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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 17, 1999
---------------------------
NUCENTRIX BROADBAND NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 0-23694 73-1435149
(State or other (Commission File (I.R.S. Employer
jurisdiction of incorporation) Number) Identification Number)
200 CHISHOLM PLACE, SUITE 200
PLANO, TEXAS 75075
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (972) 423-9494
NOT APPLICABLE
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
On June 17, 1999, Nucentrix Broadband Networks, Inc. ("Nucentrix"),
filed a "Shelf" Registration Statement on Form S-1 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933 registering the offer and sale of shares of its
common stock by certain of its stockholders who acquired shares of common stock
under Nucentrix's Plan of Reorganization under Chapter 11 of the United States
Bankruptcy Code, which became effective on April 1, 1999. On December 16, 1999,
the Registration Statement, which covers 3,842,593 shares of Nucentrix common
stock held by the selling stockholders named in the Prospectus that forms a part
of the Registration Statement (the "Prospectus"), was declared effective by the
Commission.
Certain information in the Registration Statement updates and
supplements certain information contained in Nucentrix's Annual Report on Form
10-K for the year ended December 31, 1998, and its Quarterly Reports on Form
10-Q for the quarters ended March 31, June 30 and September 30, 1999, including
information regarding Nucentrix's business strategy and the reorganization. The
Registration Statement also includes certain risk factors related to, among
other things, Nucentrix's business and operations, implementation of its
business strategy and factors that may affect the market price of its common
stock. This information is contained in the Prospectus under the headings "Risk
Factors," "Reorganization" and "Business." Each of these sections of the
Prospectus were attached as Exhibit 99.1 to the initial filing of this Form 8-K
dated June 19, 1999 (the "Original 8-K"), and incorporated by reference herein
to the extent provided in the Original 8-K. These sections of the Prospectus
have been amended since the date of the Original 8-K, and information contained
under the headings "Risk Factors" on pages 7 through 16 of the Prospectus,
"Reorganization" on pages 17 and 18 of the Prospectus and "Business" on pages 36
through 58 of the Prospectus (as so amended) is filed herewith as Exhibit 99.2
and hereby is incorporated by reference to amend and supersede such sections of
the Prospectus as filed with the Original 8-K, except that cross-references
contained in such sections of the Prospectus that refer to sections of the
Prospectus that are not incorporated herein by reference shall not be deemed
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) EXHIBITS.
*99.1 -- "Risk Factors," "Reorganization" and "Business"
sections of the Prospectus which forms a part of the
Company's Registration Statement on Form S-1 as filed
with the Commission on June 17, 1999 (Registration
No. 333-80929).
99.2 -- "Risk Factors," "Reorganization" and "Business"
sections of the Prospectus which forms a part of the
Company's Registration Statement on Form S-1 as filed
with the Commission on December 16, 1999
(Registration No. 333-80929).
- ------------------
* Previously filed
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this current report to be signed on its behalf by
the undersigned thereunto duly authorized.
NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ J. CURTIS HENDERSON
--------------------------------------
Name: J. Curtis Henderson
Title: Senior Vice President and General
Counsel
Date: December 21, 1999
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<S> <C> <C>
*99.1 -- "Risk Factors," "Reorganization" and "Business"
sections of the Prospectus which forms a part of the
Company's Registration Statement on Form S-1 as filed
with the Commission on June 17, 1999 (Registration
No. 333-80929).
99.2 -- "Risk Factors," "Reorganization" and "Business"
sections of the Prospectus which forms a part of the
Company's Registration Statement on Form S-1 as filed
with the Commission on December 16, 1999
(Registration No. 333-80929).
</TABLE>
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* Previously filed
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EXHIBIT 99.2
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.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NECESSARY TO IMPLEMENT OUR
BUSINESS STRATEGY ON SATISFACTORY TERMS AND CONDITIONS.
To implement our long-term business strategy, we will need additional
capital for capital expenditures, operating expenses for system development and
acquisition costs, including debt that may be assumed in future acquisitions. We
plan to finance these activities by debt or equity financings, secured or
unsecured credit facilities, joint ventures or other arrangements. On August 4,
1999, we filed a registration statement with the Securities and Exchange
Commission relating to the proposed public offering by us of 2 million shares of
our common stock. We have not yet requested acceleration of the effectiveness of
the registration statement and have not determined when, or if, we will request
acceleration of or effect an offering pursuant to the registration statement. We
may determine to delay the offering or withdraw the registration statement
depending on, among other things, market conditions and equipment financing
opportunities. We cannot assure you that we will be able to obtain the financing
we will need to fund the implementation of our business strategy on satisfactory
terms and conditions, if at all. If we incur additional debt, we may have to
dedicate a substantial portion of our cash flow from operations to the payment
of principal and interest, which may cause us to be more vulnerable to
competitive pressures and economic downturns. If we fail to obtain additional
financing in a timely manner and on acceptable terms, we may have to delay,
reduce or eliminate the launch of new high-speed Internet access systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Future Cash Requirements" and "Business -- Business Strategy."
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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 than we have. Many of these companies can
subsidize competing services with revenues from other services and have ready
access to capital markets. As competition increases in the high-speed Internet
access market, we anticipate intensified downward pricing pressure for our
services. 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."
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.
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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. ("Hybrid"), currently
is the primary provider of wireless broadband 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 the supply of modems. In June 1999, Hybrid resumed shipment of modems
without allocation restrictions.
In addition to Hybrid, we have identified other suppliers that we believe
will become sources of modems by the end of the second quarter of 2000. If
Hybrid fails to supply or limits the supply of high-speed modems, and one or
more additional vendors do not come to market with a reliable supply of wireless
modems on satisfactory terms and conditions before the end of the second quarter
of 2000, then a shortage of available modems may occur. A shortage of available
modems could 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.
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.
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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 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.
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TWO-WAY SYSTEMS REQUIRE REGULATORY APPROVAL. WE WILL BE REQUIRED TO OBTAIN
REGULATORY APPROVAL FOR OUR CURRENT AND FUTURE TWO-WAY SYSTEMS. IF WE DO NOT
OBTAIN REQUISITE APPROVALS FOR A MARKET, THEN WE WILL NOT BE PERMITTED TO
OPERATE A TWO-WAY SYSTEM IN THAT MARKET.
In 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
second quarter of 2000. 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."
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, $13.7 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."
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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.
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.
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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 certain of
our DIRECTV offerings generate more favorable returns than our stand-alone MMDS
offering, and our DIRECTV offerings allow us to use MMDS spectrum for other
purposes, we have shifted the focus of our sales and marketing efforts to
emphasize sales of DIRECTV service. We depend on our contracts with DIRECTV to
provide DIRECTV service. Our 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 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
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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.
Although we have evaluated and taken actions intended to correct Year 2000
problems in our mission-critical and other systems, we cannot assure you that we
will not experience Year 2000 problems with our mission-critical or other
systems or that other significant Year 2000 problems that we are not currently
aware of will not arise. If Year 2000 issues arise with respect to our systems,
or 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 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 own or control approximately 65% of our outstanding common
stock. Two of these groups have a representative on our board of directors and
collectively own or control approximately 29.6% of our outstanding common stock.
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. The
concentration of ownership of our common stock by these groups also 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.
14
<PAGE> 9
SHARES ELIGIBLE FOR FUTURE SALE MAY AFFECT THE MARKET PRICE FOR OUR COMMON
STOCK.
The 3,842,593 shares covered by this prospectus constitute approximately
38% of our outstanding common stock. The selling stockholders may sell all or
any portion of these shares into the public market at any time pursuant to this
prospectus. Sales of substantial amounts of securities, or the perception that
such sales could occur, could adversely affect the market price of our common
stock. In addition, the 6,257,124 remaining shares of common stock outstanding
are freely tradeable under the Securities Act. See "Reorganization" and "Shares
Eligible For Future Sale."
WE MAY ENCOUNTER DIFFICULTIES DUE TO OUR RECENT EMERGENCE FROM CHAPTER 11
BANKRUPTCY 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.
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
1,547,000 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."
TWO FORMER STOCKHOLDERS HAVE FILED A MOTION TO REVOKE THE ORDER OF THE U.S.
BANKRUPTCY COURT CONFIRMING OUR PLAN OF REORGANIZATION. IF THE ORDER IS REVOKED,
THE DISCHARGE OF OUR DEBT MAY BECOME INEFFECTIVE AND WE COULD BE PLACED BACK IN
REORGANIZATION UNDER CHAPTER 11 OF THE U.S. BANKRUPTCY CODE.
On December 4, 1998, we filed a voluntary, prenegotiated plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. On March 15, 1999,
the bankruptcy court confirmed our plan of reorganization, which was approved by
all classes of claims that voted on the plan (including stockholders)
15
<PAGE> 10
and became effective April 1, 1999. In September 1999 we received notice that
two former stockholders had filed a motion pro se to revoke the order confirming
our plan of reorganization, asserting that we obtained the order by fraudulently
undervaluing our assets. The bankruptcy court may grant the motion and revoke
the order of confirmation if and only if the order was procured by fraud. If the
bankruptcy court grants this motion, then the court has broad authority to
revoke the Order Confirming Plan of Reorganization, grant relief to protect any
entity that acquired rights in good faith reliance on the order, and to revoke
the discharge of our debt. If the court revoked the discharge of our debt, we
could be placed back in reorganization under Chapter 11 of the U.S. Bankruptcy
Code. We have filed a motion to dismiss the motion to revoke, believe the motion
to revoke is without merit and intend to vigorously oppose the motion to revoke.
Our motion to dismiss the motion to revoke is under consideration by the
bankruptcy court. See "Reorganization" and "Business -- Legal Proceedings."
16
<PAGE> 11
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 prepetition agreement from the holders of more than
70% in principal amount of our $115 million 13% senior notes (the "Old 13%
Notes") and $125 million 14% senior notes (the "Old 14% Notes" and, together
with the Old 13% Notes, the "Old Senior Notes") to support the plan.
On March 15, 1999, the bankruptcy court confirmed our plan 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.
The selling stockholders received all of their shares of common stock covered by
this prospectus from us under our plan of reorganization.
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>
17
<PAGE> 12
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 December 1, 1999, we had
issued 9,757 additional shares of our common stock to settle some of these
claims.
In September 1999, we received notice that a Motion to Revoke Order of
Confirmation had been filed pro se in the U.S. Bankruptcy Court for the District
of Delaware by two former stockholders of Heartland Wireless Communications,
Inc., seeking to revoke the order of the bankruptcy court confirming our plan of
reorganization. The motion asserts that we procured the order confirming our
plan of reorganization by fraudulently undervaluing our enterprise value, and
seeks to set aside the order. We have filed a motion to dismiss the motion to
revoke, believe the motion to revoke is without merit and intend to vigorously
oppose the motion to revoke. Our motion to dismiss the motion to revoke is under
consideration by the bankruptcy court.
18
<PAGE> 13
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 under temporary developmental FCC licenses 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 or mobile 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 up to 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 149,000 subscribers at
December 1, 1999, including about 22,000 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, serving over 100
medium-sized and small businesses, SOHOs and telecommuters in Austin and
Sherman-Denison, Texas. We plan to add this service to 18 additional markets by
the end of 2001.
INDUSTRY OVERVIEW AND MARKET OPPORTUNITY
Internet access is one of the fastest growing segments of the
telecommunications industry. 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. We
believe 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 or both for a variety of applications,
including e-mail databases and corporate intranets. We also believe that 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
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<PAGE> 14
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 authorized 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
Internet access alternatives available in our target markets at prices
substantially lower than or comparable to those 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
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
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<PAGE> 15
domain name maintenance. In the future, we expect to provide additional
services like wireless local loop services, VoIP and virtual private
networking.
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.
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 a substantial
portion of 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 require 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. Although we may elect to
construct multi-cell systems to provide two-way Internet access service in
some or all of our markets, we believe we will be able to use existing base
stations as part of our network design in a majority of our top 20
projected Internet markets. 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 portion of the capital required
for Internet access delivery in these markets already has been invested. We
believe the incremental cost to upgrade an existing wireless cable system
to add Internet access service capabilities is about $300,000 to $600,000
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 $500,000 to
$750,000
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<PAGE> 16
for network equipment, depending upon the system design and type and
sophistication of the equipment, assuming that we are able to lease rooftop
or tower space rather than being required to construct new towers.
Expand into residential market. MCI and Sprint have announced
acquisitions of MMDS spectrum covering over 70 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
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, such as traditional ISPs, DSL providers, other fixed or mobile
wireless providers in licensed or unlicensed frequencies and CLECs.
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.
The following table summarizes our current service offerings:
<TABLE>
<CAPTION>
1-YR CONTRACT
NO. OF MONTHLY
PRODUCT SPEED USERS PRICE
- ------- ---------------- ------ -------------
<S> <C> <C> <C>
SOHO/Telecommuter Pack......................... 256 Kbps 1 $129.95
SOHO/Telecommuter Pack Plus.................... 384 Kbps 1 $159.95
Cyber Wave M256K............................... 256 Kbps 2-10 $139.95
Cyber Wave M384K............................... 384 Kbps 2-10 $169.95
Cyber Wave M768K............................... 768 Kbps to 1.54 2-10 $249.95
</TABLE>
Our current installation fee is $199.95.
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<PAGE> 17
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, 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.
EXISTING AND UNCONSTRUCTED MARKETS
The following tables provide information as of December 1, 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
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<PAGE> 18
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.
<TABLE>
<CAPTION>
NUMBER OF VIDEO
ESTIMATED SUBSCRIBERS NUMBER OF
TOTAL DECEMBER 1, CHANNELS
EXISTING MARKETS HOUSEHOLDS 1999 AVAILABLE(1)
- ---------------- ---------- --------------- ------------
<S> <C> <C> <C>
Abilene, TX................................................. 63,808 2,895 22
Ada, OK..................................................... 48,591 2,860 32
Ardmore, OK................................................. 53,076 3,387 32
Austin, TX.................................................. 437,358 8,778 33
Beloit, KS.................................................. 20,481 542 33
Bucyrus, OH................................................. 236,856 774 21
Champaign, IL............................................... 104,533 2,284 23
Chanute, KS................................................. 56,155 4,002 33(2)
Corpus Christi, TX.......................................... 167,864 9,213 33(3)
Corsicana/Athens, TX........................................ 95,753 2,063 29
Enid, OK.................................................... 40,118 3,681 32
Freeport, IL................................................ 139,485 979 20
Gainesville, TX............................................. 40,444 942 33
George West, TX............................................. 23,237 2,099 23(4)
Greenville, PA.............................................. 339,291 578 20
Hamilton, TX................................................ 31,443 2,573 33
Jacksonville, IL............................................ 48,060 482 26
Jourdanton/Charlotte, TX.................................... 101,132 1,545 29
Kerrville, TX............................................... 37,046 430 33
Kingsville/Falfurrias, TX................................... 32,484 1,442 23(4)
Laredo, TX.................................................. 51,136 3,149 33
Lawton, OK.................................................. 81,960 5,546 33
Lindsay, OK................................................. 58,730 2,483 29
Lubbock, TX................................................. 112,235 2,964 33
Macomb/Walnut Grove, IL..................................... 84,209 1,738 20
Manhattan, KS............................................... 52,720 1,767 33
Marion, KS.................................................. 55,069 871 21(5)
McAlester, OK............................................... 38,986 576 20
McLeansboro, IL............................................. 88,485 1,165 31
Medicine Lodge/Anthony, KS.................................. 30,022 1,166 22
Midland, TX................................................. 118,372 5,391 33
Monroe City/Lakenan, MO..................................... 70,196 1,291 32
Montgomery City, MO......................................... 91,080 689 23
Mt. Pleasant, TX............................................ 57,951 2,001 24
Muskogee, OK................................................ 79,972 850 20
O'Donnell, TX............................................... 66,006 518 22
Olney, IL................................................... 71,074 1,491 20
Olton, TX................................................... 27,333 653 33
Paragould, AR............................................... 142,470 2,288 20
Paris, TX................................................... 42,897 2,727 26
Peoria, IL.................................................. 204,681 1,533 29
Radcliffe/Story City, IA(6)................................. 75,788 1,538 27
Sherman/Denison, TX......................................... 110,559 7,846 29
Sikeston, MO................................................ 100,564 2,437 20
Sterling, KS................................................ 45,447 633 24(7)
Stillwater, OK.............................................. 81,586 5,469 33
Strawn/Ranger, TX........................................... 42,856 1,287 33
Taylorville, IL............................................. 166,567 1,433 20
Temple/Killeen, TX.......................................... 138,825 9,486 33(3)
Texarkana, TX............................................... 80,871 1,178 29
Tulsa, OK................................................... 324,859 9,055 33(3)
Uvalde/Sabinal, TX.......................................... 18,528 1,373 33
Vandalia, IL................................................ 93,998 1,546 20
Waco, TX.................................................... 113,247 5,120 33(8)
Watonga, OK................................................. 23,946 893 33(7)
Weatherford, OK............................................. 28,994 737 33
Wichita Falls, TX........................................... 65,257 4,303 33
Woodward, OK................................................ 14,180 2,260 33
--------- ------- -----
Total -- Existing Markets........................... 5,268,871 149,000 1,619
========= ======= =====
</TABLE>
- ---------------
41
<PAGE> 19
(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 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 new
station filing window.
(5) 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.
(6) We operate the Radcliffe/Story City, Iowa market under a management
agreement with CS Wireless Systems, Inc., which is terminable on 30 days
notice by either party. 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."
(7) One MDS channel is subject to a pending application at the FCC that we
believe is available for grant.
(8) 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 33
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...................... 3,192,142 717
Total -- All Company Markets........................ 8,461,013 2,336
========= =====
</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 2000, or
(c) to which we otherwise expect to acquire license or lease rights in 2000.
42
<PAGE> 20
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 a 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
43
<PAGE> 21
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 plan to use a sectorized, single or multi-cell design for our two-way
Internet access service. With traditional MMDS transmissions, the signal is
transmitted in a 360 degree omni-directional pattern. Sectorizing transmissions
in a cell design (either single or multi-cell) will divide channel service areas
into pie-shaped sections, or sectors, and allow re-use of each frequency in
non-adjacent sectors, increasing the bandwidth capacity for each channel used in
the network design. For example, if we have two channels authorized for response
transmissions in a four-sector cell, 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. Cellularization of channels in
certain markets could increase both the number of households our signal can
reach and the market's available bandwidth capacity; however, this type of
system design is more expensive to construct than a single-cell system.
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.
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.
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
44
<PAGE> 22
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. MMDS 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, Lucent, Conifer
Corporation and California Amplifier, Inc. Hybrid Networks currently is the
primary provider of wireless Internet modems to MMDS operators. In August 1999,
Sprint announced that it had agreed to buy $11.0 million of convertible
debentures in Hybrid, as well as $10.0 million of equipment from Hybrid to be
used in Sprint's MMDS wireless broadband service. We believe that Sprint's
announcement should facilitate Hybrid's production of wireless Internet modems.
In addition to Hybrid, we have identified other suppliers that we believe
will become sources of modems by the end of the second quarter of 2000.
Furthermore, in October 1999, Cisco announced that it intended to work with 10
high-tech companies to develop an open technology standard for two-way
transmission of data, voice and video over wireless spectrum, including MMDS
spectrum. The announced companies included Broadcom Corp., Motorola, Inc., Pace
Micro Technology, Samsung, Texas Instruments, Inc. and a unit of Toshiba. We
believe that Cisco's announcement, as well as the recent announcements by MCI
and Sprint of the acquisition of MMDS spectrum covering a total of over 70
million homes, should accelerate the production of wireless modems from multiple
vendors. However, we cannot assure you that additional vendors will come to
market with an adequate supply of reliable wireless modems of satisfactory terms
and conditions in a timely manner. A lack of available modems could have a
material adverse effect on our ability to implement our business strategy in a
timely manner. See "Risk Factors."
45
<PAGE> 23
We currently are in negotiations with a potential vendor to develop and
supply to us network and customer premises equipment to be used in our wireless
broadband Internet business and future telephony business. These negotiations
currently involve, among other things, an agreement for a long-term equipment
supply, equipment financing, and technical, sales and marketing support.
Although we believe we will reach a definitive agreement on this transaction by
the end of the first quarter of 2000, we cannot assure you that we will be able
to conclude an agreement with this potential supplier by such time or at all. If
we do not reach a definitive agreement with this vendor, we believe other
vendors will be able to supply our anticipated needs through the end of 2001 and
beyond.
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 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 eight other MMDS wireless cable providers have reached an
agreement with an alternate supplier to provide the equipment, software and
technical assistance necessary to support the Pacific Monolithics systems.
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, 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
46
<PAGE> 24
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 certain areas and are
combining their DSL service with their own Internet access services. In October
1999, SBC announced plans to invest $6 billion to upgrade its telephone networks
to offer DSL service to 77 million customers by 2002. The incumbent carriers
generally have an established brand name in their service areas and possess
sufficient capital to deploy DSL services rapidly.
Inter-exchange Carriers. Many of the inter-exchange carriers, such as AT&T
Corp., MCI WORLDCOM, Inc. and Sprint 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. Also, in October 1999, MCI and Sprint announced plans to merge,
creating one of the largest telecommunications companies in the world, and the
largest owner of MMDS spectrum 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. AT&T has also announced plans
to expand its fixed-wireless network to compete for voice and high-speed data
customers in businesses and residences. We also may face competition from
satellite-based systems. 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
47
<PAGE> 25
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 wireless local loop services and VoIP.
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 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 AT&T Broadband & Internet Services
(formerly 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 and Echostar Communications Corporation. We compete with many retail
distributors of DIRECTV and other DBS service. In November 1999, Congress
enacted legislation allowing DBS providers to offer local television stations.
We do not expect DBS providers to offer local stations into a majority of our
existing local markets for some time, if at all, because of the size of these
markets; however, the growth of DBS service has been significant since it was
first launched, and we expect that the DBS service providers will continue to be
significant competitors for 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.
48
<PAGE> 26
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 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 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.
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The application and licensing process for ITFS stations is different from
those for MDS and MMDS stations. In 1995, the FCC adopted a national filing
window system. Under this system the FCC accepts applications for licenses for
new ITFS stations or major changes to existing ITFS licenses only if they are
filed within specific windows, typically five days, set by the FCC. Applications
filed in a particular window are subject only to competing proposals filed in
that same window. Where two or more applications are filed within the same
window and are predicted to cause each other harmful electrical interference,
licenses are awarded by the FCC pursuant to a comparative selection process.
In 1998, the FCC, acting pursuant to the Balanced Budget Act of 1997,
tentatively concluded that competing ITFS applications should be subject to
auction, or competitive bidding. However, because the FCC was uncertain at the
time whether its conclusion correctly reflected Congress's intent with regard to
the treatment of competing ITFS applications, it decided not to proceed
immediately with the auction of ITFS applications and to first seek
Congressional guidance on the matter. In April 1999, having received no specific
guidance from Congress, the FCC reaffirmed its previous decision to use spectrum
auctions to resolve competing ITFS applications. The FCC did, however, state
that it would amend its rules regarding ITFS auctions if Congress were to
specify a change to the FCC's auction authority in this regard.
Generally, in the case of MDS, MMDS and ITFS stations, the FCC issues the
station licensee a conditional license, allowing construction of the station to
commence. The station may be constructed and operated only in accordance with
the parameters set forth in the license. Channel transmission generally must
begin within one year of grant of the conditional license in the case of
incumbent MDS/MMDS licenses, 18 months in the case of ITFS licenses and five
years for BTA MDS/MMDS licenses. If channel construction deadlines for a license
are not met, then (1) the FCC may revoke the license or (2) in the case of the
BTA licenses, reduce the license service area if less than two-thirds of the
population of the BTA service area is capable of being reached by a station
signal by the expiration of the five-year BTA build-out period. Although FCC
rules permit parties to request extensions of channel construction deadlines,
the FCC is not required to grant extensions. We believe that we have satisfied
all construction deadlines relating to our licensed stations except for those
licenses for which the deadline has not yet passed or for which we have received
an extension.
MDS, MMDS and ITFS licenses generally have terms of 10 years. All
"incumbent" MDS/MMDS licenses expire on May 1, 2001. All BTA MDS/MMDS licenses
expire on March 28, 2006. Licenses may be renewed through applications filed
with the FCC within a certain period before expiration of the license term, and
petitions to deny applications for renewal may be filed by other parties during
certain periods following the filing of such applications. The FCC may revoke or
cancel licenses for violations of the Communications Act or the FCC's rules and
policies. 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
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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 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
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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
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 some time in the second quarter of 2000. 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.
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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.
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.
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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 January 3, 2000, to consummate this transfer. If we have
not consummated the transfer by that time, we intend to request an extension
from the FCC. 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 consummation of these assignments. Upon consummation of these
assignments, 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.
SBA Tower Sale. In October 1999, we signed a definitive agreement with SBA
Towers, Inc. ("SBA") to sell 34 communications towers to SBA for $7.0 million.
We will lease back space on the towers from SBA for our wireless broadband
Internet and video operations. We expect the transaction to close in the fourth
quarter of 1999. The transaction is subject to customary closing conditions. The
$7.0 million purchase price is subject to reduction if closing conditions for
some of the sites are not satisfied and, therefore, those sites are excluded
from the sale.
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 and certain of its former officers and
directors are 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). 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
allegedly misrepresented Nucentrix's financial condition in various press
releases and public filings. The plaintiffs seek unspecified
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damages, costs and expenses, including attorneys' and experts' fees. On November
2, 1998, the court granted the defendants' motion to dismiss the plaintiffs'
complaint. The plaintiffs filed an amended complaint on January 4, 1999. 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 granted
plaintiffs' permission to file an amended complaint for a second time, which the
plaintiffs have filed and to which the defendants have responded.
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 from November 15,
1995, to 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). Plaintiffs in the Thompson action allege 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. Plaintiffs' 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 plaintiffs seek unspecified compensatory and punitive
damages, costs and expenses, including attorneys' fees and experts' fees, as
well as injunctive relief relating to any proceeds derived from defendants'
stock sales, if any. The plaintiffs have alleged in a statement of the case that
their 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 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. This matter is currently set for trial in
April 2000.
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
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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 determined not to be, entitled to the benefit of the Assumed
Indemnity Obligations incur liability in any of these lawsuits, we believe that
any claim they may assert against us for indemnification, to the extent allowed
by the bankruptcy court, would be treated as Class 6 Indemnity Claims under our
plan 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 as part of our Assumed
Indemnity Obligations, subject to the exceptions described above, to the extent
the proceeds of our corporate liability insurance are insufficient to cover such
liabilities.
To the extent plaintiffs in the Coates and Thompson actions are entitled to
any recovery from us and the bankruptcy court allows any claim they may file
against us, we believe any such claim for recovery would be classified under our
plan 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 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 intend to vigorously defend the Coates and Thompson actions. While it is
not feasible to predict or determine the final outcome of these proceedings or
to estimate the amounts or potential range of loss for these matters, and while
management does not expect such an adverse outcome, management believes that an
adverse outcome in one or more of these proceedings against one or more persons
entitled to the benefit of Assumed Indemnity Obligations which, in the
aggregate, exceeds or 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
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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 seek
unspecified money damages, interest, attorneys' fees and costs. We believe that
the plaintiff's claims in the Garcia case are barred by, among other things, the
order confirming our plan 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 filed a motion with the bankruptcy court to permanently enjoin and
dismiss this matter. The bankruptcy court has heard oral arguments on the
motion, but has not rendered a decision.
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 unenforceable and usurious. 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 these 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, 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 February 22, 2000.
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, management
believes that an adverse outcome in one or more of these proceedings could have
a material adverse effect on our financial condition, results of operations or
cash flows.
Motion to Revoke Order of Confirmation. In September 1999, we received
notice that a Motion to Revoke Order of Confirmation had been filed pro se in
the U.S. Bankruptcy Court for the District of Delaware (No. 98-2692-JJF) by two
former stockholders of Heartland Wireless Communications, Inc., seeking to
revoke the order of the bankruptcy court confirming our plan of reorganization
under Chapter 11 of the U.S. Bankruptcy Code. The motion asserts that we
procured the order confirming our plan of reorganization by fraudulently
undervaluing our enterprise value, and seeks to set aside the order. While it is
not feasible to predict or determine the final outcome of this proceeding, and
while management does not expect such an outcome, an adverse outcome in this
proceeding could result in the discharge of our debt under our plan of
reorganization being revoked and we could be placed back in reorganization under
Chapter 11. We have filed a motion to dismiss the motion to revoke, believe the
motion to revoke is without merit and intend to vigorously oppose the motion to
revoke. Our motion to dismiss the motion to revoke is under consideration by the
bankruptcy court. See "Risk Factors" and "Reorganization."
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 December 1, 1999, we had approximately 640 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.
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PROPERTIES
We lease approximately 24,000 square feet of office space for our executive
offices in Plano, Texas. Approximately 1,380 square feet of this space is
subleased to CS Wireless. We lease approximately 9,600 square feet of space for
telemarketing, customer care operations and training facilities in Denison,
Texas. We believe that the facilities described above are leased at fair market
value and are adequate for the foreseeable future.
The principal physical assets of our operating systems consist of satellite
signal reception equipment, radio transmitters and transmission 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 leases 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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