2)
increase the Company's geographic scope for wireless broadband network services
by acquisitions or alliances, (3) offer telephony services including wireless
local loop and Voice over the Internet or "VOIP" services, and (4) maintain or
moderately grow the subscriber base in the Company's multichannel video business
which, coupled with anticipated improvements in operating costs, would provide
revenues sufficient to cover substantially all operating costs of the
multichannel video business (excluding certain unallocated corporate overhead)
while the Company develops and expands other wireless broadband businesses.
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The Company does not expect to generate sufficient cash flow to fully
implement its business strategy without raising additional capital. The growth
of the Company's revenue base and the implementation of its business strategy is
subject to and dependent upon obtaining additional capital on terms and
conditions acceptable to the Company and in a timely manner, as well as the
emergence of one or more national manufacturers of wireless modems for two-way
Internet services provided over MMDS spectrum.
On August 4, 1999, the Company filed a registration statement with the
SEC relating to the proposed offering by the Company of 2 million shares of
common stock. See "MD&A - Recent Events." If the Company consummates the
offering, management expects the proceeds of the offering, cash on hand and cash
generated by operations will be sufficient to fund operations and capital
requirements until at least the end of 2001. The Company may be required to seek
additional sources of capital if its operating assumptions prove to be
inaccurate, it consummates any significant acquisitions or alliances or it
accelerates the implementation of its business strategy.
There can be no assurance that the Company will be able to consummate
its proposed common stock offering or otherwise obtain capital in a timely
manner and on terms satisfactory to the Company that will be necessary to
implement its business strategy and grow the Company's revenue base. If the
Company is unable to obtain financing in a timely manner and on acceptable
terms, management has developed and intends to implement a plan that would allow
the Company to continue operating in the normal course of business at least
through June 30, 2000. More specifically, this plan would include delaying,
reducing or eliminating the launch of new wireless broadband network systems
(including high-speed Internet access systems), reducing or eliminating new
video subscriber installations and related marketing expenditures and reducing
or eliminating other discretionary expenditures.
As a result of the cancellation of the Company's senior notes and
convertible notes and the issuance of new shares of common stock and warrants
under the Company's Plan of Reorganization, certain tax attributes of the
Company must be permanently reduced. These reductions may be applied to one or
more tax items, including but not limited to pre-bankruptcy net operating loss
carryforwards, the tax basis of certain assets and the tax basis of subsidiary
stock ("Tax Attribute Reduction"). Management is currently considering the
impact of alternatives available to the Company in performing this Tax Attribute
Reduction, but has not yet concluded which alternative it will select.
Accordingly, amounts allocated to the Successor assets and liabilities at the
Effective Date may be revised and such revisions could be material. Management
will endeavor to select that Tax Attribute Reduction alternative which will best
meet its business objectives and maximize future tax benefits. No matter which
alternative is selected, the cancellation of debt will not constitute taxable
income.
In addition to the permanent Tax Attribute Reduction previously
described, the Company must also limit the annual deduction of pre-bankruptcy
net operating losses and "built-in-deduction" to an amount no greater than the
fair market value of the Company immediately after the restructuring, multiplied
by the long term tax exempt rate. This annual limit is currently estimated to be
approximately $7.3 million.
At the present time management has not yet determined how much, if any,
pre-bankruptcy net operating losses will be available to offset post-bankruptcy
taxable income. In the current quarter, the Company has continued to experience
losses and does not believe that prospective Tax Attribute Reduction will have a
material impact on the Company's condensed consolidated financial statements.
EQUIPMENT VENDORS
MMDS Internet access equipment and customer premises equipment such as
routers, Ethernet switches, wireless data converters and transceivers currently
are available from a variety of sources such as Cisco Systems, Inc., Conifer
Corporation and California Amplifier, Inc. Hybrid Networks, Inc. ("Hybrid")
currently is the primary provider of wireless Internet modems to MMDS operators.
In January 1999 Hybrid notified the Company 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.
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The Company intends to work with Hybrid and others to pursue ways to
resolve long-term supply needs. The Company has identified other suppliers that
it believes will become additional sources of modems by the end of 1999. The
Company also believes that the recent announcements by MCI WorldCom, Inc. and
Sprint Corporation of the acquisition of MMDS spectrum covering a total of over
51 million homes will accelerate the production of wireless modems from multiple
vendors. The Company currently intends to analyze the technology platforms that
it believes will be announced by these companies before finalizing its long-term
source of supply for wireless modems. There can be 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. A lack of available
modems could have a material adverse effect on the Company's ability to
implement its business strategy in a timely manner.
CHANGES IN METHOD FOR REPORTING SUBSCRIBERS
Periodically, the Company may implement price increases or create new
program offerings that upgrade its basic program price structure. Upon such
occurrence, the Company also will update its methodology for reporting
subscribers in MDUs who are billed in bulk to the MDU owner. These "bulk" MDU
subscribers are converted to single family unit ("SFU") subscribers for
reporting purposes using an equivalent basic unit ("EBU") rate that corresponds
to the Company's 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.
Effective March 31, 1998, the Company's EBU rate was increased to
$24.99, resulting in a decrease of approximately 4,000 reported video
subscribers. On November 1, 1998, in conjunction with the Company's first
system-wide price increase, the EBU rate was increased to $26.99, resulting in a
decrease of approximately 600 reported video subscribers.
THE YEAR 2000
The Company has 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 the team's efforts is being monitored by
senior management and periodically is reported to the Audit Committee of the
Board of Directors.
The Company recognizes the need to remediate and test its
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.
The Company has evaluated its systems and has identified the following
systems and functions as mission-critical:
o headend equipment/addressable systems, related to the receipt
and transmission of programming and data,
o billing and collection systems, and
o telecommunications systems in the Company's customer service
facility.
Headend Equipment/Addressable Systems. The Company has completed the
evaluation of these systems and has 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
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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. The Company has verified Year 2000
compliance with its billing and collections software vendor and is performing
additional testing on this software, to be substantially complete in the third
quarter of 1999.
Telecommunications System in Customer Care Facility. The Company is
upgrading its system software to be Year 2000 compliant and has obtained
documentation from the software supplier verifying Year 2000 compliance.
The Company's failure to make mission-critical systems Year 2000
compliant by year-end 1999 could adversely affect its ability to service its
customers and otherwise carry on its business. Although management expects that
it will have identified and remediated any Year 2000 problems in the Company's
internal systems prior to the end of 1999, if any significant Year 2000 problems
in its 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 the Company's operations. Management believes, based on
information currently available and the current status of the Company's efforts
to identify and correct Year 2000 problems, that the worst case scenarios that
could affect the Company's operations as a result of Year 2000 problems are an
inability to:
o transmit and receive data,
o transmit and receive video programming, and
o produce and send invoices.
While the Company is working to test its own mission-critical systems
for Year 2000 problems, it does not control the systems of its suppliers. The
Company is seeking assurance from its suppliers regarding the Year 2000
readiness of their systems. The Company also plans to conduct interoperability
testing (where practical) to determine whether the Company's suppliers' systems
will accurately provide the Company's systems with date, data and functionality
into and beyond the new millennium. The Company expects to complete its
evaluation by August 31, 1999. Notwithstanding these measures, there is some
risk that the interoperation of the Company's systems with those of its
suppliers may be affected by the Year 2000 date change. Any such impact could
have a material adverse effect on the Company's financial condition or results
of operations.
The Company 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, there can be no assurance that the system
of any acquired company will be fully Year 2000 compliant when acquired or will
be capable of timely remediation.
The Company's Year 2000 efforts are ongoing and its overall plan, as
well as the consideration of contingency plans, will continue to evolve as new
information becomes available. Having identified its mission-critical and
business-critical systems of its key suppliers, and the associated risks of
failure of those systems to be Year 2000 compliant, the Company is in the
process of devising contingency plans which will be implemented if it determines
that any of those systems will not be made Year 2000 compliant in a timely
manner. The Company is considering alternative contingency plans that will be
ready for implementation by the end of the third quarter of 1999.
The Company does not believe the costs related to its Year 2000
compliance project will be material to its financial condition or results of
operations. The Company did not have any material expenditures prior to 1999 for
Year 2000 compliance projects, and has budgeted approximately $175,000 for Year
2000 compliance initiatives during 1999, all of which has been spent or
allocated for current projects. The Company believes that it will be able to
achieve Year 2000 compliance of its IT and non-IT systems within its current
budget. Costs and the date by which the Company plans
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to complete Year 2000 modifications are based on its 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 the Company to execute its 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 the Company's operations and financial condition could
differ materially from these estimates.
COMMITMENTS AND CONTINGENCIES
The Company and certain of its former directors and officers are the
subject of certain pending litigation. See note (7) and Part II, Item 1 "Legal
Proceedings" of this Form 10-Q. 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 that exceeds or otherwise is excluded from applicable insurance
coverage could have a material adverse effect on the Company's financial
condition or results of operations.
INFLATION
Management does not believe that inflation has had or is likely to have
any significant impact on the Company's operations. Management believes that the
Company will be able to increase subscriber rates, if necessary, to keep pace
with inflationary increases in costs.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133"), 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. SFAS 133. In July 1999, the Financial Accounting
Standards Board issued SFAS 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 Company expects that the adoption of SFAS No.
133 will not have an impact on its financial condition or results of operations.
RECENT EVENTS
On December 4, 1998, the Company filed a voluntary, pre-negotiated Plan
of Reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the District of Delaware. On March 15, 1999, the Bankruptcy
Court confirmed the Plan, and the Company emerged from Chapter 11 on April 1,
1999.
Effective April 1, 1999, and in accordance with the Company's Plan of
Reorganization, the Company adopted the New Stock Option Plan. Under the New
Stock Option Plan, a total of 900,000 shares of common stock have been reserved
for issuance. As of the Effective Date, options to acquire 807,000 shares of
common stock had been granted to management, other key employees and
non-employee directors of the Company, of which options to purchase 429,480
shares were exercisable and options to purchase 52,500 shares had been exercised
at July 31, 1999. The exercise price of all options granted as of the Effective
Date is $12.50 per share. Unvested options will immediately vest and become
exercisable upon a "change in control" of the Company, as defined in the New
Stock Option Plan.
On August 4, 1999, the Company filed a registration statement with the
SEC relating to the proposed offering by the Company of 2 million shares of
common stock. The Company also granted the underwriters an option to purchase an
additional 300,000 shares solely to cover overallotments, if any. The Company
intends to use the proceeds of the offering to expand its Internet access
networks and services; acquire MMDS spectrum in additional markets; pursue
-19-
<PAGE> 20
acquisitions of, and strategic alliances with, other providers of Internet
access, broadband and telephony services, such as traditional ISPs, DSL service
providers, other fixed wireless providers in licensed or unlicensed frequencies,
and CLECs; test and implement new technologies such as wireless local loop and
VOIP services; and fund general corporate purposes. The registration statement
relating to the proposed offering is not effective, and there can be no
assurance that the Company will be able to consummate this offering on
satisfactory terms or at all.
On August 10, 1999, the Nasdaq - Amex Market Group approved the Company's
application to list its common stock on the Nasdaq National Market. The Nasdaq
National Market began listing the Company's common stock on August 12, 1999,
under the symbol "NCNX."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt. The Company's
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,
the Company has not entered into any derivative financial instruments to manage
interest rate risk and is currently not evaluating the future use of any such
financial instruments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Plan of Reorganization. On December 4, 1998, the Company filed its 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. See "MD&A - Financial Restructuring."
Securities Litigation. The Company and certain of its former officers
and directors were co-defendants 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). On July 8, 1999, for the second time, the court granted
defendants' motion to dismiss the plaintiffs' complaint for failure to state a
claim. The court also granted plaintiffs permission to file an amended complaint
for a second time, which is required to be filed by August 23, 1999.
Certain of the Company's former officers and directors are
co-defendants in a purported securities class action lawsuit originally filed in
July 1998 in State District Court in Kleburg County, Texas. The case was removed
to the U.S. District Court for the District Court for the Southern District of
Texas in December 1998. The Company was originally a named defendant in this
lawsuit, which is styled Thompson, et al. v. Heartland Wireless Communications,
Inc. et al. (98-371-d). In May 1999, the Company was dismissed as a named
defendant from the Thompson lawsuit and the lawsuit was remanded to State
District Court. Three of the Company's former officers and directors remain
named defendants. 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 damages, for total damages of $70.5 million.
The Company's liability with respect to the Thompson and Coates lawsuits is
limited under the Plan of Reorganization as described below. The parties are
scheduled to mediate this dispute in September 1999.
Fourteen current and former directors, officers and/or employees of
Nucentrix were defendants in a purported securities class action lawsuit filed
in federal court in November 1998 in the Northern District of Texas styled
Shehadi, et al., v. David E. Webb, et al., (3-98-CV-2660-H). On July 12, 1999,
the plaintiffs voluntarily dismissed the Shehadi lawsuit against all defendants
without prejudice.
-20-
<PAGE> 21
The Company's By-Laws as in effect before the Effective Date of the
Company's Plan provided for indemnification of the Company's 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, the Company's
current and former directors and officers who are parties to the securities
actions may have a claim for indemnification against the Company 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 the Company's Plan.
Under Section 11.5 of the Company's Plan, the Company is obligated, to
the extent permitted under the DGCL, to indemnify persons who served as officers
or directors of the Company on or after April 25, 1997, for certain liabilities
arising as a result of such persons having served as an officer or director of
the Company, including, subject to the limitations described below, liabilities
arising out of their being named as a defendant in the securities lawsuits. The
Company's obligations under Section 11.5 of the Company's Plan are referred to
as "Assumed Indemnity Obligations." The Company's 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 the individual's duty of loyalty to the Company or the Company's
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 the Company's 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 the Company which are not covered by the Company's Assumed
Indemnity Obligations, to the extent allowed by the Bankruptcy Court, are
classified as Class 6 Indemnity Claims under the Company's Plan . Under Section
4.6 of the Company's Plan, holders of Class 6 Indemnity Claims allowed by the
Bankruptcy Court are entitled to recover on account of such claims only to the
extent of any available coverage under the Company's corporate liability
insurance, including any self-insured retention under those policies.
All of the Company's former officers and directors of the Company 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 an officer or director after April 25, 1997, and, therefore,
are beneficiaries of the Assumed Indemnity Obligations. To the extent the two
former officers and directors 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, the Company believes that
any claim they may assert against the Company for indemnification, to the extent
allowed by the Bankruptcy Court, will be treated as Class 6 Indemnity Claims
under the Company's Plan and their recovery will be limited to any available
proceeds of the Company's corporate liability insurance. To the extent any of
the other former or current officers or directors incur any liability in any of
these lawsuits, the Company would be obligated to indemnify such persons,
subject to the exceptions described above, to the extent the proceeds of the
Company's corporate liability insurance are insufficient to cover such
liabilities.
To the extent plaintiffs in the Coates or Thompson actions are entitled
to any recovery from the Company and the Bankruptcy Court allows any claim they
may file against the Company, the Company believes any such claim for recovery
would be classified under the Company's Plan as a Class 7 Bondholder Litigation
Claim, which is a claim based on the purchase or sale of the Company's debt
securities, or a Class 8 Stockholder Litigation Claim, which is a claim based on
the purchase or sale of the Company's equity securities. Under the Company's
Plan, each holder of a Bondholder Litigation Claim that is allowed by the
Bankruptcy Court will be entitled to receive, in full satisfaction of such
claim, (1) a pro rata portion of any liability insurance proceeds that remain
after the satisfaction of the Company's 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 the Company are obligated to issue under the Company's Plan, up
to the number of warrants with a value sufficient to satisfy the allowed amount
of such claim. Each holder of a Stockholder Litigation Claim that is allowed by
the Bankruptcy Court will be entitled to receive, in full satisfaction of such
claim, (1) a pro rata portion of any liability insurance proceeds that remain
after the satisfaction of the Company's 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
-21-
<PAGE> 22
portion of the 275,000 warrants that the Company is obligated to issue under
the Company's Plan, up to the number of warrants with a value sufficient to
satisfy the allowed amount of such claim. The Stockholder Litigation Claims
Portion of these warrants will be that portion of the warrants that remain after
satisfaction of Bondholder Litigation Claims that bears the same proportion to
the total number of remaining warrants as the number of shares of equity
interests represented by allowed Stockholder Litigation Claims bears to the
number of shares of equity interests represented by the allowed Stockholder
Litigation Claims and the allowed claims of previous holders of common stock and
other equity interests in the Company prior to the Effective Date.
Late Fee Litigation. The Company is a party to a purported class action
lawsuit alleging, among other things, overcharging of administrative late fees.
The lawsuit is styled Azalia Garcia, et al. v. Heartland Wireless
Communications, Inc. d/b/a Heartland Cable Television (98-60898-1). The Company
believes that the plaintiff's claims in the Garcia case are barred by, among
other things, the order confirming the Company's Plan of Reorganization entered
by the Bankruptcy Court on March 15, 1999, for plaintiff's failure to file a
proof of claim, and that the plaintiff is entitled to no recovery under the
Plan. The Company has notified the plaintiff and the State District Court in
which this matter is pending that it intends to request the Bankruptcy Court to
permanently enjoin and dismiss this matter.
The Company was a party to a similar lawsuit filed in May 1998 in State
District Court in Grayson County, Texas styled Warren, et al., v. Heartland
Wireless Communications, Inc. (98-0715). In June 1999, the Company filed a
motion for summary judgment in the Warren case, based on the plaintiffs' failure
to file a proof of claim in the Company's Chapter 11 proceedings. The plaintiffs
subsequently moved to non-suit this case, and on July 15, 1999, the court
granted plaintiff's motion for non-suit and dismissed all claims against the
Company without prejudice.
Nucentrix also is a party to a purported late fee class action lawsuit
styled Ysasi, et al., v. Heartland Wireless Communications, Inc. (98-6430-B).
The plaintiff in Ysasi has moved for summary judgment against Nucentrix on the
grounds of usury. This motion is scheduled for hearing September 2, 1999.
General. For additional information on the above matters, see "Item 3 -
Legal Proceedings" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The Company intends to vigorously defend the above
matters that remain pending. 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 that exceeds or otherwise is excluded from applicable insurance
coverage could have a material adverse effect on the Company's financial
condition or results of operations.
The Company is a party, from time to time, to routine litigation
incident to its business. The Company does not believe that any other pending
litigation matter will have a material adverse effect on its financial condition
or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Plan of Reorganization under Chapter 11 of the United
States Bankruptcy Code (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form
8-K dated January 19, 1999).
2.2 Order Confirming the Company's Plan of Reorganization
Under Chapter 11 of the Bankruptcy Code, dated as of
March 15, 1999 (incorporated by reference to Exhibit
2.2 to the Registrant's Registration Statement on
Form S-1 filed with the SEC on June 17, 1999, No.
333-80929 (the "June 1999 Form S-1")).
-22-
<PAGE> 23
3.1 Amended and Restated Certificate of Incorporation of
the Company (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
10-Q")).
3.2 Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the March 1999 Form
10-Q).
4.1 Specimen Stock Certificate (incorporated by reference
to Exhibit 4.1 to the June 1999 Form S-1).
10.1 First Amended and Restated 1999 Share Incentive Plan
(incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 filed
with the SEC on June 3, 1999, Registration No.
333-79913).
10.2 Nonqualified Stock Option Agreement between the
Company and Carroll D. McHenry, dated as of April 1,
1999 (incorporated by reference to Exhibit 10.15 to
the June 1999 Form S-1).
10.3 Nonqualified Stock Option Agreement between the
Company and Marjean Henderson, dated as of April 1,
1999 (incorporated by reference to Exhibit 10.16 to
the June 1999 Form S-1).
10.4 Nonqualified Stock Option Agreement between the
Company and J. Curtis Henderson, dated as of April 1,
1999 (incorporated by reference to Exhibit 10.17 to
the June 1999 Form S-1).
10.5 Nonqualified Stock Option Agreement between the
Company and Alexander R. Padilla, dated as of April
1, 1999 (incorporated by reference to Exhibit 10.18
to the June 1999 Form S-1).
10.6 Nonqualified Stock Option Agreement between the
Company and Frank H. Hosea, dated as of April 1, 1999
(incorporated by reference to Exhibit 10.19 to the
June 1999 Form S-1).
10.7 Warrant Agreement dated as of April 1, 1999
(incorporated by reference to Exhibit 10.1 to the
March 1999 10-Q).
*27 Financial Data Schedule
- ---------------------
*Filed herewith.
(b) REPORTS ON FORM 8-K
1. On June 22, 1999, the Company filed a Current Report on Form 8-K dated
June 17, 1999, regarding the filing of a "Shelf" Registration Statement
on Form S-1, registering the offer and sale by certain stockholders of
the Company's common stock acquired pursuant to the Company's Plan of
Reorganization.
-23-
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: August 13, 1999 NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ CARROLL D. MCHENRY
-------------------------------------------------
Carroll D. McHenry
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
By: /s/ MARJEAN HENDERSON
-------------------------------------------------
Marjean Henderson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
-24-
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Plan of Reorganization under Chapter 11 of the United States
Bankruptcy Code (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated January 19,
1999).
2.2 Order Confirming the Company's Plan of Reorganization Under
Chapter 11 of the Bankruptcy Code, dated as of March 15, 1999
(incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1 filed with the SEC on June
17, 1999, No. 333-80929 (the "June 1999 Form S-1")).
3.1 Amended and Restated Certificate of Incorporation of the
Company (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 10-Q")).
3.2 Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the March 1999 Form 10-Q).
4.1 Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to the June 1999 Form S-1).
10.1 First Amended and Restated 1999 Share Incentive Plan
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8 filed with the SEC on June
3, 1999, Registration No. 333-79913).
10.2 Nonqualified Stock Option Agreement between the Company and
Carroll D. McHenry, dated as of April 1, 1999 (incorporated by
reference to Exhibit 10.15 to the June 1999 Form S-1).
10.3 Nonqualified Stock Option Agreement between the Company and
Marjean Henderson, dated as of April 1, 1999 (incorporated by
reference to Exhibit 10.16 to the June 1999 Form S-1).
10.4 Nonqualified Stock Option Agreement between the Company and J.
Curtis Henderson, dated as of April 1, 1999 (incorporated by
reference to Exhibit 10.17 to the June 1999 Form S-1).
10.5 Nonqualified Stock Option Agreement between the Company and
Alexander R. Padilla, dated as of April 1, 1999 (incorporated
by reference to Exhibit 10.18 to the June 1999 Form S-1).
10.6 Nonqualified Stock Option Agreement between the Company and
Frank H. Hosea, dated as of April 1, 1999 (incorporated by
reference to Exhibit 10.19 to the June 1999 Form S-1).
10.7 Warrant Agreement dated as of April 1, 1999 (incorporated by
reference to Exhibit 10.1 to the March 1999 10-Q).
*27 Financial Data Schedule
</TABLE>
- ---------------------------------
*Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> APR-01-1999
<CASH> 0<F1>
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 173,783
<CHANGES> 0
<NET-INCOME> 173,783
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS FDS INCLUDES INFORMATION FOR THE PREDECESSOR ENTITY AS OF THE EFFECTIVE
DATE.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 26,820<F1>
<SECURITIES> 785
<RECEIVABLES> 2,690
<ALLOWANCES> 445
<INVENTORY> 0
<CURRENT-ASSETS> 31,675
<PP&E> 55,548
<DEPRECIATION> 0
<TOTAL-ASSETS> 170,799
<CURRENT-LIABILITIES> 15,822
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 141,407
<TOTAL-LIABILITY-AND-EQUITY> 170,799
<SALES> 16,811
<TOTAL-REVENUES> 16,811
<CGS> 0
<TOTAL-COSTS> 22,532
<OTHER-EXPENSES> 1,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309
<INCOME-PRETAX> (5,105)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,105)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,105)
<EPS-BASIC> (.51)
<EPS-DILUTED> (.51)
<FN>
<F1>THIS FDS INCLUDES OPERATIONS OF THE SUCCESSOR ENTITY FROM THE EFFECTIVE DATE
THROUGH JUNE 30, 1999.
</FN>
</TABLE>
