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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 8-K
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
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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. As of the date of this
current report on Form 8-K, the Registration Statement had not been 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 Report on Form 10-Q
for the quarter ended March 31, 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 that forms a part of the Registration Statement (the
"Prospectus") under the headings "Risk Factors" on pages 7 through 14 of the
Prospectus, "Reorganization" on pages 16 and 17 of the Prospectus and "Business"
on pages 34 through 56 of the Prospectus, which sections of the Prospectus are
attached hereto as Exhibit 99.1 and hereby are incorporated herein by reference,
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.
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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: June 17, 1999
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
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<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.
</TABLE>
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EXHIBIT 99.1
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 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 financing, secured or unsecured
credit facilities, joint ventures or other arrangements. We cannot assure you,
however, that we will be able to obtain the financing we will need to fund 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."
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,
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- cable modem service providers, and
- other fixed-wireless and satellite data service providers.
Most of our competitors are well-established and have larger and better
developed networks and systems, longer-standing relationships with customers and
suppliers, greater name recognition and significantly greater financial,
technical and marketing resources. Many of these companies can subsidize
competing services with revenues from other services and have ready access to
capital markets. As competition increases in the high-speed Internet access
market, we anticipate intensified downward pricing pressure for our services. We
have not obtained significant market share in either of the markets where we
currently offer high-speed Internet access services. We cannot assure you that
we will be able to compete effectively in any of our markets. Our failure to
establish a significant number of Internet access customers in our markets would
adversely affect our ability to successfully implement our business strategy.
See "Business -- Competition."
WE MAY FACE DIFFICULTIES IMPLEMENTING OUR BUSINESS STRATEGY BECAUSE IT INCLUDES
OPERATIONS THAT HAVE NOT BEEN WIDELY DEPLOYED ON A COMMERCIAL BASIS.
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 VOIP or wireless local loop
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.
OUR NETWORK SCALABILITY, SPEED AND INFRASTRUCTURE FOR INTERNET ACCESS SERVICE IS
UNCERTAIN. IF WE ARE UNABLE TO PROVIDE RELIABLE HIGH-SPEED INTERNET ACCESS, THEN
DEMAND FOR OUR SERVICES AND OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY COULD
BE ADVERSELY AFFECTED.
Due to the limited deployment of our high-speed Internet access service,
the ability of our wireless systems to connect and manage a substantial number
of on-line subscribers at high transmission speeds is uncertain. The actual
channel capacity and data transmission speeds will depend on a variety of
factors, including content, Internet traffic, the number of active customers on
a channel, the number of channels that we can use to provide our service, the
capability of high-speed modems used, the capacity and service quality of
third-party Internet backbone providers and a customer's system configuration.
We can not assure you that we will be able to expand or adapt our network
infrastructure to respond to a growth in the number of customers served, an
increased demand to transmit larger amounts of data or changes to our customers'
product and service requirements. Our failure to achieve or maintain reliable
high-speed data transmission capabilities could significantly reduce consumer
demand for our services.
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AN INABILITY TO EFFECTIVELY MANAGE OUR RAPID GROWTH COULD ADVERSELY AFFECT OUR
OPERATIONS.
Our business strategy contemplates rapid expansion in the foreseeable
future. This growth will increase our operating complexity and require that we,
among other things:
- accurately assess the market for our new services,
- expand our employee base with highly-skilled personnel,
- develop additional financial and management controls and systems,
- control expenses related to our business strategy, and
- obtain and maintain necessary regulatory approvals.
We cannot assure you that we will be able to successfully undertake or
manage these activities or determine the effect that our failure to do so may
have on our operations.
LIMITED SUPPLY OF CUSTOMER PREMISE MODEMS FOR HIGH-SPEED INTERNET SERVICE MAY
RESTRICT OUR GROWTH.
Our business strategy assumes substantial growth of high-speed Internet
access services over our spectrum. Hybrid Networks, Inc. currently is the
primary supplier of high-speed modems necessary for MMDS wireless Internet
access. In January 1999, Hybrid notified us that to ensure sufficient cash to
continue operations, customer support and product availability, Hybrid would
begin allocating the supply of modems. Hybrid recently resumed shipments of
modems without allocation restrictions. We also have identified other suppliers
that we believe will become an additional source of modems by the end of 1999.
If Hybrid fails to supply or limits the supply of high-speed modems and we are
unable to locate an alternate provider, then the lack of available modems will
have a material adverse effect on our ability to implement our business plan in
a timely manner. See "Business -- Suppliers -- Internet Access Equipment."
WE ARE SUBJECT TO EXTENSIVE FEDERAL LAWS, RULES AND REGULATIONS. THE LAWS, RULES
AND REGULATIONS TO WHICH WE ARE SUBJECT COULD CHANGE AT ANY TIME IN AN
UNPREDICTABLE MANNER.
Our continued ability to acquire and maintain MMDS spectrum licenses, which
are vital to our operations, is subject to extensive regulation. These
regulations directly affect the breadth of services we are able to offer, as
well as the rates, terms and conditions of those services. We also are affected
indirectly by the effect of other governmental regulations on companies that
offer competing services. Regulations and their application are subject to
continual change as a result of new legislation, regulations adopted from time
to time by regulatory authorities and judicial interpretation of these laws and
regulations. We are not able to predict the extent to which any such change in
the regulatory environment could affect our business. We cannot assure you that
changes in legislation, regulations and interpretations would not have a
significant adverse impact on our ability to implement our business strategy.
See "Business -- Government Regulation" for a further discussion of the
regulations applicable to our operations.
Aside from the use of spectrum, the FCC has held that the terms and
conditions of providing Internet and Internet access services are not subject to
FCC regulation. Nevertheless, the FCC has held that the provision of Internet
access is an interstate service subject to FCC jurisdiction. There can be no
certainty that the providing of Internet access services will continue to be
free from FCC regulation. Moreover, if we begin providing wireless local loop
services, we will be subject to FCC and state regulation of our interstate and
intrastate services, respectively.
WE DEPEND ON FCC-REGULATED LICENSES AND CHANNEL LEASES. THE FAILURE TO MAINTAIN
CHANNEL RIGHTS IN CERTAIN MARKETS COULD ADVERSELY AFFECT OUR ABILITY TO TIMELY
IMPLEMENT OUR BUSINESS STRATEGY.
We depend upon licenses granted to us by the FCC and leases with other FCC
license holders for access to channel capacity necessary to operate our Internet
and video businesses. These licenses are
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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 our total
available channels. 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 service on terms and conditions that
are acceptable to us.
TWO-WAY SYSTEMS REQUIRE REGULATORY APPROVAL. WE WILL BE REQUIRED TO OBTAIN
REGULATORY APPROVAL FOR OUR CURRENT AND ALL FUTURE TWO-WAY SYSTEMS. IF WE DO NOT
OBTAIN REQUISITE APPROVALS FOR A MARKET, THEN WE WILL NOT BE PERMITTED TO
OPERATE A TWO-WAY SYSTEM IN THAT MARKET.
In September 1998 the FCC approved broad authority for flexible two-way use
of MMDS spectrum. This spectrum previously could be used only for one-way
transmissions. The new rules require the filing with the FCC of applications to
receive authorization for two-way use of our MMDS spectrum. We expect the first
opportunity to file these applications, or "filing window," to occur in the
third quarter of 1999. The application process will require us to engineer a
network configuration and channel-use plan for the use of our frequencies in
each market where we intend to launch a two-way system, including Austin and
Sherman-Denison, Texas, which we currently operate under temporary developmental
authorizations from the FCC. The applications must meet FCC interference
protection rules or contain the consent of other MMDS licensees in these markets
and adjacent markets. We cannot assure you that:
- we will be able to complete the necessary processes to enable us to file
two-way applications for each of our markets,
- applications filed will not be preempted or otherwise limited by
previously 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.
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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, $14.4 million in principal amount of which remains
payable quarterly through August 2006. Each BTA is subject to an individual
installment note. If we fail to make one or more scheduled installment payments
on a BTA note after any applicable grace period, that BTA authorization may be
forfeited to the FCC.
To retain a BTA authorization, we must provide a required level of service
in the BTA by August 2001. We will satisfy the service requirement for a BTA if
our signal in the BTA is capable of reaching at least two-thirds of the BTA
population outside of the service areas of other MMDS operators within our BTAs.
If we fail to meet this requirement, then the BTA authorization for the portion
of the BTA that is not capable of being served may be subject to forfeiture.
Constructing MMDS channels capable of providing service to the required
population in unconstructed BTAs could require substantial capital expenditures.
See "Business -- Government Regulation -- BTA Auction and Service Requirements."
WE DEPEND ON CERTAIN KEY PERSONNEL, AND WILL REQUIRE ADDITIONAL KEY PERSONNEL TO
IMPLEMENT OUR BUSINESS STRATEGY. IF WE LOSE OUR CHIEF EXECUTIVE OFFICER OR ARE
NOT ABLE TO HIRE AND RETAIN EMPLOYEES WITH THE REQUIRED TECHNICAL SKILLS, OUR
ABILITY TO DEVELOP AND LAUNCH HIGH-SPEED INTERNET ACCESS AND RELIABLE SERVICE
COULD BE ADVERSELY AFFECTED.
Our future success largely depends on the expertise of Carroll D. McHenry,
our Chief Executive Officer, President and Chairman of the Board, and other
members of senior management. We have employment agreements with Mr. McHenry and
other members of senior management, but do not maintain a key person life
insurance policy on the life of Mr. McHenry or other members of senior
management.
We also believe that our future success will depend in large part on our
ability to hire and retain highly skilled, knowledgeable and qualified
managerial, professional, technical and sales personnel with skills and talents
required to develop and operate our wireless broadband network services. To
implement our business strategy and manage our planned growth successfully, we
will need to hire and retain a substantial number of additional employees. We
have experienced significant competition in attracting and retaining personnel
who possess the skills that we are seeking. As a result of this competition, we
may experience a shortage of qualified personnel.
PURSUING ACQUISITION OPPORTUNITIES WILL INVOLVE SIGNIFICANT 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. The pursuit of
acquisition 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,
negotiating acquisition agreements and
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integrating the acquired businesses with our existing operations. 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. OUR FAILURE TO
MAINTAIN AND EXPAND OUR WIRELESS CABLE SUBSCRIBER BASE COULD ADVERSELY AFFECT
OUR RESULTS OF OPERATIONS.
The subscription television business also is highly competitive, and many
of our competitors have significantly greater resources and channel capacity
than we have. Our principal subscription television competitors consist of
traditional hardwire or franchised cable operators, direct to home/direct
broadcast satellite providers and private cable operators. Wireless cable
providers, including our subscription television service, have only
approximately a 1.3% share of the national subscription television market. In
addition, local off-air VHF/UHF broadcast television stations, such as
affiliates of ABC, NBC, CBS and Fox, continue to be a primary source of free
video programming for the public. Our failure to maintain our existing wireless
cable subscriber base and expand this subscriber base could adversely affect our
results of operations. We cannot assure you that we will be able to maintain or
expand our subscriber base for our wireless cable services.
LOSS OF DIRECTV CONTRACTS COULD ADVERSELY AFFECT THE DEMAND FOR OUR WIRELESS
CABLE SERVICE.
Our business strategy assumes growth of our DIRECTV offerings, either
independently or in combination with our MMDS video offering. Because our
DIRECTV offerings generate more favorable returns than our stand-alone MMDS
offering, we have shifted the focus of our sales and marketing efforts to
emphasize sales of DIRECTV service. We depend on our contracts with DIRECTV to
provide DIRECTV service. Our single-family unit ("SFU") and multiple-dwelling
unit ("MDU") contracts with DIRECTV expire in April 2003 and October 2004,
respectively. A cancellation or nonrenewal of our contracts with DIRECTV could
have a material adverse effect on our ability to maintain or expand our wireless
cable subscriber base. See "Business -- Suppliers."
OUR WIRELESS BROADBAND SERVICES HAVE LINE OF SIGHT LIMITATIONS. THESE LINE OF
SIGHT LIMITATIONS MAY REDUCE THE NUMBER OF CUSTOMERS WE CAN SERVE IN A MARKET OR
INCREASE OUR COST OF OPERATIONS.
Our wireless broadband services require a direct line of sight between our
base station and the antenna at the customer's site. Our average coverage radius
of a single-cell base station is approximately 35 miles, depending on local
conditions. However, our transmission paths can be obstructed by foliage,
terrain and buildings, among other things. As a result, we may not be able to
supply service to all potential customers in a market from a single base
station. While in certain instances we can employ additional equipment to
overcome line of sight obstructions, we may not always be able to secure the
required FCC approval necessary to achieve the desired signal coverage. Adding
this equipment in some instances also could increase our costs of service. While
these costs may not be significant in all cases, they may cause our wireless
broadband services to become less economical in certain markets.
BUILDING OWNERS CONTROL ACCESS TO CERTAIN STRATEGIC RECEIVE SITES.
We may be required to obtain rights from building owners to install our
antennas and other equipment to provide service to our business customers. We
cannot assure you that we will be able to obtain, at costs or on terms
acceptable to us, the access rights necessary to expand our services as planned.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGY CHANGES.
The high-speed Internet access industry is subject to rapid technological
change, frequent new service introductions and evolving industry standards. We
believe that our future success will depend largely on our ability to anticipate
or adapt to such changes and to offer, on a timely basis, services that meet
evolving standards. We cannot predict the extent to which competitors using
existing or currently
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undeployed methods of delivery of Internet access services will compete with our
services. We cannot assure you that:
- existing, proposed or undeveloped technologies will not render our
fixed-wireless systems less profitable or less viable,
- we will have the resources to acquire new technologies or to introduce
new services that could compete with future technologies, or
- we will be successful in responding to technological changes in a timely
and cost effective manner.
YEAR 2000 PROBLEMS MAY ADVERSELY AFFECT OUR OPERATIONS.
We depend heavily on information technology and other systems and functions
for all phases of our operations, including transmission of data and video
programming, billing and collections and customer service functions. Computer
software, hardware, microprocessor chips and other computer equipment use two
digits to identify a particular year and some of these may not recognize the
number "00" or may recognize it as a year prior to 1999. Unless these computer
equipment and software programs are modified or upgraded to correct these Year
2000 problems prior to January 1, 2000, errors and malfunctions could result. We
believe, based on information currently available and the current status of our
efforts to identify and correct Year 2000 problems, that the worst case
scenarios that could affect our operations as a result of Year 2000 problems are
an inability to:
- transmit and receive data,
- transmit and receive video programming, and
- produce and send invoices.
We are in the process of evaluating Year 2000 problems that may affect our
material suppliers, and anticipate completing our evaluation by August 31, 1999.
If a material supplier is adversely affected by Year 2000 problems and, as a
result is unable to provide services or materials to us, then our ability to (1)
provide Internet access or wireless cable services or (2) implement our business
strategy on a timely basis could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition -- The Year 2000."
VIRUSES, BREAK-INS AND OTHER SECURITY BREACHES COULD CAUSE INTERRUPTIONS, DELAYS
OR A CESSATION OF THE SERVICES WE PROVIDE TO OUR INTERNET CUSTOMERS.
Despite the implementation of network security measures, the core of any
Internet network infrastructure is vulnerable to computer viruses, break-ins and
similar disruptive problems. We may experience future interruptions in service
as a result of the actions of Internet users, current and former employees or
others. Unauthorized use could also potentially jeopardize the security of our
computer systems and the computer systems of our customers. Although we intend
to continue to implement security measures to prevent this, the possibility
exists that the measures we implement will be circumvented in the future. In
addition, eliminating such viruses and remedying such security problems may
cause interruptions, delays or cessation of service to our Internet customers.
If our security measures fail, we may lose customers or be sued, resulting in
additional expenses.
WE MAY BE LIABLE FOR INFORMATION SENT THROUGH OUR NETWORK.
The law relating to the liability of Internet access providers for
information carried on, stored on or disseminated through their network is
unsettled. Several private lawsuits seeking to impose liability upon Internet
access providers currently are pending. In addition, legislation has been
enacted and new legislation has been proposed that imposes liability for the
transmission of or prohibits the transmission of certain types of information on
the Internet, including sexually explicit and gambling information. While no one
has ever filed a claim against us relating to this issue, someone may file a
claim of that type in the
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future and may be successful in imposing liability on us. Although we carry
Internet liability insurance, it may not be adequate to compensate claimants or
may not cover us if we become liable for information carried on or disseminated
through our networks.
CONCENTRATION OF OWNERSHIP MAY AFFECT CORPORATE ACTIONS AND MARKET PRICE FOR OUR
COMMON STOCK.
Based on reports filed with the Securities and Exchange Commission, six
ownership groups own or control approximately 67.1% of our outstanding common
stock. Two of these groups have a representative on our board of directors and
collectively own or control approximately 30.7% 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.
As of June 11, there were 16 record holders of common stock, although we
believe there are over 1,000 beneficial owners of our common stock. The
relatively small number of record owners could significantly impair the
liquidity and adversely affect the market price of our common stock. Other
investors in the public market may avoid making an investment in Nucentrix
because of such concentration of ownership.
SHARES ELIGIBLE FOR FUTURE SALE MAY AFFECT THE MARKET PRICE FOR OUR COMMON
STOCK.
The 3,363,536 shares covered by this prospectus constitute approximately
33.5% 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 6,684,924 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.
COMMITMENTS FOR FUTURE ISSUANCES OF COMMON STOCK CREATE THE POTENTIAL FOR
DILUTION.
There are outstanding warrants and options to purchase an aggregate of
1,588,500 shares of our common stock and we will issue warrants to purchase
another 275,000 shares of our common stock under our plan of reorganization.
Substantially all of the shares of common stock underlying these securities will
be freely tradeable when issued. The exercise or conversion of outstanding
warrants and stock options will dilute the percentage ownership of our other
stockholders. In addition, any sales in the public market of shares of our
common stock issuable upon the exercise or conversion of these warrants and
stock options, or the perception that such sales could occur, may adversely
affect the prevailing market price of our common stock. See "Reorganization" and
"Shares Eligible For Future Sale."
14
<PAGE> 9
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, 2005, 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, 2004 until April 1, 2005................. $24.74
after April 1, 2005.................................... $27.63
</TABLE>
16
<PAGE> 10
If we merge with another company or sell all or substantially all of our assets
or stock before April 1, 2005, 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 June 11, 1999, we had
issued 4,960 additional shares of our common stock to settle some of these
claims.
17
<PAGE> 11
BUSINESS
OVERVIEW
We use our high-capacity radio spectrum to provide wireless broadband
network services in medium and small markets in the central United States. We
control up to 196 MHz of radio spectrum in the 2.1 to 2.7 GHz band licensed by
the FCC in 87 markets. We currently provide always-on, high-speed Internet
access service in two markets, primarily to medium-sized and small businesses,
small offices/home offices ("SOHOs") and telecommuters, and plan to expand this
service into 18 additional markets by the summer 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 use our spectrum to transmit and receive signals between a base station
and transmit/receive equipment at each customer's location. Our radio spectrum,
commonly and collectively referred to as "MMDS," is comprised of the following
channels:
- MDS (Multipoint Distribution Service) -- 2 channels in the 2150-2160 MHz
band and 3 channels in the 2650-2680 MHz band,
- ITFS (Instructional Television Fixed Service) -- 20 channels in the
2500-2686 MHz band, and
- MMDS (Multichannel Multipoint Distribution Service) -- 8 channels in the
2596-2644 MHz band.
Our MMDS spectrum has demonstrated capability to transmit at aggregate data
rates of up to 30 Mbps per six-MHz channel and, unlike other fixed-wireless
providers, covers a service area radius of 35 miles from a single base station.
We also lease the rights to 20 MHz of Wireless Communications Service ("WCS")
spectrum at 2.3 GHz in 19 markets.
We presently have television transmission facilities constructed and
operating in 58 of our 87 markets. We currently are the largest operator of
wireless cable systems in the United States, with about 157,000 subscribers at
May 30, 1999, including about 16,000 subscribers who receive DIRECTV programming
sold by us, either alone or with our MMDS programming. We have added high-speed
Internet access service in two of our 58 markets and plan to add this service to
11 additional operating markets and to seven of our 29 non-operating markets by
the summer of 2001.
INDUSTRY OVERVIEW AND MARKET OPPORTUNITY
Internet access is one of the fastest growing segments of the
telecommunications industry. International Data Corporation ("IDC") estimates
that the number of Internet users worldwide has increased substantially over the
last several years, reaching nearly 159 million in 1998 with expected growth of
26% per year over the next five years. IDC reports that Internet service
provider revenues are forecasted to grow from $10.7 billion in 1998 to $37.4
billion in 2003, with business access comprising 62% of the total access revenue
base.
Data communication capabilities provided by the Internet allow medium-sized
and small businesses to streamline e-commerce and communications among
employees, customers and suppliers. To fully take advantage of the efficiency
provided by the Internet's capabilities, businesses need high-speed Internet
connectivity. We also expect the demand for high-speed Internet access from
SOHOs and telecommuters to increase as companies encourage an increasing number
of employees to work in remote offices or their homes. According to IDC, there
were approximately 43 million telecommuters and SOHO-based workers in the United
States in 1998. IDC estimates that approximately 60% of telecommuters and SOHOs
need access to corporate networks, the Internet or both for a variety of
applications, including e-mail databases and corporate intranets. According to
IDC, in 1998 60% of SOHOs and telecommuters used Internet access services, with
an estimated annual growth rate for this market of between 12-15%.
34
<PAGE> 12
Traditionally, medium-sized and small businesses, telecommuters and SOHOs
have relied on low-speed Internet access using existing telephone lines. Most
telephone networks today are fiber, capable of high-capacity and high-speed
transporting of data. However, the portion of the networks that ultimately
connects to the customer premises, commonly referred to as the "local loop" or
"last mile," generally is narrowband copper wire with service speeds limited to
56-128 Kbps. This limitation currently constrains the capacity and speed of the
Internet to most users. As a result, users are seeking affordable higher-speed
access alternatives.
The higher speed Internet access alternatives offered by our competitors
have the following limitations:
- T1 service, at 1.54 Mbps, is a fast but relatively expensive solution,
typically available at approximately $2,000 per month in our markets,
plus installation and equipment costs of approximately $3,000.
- DSL service is delivered across the incumbent local exchange carrier's
("ILEC") existing copper wire system. While this service is capable of
delivering very high speeds, DSL suffers performance limitations the
farther the customer premise is from the central office of the ILEC.
Distances are limited to about four to five miles from a central office
for the lowest speed solutions and 10,000 feet or less for the fastest.
- High-speed cable networks may be capable of high-speed data transmission.
However, we estimate that cable passes only 40% of businesses in our
markets and, therefore, does not serve a large portion of our targeted
customer base. In addition, we believe that a majority of existing cable
systems in our markets have not been retrofitted to enable two-way
high-speed data transmission. Moreover, cable is a shared medium and the
more subscribers loaded on the network, the slower the per subscriber
speed becomes.
- Other high-speed wireless providers, such as those using 24 GHz, 28 GHz
and 38 GHz spectrum, have concentrated on the more densely populated
urban areas because of transmission distance limitations. Signals using
these radio frequencies are generally limited to a one to three-mile
radius, or three to 28 square miles, which makes application in less
densely populated areas less economical.
- Satellite networks, such as direct broadcast satellite, currently offer
only one-way Internet access, with upstream access limited to existing
copper telephone lines.
THE NUCENTRIX SOLUTION
In 1998, Nucentrix and several other MMDS companies demonstrated the
commercial viability of providing high-speed Internet access using MMDS
spectrum. However, the FCC historically had limited the use of MMDS spectrum to
one-way transmissions. In September 1998, the FCC approved the use of MMDS
spectrum to provide two-way services, including high-speed data, voice and video
communications. 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 to our target customer base at
prices comparable to or substantially lower than 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, customers can upgrade their access speeds without adding
additional hardware.
Always-On Service. Our Internet access networks provide 24-hour,
always-on connectivity, which dial-up modem, ISDN and alternative local
area network remote access systems do not provide.
35
<PAGE> 13
Full Service 24-Hour Internet Access/Support. We are a full service
24-hour ISP and, through third parties, provide ancillary value added
services such as e-mail, web design, web hosting and domain name
maintenance. In the future, we expect to provide additional services like
VOIP, virtual private networking and wireless local loop services.
Reliability. We have engineered our wireless point to multipoint radio
path links to provide 99.99% reliability. We also offer two separate and
diverse routes to the nearest Internet backbone connection to ensure our
customers maximum network reliability.
Experienced Management Team. We are led and managed by a team of
professionals with extensive experience in information technology as well
as wireless, data, video and general telecommunications industries. Leading
our team is Carroll D. McHenry, President and Chief Executive Officer, who
has 32 years experience in the telecommunications and information systems
industries.
Customer Equipment Financing. As with most new technology, we expect
the cost of customer premise equipment to decline as demand increases.
While we intend to encourage our customers to buy the modems and other
equipment necessary for high-speed Internet access, we expect to offer a
financing solution to lower the cost of entry for our customers.
BUSINESS STRATEGY
Out goal is to become a leading primary provider of high-speed wireless
broadband network services in our markets. Our strategy includes the following
key elements:
Exploit the increasing demand for affordable high-speed Internet
access. We plan to focus initially on medium-sized and small businesses,
SOHOs and telecommuters in medium markets, where we believe the demand for
high-speed Internet access is the greatest and alternatives, if available,
have performance or distance limitations or are relatively expensive.
Achieve "first to market" status. We believe that a significant
percentage of our target business customers currently are unpassed by
broadband cable or fiber network providers. Even considering the time to
build out a non-operating market, we believe we can complete our facilities
and begin reaching our target customer base faster than our competitors.
For example, DSL technology generally requires arrangements with local
exchange carriers to co-locate in multiple central offices. Other
fixed-wireless providers have much shorter transmission paths than we do
and, therefore, require more base stations than we do to cover an entire
market. As a result, these technologies will require additional time and
capital expense to reach our target customers.
Take advantage of our existing high capacity and wide coverage
spectrum. We expect to benefit from our MMDS radio spectrum, which allows
us to provide broadband services over large geographic areas. Our MMDS
spectrum is capable of transmitting at aggregate data rates of up to 30
Mbps per six-MHz channel, or the equivalent of approximately 20 T1
telephone lines. We control an average of 27 six-MHz channels in our
existing markets. In addition, our MMDS spectrum has a typical coverage
radius for a single base station design of up to 35 miles for high-speed
Internet access service, or approximately 3,800 square miles compared to a
one to three-mile radius, or three to 28 square miles, for other wireless
broadband service providers and a two to a five-mile radius from the local
exchange carrier's central office, or 13 to 80 square miles, for DSL. This
will allow us to reach businesses in office parks, suburbs, strip shopping
centers and along interstate highways that other fixed wireless and DSL
providers currently may be unable to serve.
Leverage our existing investment in MMDS infrastructure, including
base stations and other transmission facilities. We believe that the
favorable characteristics of our spectrum discussed above initially will
enable us to provide high-speed Internet access service using a single base
station design for each market. Thirteen of our projected 20 Internet
markets to be launched by the summer of 2001 are fully operational in the
delivery of wireless cable service and, therefore, a substantial portion of
the capital required for Internet access delivery in these markets already
has been invested. The
36
<PAGE> 14
incremental cost to upgrade an existing wireless cable headend facility to
add Internet access service capabilities is about $200,000 to $400,000 per
base station and the time to retrofit a base station is 30-60 days
following receipt of necessary regulatory approvals. We estimate the
buildout of an unconstructed market to deliver high-speed Internet access
service will require an initial expenditure of approximately $450,000 to
$600,000 for base station equipment for a single site, assuming that we are
able to lease transmission tower space rather than being required to
construct a new tower.
Expand into residential market. MCI WORLDCOM and Sprint recently have
announced acquisitions of MMDS spectrum covering approximately 49 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 VOIP and wireless local loop
services, which will connect customers directly to the public switched
telephone network.
Expand through acquisitions. We plan to pursue strategic acquisitions
that increase our geographic service areas and enable us to accelerate
market penetration and expand our customer bases.
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.
37
<PAGE> 15
The following table summarizes our service offerings:
<TABLE>
<CAPTION>
NO. OF 1-YR CONTRACT 2-YR CONTRACT
PRODUCT SPEED USERS MONTHLY PRICE MONTHLY PRICE
- ------- ----- ------ ------------- -------------
<S> <C> <C> <C> <C>
Telecommuter Pack....... 256 Kbps w/o Web Host 1 $129.95 $114.95
SOHO Pack............... 256 Kbps with Web Hosting 1 $149.95 $134.95
SOHO Pack Plus.......... 384 Kbps with Web Hosting 1 $169.95 $154.95
Small Business
Package............... 128 Kbps 2-20 $149.95 $134.95
Cyber Wave M256K........ 256 Kbps 2-20 $249.95 $224.95
Cyber Wave M384K........ 384 Kbps 2-20 $399.95 $359.95
Cyber Wave M768K........ 768 Kbps to 1.54 2-20 $899.95 $799.95
</TABLE>
Our current installation fees are $940 for single users and $1,160 for
multiple users.
We expect our customers' needs will evolve over time, resulting in demand
for faster connections. We can increase our customers' access speeds without
upgrading the equipment located at their premises. Remote upgrades allow
customers to improve performance without service interruptions or additional
equipment investment.
Subscription Television Business. Through our wireless cable programming,
we generally offer our subscribers local off-air VHF/UHF channels from
affiliates of ABC, NBC, CBS and Fox and other local independent broadcast
stations, as well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN, USA, WGN,
WTBS, Discovery, the Nashville Network, A&E and other cable programming. The
channels and programming that we offer in each market will vary depending upon
the amount of spectrum capacity controlled in such market.
Currently, wireless cable providers can offer a maximum of 33 channels of
analog video programming. Because we historically have not used equipment that
converts signals over the MDS-1 channel, and the MDS-2A channel will not
accommodate color video programming satisfactorily, we can offer a maximum of 31
channels of video programming in our markets. We have supplemented our analog
channel capacity by entering into cooperative marketing arrangements with
DIRECTV and DIRECTV distributors, which allow us to market up to 185 channels of
digital programming in 51 markets in combination with our MMDS offering or as a
stand-alone offering. See "Business -- Suppliers." Our business strategy
currently does not include the launch of any new wireless cable-only markets, or
adding wireless cable programming to any of our unconstructed markets that we
intend to build out for Internet services.
MMDS LICENSES AND LEASES
We hold the licenses for approximately 75% of our MMDS and MDS channels. We
lease from third-party license holders the rights to (1) the remaining 25% of
our MMDS and MDS channels and (2) all of our ITFS channels, which generally
comprise 20 of the 33 channels available in each market. All MDS and MMDS
licenses expire in either 2001 or 2006. Approximately 50% of our MDS/MMDS
licenses are for "incumbent" channels that expire in 2001; the other 50% are BTA
channels that expire in 2006. ITFS licenses generally have a term of 10 years.
All licenses are subject to renewal by the FCC as described in
"Business -- Government Regulation." Although FCC custom and practice establish
a presumption of granting renewals of licenses, the presumption requires that
the licensee substantially comply with its regulatory obligations during the
license period.
Each of our channel leases typically covers four ITFS channels or one to
four MMDS or MDS channels. The terms of the leases for ITFS channels typically
expire five to ten years after the license grant date but in any event may not
exceed 15 years. The terms of the leases for MMDS and MDS channels typically
expire five to 10 years from the lease execution date. The remaining initial
terms of most of our operating channel leases range from two to six years,
although substantially all of these leases renew automatically or upon notice
from us. Although we do not believe that the termination of or failure to renew
a single channel lease would adversely affect us, several terminations or
failures to renew in one or more operating systems could have a material adverse
effect on our operations.
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<PAGE> 16
EXISTING AND UNCONSTRUCTED MARKETS
The following tables provide information as of May 31, 1999, regarding the
87 markets in which we operate a wireless cable system or Internet business, own
the BTA authorization or have acquired, or expect to acquire, MMDS channel
rights. Certain of our channel rights are subject to pending applications for
new channel licenses or modifications to existing channel licenses, and must be
reviewed by the FCC's engineering and legal staff. We cannot assure you of the
number of applications that will be granted.
"Estimated Total Households" represents our current estimates of the
approximate number of households that may be served from existing or projected
tower sites. Total household information is based on 1990 census bureau data
from a commercially available population software program, and includes an
average annual growth rate of 1%, based on census bureau data released in March
1998. Historically, MMDS companies have provided information on total households
to present basic information about their markets. The following table does not
include information on the number of businesses in our markets. We estimate that
our wireless transmissions can be received by an average of 85% of the homes in
our markets using our current network design.
39
<PAGE> 17
<TABLE>
<CAPTION>
ESTIMATED NUMBER OF VIDEO NUMBER OF
TOTAL SUBSCRIBERS CHANNELS
EXISTING MARKETS HOUSEHOLDS 5/30/99 AVAILABLE(1)
- ---------------- ---------- --------------- ------------
<S> <C> <C> <C>
Abilene, TX................................................. 63,808 2,817 22
Ada, OK..................................................... 48,591 3,073 32
Ardmore, OK................................................. 53,076 3,387 32
Austin, TX.................................................. 437,358 9,462 32
Beloit, KS.................................................. 20,481 563 33
Bucyrus, OH................................................. 236,856 836 21
Champaign, IL............................................... 104,533 2,652 23
Chanute, KS................................................. 56,155 4,149 33(2)
Corpus Christi, TX.......................................... 167,864 10,232 33(3)
Corsicana/Athens, TX........................................ 95,753 2,139 29
Enid, OK.................................................... 40,118 3,789 32
Freeport, IL................................................ 139,485 1,055 20
Gainesville, TX............................................. 40,444 1,038 33
George West, TX............................................. 23,237 2,127 23(4)
Greenville, PA.............................................. 339,291 641 20
Hamilton, TX................................................ 31,443 2,640 33
Jacksonville, IL............................................ 48,060 526 26
Jourdanton/Charlotte, TX.................................... 101,132 1,715 28
Kerrville, TX............................................... 37,046 417 33
Kingsville/Falfurrias, TX................................... 32,484 1,498 23(4)
Laredo, TX.................................................. 51,136 3,806 33
Lawton, OK.................................................. 81,960 5,811 33
Lindsay, OK................................................. 58,730 2,548 29
Lubbock, TX................................................. 112,235 3,214 33
Macomb/Walnut Grove, IL..................................... 84,209 1,762 20
Manhattan, KS............................................... 52,720 1,785 33(5)
Marion, KS.................................................. 55,069 937 21(6)
McAlester, OK............................................... 38,986 644 20
McLeansboro, IL............................................. 88,485 1,278 31
Medicine Lodge/Anthony, KS.................................. 30,022 1,259 22(7)
Midland, TX................................................. 118,372 5,503 33
Monroe City/Lakenan, MO..................................... 70,196 1,393 32(8)
Montgomery City, MO......................................... 91,080 699 23
Mt. Pleasant, TX............................................ 57,951 2,162 24
Muskogee, OK................................................ 79,972 906 20
O'Donnell, TX............................................... 66,006 602 22
Olney, IL................................................... 71,074 1,535 20
Olton, TX................................................... 27,333 751 33
Paragould, AR............................................... 142,470 2,286 20
Paris, TX................................................... 42,897 2,824 26
Peoria, IL.................................................. 204,681 1,670 29
Radcliffe/Story City, IA(9)................................. 75,788 1,637 27
Sherman/Denison, TX......................................... 110,559 7,905 29
Sikeston, MO................................................ 100,564 2,425 20
Sterling, KS................................................ 45,447 723 24(5)
Stillwater, OK.............................................. 81,586 5,478 33
Strawn/Ranger, TX........................................... 42,856 1,295 33
Taylorville, IL............................................. 166,567 1,501 20
Temple/Killeen, TX.......................................... 138,825 9,974 33(3)
Texarkana, TX............................................... 80,871 1,213 29
Tulsa, OK................................................... 324,859 10,104 33(3)
Uvalde/Sabinal, TX.......................................... 18,528 1,505 33
Vandalia, IL................................................ 93,998 1,564 20
Waco, TX.................................................... 113,247 5,216 33(10)
Watonga, OK................................................. 23,946 831 33(5)
Weatherford, OK............................................. 28,994 725 33
Wichita Falls, TX........................................... 65,257 4,614 33
Woodward, OK................................................ 14,180 2,291 33
--------- ------- -----
Total -- Existing Markets........................... 5,268,871 157,132 1,617
========= ======= =====
</TABLE>
- ---------------
40
<PAGE> 18
(1) Unless otherwise noted, the number of channels available includes MMDS, MDS
and ITFS channels that are either licensed to us or leased to us from other
license holders. The number of channels available includes leased channels
that may not currently be available for two-way broadband wireless
services.
(2) Eight MMDS and two MDS channels are currently authorized under a special
temporary authorization from the FCC. These channels are subject to pending
applications for permanent authority at the FCC that we believe are
available for grant.
(3) One MDS channel is available for license through our ownership of the BTA.
(4) We have leases with two prospective ITFS applicants for eight additional
ITFS channels that we believe will be available in the FCC's next ITFS
filing window.
(5) One MDS channel is subject to a pending application at the FCC that we
believe is available for grant.
(6) Four ITFS channels are subject to pending proceedings at the FCC and we
believe will be granted pursuant to an agreement with the wireless cable
operator of the adjacent Salina, Kansas market. We have the right to lease
one MDS channel that is subject to a pending application that we believe is
available for grant.
(7) We have the right to lease four ITFS channels which are subject to a
pending application that we believe is available for grant under a
settlement agreement with a competing ITFS applicant.
(8) Four MMDS channels are subject to a pending application at the FCC that we
believe are available for grant.
(9) We operate the Radcliffe/Story City, Iowa market under a management
arrangement with CS Wireless Systems, Inc. CS Wireless has agreed to assign
to us its rights to the assets and channel leases for this market upon FCC
approval of the assignment of certain other MMDS and WCS spectrum rights
and the closing of a master agreement with CS Wireless. See
"Business -- Recent Transactions -- CS Wireless Transaction."
(10) Two MDS channels are available for license through our ownership of the
BTA.
<TABLE>
<CAPTION>
TOTAL CHANNELS
UNCONSTRUCTED MARKETS HOUSEHOLDS EXPECTED(1)
- --------------------- ---------- -----------
<S> <C> <C>
Altus, OK................................................... 27,256 33
Amarillo/Borger, TX......................................... 132,984 29
Bartlesville/Ponca City, OK................................. 128,271 33
Burnet, TX.................................................. 50,850 32
Casper, WY.................................................. 31,242 13
Charleston, WV.............................................. 183,746 4
Cheyenne, WY................................................ 33,940 13
Columbia, MO................................................ 118,199 21
Des Moines, IA.............................................. 225,319 31
El Dorado, AR............................................... 79,031 16
El Paso, TX................................................. 235,243 29
Elk City, OK................................................ 26,010 25
Fischer, TX................................................. 439,639 25
Flagstaff, AZ............................................... 45,693 6
Forrest City, AR............................................ 172,317 20
Great Bend, KS.............................................. 53,865 33
Hays, KS.................................................... 29,040 33
Holdenville, OK............................................. 48,575 33
Kossuth, TX................................................. 71,964 33
Lake City, FL............................................... 51,277 16
Lenapah, OK................................................. 56,147 33
Lufkin, TX.................................................. 70,954 13
Magnolia, AR................................................ 58,421 22
Ottawa/LaSalle, IL.......................................... 238,510 16
Paducah/Mayfield, KY........................................ 76,393 33
Searcy, AR.................................................. 76,935 33
Springfield, MO............................................. 143,756 33
Topeka, KS.................................................. 112,540 33
Tyler, TX................................................... 174,025 21
---------- -----
Total -- Unconstructed Markets...................... 3,192,142 716
---------- -----
Total -- All Company Markets........................ 8,461,013 2,333
========== =====
</TABLE>
- ---------------
(1) The number of channels expected includes channels (a) that are either
licensed to us or leased to us from other license holders, (b) for which we
have filed or because of our BTA ownership have the exclusive right to file
license applications with the FCC which we expect to be granted in 1999, or
(c) to which we otherwise expect to acquire license or lease rights in 1999.
41
<PAGE> 19
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 premise equipment at each customer's location. Each
base station includes a transmission tower, transmit and receive antennas,
transmitters, waveguide and other transmission equipment. A "point of presence,"
which may be located at the base station, houses other equipment related to our
Internet business. Each point of presence includes (1) a transceiver to transmit
and receive response or downstream data, (2) a wireless data converter that
converts a wireless signal to a wireline signal (and vice versa), (3) an
Ethernet switch that provides the electrical connection for electronic devices
at the base station or other point of presence and (4) a gateway router that
serves to direct the traffic to the proper Internet address and connect 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 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.
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<PAGE> 20
We initially plan to use a sectorized, single-cell design for our two-way
Internet access service. With traditional MMDS transmissions, the signal is
transmitted in a 360 degree omni-directional pattern. Our single-cell design
will divide our channel service areas into four 90 degree sectors. Sectorization
of our transmissions under this design will allow us to re-use each frequency in
every other sector two times, doubling the bandwidth capacity for each channel
used. For example, if we have two channels authorized for response
transmissions, and allocate each channel into every other sector of four
possible sectors, the first channel could be re-used for response transmissions
in sectors 1 and 3, while the second channel could be reused for response
transmissions in sectors 2 and 4. We have selected the single-cell over a
cellularized design because of design simplicity, lower infrastructure costs and
licensing issues. Cellularization of the channels in certain markets could
increase both the number of households our signal can reach and the market's
available bandwidth capacity. We intend to continue to research cellularized
designs and plans.
Wireless cable. Wireless cable programming is received by the base station
from satellite transmissions and then retransmitted to receiving equipment
located at the subscriber's premises. At the subscriber's premises, the
microwave signals are converted to frequencies that can pass through
conventional coaxial cable into an addressable descrambling converter and then
to a television set. Our customers who subscribe to DIRECTV receive DIRECTV
programming from an orbiting satellite with an 18-inch parabolic dish located at
the customers' premises. The DIRECTV signal is converted through a separate set
top box at the customers' premises.
CUSTOMER SUPPORT
Customer support for our Internet service is provided 24 hours a day, seven
days a week through a toll free access telephone number. We provide
Nucentrix-branded Internet customer service through a contract with ISP
Alliance, Inc. ("ISPA"), an Internet customer service provider in Atlanta,
Georgia, which allows us to deliver this customized service on a "pay as used"
basis. There is no additional charge to the customer beyond their monthly
service fee. ISPA's on line customer service system is available to us through
an Internet connection, and allows us to monitor the call volume and specific
service activity for remedial action. Using this approach has allowed us to
defer building and training an internal customer service organization until our
business volume justifies this expense. Customer problems called in to ISPA are
handled within a traditional six-level customer service escalation procedure. An
unresolved problem is referred by ISPA to the appropriate market's wireless
specialist who will typically visit the customer site and provide support and
oversight through problem resolution. ISPA provides us with an on-line customer
service call and resolution history, and post-help customer feedback through the
use of customer satisfaction questionnaires.
Our existing billing system will accommodate our current Internet access
service offerings. 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 provide a high-speed
alternative to their traditional narrowband connections over the last mile. VARs
are
43
<PAGE> 21
participating in our sales efforts because our service is complementary to their
business, which often includes the design and implementation of a LAN (local
area network), Web site or similar technical support activity. Systems
integrators perform many of the same functions as VARs, but they also implement
a broader solution designed for the customer who desires to use the Internet as
a core part of its business. In the markets we serve we believe that we are the
only ISP that will form partnerships with all three of these indirect sales
channels.
Our direct Internet marketing activities include establishing Nucentrix
brand recognition within each market and supporting our sales campaigns with
appropriate advertising, product launch promotions and supporting marketing
materials. Our marketing campaigns have been developed around a high-speed,
high-value and high-reliability theme. The campaigns include the use of targeted
direct mail and traditional media advertising in high technology magazines as
well as in business sections of local newspapers. We sponsor seminars covering
such topics as Introduction to the Internet for Small Business and Profiting
from the Internet to support our marketing efforts.
Subscription Television Service. Our subscription television service is
marketed under our "Heartland Cable Television" brand, often in association with
DIRECTV programming. Our marketing is designed to take advantage of DIRECTV's
national campaigns and heavy use of national media. Our campaigns include direct
mail and selected outdoor materials to link the Heartland Cable Television brand
with DIRECTV. All responses are directed to our national call center which
provides 24 hour a day, 7 days a week sales coverage. We also market the
Heartland/DIRECTV service through a direct sales force that works door-to-door.
SUPPLIERS
Internet Customer Service and Support. We have entered into an agreement
with ISPA, a leading supplier of systems and operational support for ISPs, to
provide 24 hours a day, seven days a week customer service and support for our
Internet access customers, under the Nucentrix brand. ISPA provides our
technical support, e-mail, Web design and hosting, domain name registration and
maintenance on a "pay as used" basis. ISPA also provides us with a network
monitoring system, a customer service tracking system and an administrative
management system for adding, deleting, modifying accounts and producing
reports. Our contract with ISPA expires in May 2000, unless both parties agree
to renew the contract.
Internet Access Equipment. Internet access equipment and CPE such as
routers, Ethernet switches, wireless data converters and transceivers currently
are available from a variety of sources such as Cisco Systems, Inc., Lucent
Technologies, Inc., Conifer Corporation and California Amplifier, Inc. Hybrid
Networks, Inc. currently is the primary provider of wireless Internet modems to
MMDS operators. In January 1999 Hybrid notified us that, to ensure sufficient
cash to continue operations, customer support and product availability, Hybrid
would begin allocating its supply of modems. Recently, Hybrid has resumed
shipments without allocation restrictions. We intend to work with Hybrid and
others to pursue ways to resolve long-term supply needs. We also have identified
other suppliers that we believe will become an additional source of modems by
the end of 1999. We believe there is adequate long-term supply for all other
equipment necessary to operate our Internet business.
Wireless Cable Equipment. We use subscriber and headend equipment for our
wireless cable and DIRECTV business from a variety of suppliers, including
California Amplifier, General Instrument Corporation, Scientific-Atlanta, Inc.,
ADC Telecommunications, Inc., Conifer, Passive Devices, Inc. and PerfectTen
Satellite Distributing, Inc. We also use subscriber and headend equipment
supplied by Pacific Monolithics, Inc. in 22 of our 58 operating markets. Pacific
Monolithics filed for protection under Chapter 11 of the U.S. Bankruptcy Code on
October 13, 1998, and has discontinued production and service of such equipment.
In response, we and ten other MMDS wireless cable providers have negotiated an
agreement with an alternate supplier to provide the equipment, software and
technical assistance necessary to support the Pacific Monolithics systems. We
expect to finalize this agreement by June 30, 1999.
44
<PAGE> 22
DIRECTV. In April 1998 we entered into a five-year agreement with DIRECTV
which allows us to market up to 185 channels of DIRECTV digital programming to
SFU subscribers, either alone or in combination with our local and premium MMDS
programming, referred to as a "combo" package. DIRECTV pays us a commission for
each SFU subscriber to whom we sell a DIRECTV programming package, as well as
equipment and marketing subsidies. We believe these subsidies materially reduce
the capital expenditure costs required for such new subscribers. We currently
market DIRECTV programming to SFU subscribers in 51 markets.
In October 1997 we entered into a seven-year agreement with DIRECTV to
provide DIRECTV programming to MDUs, such as apartment buildings and condominium
complexes. The MDU agreement is substantially similar to the SFU agreement for
this programming. We believe this additional programming offering will allow us
to target higher income properties and renegotiate existing and renewing
contracts with more advantageous economic terms. We currently offer DIRECTV
programming to residential MDUs in 50 markets. DIRECTV is a registered trademark
of DIRECTV, Inc., a subsidiary of the Hughes Electronics unit of General Motors
Corporation.
Video Programming. We generally offer our subscribers local off-air VHF/UHF
channels from affiliates of ABC, NBC, CBS and Fox and other local independent
broadcast stations, as well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN,
USA, WGN, WTBS, Discovery, the Nashville Network, A&E and other cable
programming. The channels and programming that we offer in each market varies
depending upon the amount of spectrum capacity controlled in each market. We are
required to obtain the consent of local network affiliates to retransmit their
signals. Additionally, we are required to maintain contracts with cable
programmers like HBO and ESPN, which generally require payment on a per
subscriber basis.
COMPETITION
High-Speed Internet Competition
The Internet access market is highly competitive. We will face competition
from many Internet access and service providers with significantly greater
financial resources, well-established brand names and large, existing customer
bases. Moreover, we expect the level of competition to intensify in the future.
We expect significant competition from:
ISPs. ISPs provide Internet access to residential and business
customers. These companies can:
- provide Internet access over ILECs' networks at or below ISDN speeds,
- offer DSL-based access using their own DSL services, or DSL services
offered by ILECs and others, and
- have significant and sometimes nationwide marketing presences and
combine these with strategic or commercial alliances with DSL-based
competitive carriers. Significant ISPs include Concentric Network
Corporation, Mindspring Enterprises, Inc., PSINet Inc. and Verio,
Inc..
Incumbent Local Exchange Carriers. ILECs, such as SBC Communications,
Inc., GTE Corp., Ameritech Corp. and US WEST, Inc. have existing
metropolitan area networks and circuit switched local access networks. Most
incumbent carriers have announced deployment of commercial DSL services in
certain areas and are combining their DSL service with their own Internet
access services. The incumbent carriers generally have an established brand
name in their service areas and possess sufficient capital to deploy DSL
services rapidly.
Inter-exchange Carriers. Many of the inter-exchange carriers, such as
AT&T Corp., MCI WORLDCOM, Inc. and Sprint Corp., are expanding their
capabilities to support high-speed, end-to-end networking services. These
carriers have deployed large scale networks, have large numbers of existing
business and residential customers and enjoy strong name recognition. These
companies increasingly are bundling their services to include high-speed
local access combined with metropolitan and wide area networks, and a full
range of Internet services and applications. In March 1999, AT&T
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<PAGE> 23
merged with TeleCommunications, Inc., the largest cable operator in the
United States, and in April 1999 announced plans to acquire MediaOne Group,
Inc., one of the largest cable operators in the United States. We expect
companies such as these to offer combined data, voice and video services.
They also could deploy DSL services in combination with their current fiber
networks.
Competitive Local Exchange Carriers. Certain CLECs, including
NorthPoint Communications, Inc., and Covad Communications Group, Inc., have
begun offering DSL-based data services. Other competitive carriers are
likely to do so in the future.
Cable Modem Service Providers. Cable modem service providers, like
Roadrunner, @Home Networks and @Work Networks and their cable partners,
currently offer to consumers and are preparing to offer to businesses
high-speed Internet access over hybrid fiber coaxial cable networks. Where
deployed, these networks provide local access services similar to our
services, and in some cases at higher speeds.
Other Wireless and Satellite Service Providers. We also may face
competition from other fixed-wireless services, including 24 GHz licensees
such as Teligent, Inc., 28 GHz licensees such as NEXTLINK Communications,
Inc. and 38 GHz licensees such as Winstar Communications, Inc. We also may
face competition from satellite-based systems. Motorola Satellite Systems,
Inc., Hughes Communications, Inc. (a subsidiary of General Motors
Corporation), Teledesic LLC and others have filed applications with the FCC
for global satellite networks that can be used to provide ubiquitous
two-way broadband voice and data services to fixed locations.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
We may not be able to compete effectively, especially against established
industry competitors with significantly greater financial resources. Some of the
competitive factors we face include:
- transmission speed,
- reliability of service,
- ability to bundle services,
- price performance,
- customer support,
- brand recognition,
- operating experience, and
- capital availability.
Other Telephony Services
We also will face intense competition from other providers of telephony
transmission services as we implement VOIP and wireless local loop services.
This competition will be increased because MMDS spectrum traditionally has not
been used to deliver telephony services, and consumer acceptance of such
services delivered across MMDS spectrum is unknown at this time. Many of the
existing providers of telephony services, such as regional Bell operating
companies and other local exchange carriers, have significantly greater
financial and other resources than us and better established brand awareness in
their service areas.
Subscription Television Competition
Hardwire Cable. Our principal subscription television competitors are
traditional hardwire cable operators such as TeleCommunications, Inc., and Time
Warner Entertainment. Hardwire cable companies generally are well established
and known to our potential customers and have significantly greater financial
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<PAGE> 24
and other resources than we have. In addition, these competitors are also
bundling additional services with their cable TV services, such as high-speed
Internet access, to enhance their products.
Direct Broadcast Satellite ("DBS"). DBS service is available from DIRECTV,
Inc., which is a subsidiary of the Hughes Electronic unit of General Motors
Corporation, PrimeStar, Inc. and Echostar Communications Corporation. We compete
with many retail distributors of DIRECTV and other DBS service. The growth of
DBS service has been significant since it was first launched and we expect that
the DBS service providers will continue to be significant competitors for video
programming customers.
Inter-exchange Carriers. We expect that AT&T will combine its current
consumer long-distance, wireless and Internet services units with TCI's cable,
telecommunications and high-speed Internet access businesses. With this ability
to bundle high-speed services with cable programming, we expect that AT&T will
be a significant competitor to our MMDS and DIRECTV programing services.
Private Cable. Private cable is a multi-channel subscription television
service where the programming is received by satellite receiver and then
transmitted via coaxial cable throughout private property, often MDUs, without
crossing public rights of way. FCC rules permit point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 GHz band. Private cable operators compete with us for exclusive rights of
entry into larger MDUs.
Local Off-Air VHF/UHF Broadcasts. Local off-air VHF/UHF broadcast
television stations (such as affiliates of ABC, NBC, CBS and Fox) provide free
programming to the public. Potential customers may forego subscription
television and only receive free off-air programming.
GOVERNMENT REGULATION
General. MDS, MMDS and ITFS services are subject to regulation by the FCC
under the Communications Act of 1934, as amended. The Communications Act
authorizes the FCC, among other things, to
- issue, revoke, modify and renew station licenses,
- approve the assignment and/or transfer of control of such licenses,
- approve the location and technical parameters of MDS, MMDS and ITFS
transmission facilities (headends and base stations),
- regulate the kind, configuration and operation of equipment used by MDS,
MMDS and ITFS systems, and
- impose certain equal employment opportunity and other periodic reporting
requirements on MDS, MMDS and ITFS operators.
MDS, MMDS and ITFS Licenses. In our markets, a total of 32 six-MHz channels
and one four-MHz channel are available in the MDS, MMDS and ITFS frequency
bands. The FCC can license the 13 MDS and MMDS channels directly to commercial
entities for full-time operation without programming restrictions. Except in
limited circumstances, the FCC generally can license 20 ITFS channels only to
qualified non-profit educational organizations. Each of the ITFS channels must
broadcast programming for educational purposes a minimum of 20 hours per week.
The remaining air time on ITFS channels may be 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
47
<PAGE> 25
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.
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 has 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
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<PAGE> 26
following the filing of such applications. The FCC may revoke or cancel licenses
for violations of the Communications Act or the FCC's rules and policies.
Conviction of certain criminal offenses may also render a licensee or applicant
unqualified to hold a license. Although FCC custom and practice establish a
presumption granting renewals of licenses, the presumption requires that the
licensee substantially comply with its regulatory obligations during the license
period.
FCC rules generally prohibit the sale for profit of an incumbent MDS or
MMDS conditional license or of a controlling interest in the conditional license
holder before construction of the station or, in certain instances, prior to the
completion of one year of operation. However, access to channels may be obtained
during these prohibited periods through the leasing of an MDS or MMDS license
holder's channel capacity. The granting of options to purchase a controlling
interest in a licensee or an option to purchase a license is also permitted
during these prohibited periods. During the lifetime of any such lease or option
agreement, the licensee must remain in control of its FCC license to avoid
violating FCC transfer-of-control rules. Our lease agreements with license
holders typically require the license holders, at our expense, to use their best
efforts, in cooperation with us, to make various required filings with the FCC
in connection with the maintenance and renewal of licenses. We believe this
reduces the likelihood that the FCC will revoke, cancel or fail to renew a
license.
BTA Auction and Service Requirements. In March 1996 the FCC concluded its
first auction of available commercial MMDS spectrum in the 493 BTAs. The winner
of a BTA has the exclusive right to apply for and develop the available MDS and
MMDS frequencies in the BTA, subject to certain specified interference criteria
that protect incumbent MDS and MMDS stations. Incumbent licensees also must
protect the BTA licensees from system interference caused by modifications to
incumbent stations, including power increases or base station relocations.
BTA auction winners with MMDS spectrum rights have a five-year "build-out"
period. During the build-out period, a BTA holder can initiate or expand service
within its BTA without competition from other MMDS spectrum applicants except in
those areas and on those channels for which there is an incumbent MDS or MMDS
licensee. After the five-year period, a BTA holder can retain its authorization
for an entire BTA if its signal is capable of covering at least two-thirds of
the population within its BTA service area, excluding those who are located
within the protected service areas of incumbent MDS/MMDS stations licensed to
others. If the BTA holder fails to meet the coverage requirement after the
five-year build-out period, then the BTA license for the portion of the BTA that
is not capable of being served will be subject to forfeiture. The FCC's rules
allow BTAs to be partitioned and BTA licensees are permitted to contract with
other entities to allow them to file applications with the FCC for available
channels within the partitioned area. We expect the FCC to renew BTA licenses
after the expiration of their 10-year term if the authorization holder satisfies
the coverage requirement and is in compliance with the Communications Act and
the FCC's rules.
We acquired 93 BTAs in the March 1996 auction at a total cost of
approximately $19.8 million. Under the terms of the BTA auction, we remitted
approximately $4.0 million as down payments and deposits. The remaining $15.8
million bears interest at 9.5% and is being paid under 10-year installment notes
that began in the fourth quarter of 1996 with interest-only payments. Quarterly
payments of principal and interest began in the fourth quarter of 1998. All of
our BTA licenses have an effective date of August 16, 1996, except for one which
has an effective date of September 17, 1996. Failure to meet the above-described
installment payment schedule or the five-year construction deadlines could
result in the forfeiture of some or all of the BTA authorizations that we hold.
We believe that we have achieved, or will 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."
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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."
Transmission. The FCC also regulates transmitter locations and signal
strengths. The operation of an MDS, MMDS and ITFS system typically requires the
co-location of a commercially viable number of channels operating with common
technical characteristics. To co-locate channels, an applicant must demonstrate
that its proposed signal does not violate interference standards in the
FCC-protected area of previously-authorized MDS, MMDS and ITFS stations. An MDS
and MMDS license holder generally is protected from interference from another
MDS or MMDS operator within a 35-mile radius of the base station. An ITFS
license holder generally is entitled to protection to all of its receive sites.
In addition, an ITFS station is entitled to a 35-mile protected service area (1)
during the use of the station's excess channel capacity by an MMDS operator if
it has requested and received a protected service area from the FCC or (2) from
all MDS, MMDS and ITFS station licensees that implement two-way digital
operations.
Two-Way Authorization. In September 1998 the FCC amended its rules to allow
for the use of MMDS spectrum for fixed, two-way digital voice, video and data
communications. As amended, these rules are referred to as the "two-way rules."
Although petitions for reconsideration or clarification of various portions of
the ruling remain pending, portions of the two-way rules became effective on
February 8, 1999, and we expect the remainder of the rules to become effective
in the third quarter of 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, 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
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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. That
filing window is expected to occur some time in the third quarter of 1999. All
applications filed during this one-week window will be considered as having been
filed on the same day. Applicants must certify that they are in compliance with
all applicable technical, interference and notification rules, including all
necessary interference consent letters. The FCC has indicated that its staff
will review the applications for completeness, but generally will not conduct
its own interference studies. The FCC will issue a public notice of its receipt
of the filed applications, after which applicants will have 60 days to resolve
engineering conflicts and amend their applications. The FCC will then issue a
second public notice accepting the applications that also sets another 60-day
period for parties to file petitions to deny.
After the initial one-week filing window, the FCC will use a "rolling"
one-day filing window for booster and hub applications. Applications will be
placed on public notice, giving parties 60 days to file petitions to deny. If no
petitions to deny are filed, the applications are granted on the 61st day.
Regulation of Internet Service Providers. Congress has passed a number of
laws that concern the Internet, including the Digital Millennium Copyright Act,
the Children's Online Privacy Protection Act, the Children's Online Protection
Act and the Protection of Children from Sexual Predators Act of 1998. Generally,
these laws provide liability limitations for Internet service providers that do
not knowingly engage in unlawful activity. Although we do not anticipate that
compliance with these laws will have an adverse impact on us, we may be required
to implement operating guidelines to comply with the laws and could be subject
to liability if we fail to implement appropriate guidelines or otherwise violate
any of these new laws.
Aside from the use of spectrum, the FCC has held that the terms and
conditions of providing Internet and Internet access services are not subject to
FCC regulation. However, the FCC has held that the provision of Internet access
is an interstate service subject to FCC jurisdiction. There can be no certainty
that the providing of Internet access services will continue to be free from FCC
regulation. Moreover, if we begin providing wireless local loop services, we
will be subject to FCC and state regulation of our interstate and intrastate
services, respectively.
The Cable Act. On October 5, 1992, Congress passed the Cable Television
Consumer Protection and Competition Act of 1992 (the "Cable Act"). Pursuant to
the Cable Act, effective October 6, 1993, commercial broadcasters may require
cable operators to obtain their consent before retransmitting their signals. The
FCC has exempted wireless cable providers from the retransmission consent rules
if the receive-site antenna is either owned by the subscriber or within the
subscriber's control and available for purchase by the subscriber upon the
termination of service. In all other cases, wireless cable providers must obtain
consent to retransmit broadcast signals. We believe that we have obtained
substantially all consents required to retransmit local broadcast signals in our
subscription television markets. We cannot assure you that existing consents
will be maintained or renewed or that we will be able to obtain any additional
necessary consents on terms satisfactory to us, if at all. Unlike hard-wired
cable systems, wireless cable systems, are not required under the Cable Act and
the FCC's "must carry" rules to retransmit a specified number of local
commercial and non-commercial television or qualified low power television
signals.
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 compliant 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
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1976, certain "cable systems," including wireless cable providers, are entitled
to engage in the secondary transmission of programming without the prior
permission of the holders of copyrights in the programming if a compulsory
copyright license is secured. Such a license may be obtained upon the filing of
certain reports and the payment of certain fees set by copyright arbitration
royalty panels. We believe we have obtained all compulsory copyright licenses
required for each of our subscription television markets.
In 1994, Congress enacted legislation that clarified the ability of
wireless cable providers to obtain the benefit of the Section 111 compulsory
copyright license. Periodically, Congress has considered proposals to phase out
the Section 111 compulsory license. In response to a request from Congress, the
U.S. Copyright Office held a public hearing on the issue of compulsory licenses
in May 1997 and endorsed eventual replacement of the statutory license by a free
market negotiated license while recommending retention of the existing license
for the near future. Congress currently is holding hearings to review this and
other recommendations. Because our wireless cable systems retransmit only a
limited number of broadcast channels, we do not believe that the termination of
the compulsory copyright license would have a material adverse effect on our
financial condition, results of operations or cash flows.
Other Regulations. MMDS operators are subject to regulation by the FAA for
the construction, maintenance and lighting of transmission towers and by certain
local zoning regulations affecting construction of towers and other facilities.
There may also be restrictions imposed by local authorities.
RECENT TRANSACTIONS
CS Wireless Transaction. Effective December 2, 1998, Nucentrix, CAI
Wireless Systems, Inc. and CS Wireless signed a Master Agreement pursuant to
which CAI purchased our 36% equity interest in CS Wireless for $1.5 million. In
addition, CS Wireless agreed to assign to us channel rights to MDS-1 channels
(2150 MHz-2156 MHz) in Austin, Corpus Christi, El Paso and Killeen, Texas, and
WCS (2.3 GHz) frequencies in 19 markets, an operating wireless cable system in
Radcliffe/Story City, Iowa with approximately 1,600 subscribers, and certain
subscriber equipment. We also agreed to assign MMDS channel rights and related
equipment in Portsmouth, New Hampshire to CS Wireless. Following this
transaction, we retained no equity interest or corporate governance rights in CS
Wireless.
We and CS Wireless have filed for FCC approval of the assignment to us of
the MDS-1 channels. We also have agreed with CS Wireless, upon execution of a
comprehensive two-way interference coordination agreement, to file for approval
of the assignment to us of the WCS Spectrum. We have executed a spectrum lease
with CS Wireless giving us the exclusive right to use the MDS-1 channels,
subject to certain pre-existing leasehold interests, and the WCS spectrum
pending FCC approval of these assignments. The transfers and assignments will
occur following FCC approval, at which time we have agreed to cancel a
promissory note issued by CS Wireless to us, the outstanding balance of which,
prior to December 2, 1998, was approximately $2.3 million. These lease
arrangements may be terminated by CS Wireless if FCC approval is not obtained by
September 1999, in which case we would retain the promissory note issued by CS
Wireless. We also are operating the Radcliffe/Story City market under a
management arrangement with CS Wireless, which CS Wireless also could terminate
if FCC approval is not obtained.
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 marks HEARTLAND and
HEARTLAND CABLE TELEVISION. We also own common law trademark rights in and have
a federal registration on the trademark HEARTLAND WIRELESS and design in the
United States. Because of the recognition of these
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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 is a co-defendant in a stockholder action
filed in February 1998 in the United States District Court for the Northern
District of Texas, styled Coates, et al. v. Heartland Wireless Communications,
Inc., et al. (3-98-CV-0452-D). The Coates action involves federal securities
laws claims brought by two former stockholders of Nucentrix against Nucentrix
and six former officers and/or directors. The complaint asserts claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and alleges
that during a period beginning on November 14, 1996, and ending on March 20,
1997, defendants allegedly misrepresented Nucentrix's financial condition in
various press releases and public filings. The plaintiffs seek unspecified
damages, costs and expenses, including attorneys' and experts' fees. On November
2, 1998, the court granted the defendants' motion to dismiss the plaintiffs'
complaint. The court granted the plaintiffs permission to replead, and the
plaintiffs filed an amended complaint on January 4, 1999. A motion to dismiss
the amended complaint is pending.
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). 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 asserts that, during the purported
class period, Nucentrix and certain former officers and directors allegedly
misstated material facts concerning Nucentrix's subscriber base and allegedly
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 Thompson action seeks to represent a class consisting
of anyone who acquired the securities of Nucentrix between November 15, 1995,
and March 20, 1997. In May 1999, we were 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.
In addition, 14 current and former directors, officers and/or employees of
Nucentrix are defendants in a purported class action lawsuit filed in federal
court in November 1998 in the Northern District of Texas styled Shehadi, et al.
v. David E. Webb, et al.(3-98-CV-2660-H). The Shehadi action is a purported
class action asserted on behalf of all purchasers of Nucentrix's securities on
the open market from November 15, 1995, through August 14, 1998. The complaint
asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and alleges that, during the class period, Nucentrix and certain former and
current directors and officers misstated material facts concerning Nucentrix's
subscriber base and allegedly omitted to disclose the need for a material
write-down of accounts receivable relating to that subscriber base. The
complaint also alleges that Nucentrix failed to write down certain assets and
investments in affiliates in accordance with GAAP and over-estimated certain
amortization periods relating to subscriber installation costs. The plaintiffs
seek unspecified rescissory and compensatory damages, costs and expenses,
including attorneys' and experts' fees, as well as unspecified injunctive
relief. As of May 31, 1999, the Shehadi action was pending in the United States
District Court for the Northern District of Texas. At the time of filing this
lawsuit, the plaintiffs also filed a request to withhold issuance of service to
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all defendants and we do not believe that the plaintiffs have served this
lawsuit on any defendant. The lawsuit remains pending.
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, Thompson or Shehadi
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, Thompson or
Shehadi 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, are classified as Class 6 Indemnity Claims under our plan of
reorganization. Under Section 4.6 of our plan of reorganization, holders of
Class 6 Indemnity Claims allowed by a Bankruptcy Court are 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, Thompson and Shehadi actions, other than two former officers and
directors who are defendants in each of the Coates, Thompson and Shehadi actions
and three additional former officers who are defendants in the Shehadi action,
served as an officer or director after April 25, 1997, and, therefore, are
beneficiaries of the Assumed Indemnity Obligations. To the extent the five
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, we believe that any claim
they may assert against us for indemnification, to the extent allowed by the
bankruptcy court, will be treated as Class 6 Indemnity Claims under our plan of
reorganization and their recovery will be limited to any available proceeds of
our corporate liability insurance. To the extent any of the other former or
current officers or directors incur any liability in any of these lawsuits, we
would be obligated to indemnify such persons, subject to the exceptions
described above, to the extent the proceeds of our corporate liability insurance
are insufficient to cover such liabilities.
To the extent plaintiffs in the Coates, Thompson and Shehadi 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
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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, Thompson and Shehadi 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, 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 two purported class action
lawsuits filed in May 1998 and pending in State District Court in Brooks and
Grayson Counties, Texas. The lawsuits are styled Garcia, et al. v. Heartland
Wireless Communications, Inc. d/b/a Heartland Cable Television (98-60898-1) and
Warren, et. al. v. Heartland Wireless Communications, Inc. (98-0715). The
lawsuits allege that the administrative late fees charged by Nucentrix are not
reasonably related to the costs incurred by Nucentrix as a result of late
payment of accounts. The plaintiffs seek to certify a class to represent all
persons receiving cable service from Nucentrix or who have been charged a late
fee by Nucentrix. The plaintiffs seek 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.
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 liquidated damages provisions of our customer agreements are
unconscionable, invalid and illegal, and therefore unenforceable. The plaintiffs
also allege that our administrative late fees are "unreasonably large" and
therefore unenforceable. The plaintiffs seek 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 plaintiffs seek
(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.
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,
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.
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.
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EMPLOYEES
As of May 31, 1999, we had approximately 730 employees. None of our
employees is subject to a collective bargaining agreement. We have experienced
no work stoppages and believe that we generally have good relations with our
employees. We also presently use the services of independent service providers
to install certain components of our operating systems.
PROPERTIES
We lease approximately 24,000 square feet of office space for our executive
offices in Plano, Texas. Approximately 1,900 square feet of this space is
subleased to CS Wireless. We lease approximately 6,300 square feet of space for
telemarketing, customer care operations and training facilities in Durant,
Oklahoma from an affiliate of Mr. L. Allen Wheeler, a former director of
Nucentrix, and Mr. David E. Webb, a former executive officer and director of
Nucentrix, under leases that expire March 1, 2000. We pay approximately $48,000
per year for the Durant space. We believe that the facilities described above
are leased at fair market value and are adequate for the foreseeable future.
The principal physical assets of our operating systems consist of satellite
signal reception equipment, radio transmitters and transmission antennae, as
well as office space and base station and headend space. We lease office space
for our existing markets and may, in the future, purchase or lease additional
office space in other locations if we launch other systems. We also own
transmission towers or 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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