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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-23694
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Nucentrix Broadband Networks, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 73-1435149
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
200 Chisholm Place, Suite 200, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code (972) 423-9494
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N/A
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Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report.
Indicate by check X whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Shares Outstanding
Class as of November 1, 1999
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Common Stock, $.001 par value 10,099,717
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
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SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 23,954 $ 30,676
Restricted assets - investment in debt securities 626 1,011
Subscriber receivables, net of allowance for
doubtful accounts of $610 and $348, respectively 1,256 1,560
Other receivables 1,946 1,312
Prepaid expenses and other 1,349 1,563
---------- ----------
Total current assets 29,131 36,122
Systems and equipment, net 53,101 61,037
License and leased license investment, net 74,868 79,703
Note and lease receivables 3,294 3,901
Other assets, net 3,523 5,269
---------- ----------
Total assets $ 163,917 $ 186,032
========== ==========
Liabilities not subject to compromise:
Current liabilities:
Accounts payable and accrued expenses $ 13,488 $ 11,915
Current portion of long-term debt 1,785 2,019
---------- ----------
Total current liabilities 15,273 13,934
---------- ----------
Long-term debt, less current portion 12,975 14,258
Minority interest in subsidiaries 149 149
Liabilities subject to compromise -- 322,781
Commitments and contingencies (note 7)
Stockholders' equity:
Common stock, $.001 par value; authorized
50,000,000 shares, 19,795,521 shares outstanding at
December 31, 1998, all canceled as of April 1, 1999 -- 20
Common stock, $.001 par value; authorized
30,000,000 shares, 10,089,460 shares outstanding as
of September 30, 1999 10 --
Preferred stock, $0.001 par value; 15,000,000 shares
authorized; none issued -- --
Additional paid-in capital 147,043 261,943
Accumulated deficit (11,533) (426,695)
Treasury stock, at cost, 13,396 shares at December 31,
1998, all canceled as of April 1, 1999 -- (358)
---------- ----------
Total stockholders' equity 135,520 (165,090)
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$ 163,917 $ 186,032
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NUCENTRIX BROADBAND NETWORKS, INC.
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Successor (note 2) Predecessor (note 2)
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Three Three
Months Ended Months Ended
September 30, September 30,
1999 1998
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<S> <C> <C>
REVENUES $ 16,577 $ 18,213
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OPERATING EXPENSES:
System operations 8,042 8,787
Selling, general and administrative 8,394 10,432
Depreciation and amortization 6,035 12,228
Impairment of long-lived assets -- 88,095
------------ ----------
Total operating expenses 22,471 119,542
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Operating loss (5,894) (101,329)
OTHER INCOME (EXPENSE):
Interest income 376 646
Interest expense (272) (10,040)
Equity in losses of affiliates -- (11,681)
Other income (expense), net (179) 0
------------ ----------
Total other income (expense) (75) (21,075)
------------ ----------
Loss before reorganization costs and
extraordinary item (5,969) (122,404)
Reorganization costs (459) (596)
------------ ----------
Loss before extraordinary item (6,428) (123,000)
Extraordinary item:
Gain on debt forgiveness -- --
------------ ----------
NET INCOME (LOSS) $ (6,428) $ (123,000)
============ ==========
BASIC AND DILUTED NET LOSS PER NEW COMMON SHARE $ (0.64) N/A
============ ==========
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 10,060,000
============
<CAPTION>
Successor (note 2) Predecessor (note 2)
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Period from Period from Nine
Effective Date to anuary 1, 1999 to Months Ended
September 30, Effective September 30,
1999 Date 1998
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<S> <C> <C> <C>
REVENUES $ 33,388 $ 18,086 $ 55,934
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OPERATING EXPENSES:
System operations 16,229 8,599 27,071
Selling, general and administrative 17,246 9,156 27,774
Depreciation and amortization 11,528 5,953 34,681
Impairment of long-lived assets -- -- 105,791
------------ --------- ----------
Total operating expenses 45,003 23,708 195,317
------------ --------- ----------
Operating loss (11,615) (5,622) (139,383)
OTHER INCOME (EXPENSE):
Interest income 744 423 2,137
Interest expense (581) (321) (30,005)
Equity in losses of affiliates -- -- (30,340)
Other income (expense), net 521 2 (10)
------------ --------- ----------
Total other income (expense) 684 104 (58,218)
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Loss before reorganization costs and
extraordinary item (10,931) (5,518) (197,601)
Reorganization costs (602) (2,311) (1,242)
------------ --------- ----------
Loss before extraordinary item (11,533) (7,829) (198,843)
Extraordinary item:
Gain on debt forgiveness -- 173,783 --
------------ --------- ----------
NET INCOME (LOSS) $ (11,533) $ 165,954 $ (198,843)
============ ========= ==========
BASIC AND DILUTED NET LOSS PER NEW COMMON SHARE $ (1.15) N/A N/A
============ ========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED 10,035,000
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
SUCCESSOR (NOTE 2) PREDECESSOR (NOTE 2)
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PERIOD FROM
PERIOD FROM JANUARY 1, NINE MONTHS
EFFECTIVE DATE TO 1999 TO ENDED
SEPTEMBER 30, 1999 EFFECTIVE DATE SEPTEMBER 30, 1998
------------------ -------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (11,533) $ 165,954 $ (198,843)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary gain on debt forgiveness -- (173,783) --
Depreciation and amortization 11,528 5,953 34,681
Debt accretion and debt issuance cost amortization -- -- 4,813
Equity in losses of affiliates -- -- 30,340
Impairment of undeveloped licenses -- -- 105,791
Other -- -- 81
Changes in assets and liabilities:
Restricted assets - investment in debt securities 385 -- --
Subscriber and other receivables 624 (954) (147)
Prepaid expenses and other 222 (158) (763)
Accounts payable and accrued expenses (1,317) 2,890 18,392
---------- ---------- ----------
Net cash used in operating activities (91) (98) (5,655)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of assets -- -- 236
Purchases of systems and equipment (3,772) (2,534) (10,438)
Proceeds from sale of debt securities -- -- 8,731
Proceeds from note and lease receivables 158 138 --
Other (46) (16) --
---------- ---------- ----------
Net cash used in investing activities (3,660) (2,412) (1,471)
---------- ---------- ----------
Cash flows from financing activities:
Payments on short-term borrowings and notes payable (224) (241) (1,100)
Payments on long-term debt (717) (335) --
Proceeds from exercise of stock options 1,056 -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities 115 (576) (1,100)
---------- ---------- ----------
Net decrease in cash and cash equivalents (3,636) (3,086) (8,226)
Cash and cash equivalents at beginning of period 27,590 30,676 42,821
---------- ---------- ----------
Cash and cash equivalents at end of period $ 23,954 $ 27,590 $ 34,595
========== ========== ==========
Cash paid for interest $ 503 $ 391 $ 9,775
========== ========== ==========
Cash paid for reorganization costs $ 820 $ 2,311 $ 1,242
========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
(1) Description of Business
Nucentrix Broadband Networks, Inc. (the "Company"), formerly Heartland
Wireless Communications, Inc., provides wireless broadband network and
multichannel subscription television services using up to 196 megahertz
("MHz") of radio spectrum in the 2.1 gigahertz ("GHz") to 2.7 GHz
range, primarily in medium and small markets in the central United
States. The Company owns the basic trading area ("BTA") authorization,
or otherwise licenses or leases spectrum allocated by the Federal
Communications Commission ("FCC") as Multichannel Multipoint
Distribution Service ("MMDS"), Multipoint Distribution Service ("MDS")
and Instructional Television Fixed Service ("ITFS"), in 87 markets.
This spectrum collectively is commonly referred to as "MMDS" and,
unless otherwise noted, is referred to in this Form 10-Q as MMDS. The
Company also leases 20 MHz of Wireless Communications Service ("WCS")
spectrum from CS Wireless Systems, Inc. ("CS Wireless") in 19 markets.
The Company provides two-way high-speed Internet access services,
primarily to businesses and small offices/home offices ("SOHOs"). The
Company currently offers Internet access service under temporary
developmental FCC licenses in Austin and Sherman/Denison, Texas,
providing service to over 100 business customers. Through its
wholly-owned subsidiary, Heartland Cable Television, Inc. ("Heartland
Cable"), the Company also provides multichannel subscription television
service in 58 markets, including one market operated under a management
arrangement with CS Wireless. Heartland Cable's video offerings include
an average of 26 analog video channels in 58 markets and up to 185
digital channels from DIRECTV, Inc. ("DIRECTV") and its distributors in
51 of the 58 markets, in combination with Heartland Cable's service or
as a stand-alone offering. At November 1, 1999, Heartland Cable
provided multichannel video service to approximately 150,700
subscribers, including approximately 21,600 subscribers who received
DIRECTV programming sold and serviced by Heartland Cable.
(2) Chapter 11 Reorganization
On December 4, 1998, the Company filed a voluntary, pre-negotiated Plan
of Reorganization (the "Plan" or "Plan of Reorganization") under
Chapter 11 of the U.S. Bankruptcy Code. On March 15, 1999, the
Bankruptcy Court confirmed the Plan, and the Company emerged from
Chapter 11 on April 1, 1999 (the "Effective Date").
The Company adopted Fresh Start Reporting as of the Effective Date, in
accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"). Fresh Start
Reporting results in a new reporting entity with assets and liabilities
adjusted to estimated fair value and beginning retained earnings set to
zero. Liabilities subject to compromise are adjusted to zero in
connection with their cancellation under the Plan. The effects of the
Plan and the application of Fresh Start Reporting on the Company's
condensed consolidated balance sheet at the Effective Date were as
follows:
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PREDECESSOR BASIS FRESH START REPORTING SUCCESSOR BASIS
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EFFECTIVE DATE ADJUSTMENTS EFFECTIVE DATE
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(In thousands)
<S> <C> <C> <C>
Current assets $ 33,931 $ 33,931
Systems & equipment, net 59,513 $ (2,917)(B) 56,596
License and leased license investment, net 78,088 78,088
Note and lease receivables 3,763 3,763
Other assets, net (4,750)(A)
5,222 3,802 (B) 4,274
---------- ---------- ----------
$ 180,517 $ (3,865) $ 176,652
========== ========== ==========
Current liabilities $ 16,651 $ 16,651
Long-term debt, less current portion 13,855 13,855
Minority interest in subsidiaries 149 149
Liabilities subject to compromise 322,781 $ (322,781)(A) --
Stockholders' equity(deficit):
Old common stock 20 (20)(B) --
Additional paid-in capital 261,943 (261,943)(B) --
Accumulated deficit (434,524) 318,031 (A) --
116,493 (B)
Treasury stock - 13,396 shares at cost (358) 358 (B) --
New common stock -- 10 (B) 10
New preferred stock -- -- --
New additional paid-in capital -- 145,987 (B) 145,987
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Total stockholders' equity (deficit) (172,919) 318,916 145,997
---------- ---------- ----------
$ 180,517 $ (3,865) $ 176,652
========== ========== ==========
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(A) Reflects the discharge of debt (liabilities subject to compromise) and
write-off of related unamortized debt discounts and debt issuance
costs.
(B) Reflects the issuance of new shares of the Company's common stock to
the holders of senior notes and convertible notes, and the allocation
of reorganization value to identifiable tangible and intangible assets,
based on the estimated fair value of the assets, and the adjustment to
eliminate the Company's common stock outstanding as of the Effective
Date (which was canceled pursuant to the Plan) and to reset beginning
retained earnings of the Company to zero in accordance with Fresh Start
Reporting.
As a result of the application of Fresh Start Reporting, financial
information in the accompanying unaudited condensed consolidated financial
statements as of September 30, 1999, and for the period from the Effective
Date to September 30, 1999 (the "Successor Period"), is presented on a
different basis than the financial information as of December 31, 1998, and
for the three and nine months ended September 30, 1998, and for the period
January 1, 1999, to the Effective Date (the "Predecessor Period").
Accordingly, such information is not comparable. The Predecessor Period
includes operations through March 31, 1999, plus the gain on debt
forgiveness recognized on the Effective Date. The Successor Period includes
operations for the Effective Date through September 30, 1999.
As a result of the cancellation of the senior notes and convertible notes
and common stock outstanding at the Effective Date, and the issuance of new
shares of common stock and warrants in accordance with the Plan, certain
tax attributes of the Company must be permanently reduced. These reductions
may be applied to one or more tax items, including but not limited to
pre-bankruptcy net operating loss carryforwards, the tax basis of certain
assets and the tax basis of subsidiary stock ("Tax Attribute Reduction").
Management is currently considering the impact of alternatives available to
the Company in performing this Tax Attribute Reduction, but has not yet
concluded which alternative it will select. Accordingly, amounts allocated
to the successor assets and liabilities at the Effective Date may be
revised and such revisions could be material. Management
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will endeavor to select that Tax Attribute Reduction alternative which will
best meet its business objectives and maximize future tax benefits. The
cancellation of debt will not be treated as taxable income under any of the
alternatives.
In addition to the permanent Tax Attribute Reduction, the Company must also
limit the annual deduction of pre-bankruptcy net operating losses and
"built-in-deductions" to an amount no greater than the fair market value of
the Company immediately after the restructuring, multiplied by the
long-term tax exempt rate. This annual limitation is currently estimated to
be approximately $7.3 million.
At the present time management has not yet determined how much, if any,
pre-bankruptcy net operating losses will be available to offset
post-bankruptcy income. In the current quarter, the Company has continued
to experience losses and does not believe that the prospective Tax
Attribute Reduction will have a material impact on the Company's condensed
consolidated financial statements.
In connection with the Plan, the Company recorded an extraordinary gain of
approximately $174.0 million related to the discharge of liabilities
subject to compromise. This extraordinary gain is not taxable to the
Company pursuant to Federal income tax law because it arose in connection
with the Company's recapitalization under Chapter 11 of the U.S. Bankruptcy
Code. It will, however, result in a permanent Tax Attribute Reduction to be
determined as discussed above.
(3) Liquidity and Capital Resources
The Company's condensed consolidated financial statements have been
presented on a going concern basis which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.
In October 1999 the Company announced that it had signed a definitive
agreement for the sale and leaseback of 34 of its communications towers,
under which it expects to receive $7.0 million in the fourth quarter of
1999. This transaction is subject to customary closing conditions. The
Company also expects to receive approximately $4.5 million in the fourth
quarter of 1999 in exchange for its equity interest in Wireless One, Inc.
("Wireless One"), which the Company expects will announce confirmation of
its plan of reorganization in the fourth quarter of 1999. Additionally,
from time to time the Company has been engaged in discussions with vendors
and prospective vendors regarding financing of equipment necessary in the
build-out of two-way wireless broadband communications systems.
Although the Company does not expect to generate sufficient cash flow to
fully implement its long-term business strategy without additional capital
or financing, management expects that cash on hand and cash generated from
operations, the tower sale-leaseback and the Wireless One equity exchange
will be sufficient to fund operations and capital requirements at least
until the end of 2000. On August 4, 1999, the Company filed a registration
statement with the Securities and Exchange Commission ("SEC") relating to
the proposed offering by the Company of 2 million shares of common stock.
The SEC has notified the Company that the Company may request, and the
staff would grant, acceleration of the effectiveness of the registration
statement. To date the Company has not requested such acceleration and has
not determined when, or if, it will request acceleration of its
registration statement. The Company may determine to delay or withdraw such
offering, depending upon market conditions and equipment financing
opportunities, among other things.
The Company may seek additional capital or financing in 2000 if it
accelerates the implementation of its business strategy, if it consummates
significant acquisitions or alliances or if its operating assumptions prove
to be inaccurate. In any event, the Company likely will seek additional
capital or financing before the end of 2001 in order to implement its
long-term business strategy. Options include the sale of debt or equity
securities, including acceleration of the above-referenced registration
statement, borrowings under secured or unsecured loan arrangements,
including vendor equipment financing, and sales of assets.
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(4) Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the
Company and its majority-owned subsidiaries. Significant intercompany
balances and transactions between the entities have been eliminated in
consolidation.
(5) Interim Financial Information
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of September 30, 1999, and the
results of operations and cash flows for the three months ended September
30, 1999, the period from January 1, 1999, to the Effective Date, the
Effective Date to September 30, 1999, and the three and nine months ended
September 30, 1998. These results are not necessarily indicative of the
results to be expected for the full fiscal year. The accompanying financial
statements are for interim periods and should be read in conjunction with
the audited Consolidated Financial Statements of the Company for the year
ended December 31, 1998, included in the Company's Form 10-K for the year
ended December 31, 1998.
(6) Net Loss Per Common Share - Basic and Diluted
The Company has presented (1) basic loss per share, computed on the basis
of the weighted average number of common shares outstanding during the
period, and (2) diluted loss per share, computed on the basis of the
weighted average number of common shares and all dilutive potential common
shares outstanding during the period. Common stock options (and other
potentially dilutive equity securities) have not been included in the
calculation of diluted loss per share because their effects are
antidilutive. Earnings per share information has not been presented for the
Predecessor Period as the Company was recapitalized on the Effective Date,
in connection with the Plan, and accordingly, per share amounts are not
comparable between the Predecessor and Successor Periods.
(7) Commitments and Contingencies
At September 30, 1999, the Company and/or certain of its former directors
and officers to whom the Company may have indemnity obligations were
co-defendants in one securities lawsuit with two plaintiffs, and one
purported securities class action lawsuit. See Part II, Item 1 "Legal
Proceedings." These actions allege, among other things, various violations
of federal and state securities laws. In addition, the Company was a party
to two purported class action lawsuits alleging, among other things, that
the Company overcharged its customers for administrative late fees and that
such fees were usurious.
On July 8, 1999, the securities lawsuit noted above involving two
plaintiffs was dismissed without prejudice for the second time for
plaintiffs' failure to state a claim. The plaintiffs have filed an amended
complaint, to which the individual defendants have responded.
The Company filed a motion in U. S. Bankruptcy Court to enjoin and dismiss
one of the two pending purported late fee class action lawsuits because of
the plaintiff's failure to file a proof of claim in the Company's Chapter
11 proceedings. The Court has heard oral arguments on the motion, but has
not rendered a decision.
In September 1999, the Company received notice that a Motion to Revoke
Order of Confirmation had been filed pro se in U.S. Bankruptcy Court by two
former stockholders in Heartland Wireless Communications, Inc. The Motion
asserts that the Company procured the Order of Confirmation in its Chapter
11 proceeding by
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fraud, and seeks to set aside such Order. The Company has responded to this
Motion, believes the Motion is without merit, and intends to vigorously
defend the matter.
The Company intends to vigorously defend all of the above matters. While it
is not feasible to predict or determine the final outcome of these
proceedings or to estimate the amounts or potential range of loss with
respect to these matters, and while management does not expect such an
adverse outcome, an adverse outcome in one or more of these proceedings
that exceeds or otherwise is excluded from applicable insurance coverage
could have a material adverse effect on the Company's consolidated
financial condition, results of operations or cash flows.
The Company is also a party to other legal proceedings, a majority of which
are incidental to its business. In the opinion of management, and after
consideration of amounts recorded in the accompanying consolidated
financial statements, the ultimate effects of such other matters are not
expected to have a material adverse effect on the Company's consolidated
financial condition, results of operations or cash flows.
The Company has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission, which expire through
2004. The agreements generally require monthly payments based upon the
number of subscribers to the Company's television service, subject to
certain minimums.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis should be read in conjunction with the Company's
unaudited condensed consolidated financial statements and notes thereto.
OVERVIEW
The Company provides wireless broadband, or high capacity, network and
multichannel subscription television services using up to 196 MHz of radio
spectrum in the 2.1 GHz to 2.7 GHz range, primarily in medium and small markets
in the central United States. The Company owns the BTA authorization, or
otherwise licenses or leases MMDS, MDS and ITFS spectrum in 87 markets. The
Company also leases 20 MHz of WCS spectrum from CS Wireless in 19 markets. CS
Wireless has agreed to transfer this spectrum to the Company. The closing of
this agreement is subject to approval by the FCC and the execution by CS
Wireless and the Company of an agreement on two-way frequency coordination in
adjacent markets.
Historically, the Company has used its spectrum to provide wireless
multichannel subscription television services, commonly referred to as "wireless
cable." Through the Company's wholly-owned subsidiary, Heartland Cable, the
Company currently is the largest operator of wireless cable systems in the
United States in terms of subscribers. Going forward, the Company's goal is to
become a leading provider of wireless broadband services in its markets, while
expanding into additional medium-sized markets through acquisition of additional
MMDS spectrum licenses. The Company also intends to explore acquisitions of, and
strategic alliances with, other providers of Internet access, broadband and
telephony services, such as traditional Internet service providers or "ISPs,"
direct subscriber line or "DSL" providers, other fixed-wireless service
providers in licensed or unlicensed frequencies and competitive local exchange
carriers or "CLECs."
Heartland Cable provides an average of 26 analog channels of cable
television and local broadcast network programming to 58 operating markets in
the central United States, including one market operated under a management
arrangement with CS Wireless, pending consummation of an agreement to assign
this market to the Company. Heartland Cable also offers up to 185 channels of
digital direct broadcast satellite ("DBS") programming from DIRECTV and its
distributors in 51 of its operating markets. At November 1, 1999, the Company
had wireless cable channel rights in 87
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markets and Heartland Cable provided wireless multichannel video service to
approximately 150,700 subscribers, including approximately 21,600 subscribers
who received DIRECTV programming sold and serviced by Heartland Cable.
The Company also provides two-way high-speed wireless Internet access
services primarily to businesses and SOHOs. The Company currently offers
high-speed Internet access under temporary developmental FCC licenses in Austin
and Sherman/Denison, Texas, providing service to over 100 business customers.
The Company, through national independent contractors, also offers technical
support, e-mail, Web design and hosting and domain name registration and
maintenance in connection with its high-speed Internet access business.
In connection with the FCC's rules on MMDS two-way communications services
that were adopted in September 1998 and finalized in July 1999, the FCC has
stated that it will announce a one-week "filing window" for applications for
two-way authorizations. The Company currently expects the FCC to open this
window in the second quarter of 2000, at which time the Company intends to file
two-way applications for a number of its markets, including Austin and
Sherman/Denison. All such applications must meet FCC interference protection
rules or contain the consent of co-channel and adjacent channel licensees in the
Company's markets and neighboring markets. All complete applications that have
not been opposed within 120 days after the close of the filing window will be
granted. Although the Company believes it will be able to file for and receive
two-way authorizations to replace its developmental authorizations in Austin and
Sherman/Denison, there can be no assurance that it will receive such
authorizations in these or other markets.
EBITDA
"EBITDA," or earnings before interest, taxes, depreciation and
amortization, is widely used by analysts, investors and other interested parties
in the Internet, cable television and telecommunications industries. EBITDA is
also a widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA is not a financial measure determined
under generally accepted accounting principles and should not be considered as
an alternative to net income as a measure of operating results or to cash flows
from operating activities as a measure of funds available for discretionary or
other liquidity purposes. In addition, EBITDA as presented by the Company is not
necessarily consistent with the presentation of EBITDA by other companies.
FORWARD-LOOKING STATEMENTS
Certain statements in this report relating to the Company's operating
results, and plans and objectives of management for future operations, including
plans or objectives relating to the Company's business strategy and financing
needs, are forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "intends,"
"will," "should," "anticipates," "plans" or comparable terminology or by
discussions of strategy. Such statements reflect the Company's current view
relating to future events and are based on an assessment of, and are subject to,
a variety of factors, contingencies, risks, assumptions and uncertainties deemed
relevant by management, including (i) the supply of wireless broadband customer
premises and transmission equipment for two-way Internet, data, wireless local
loop and Internet protocol or "IP" telephony services provided over MMDS
spectrum, (ii) the ability to obtain two-way authorizations from the FCC for
Internet and other wireless broadband services, (iii) business and economic
conditions in the Company's existing markets, and (iv) competitive products and
services, as well as those matters discussed specifically elsewhere herein. As a
result, the actual results realized by the Company could differ materially from
the statements made herein. Investors are cautioned not to place undue reliance
on the forward-looking statements made in this report.
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FINANCIAL RESTRUCTURING
On December 4, 1998, the Company filed a voluntary, pre-negotiated Plan of
Reorganization (the "Plan of Reorganization" or "Plan") under Chapter 11 of the
U.S. Bankruptcy Code. The Plan was confirmed by the Bankruptcy Court on March
15, 1999, and became effective on April 1, 1999 (the "Effective Date").
Pursuant to the Plan, on the Effective Date the Company's senior notes,
convertible notes and all outstanding shares of common stock, options and
warrants were canceled and (i) in exchange for the senior notes, the Company
distributed pro rata to the holders thereof 9.7 million shares of common stock,
and (ii) in exchange for the convertible notes, the Company distributed pro rata
to the holders thereof 300,000 shares of common stock and warrants to acquire
825,000 shares of common stock at a per share exercise price of $27.63, subject
to adjustment to between $12.37 and $24.74 in the event of a purchase of all of
the Company's common stock or assets for cash and other consideration on or
before April 1, 2004. The term of the warrants is eight and one-half years from
the Effective Date.
The Company also is obligated under the Plan to issue (i) warrants to
acquire an additional 275,000 shares of common stock, and (ii) additional shares
of common stock, which the Company does not believe will exceed 75,000, to
satisfy certain miscellaneous unsecured claims that may be allowed by the
Bankruptcy Court, including claims related to contract disputes, lease rejection
claims, tort claims (except for personal injury or wrongful death claims) and
indemnity claims. As of November 1, 1999, none of the 275,000 warrants had been
issued, and 14,717 shares of common stock had been issued to settle
miscellaneous unsecured claims. The 275,000 warrants will be allocated first to
holders of pre-petition bondholder litigation claims, to the extent any such
claims are allowed by the Bankruptcy Court and exceed available corporate
liability insurance proceeds; second, pro rata among holders of pre-petition
stockholder litigation claims, to the extent any such claims are allowed by the
Bankruptcy Court and exceed any available corporate liability insurance
proceeds; and third, pro rata among pre-petition holders of common stock.
Also under the Plan, the Company's old employee and nonemployee director
stock option plans were terminated, and the Company adopted a new Share
Incentive Plan ("New Stock Option Plan"). The Company is authorized to grant
awards for a total of 900,000 shares of common stock under the New Stock Option
Plan. At November 1, 1999, the Company had granted options to purchase a total
of 807,000 shares of common stock under the New Stock Option Plan, of which
options to purchase 85,000 shares had been exercised.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999,
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
As a result of the application of Fresh Start Reporting, financial
information in the accompanying unaudited condensed consolidated financial
statements as of September 30, 1999, and for the period from the Effective Date
to September 30, 1999 (the "Successor Period"), is presented on a different
basis than the financial information as of December 31, 1998, and for the three
and nine months ended September 30, 1998, and for the period January 1, 1999,
through the Effective Date (the "Predecessor Period"). Accordingly, such
information is not comparable. However, for purposes of comparison discussions
below, the nine months ended September 30, 1999, represents the combined amounts
for the period January 1, 1999 through the Effective Date, and the period from
the Effective Date through September 30, 1999. The Predecessor Period includes
operations through March 31, 1999, plus the gain on debt forgiveness recognized
on the Effective Date. The Successor Period includes operations for the
Effective Date through September 30, 1999. The most significant impact of Fresh
Start Reporting on the Company's operating results is decreased depreciation,
amortization and interest expense.
Revenues; Subscribers. The Company's revenues consist of fees generated
from start-up Internet operations in Austin and Sherman/Denison, Texas, monthly
fees paid by multichannel video subscribers for basic programming, equipment
rental and other miscellaneous fees. The Company's revenues for the third
quarter of 1999, consisting primarily of revenues from the Company's video
business, were $16.6 million, compared to $18.2 million for the third quarter of
1998. Revenues for the nine months ended September 30, 1999, were $ 51.5
million, compared to $55.9
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million for the same period last year. The average number of video subscribers
for the three months ended September 30, 1999, was 153,971 compared to 167,142
for the same period of 1998. For the nine months ended September 30, 1999, the
average number of subscribers was 156,486 compared to 174,933 for the nine
months ended September 30, 1998. The decline in revenues over the periods
presented is the result of a decline in video subscribers coupled with a decline
in the average monthly recurring revenue per subscriber for the third quarter of
1999. The decline in video subscribers is related primarily to (i) the Company's
first system-wide price increase in the fourth quarter of 1998, which resulted
in increased disconnects by video subscribers, (ii) the Company's revision of
its equivalent basic unit ("EBU") that it uses to compute subscriber count in
multiple dwelling units ("MDUs") (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Changes in Method for Reporting
Subscribers"), (iii) decreased marketing of MMDS subscription television
services and overall increased competition for cable television services, and
(iv) a loss of subscribers in Austin in the second quarter of 1999, which
resulted from a technology conversion that caused some existing subscribers to
fall outside of the coverage range of the new technology. Internet service
revenues for the quarter and nine months ended September 30, 1999, were not
material.
The Company began operating an additional market on behalf of CS Wireless
in May 1999, which added approximately 1,650 subscribers and $133,000 in
additional revenue for the third quarter and $230,000 for the nine-month period.
On a per subscriber basis, average monthly recurring revenue per video
subscriber was $33.23 for the quarter ended September 30, 1999, compared to
$33.76 for the same quarter of 1998. The decrease was caused by the growing
number of DIRECTV subscribers in the Company's subscriber base, which generate
lower average revenues to the Company than MMDS subscribers. However, DIRECTV
offerings have a lower programming cost, which results in an overall higher
gross margin than MMDS offerings. Average monthly recurring revenue per
subscriber was $33.75 for the nine months ended September 30, 1999, compared to
$33.78 for the same period last year. Year-to-date average revenue per
subscriber was essentially flat compared to the same period last year, as the
increases caused by a greater percentage of customers purchasing premium
services was offset by a higher proportion of DIRECTV customers.
System Operations Expense. Systems operations expense includes programming
costs, channel lease payments, labor and overhead relating to service calls and
churn, transmitter site and tower rentals, certain repairs and maintenance
expenditures and Internet service costs. Programming costs (with the exception
of minimum payments) and channel lease payments (with the exception of certain
fixed payments) are variable expenses based on the number of subscribers. System
operations expense was $8.0 million, or 48.5% of revenues, for the third quarter
of 1999, compared to $8.8 million, or 48.2% of revenues, for the third quarter
of 1998. For the nine months ended September 30, 1999, system operations expense
was $24.8 million, or 48.2% of revenues, compared to $27.1 million, or 48.4% of
revenues, for the comparable prior year period. System operations expense
decreased over both periods primarily due to lower programming expense as a
result of lower subscriber count and a larger proportion of DIRECTV subscribers,
which have lower programming costs. Average monthly churn was 3.6% and 3.1% for
the quarter and nine months ended September 30, 1999, respectively, compared to
3.7% and 3.5% for the quarter and nine months ended September 30, 1998,
respectively.
Selling, General and Administrative (SG&A) Expense. SG&A expense for the
third quarter of 1999 was $8.4 million, or 50.6% of revenues, compared to $10.4
million, or 57.3% of revenues, for the same period last year. For the nine
months ended September 30, 1999, SG&A expense was $26.4 million, or 51.3% of
revenues, compared to $27.8 million, or 49.7% of revenues, for the same period
in 1998. SG&A expense for the three and nine months ended September 30, 1999,
included $409,000 and $1.0 million, respectively, in costs associated with the
Company's Internet operations, which primarily included labor and marketing
expenses incurred to launch the Austin and Sherman/Denison markets. Excluding
Internet costs and revenues, SG&A would have been 48.2% and 49.3% of revenues
for the three and nine month periods, respectively. SG&A expense decreased for
the quarter and nine-month periods in 1999 due to decreased marketing costs and
savings from consolidation of certain market offices and management, slightly
offset by increased expenditures to improve service at the Company's customer
care center and start-up costs for the Internet access business. Excluding
Internet costs, third quarter SG&A decreased as a percent of revenues primarily
due to lower MMDS video advertising expenditures as the Company emphasized
DIRECTV marketing which requires fewer advertising dollars to promote brand
awareness.
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Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and amortization of license and
leased license investment. The Company's policy is to capitalize the excess of
direct costs of subscriber installations over installation fees. These direct
costs include reception materials and equipment on subscriber premises and
installation labor and overhead. These direct costs are capitalized as systems
and equipment in the accompanying condensed consolidated balance sheets.
Depreciation and amortization expense was $6.0 million and $17.5 million for the
three months and nine months ended September 30, 1999, respectively, compared to
$12.2 million and $34.7 million for the three months and nine months ended
September 30, 1998, respectively. The decrease in depreciation expense over the
periods presented was due to a write-down of certain long-lived assets to
estimated fair market value during 1998, in accordance with Statement of
Financial Accounting Standards No. 121.
Operating Loss. The Company generated operating losses of $5.9 million and
$17.2 million for the three and nine months ended September 30, 1999,
respectively, compared to $101.3 million and $139.4 million for the three and
nine months ended September 30, 1998, respectively. Excluding the write-down of
long-lived assets in the second and third quarters of 1998, operating loss for
the nine months ended September 30, 1999, improved $16.3 million from the prior
year. This was primarily due to lower programming costs, as well as lower
depreciation expense resulting from the write-down of assets to estimated fair
market value during 1998 in accordance with Statement of Financial Accounting
Standards No. 121, offset somewhat by the decrease in revenues between periods.
Consolidated EBITDA, excluding the impairment of long-lived assets charge
recorded in 1998, was a positive $141,000 and a positive $244,000 for the three
and nine months ended September 30, 1999, respectively, compared to a negative
$1.0 million and a positive $1.1 million for the three and nine months ended
September 30, 1998, respectively. EBITDA decreased during the 1999 nine-month
period presented due to lower revenues resulting from fewer subscription
television subscribers and higher SG&A expenses related to the Company's launch
of its Internet operations.
Interest Income. Interest income was $376,000 and $1.2 million for the
three and nine months ended September 30, 1999, respectively, compared to
$646,000 and $2.1 million for the three and nine months ended September 30,
1998, respectively. The decrease in interest income was due to higher interest
earnings in the first three months of 1998 on larger escrowed balances
segregated for the payment of interest on senior notes, which were paid in April
1998, combined with lower overall cash balances in the current year due to
payment of reorganization costs.
Interest Expense. The Company incurred interest expense of $272,000 and
$902,000 for the three and nine months ended September 30, 1999, respectively,
compared to $10.0 million and $30.0 million for the three and nine months ended
September 30, 1998, respectively. Interest expense decreased in 1999 because the
Company discontinued the accrual of interest on its senior notes and convertible
notes upon filing its voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code on December 4, 1998. These notes were fully discharged upon confirmation of
the Plan of Reorganization on March 15, 1999, and removed from the Company's
books in accordance with Fresh Start Reporting on April 1, 1999, the Effective
Date of the reorganization. Consequently, no interest expense was incurred on
these senior and convertible notes during 1999. If interest had continued to be
accrued, total interest expense would have been $12.6 million for the period
from January 1, 1999, through the Effective Date.
Equity in Losses of Affiliates. The Company recorded equity in losses of
affiliates of $30.3 million for the nine months ended September 30, 1998, during
which time the Company owned approximately 20% of the outstanding common stock
of Wireless One, and approximately 36% of the outstanding common stock of CS
Wireless. Losses recorded in prior years for Wireless One reduced the Company's
investment balance to zero in November 1997. During the second quarter of 1998,
the Company wrote off $6.8 million of its excess cost in CS Wireless and during
the third quarter of 1998, the Company wrote off its remaining investment
balance of $11.7 million based on losses incurred by CS Wireless. In December
1998, the Company sold its 36% equity interest in CS Wireless to CAI Wireless
Systems, Inc. Accordingly, no losses from affiliates were recorded in 1999.
Other Income/Expense. Other income increased during the three and
nine-month periods as the result of cash settlements from certain litigation
matters. Other expense during the current three-month period includes losses on
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disposal of obsolete reception facilities, including charges to dismantle and
remove such equipment from operating markets.
Reorganization Costs. During the nine months ended September 30, 1999, the
Company incurred $2.9 million in expenses related to its reorganization under
Chapter 11. These costs were for financial and legal advisors, accountants and
administrative costs.
Gain on Debt Forgiveness. In connection with the Plan, the Company recorded
an extraordinary gain of approximately $173.8 million reflecting the
extinguishment of liabilities subject to compromise in exchange for common stock
and warrants. On the Effective Date, the Company's senior notes and convertible
notes totaling approximately $318.0 million, including the interest accrued
thereon and associated unamortized discounts and debt issuance costs, were
canceled and exchanged for 10 million shares of newly-issued common stock and
warrants to acquire 825,000 shares of common stock, with a combined fair value
of $144.2 million. This extraordinary gain is not taxable to the Company
pursuant to Federal income tax law because it arose in connection with the
Company's recapitalization under Chapter 11 of the U.S. Bankruptcy Code. It
will, however, result in a permanent Tax Attribute Reduction to be determined,
as discussed in note 2 of Notes to Condensed Consolidated Financial Statements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Cash Requirements."
Net Loss. The Company has recorded net losses since inception. Excluding
the extraordinary gain on debt forgiveness discussed above, the Company incurred
net losses of $7.8 million for the Predecessor Period January 1, 1999, through
the Effective Date and net losses of $11.5 million for the Successor Period. Net
loss for the third quarter ended September 30, 1999, was $6.4 million, compared
to $23.2 million for the third quarter of the prior year, excluding certain
nonrecurring impairment charges in the third quarter of 1998. The improvement in
net loss resulted primarily from lower depreciation expense related to the
nonrecurring impairment charges, lower interest expense due to the cancellation
of approximately $318.0 million in debt in the Company's financial
restructuring, cost savings from consolidation of certain market offices and
management, and decreased video marketing expenses. Per share amounts are not
comparable between the Predecessor and Successor Periods and, accordingly, are
not presented or discussed for the Predecessor Period.
LIQUIDITY AND CAPITAL RESOURCES
The wireless broadband network business is capital-intensive. Since
inception, the Company has expended funds to lease or otherwise acquire MMDS
channel rights in various markets and systems in operation, to construct
operating systems and to finance initial system operating losses. The Company's
primary sources of capital have been from subscription fees, debt financing, the
sale of common stock and the sale of MMDS channel rights that were not part of
the Company's strategic plan. The growth of the Company's business will require
substantial investment for the development and launch of wireless broadband
services such as high-speed Internet, wireless local loop and IP telephony
services. The approval by the FCC of flexible two-way use of the Company's
spectrum will allow the Company to deploy these new applications that the
Company believes are necessary to maximize the value of its broadband spectrum,
but will require additional capital resources to develop and implement.
The Company estimates that a launch of a new wireless broadband network
system providing high-speed Internet access in a typical non-operating market
will involve an initial expenditure of approximately $450,000 to $600,000 for
base station equipment, depending upon the type and sophistication of the
equipment, assuming the Company is able to lease transmission tower space rather
than construct a new tower. The Company believes that incremental base station
costs to launch an Internet service business in one of the Company's existing
systems will be $200,000 to $400,000. In addition, the Company estimates that
the acquisition and installation of each new Internet subscriber will cost
approximately $1,700. This includes charges for equipment, labor, overhead and
direct commissions. This may be partially offset by installation and other
up-front fees. Other launch costs include the cost of securing adequate space
for marketing and warehouse facilities in markets not previously operating a
video business, as well as costs related to employees. As a result of these
costs, operating losses are likely to be incurred by a system during the
start-up period.
Cash used in operations was $189,000 during the nine months ended September
30, 1999, compared to $5.7 million during the same period of 1998. During the
second quarter of 1998, the Company paid $8.8 million in interest on its senior
notes. No interest was paid on these notes since that time, as the Company
discontinued accruing interest
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on its senior notes when the Company filed its bankruptcy petition on December
4, 1998, and the debt was discharged effective March 15, 1999, upon confirmation
of the Plan. In addition, the Company received approximately $700,000 in
settlement of certain litigation matters. This increase in cash provided by
operations was partially offset by an increase in cash paid of $1.9 million for
reorganization costs and lower revenues resulting from fewer subscribers in
1999, net of savings from lower programming costs.
Cash used in investing activities was $6.1 million during the nine months
ended September 30, 1999, compared to $1.5 million for the same period in 1998.
Cash provided by investing activities during 1998 included $8.7 million from the
sale of debt securities held in the Company's escrow account for payment of
interest on its senior notes. Cash used for the purchase of systems and
equipment decreased $4.1 million during the nine months ended September 30,
1999, due to fewer subscriber installs in 1999, as well as tower equipment
purchases in 1998 related to channel construction in certain markets.
Cash used in financing activities was $461,000 during the nine months ended
September 30, 1999, compared to $1.1 million during the comparable 1998 period.
Cash used in the prior year was for principal payments on capital lease
obligations and other notes payable, several of which have been fully repaid.
Payments on long-term debt in the current year represent principal payments on
the Company's BTA debt, which commenced in the fourth quarter of 1998. Current
year debt payments were largely offset by $1.1 million in cash proceeds from the
exercise of employee stock options.
At November 1, 1999, the Company had approximately $23.7 million of
unrestricted cash and cash equivalents and $626,000 in restricted cash
representing collateral securing various outstanding letters of credit to
certain vendors of the Company.
FUTURE CASH REQUIREMENTS
The Company's goal is to become a leading provider of wireless broadband
network services in its markets. To implement this strategy, the Company plans
to (1) launch high-speed Internet access service to medium-sized and small
businesses in an additional 18 markets by the end of 2001, (2) increase the
Company's geographic scope for broadband network services by acquisitions or
alliances, (3) offer telephony services including wireless local loop and voice
over Internet protocol or "VOIP" services, and (4) maintain the Company's
subscription television business which, coupled with anticipated improvements in
operating costs, the Company expects should provide revenues sufficient to cover
substantially all operating costs of the subscription television business
(excluding certain unallocated corporate overhead) while the Company develops
and expands other wireless broadband businesses.
In October 1999 the Company announced that it had signed a definitive
agreement for the sale and leaseback of 34 of its communications towers, under
which it expects to receive $7.0 million in the fourth quarter of 1999. This
transaction is subject to customary closing conditions. The Company also expects
to receive approximately $4.5 million in the fourth quarter of 1999 in exchange
for its equity interest in Wireless One, which the Company expects will announce
confirmation of its plan of reorganization in the fourth quarter of 1999.
Additionally, from time to time the Company has been engaged in discussions with
vendors and prospective vendors regarding financing of equipment necessary in
the build-out of two-way wireless broadband communications systems.
Although the Company does not expect to generate sufficient cash flow to
fully implement its long-term business strategy without additional capital or
financing, management expects that cash on hand and cash generated from
operations, the tower sale-leaseback and the Wireless One equity exchange will
be sufficient to fund operations and capital requirements at least until the end
of 2000. On August 4, 1999, the Company filed a registration statement with the
SEC relating to the proposed offering by the Company of 2 million shares of
common stock. The SEC has notified the Company that the Company may request, and
the staff would grant, acceleration of the effectiveness of the registration
statement. To date, the Company has not requested such acceleration, and has not
determined when, or if,
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it will request acceleration of its registration statement. The Company may
determine to delay or withdraw such offering, depending upon market conditions
and equipment financing opportunities, among other things.
The Company may seek additional capital or financing in 2000 if it
accelerates the implementation of its business strategy, if it consummates
significant acquisitions or alliances or if its operating assumptions prove to
be inaccurate. In any event, the Company likely will seek additional capital or
financing before the end of 2001 in order to implement its long-term business
strategy. Options include the sale of debt or equity securities, including
acceleration of the above-referenced registration statement, borrowings under
secured or unsecured loan arrangements, including vendor equipment financing,
and sales of assets.
As a result of the cancellation of the Company's senior notes and
convertible notes and the issuance of new shares of common stock and warrants
under the Plan of Reorganization, certain tax attributes of the Company must be
permanently reduced. These reductions may be applied to one or more tax items,
including but not limited to pre-bankruptcy net operating loss carryforwards,
the tax basis of certain assets and the tax basis of subsidiary stock ("Tax
Attribute Reduction"). Management is currently considering the impact of
alternatives available to the Company in performing this Tax Attribute
Reduction, but has not yet concluded which alternative it will select.
Accordingly, amounts allocated to the successor assets and liabilities at the
Effective Date may be revised and such revisions could be material. Management
will endeavor to select that Tax Attribute Reduction alternative which will best
meet its business objectives and maximize future tax benefits. Regardless of the
alternative that is selected, the cancellation of debt will not constitute
taxable income.
In addition to the permanent Tax Attribute Reduction previously described,
the Company must also limit the annual deduction of pre-bankruptcy net operating
losses and "built-in-deduction" to an amount no greater than the fair market
value of the Company immediately after the restructuring, multiplied by the long
term tax exempt rate. This annual limit is currently estimated to be
approximately $7.3 million.
At the present time management has not determined how much, if any,
pre-bankruptcy net operating losses will be available to offset post-bankruptcy
taxable income. In the current quarter, the Company has continued to experience
losses and does not believe that prospective Tax Attribute Reduction will have a
material impact on the Company's condensed consolidated financial statements.
EQUIPMENT VENDORS
MMDS Internet access equipment and customer premises equipment such as
routers, Ethernet switches, wireless data converters and transceivers currently
are available from a variety of sources such as Cisco Systems, Inc. ("Cisco"),
Conifer Corporation and California Amplifier, Inc. Hybrid Networks, Inc.
("Hybrid") currently is the primary provider of wireless Internet modems to MMDS
operators. In August 1999, Sprint Corporation ("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. The Company believes that Sprint's announcement will
facilitate Hybrid's production of wireless Internet modems.
In addition to Hybrid, the Company has identified other suppliers that it
believes will become sources of modems by the end of the first 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. The
Company believes that Cisco's announcement, as well as the recent announcements
by MCI WorldCom, Inc. and Sprint of the acquisition of MMDS spectrum covering a
total of over 70 million homes, will accelerate the production of wireless
modems from multiple vendors. However, there can be no assurance that additional
vendors will come to market with an adequate supply of reliable wireless modems
on satisfactory terms and conditions in a timely manner. A lack of available
modems could have a material adverse effect on the Company's ability to
implement its business strategy in a timely manner.
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CHANGES IN METHOD FOR REPORTING SUBSCRIBERS
Periodically, the Company may implement price increases or create new
program offerings that upgrade its basic program price structure. Upon such
occurrence, the Company also will update its methodology for reporting
subscribers in MDUs who are billed in bulk to the MDU owner. These "bulk" MDU
subscribers are converted to single family unit ("SFU") subscribers for
reporting purposes using an equivalent basic unit ("EBU") rate that corresponds
to the Company's most utilized current pricing tier for basic programming for
SFU subscribers. This rate is divided into the total revenue from bulk
subscribers to get an "equivalent" number of subscribers for reporting purposes.
Consequently, when this rate is increased, the number of equivalent subscribers
will change and normally decrease. The following EBU rate revisions occurred
during the periods presented herein.
Effective March 31, 1998, the Company's EBU rate was increased to $24.99,
resulting in a decrease of approximately 4,000 reported video subscribers. On
November 1, 1998, in conjunction with the Company's first system-wide price
increase, the EBU rate was increased to $26.99, resulting in a decrease of
approximately 600 reported video subscribers.
THE YEAR 2000
The Company has established an employee team to identify and correct Year
2000 compliance issues. Information technology ("IT") systems with non-compliant
code have been identified and modified or replaced with systems that are Year
2000 compliant. Similar actions have been taken with respect to non-IT systems;
primarily systems embedded in office, communications and other facilities.
Progress of the team's efforts is being monitored by senior management and
periodically is reported to the Audit Committee of the Board of Directors.
The Company recognizes the need to remediate and test its mission-critical
systems to ensure that individually the systems are Year 2000 compliant and that
collectively they operate in a manner that ensures Year 2000 functionality.
The Company has evaluated its systems and has identified the following
systems and functions as mission-critical:
o headend equipment/addressable systems, related to the receipt and
transmission of programming and data,
o billing and collection systems, and
o telecommunications systems in the Company's customer service facility.
Headend Equipment/Addressable Systems. The Company has evaluated these
systems and has completed remediation of certain identified features that were
not Year 2000 compliant through software and hardware upgrades, including all
hardware and software related to satellite relays.
Billing and Collection Systems. The Company has verified Year 2000
compliance with its billing and collections software vendor and completed
additional testing on this software during the third quarter of 1999.
Telecommunications System in Customer Care Facility. The Company has
upgraded its system software to be Year 2000 compliant and has obtained
documentation from the software supplier verifying Year 2000 compliance.
Although the Company believes that it has identified and remediated any
Year 2000 problems in the Company's mission critical systems, if other
significant Year 2000 problems are not discovered or are not remediated
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in a timely manner, significant failures of these functions could occur and
could have material adverse consequences for the Company's operations.
Management believes, based on information currently available and the current
status of the Company's efforts to identify and correct Year 2000 problems, that
the worst case scenarios that could affect the Company's operations as a result
of Year 2000 problems are an inability to:
o transmit and receive data,
o transmit and receive video programming, and
o produce and send invoices.
While the Company has tested its own mission-critical systems for Year 2000
problems, it does not control the systems of its suppliers. The Company has
received assurance from its suppliers regarding the Year 2000 readiness of their
systems. The Company also conducted interoperability testing (where practical)
to determine whether the Company's suppliers' systems will accurately provide
the Company's systems with date, data and functionality into and beyond the new
millennium. This testing and evaluation was completed in the third quarter of
1999. Notwithstanding these measures, there is some risk that the interoperation
of the Company's systems with those of its suppliers, including video
programming suppliers, may be affected by the Year 2000 date change. Any such
impact could have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
Having identified its mission-critical and business-critical systems of its
key suppliers, and the associated risks of failure of those systems to be Year
2000 compliant, the Company has devised contingency plans which will be
implemented if it determines that any of those systems will not be made Year
2000 compliant in a timely manner. These contingency plans include
implementation of emergency backup, recovery, redundancy and/or response
procedures and schedules for all mission critical systems.
The Company does not believe the costs related to its Year 2000 compliance
project will be material to its financial condition, results of operations or
cash flows. The Company did not have any material expenditures prior to 1999 for
Year 2000 compliance projects. During 1999 the Company has spent approximately
$175,000 for Year 2000 compliance initiatives, which are substantially complete.
Unanticipated failures by critical vendors, as well as the failure by the
Company to satisfactorily execute its own identification, remediation and/or
contingency efforts, could have a material adverse effect on the success and
cost of the project, as well as its estimated completion date. As a result,
there can be no assurance that these forward-looking results will be achieved,
and the actual cost and effects on the Company's financial condition, results of
operations or cash flows could differ materially from these estimates.
COMMITMENTS AND CONTINGENCIES
The Company and certain of its former directors and officers are the
subject of certain pending litigation. See note (7) of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 "Financial Statements," and
Part II, Item 1 "Legal Proceedings" of this Form 10-Q. While it is not feasible
to predict or determine the final outcome of these proceedings or to estimate
the amounts or potential range of loss with respect to these matters, and while
management does not expect such an adverse outcome, an adverse outcome in one or
more of these proceedings that exceeds or otherwise is excluded from applicable
insurance coverage could have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
INFLATION
Management does not believe that inflation has had or is likely to have any
significant impact on the Company's operations. Management believes that the
Company will be able to increase subscriber rates, if necessary, to keep pace
with inflationary increases in costs.
-18-
<PAGE> 19
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity" ("SFAS 133"), which requires that all
derivatives be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed and documented pursuant to the
provisions of SFAS No. 133. In July 1999, the Financial Accounting Standards
Board issued SFAS No. 137, which delayed the effective date of SFAS No. 133.
SFAS No. 133 is now effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Company expects that the adoption of SFAS No.
133 will not have an impact on its financial condition, results of operations or
cash flows.
RECENT EVENTS
In October 1999, the Company announced that it had signed a definitive
agreement with SBA Towers, Inc. ("SBA") to sell 34 communications towers to SBA
for $7.0 million. The Company will lease back space on the towers from SBA for
the Company's wireless Internet and video operations. Management expects the
transaction to close in the fourth quarter of 1999. The transaction is subject
to customary closing conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt. The Company's
long-term debt, which consists primarily of $14.1 million relating to the
acquisition of certain BTAs in March 1996, bears a fixed interest rate. To date,
the Company has not entered into any derivative financial instruments to manage
interest rate risk and currently is not evaluating the future use of any such
financial instruments.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Litigation. The Company 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). 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 individual
defendants have responded.
Certain of the Company's former officers and directors to whom the Company
may have indemnity obligations are co-defendants in a purported securities class
action lawsuit originally filed in July 1998 in State District Court in Kleburg
County, Texas, styled Thompson, et al. v. Heartland Wireless Communications,
Inc. et al. (98-371-d). This matter currently is set for trial in April 2000.
The Company's liability with respect to the Thompson and Coates lawsuits is
limited under the Plan of Reorganization as described below.
The Company's By-Laws as in effect before the Effective Date of the Plan
provided for indemnification of the Company's officers and directors to the
fullest extent permitted under Delaware law. Generally, Section 145 of the
General Corporation Law of the State of Delaware (the "DGCL") permits a
corporation to indemnify any person who was or is a party to any action because
such person is or was a director, officer, employee or agent of such corporation
for liabilities related to any such action if the person acted in good faith and
in a manner the person reasonably believed to be in or not opposed to the best
interest of such corporation. As a result, the Company's current and former
directors
-19-
<PAGE> 20
and officers who are parties to the securities actions may have a claim for
indemnification against the Company to the extent they incur liabilities
resulting from or incur expenses in defending these actions. The treatment of
any such claims is provided for in the Plan.
Under Section 11.5 of the Plan, the Company is obligated, to the extent
permitted under the DGCL, to indemnify persons who served as officers or
directors of the Company on or after April 25, 1997, for certain liabilities
arising as a result of such persons having served as an officer or director of
the Company, including, subject to the limitations described below, liabilities
arising out of their being named as a defendant in the securities lawsuits. The
Company's obligations under Section 11.5 of the Plan are referred to as "Assumed
Indemnity Obligations." The Company's Assumed Indemnity Obligations do not
apply, however, with respect to any liability arising from acts or omissions
occurring prior to April 25, 1997, if the liability is based on (1) a breach of
the individual's duty of loyalty to the Company or the Company's stockholders,
(2) acts or omissions taken not in good faith and not in a manner they
reasonably believed to be in or not opposed to the Company's best interest or
which involve intentional misconduct, gross negligence or a knowing violation of
law or (3) any transaction from which the director or officer derived any
improper personal benefit. Claims asserted by former directors and officers of
the Company which are not covered by the Company's Assumed Indemnity
Obligations, to the extent allowed by the Bankruptcy Court, are classified as
Class 6 Indemnity Claims under the Plan. Under Section 4.6 of the Plan, holders
of Class 6 Indemnity Claims allowed by the Bankruptcy Court are entitled to
recover on account of such claims only to the extent of any available coverage
under the Company's corporate liability insurance, including any self-insured
retention under those policies.
All of the Company's former officers and directors of the Company who are
defendants in the Coates and Thompson actions, other than two former officers
and directors who are defendants in each of the Coates and Thompson actions,
served as an officer or director after April 25, 1997, and, therefore, are
beneficiaries of the Assumed Indemnity Obligations. To the extent the two former
officers and directors or any other former or current officer or director who
otherwise is not entitled to the benefit of the Assumed Indemnity Obligations
incur liability in any of these lawsuits, the Company believes that any claim
they may assert against the Company for indemnification, to the extent allowed
by the Bankruptcy Court, will be treated as Class 6 Indemnity Claims under the
Plan and their recovery will be limited to any available proceeds of the
Company's corporate liability insurance. To the extent any of the other former
or current officers or directors incur any liability in any of these lawsuits,
the Company would be obligated to indemnify such persons, subject to the
exceptions described above, to the extent the proceeds of the Company's
corporate liability insurance are insufficient to cover such liabilities.
To the extent plaintiffs in the Coates or Thompson actions are entitled to
any recovery from the Company and the Bankruptcy Court allows any claim they may
file against the Company, the Company believes any such claim for recovery would
be classified under the Plan as a Class 7 Bondholder Litigation Claim, which is
a claim based on the purchase or sale of the Company's debt securities, or a
Class 8 Stockholder Litigation Claim, which is a claim based on the purchase or
sale of the Company's equity securities. Under the Plan, each holder of a
Bondholder Litigation Claim that is allowed by the Bankruptcy Court will be
entitled to receive, in full satisfaction of such claim, (1) a pro rata portion
of any liability insurance proceeds that remain after the satisfaction of the
Company's Assumed Indemnity Obligations and payments made on Class 6 Indemnity
Claims and (2) if insurance proceeds are insufficient to satisfy such claim in
full, a pro rata portion of the 275,000 warrants that the Company is obligated
to issue under the Plan, up to the number of warrants with a value sufficient to
satisfy the allowed amount of such claim. Each holder of a Stockholder
Litigation Claim that is allowed by the Bankruptcy Court will be entitled to
receive, in full satisfaction of such claim, (1) a pro rata portion of any
liability insurance proceeds that remain after the satisfaction of the Company's
Assumed Indemnity Obligations, Class 6 Indemnity Claims and Bondholder
Litigation Claims and (2) if insurance proceeds are insufficient to satisfy such
claim in full, a pro rata portion of the Stockholder Litigation Claims portion
of the 275,000 warrants that the Company is obligated to issue under the Plan,
up to the number of warrants with a value sufficient to satisfy the allowed
amount of such claim. The Stockholder Litigation Claims portion of these
warrants will be that portion of the warrants that remains 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
-20-
<PAGE> 21
the allowed claims of previous holders of common stock and other equity
interests in the Company prior to the Effective Date.
Late Fee Litigation. The Company is a party to a purported class action
lawsuit alleging, among other things, overcharging of administrative late fees.
The lawsuit is styled Azalia Garcia, et al. v. Heartland Wireless
Communications, Inc. d/b/a Heartland Cable Television (98-60898-1). The Company
believes that the plaintiff's claims in the Garcia case are barred by, among
other things, the order confirming the Plan of Reorganization entered by the
Bankruptcy Court on March 15, 1999, for plaintiff's failure to file a proof of
claim, and that the plaintiff is entitled to no recovery under the Plan. The
Company has 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.
The Company also is a party to a purported late fee class action lawsuit
styled Ysasi, et al., v. Heartland Wireless Communications, Inc. (98-6430-B).
The plaintiff in Ysasi has moved for summary judgment against Nucentrix on the
grounds of usury and unenforceable late fees. This motion is scheduled for
hearing November 22, 1999.
Motion to Revoke Order of Confirmation. In September 1999 the Company
received notice that a Motion to Revoke Order of Confirmation had been filed pro
se by two former stockholders in Heartland Wireless Communications, Inc. in the
U. S. Bankruptcy Court for the District of Delaware (No. 98-2692-JJF). The
Motion asserts that the Company procured the order confirming the Plan by
fraudulently undervaluing the enterprise value of the Company, and seeks to set
aside the order. The Company has responded to this Motion, believes the Motion
is without merit and intends to vigorously defend the matter.
General. For additional information on the above matters, see "Item 3 -
Legal Proceedings" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998. The Company intends to vigorously defend the above
matters. While it is not feasible to predict or determine the final outcome of
these proceedings or to estimate the amounts or potential range of loss with
respect to these matters, and while management does not expect such an adverse
outcome, an adverse outcome in one or more of these proceedings that exceeds or
otherwise is excluded from applicable insurance coverage could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
The Company is a party, from time to time, to routine litigation incident
to its business. The Company does not believe that any other pending litigation
matter will have a material adverse effect on its financial condition, results
of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Plan of Reorganization under Chapter 11 of the United States
Bankruptcy Code (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated January 19,
1999).
2.2 Order Confirming the Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, dated as of March 15, 1999 (incorporated
by reference to Exhibit 2.2 to the Registrant's Registration
Statement on Form S-1 filed with the SEC on June 17, 1999, No.
333-80929).
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<PAGE> 22
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (the "March 1999 10-Q")).
3.2 Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the March 1999 Form 10-Q).
*27 Financial Data Schedule
- ------------------
*Filed herewith.
(b) REPORTS ON FORM 8-K
None.
-22-
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: November 11, 1999 NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ Carroll D. McHenry
-------------------------------------------------
Carroll D. McHenry
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
By: /s/ Marjean Henderson
-------------------------------------------------
Marjean Henderson
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
<PAGE> 24
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Plan of Reorganization under Chapter 11 of the United States
Bankruptcy Code (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated January 19,
1999).
2.2 Order Confirming the Plan of Reorganization Under Chapter 11
of the Bankruptcy Code, dated as of March 15, 1999
(incorporated by reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1 filed with the SEC on June
17, 1999, No. 333-80929).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (the "March 1999 10-Q")).
3.2 Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the March 1999 Form 10-Q).
*27 Financial Data Schedule
</TABLE>
- ---------------------------------
*Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FDS INCLUDES OPERATIONS OF THE SUCCESSOR ENTITY FROM THE EFFECTIVE DATE
THROUGH SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 23,954
<SECURITIES> 626
<RECEIVABLES> 3,202
<ALLOWANCES> 610
<INVENTORY> 0
<CURRENT-ASSETS> 29,131
<PP&E> 53,101
<DEPRECIATION> 0
<TOTAL-ASSETS> 163,917
<CURRENT-LIABILITIES> 15,273
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 135,510
<TOTAL-LIABILITY-AND-EQUITY> 163,917
<SALES> 33,388
<TOTAL-REVENUES> 33,388
<CGS> 0
<TOTAL-COSTS> 45,003
<OTHER-EXPENSES> (1,265)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581
<INCOME-PRETAX> (11,533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,533
<EPS-BASIC> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
