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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NO. 0-23694
NUCENTRIX BROADBAND NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 73-1435149
(State of Incorporation) (I.R.S. Employer
Identification No.)
200 CHISHOLM PLACE, SUITE 200
PLANO, TEXAS 75075
(Address of principal executive offices) (Zip Code)
(972) 423-9494
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE THE NASDAQ STOCK MARKET
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Parts I, II, III, and IV of this Form 10-K or any
amendment to this Form 10-K. [ ]
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
<TABLE>
<S> <C>
AGGREGATE MARKET VALUE OF OUTSTANDING COMMON STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT, AS OF MARCH 27, 2000....................................................... $ 152,101,635
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 27, 2000...................... 10,148,183
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Registrant's definitive proxy statement to be filed pursuant to
Regulation 14A for the Annual Meeting of Stockholders to be held May 9, 2000.
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NUCENTRIX BROADBAND NETWORKS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
Item 1. Business.......................................................................................3
Item 2. Properties....................................................................................33
Item 3. Legal Proceedings.............................................................................33
Item 4. Submission of Matters to a Vote of Security Holders...........................................37
PART II
Item 5. Market for Registrant's Common Equity and Related Matters.....................................37
Item 6. Selected Financial Data.......................................................................39
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................41
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.....................................55
Item 8. Financial Statements and Supplementary Data...................................................55
Item 9. Change in and Disagreements with Accountants
on Accounting and Financial Disclosure........................................................55
PART III
Item 10. Directors and Executive Officers of the Registrant............................................55
Item 11. Executive Compensation........................................................................55
Item 12. Security Ownership of Certain Beneficial Owners and Management................................56
Item 13. Certain Relationships and Related Transactions................................................56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................56
</TABLE>
Note: The responses to Items 10 through 13 are included in the Company's
definitive proxy statement to be filed pursuant to Regulation 14A for the
Annual Meeting of Stockholders to be held May 9, 2000. The required
information is incorporated into this Form 10-K by reference to that
document and is not repeated herein.
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FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements with respect to
our financial condition, results of operations, business strategy and financial
needs. The words "may," "will," "expect," "believe," "plan," "intend,"
"anticipate," "estimate," "continue" and similar expressions, as they relate to
us, as well as discussions of our strategy, are intended to identify
forward-looking statements. Such statements reflect our current view with
respect to future events and are based on our assessment of, and are subject to,
a variety of factors, contingencies, risks, assumptions and uncertainties deemed
relevant by management, including:
o business and economic conditions in our existing markets,
o competitive technologies, products and services,
o regulatory and interference issues, including grant of two-way
transmission authorizations,
o the capabilities of the VOFDM (Vector Orthogonal Frequency Division
Multiplexing) technology platform we intend to use for wireless
broadband services, and
o those matters discussed specifically under "Item 1. Business - Risk
Factors" and elsewhere herein.
We cannot assure you that any of our expectations will be realized, and actual
results and occurrences may differ materially from our expectations as stated in
this document. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
In this Annual Report on Form 10-K, we will refer to Nucentrix Broadband
Networks, Inc., a Delaware corporation, as "Nucentrix," "we," "us" and "our."
ITEM 1. BUSINESS
We use our high-capacity radio spectrum to provide fixed wireless broadband
services in medium and small markets in the central United States. We control up
to 196 MHz of radio spectrum in the 2.1 and 2.5-2.7 GHz band licensed by the
Federal Communications Commission ("FCC") in 92 markets (including two markets
for which we have signed a letter of intent to acquire). This spectrum band is
commonly referred to as Multichannel Multipoint Distribution Service, or "MMDS."
We currently provide always-on, high- speed wireless Internet access service
under temporary developmental FCC licenses in two markets, primarily to
medium-sized and small businesses, small offices/home offices ("SOHOs") and
telecommuters. We began providing two-way wireless broadband Internet access in
Sherman-Denison, Texas, in February 1999 and in Austin, Texas, in May 1999.
In February 2000, we announced a strategic alliance and agreement with
Cisco Systems, Inc. ("Cisco"), to pursue testing and deployment of
fixed-wireless broadband services using VOFDM technology on a Cisco Powered
Network(R). The agreement includes two field trials to be completed in Austin
and Amarillo, Texas between September 2000 and the end
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of 2000. We expect to launch at least 20 total markets using VOFDM technology by
the end of 2001. We believe that a VOFDM-based technology platform will allow us
to maximize our coverage for two-way services in our markets, which should allow
us to offer these services to more subscribers than possible through other
fixed-wireless technologies currently available. We also expect that a VOFDM
technology platform will allow us to provide a higher quality of service to our
end users by decreasing the effects of multipath fading or narrowband
interference that can exist in wireless operating environments.
Historically, we have used our spectrum to provide wireless subscription
television programming, commonly referred to as "wireless cable." We presently
have wireless television transmission facilities constructed and operating in 58
markets in nine states. At February 29, 2000, we had about 130,100 wireless
cable subscribers, including about 8,300 "combo" subscribers who also subscribed
to DIRECTV(R) programming sold by us. In addition, at February 29, 2000, we
serviced and received commissions on about 13,900 subscribers who only received
DIRECTV programming. Going forward, our goal is to become a leading provider of
wireless broadband services in our markets, and we expect the number of our
wireless cable television subscribers to continue to decline as we allocate more
of our spectrum to wireless broadband access and other wireless broadband
services. We also may explore acquisitions of, and strategic alliances with,
other providers of Internet access, broadband and telephony services, such as
traditional Internet service providers ("ISPs"), digital subscriber line ("DSL")
providers, other fixed or mobile wireless providers in licensed or unlicensed
frequencies and Competitive Local Exchange Carriers ("CLECs").
We use our spectrum to transmit and receive signals between a base station
and transmit/receive equipment at each customer's location. Our radio spectrum
is comprised of the following channels:
o MDS (Multipoint Distribution Service)-- 2 channels in the 2150-2160 MHz
band and 3 channels in the 2650-2680 MHz band,
o ITFS (Instructional Television Fixed Service)-- 20 channels in the
2500-2686 MHz band,
o MMDS (Multichannel Multipoint Distribution Service)-- 8 channels in the
2596-2644 MHz band, and
o Leased rights to 20 MHz of WCS (Wireless Communications Service)
spectrum at 2.3 GHz in 19 markets.
We often collectively refer to the spectrum in the 2.1 and 2.5-2.7 GHz
bands as "MMDS" in this document.
We believe that our MMDS spectrum will be able to transmit and receive data
at effective data rates of up to 22 Mbps downstream and 19 Mbps upstream per
six-MHz channel, and can cover a service area radius of up to 35 miles from a
single base station.
Nucentrix was incorporated under the laws of the State of Delaware in
October 1993 under the name Heartland Wireless Communications, Inc. Nucentrix
emerged from a reorganization under Chapter 11 of the U.S. Bankruptcy Code on
April 1, 1999, and we changed our name on that date to Nucentrix Broadband
Networks, Inc. See "Reorganization." Our executive offices are located at 200
Chisholm Place, Suite 200, Plano, Texas 75075, and our telephone number is (972)
423-9494.
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INDUSTRY OVERVIEW
Internet access is one of the fastest growing segments of the
telecommunications industry. Data communication capabilities provided by the
Internet allow medium-sized and small businesses to streamline e-commerce and
communications among employees, customers and suppliers. To fully take advantage
of the efficiency provided by the Internet's capabilities, we believe that
businesses need high-speed Internet connectivity. We also expect the demand for
high-speed Internet access from SOHOs and telecommuters to increase as an
increasing number of employees work in remote offices or from their homes. In
addition, we expect increasing consumer demand for higher access speeds to the
Internet.
Traditionally, medium-sized and small businesses, telecommuters and SOHOs
have relied primarily on low-speed Internet access using existing telephone
lines, as have substantially all consumer Internet users. 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, we believe that users are seeking affordable
higher-speed access alternatives.
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 announced that it would
authorize the use of MMDS spectrum to provide two-way services, including
high-speed data, voice and video communications, subject to further
reconsideration of these rules. The FCC then finalized its ruling in July 1999
and, in March 2000, announced that an initial, one-week filing window for
applications for two- way services would open on July 3, 2000. This should allow
us to receive two-way operating licenses in the fourth quarter of 2000. As a
result of the FCC ruling permitting the use of MMDS spectrum for two-way
services, we believe we are well positioned to meet the needs of business and,
ultimately, residential users in our markets.
BUSINESS STRATEGY
Our goal is to become a leading 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 and have limited access to other high-speed
alternatives. Even considering the time to build out a non-operating market, we
believe we can complete a substantial portion of our facilities and begin
reaching our target customer base faster than our competitors.
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. We believe that our MMDS
spectrum will be able to transmit and receive data at effective data rates of up
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to 22 Mbps downstream and 19 Mbps upstream per six-MHz channel, or the
equivalent of up to 14 T1 telephone lines. We control an average of 28 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
should 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 with comparable speeds.
Leverage our existing investment in MMDS infrastructure, including base
stations and other transmission facilities. Although we intend to construct
multi-cell systems to provide two-way Internet access service in some or all of
our markets, we believe we will be able to use our existing base stations as
part of our network design in a majority of our markets. Therefore, a portion of
the capital required for Internet access delivery in these markets already has
been invested. We believe the incremental cost to upgrade an existing wireless
cable system to add Internet access service capabilities is about $300,000 to
$600,000 per base station and the time to retrofit a base station is 30-60 days
following receipt of necessary regulatory approvals. We estimate the buildout of
an unconstructed market to deliver high-speed Internet access service will
require an initial expenditure of approximately $500,000 to $750,000 for network
equipment, depending upon the system design and type and sophistication of the
equipment, assuming that we are able to lease rooftop or tower space rather than
being required to construct new towers.
Expand into residential market. MCI WorldCom and Sprint have announced
acquisitions of MMDS spectrum covering up to 60 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. We plan to implement telephony services over our
MMDS spectrum in selected markets. Our trials with Cisco, which we expect to
complete between September 2000 and the end of 2000, include Voice over Internet
Protocol ("VoIP") tests. By the end of 2001, we expect to offer wireless local
loop and/or VoIP services in certain of our markets.
Expand through acquisitions and strategic alliances. We may pursue
strategic acquisitions of MMDS spectrum that could increase our geographic
service areas and enable us to accelerate our market penetration and expand our
customer base. We also may explore acquisitions of, and strategic alliances
with, other providers of Internet access, broadband and telephony services, such
as traditional ISPs, DSL providers, other fixed or mobile wireless providers in
licensed or unlicensed frequencies and CLECs.
NUCENTRIX'S 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.
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We 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:
o Internet access at speeds from 256 Kbps to 1.54 Mbps,
o technical support available 24 hours a day, 7 days a week,
o e-mail,
o Web design and hosting,
o domain name registration, and
o domain name and maintenance changes.
The following table summarizes our current service offerings in Austin,
Texas:
<TABLE>
<CAPTION>
NO. OF 1-YR CONTRACT
PRODUCT SPEED USERS MONTHLY PRICE
- --------------------------- --------- ----- -------------
<S> <C> <C> <C>
SOHO/Telecommuter Pack 256 Kbps 1 $ 129.95
SOHO/Telecommuter Pack Plus 384 Kbps 1 $ 159.95
Cyber Wave M256K 256 Kbps 2-10 $ 139.95
Cyber Wave M384K 384 Kbps 2-10 $ 169.95
Cyber Wave M768K 768 Kbps 2-10 $ 249.95
Cyber Wave M1.54M 1.54 Mbps 2-10 $ 329.95
</TABLE>
Our current installation fee is $199.95. Our offerings may vary by market.
Subscription Television Business. Through our wireless cable programming,
we generally offer our subscribers local off-air VHF/UHF channels from
affiliates of ABC, NBC, CBS and Fox and other local independent broadcast
stations, as well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN, USA, WTBS,
Discovery, the Nashville Network, A&E and other cable programming. The channels
and programming that we offer in each market will vary depending upon the amount
of spectrum capacity controlled in such market. The preceding marks are
trademarks of the respective organizations and are not owned by us.
Currently, wireless cable providers can offer a maximum of 33 channels of
analog video programming. 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 over 50 markets in combination with our MMDS offering or as a stand-alone
offering. See "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 granted by the FCC 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
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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 basic trading area ("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 "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. The
majority of our ITFS channel leases do not currently contemplate two-way use of
our spectrum. We currently are negotiating amendments to certain of our existing
ITFS channel leases or new ITFS channel leases to provide for two-way use of
these channels to the extent we determine that we need additional channel
capacity in a particular market. We intend to initially use licenses that we own
for our two-way services.
We also hold licenses in 93 BTAs in which we have the exclusive right to
apply for and develop available MDS and MMDS frequencies, subject to our lease
of 10 BTAs and portions of four other BTAs to CS Wireless Systems, Inc. ("CS
Wireless"). See "Government Regulation --BTA Auction and Service Requirements."
EXISTING AND UNCONSTRUCTED MARKETS
The following tables provide information as of February 29, 2000, regarding
the 92 markets in which we operate a wireless cable or wireless broadband
Internet system, 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, modifications to existing channel
licenses or special temporary and developmental authorizations, and must be
reviewed by the FCC's engineering and legal staff. Additionally, we intend to
file for two-way authorization with the FCC for channels in many of the markets
listed below. We cannot assure you of the number of applications that will be
granted. See "Risk Factors - Two-way systems require regulatory approval. We
will be required to obtain regulatory approval for our current and future
two-way systems. If we do not obtain requisite approvals for a market, then we
will not be permitted to operate a two-way system in that market."
"Estimated Total Households" represents our current estimates of the
approximate number of households within a 35-mile radius or within direct
line-of-sight from existing or projected tower sites. Total household
information is based on 1990 census bureau data and line-of-sight information
from commercially available population and engineering software programs, and
includes an average annual growth rate of 1% based on census bureau data
released in March 1998. In addition, we estimate that there are up to 190,000
businesses and SOHOs/telecommuters, based on a commercially available business
database, in our top 40 wireless broadband Internet access markets. Some or all
of the estimated SOHOs/telecommuters may be included in the total households
listed below.
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<TABLE>
<CAPTION>
NUMBER OF
ESTIMATED TOTAL NUMBER OF CHANNELS
EXISTING MARKETS HOUSEHOLDS VIDEO SUBSCRIBERS (1) AVAILABLE(2)
- ---------------- --------- --------------------- ------------
<S> <C> <C> <C>
Abilene, TX 64,446 2,760 22
Ada, OK 49,077 2,772 32
Ardmore, OK 53,606 3,273 32
Austin, TX 441,732 8,458 33
Beloit, KS 20,686 544 33
Bucyrus, OH 239,225 760 21
Champaign, IL 105,578 2,170 24
Chanute, KS 56,717 3,859 33(3)
Corpus Christi, TX 169,553 9,112 33(4)
Corsicana/Athens, TX 96,711 2,009 29
Enid, OK 40,519 3,639 32
Freeport, IL 140,880 939 20
Gainesville, TX 40,848 897 33
George West, TX 23,469 2,098 23(5)
Greenville, PA 342,684 542 20
Hamilton, TX 31,754 2,476 33
Jacksonville, IL 45,253 464 26
Jourdanton/Charlotte, TX 102,143 1,434 29
Kerrville, TX 37,416 465 33
Kingsville/Falfurrias, TX 32,809 1,425 23(5)
Laredo, TX 51,647 3,116 33
Lawton, OK 82,780 5,434 33
Lindsay, OK 59,317 2,384 29
Lubbock, TX 113,357 2,744 33
Macomb/Walnut Grove, IL 85,051 1,706 20
Manhattan, KS 53,247 1,703 33
Marion, KS 55,620 848 21(6)
McAlester, OK 39,376 547 20
McLeansboro, IL 89,370 1,107 31
Medicine Lodge/Anthony, KS 30,322 1,146 22
Midland/Odessa, TX 119,556 5,314 33
Monroe City/Lakenan, MO 70,898 1,191 32
Montgomery City, MO 91,991 687 23
Mt. Pleasant, TX 58,531 1,834 24
Muskogee, OK 80,772 764 20
O'Donnell, TX 66,666 470 22
Olney, IL 71,785 1,384 20
Olton, TX 27,606 614 33
Paragould, AR 143,895 2,280 20
Paris, TX 43,326 2,681 26
Peoria, IL 206,728 1,478 29
Radcliffe/Story City, IA(7) 76,546 1,397 27
Sherman/Denison, TX 111,665 7,574 29
Sikeston/Cape Girardeau, MO 132,236 2,453 20
Sterling, KS 45,901 604 24
Stillwater, OK 82,402 5,327 33
Strawn/Ranger, TX 43,286 1,244 33
Taylorville, IL 93,341 1,386 20
Temple/Killeen, TX 140,213 9,294 33(4)
Texarkana, TX 81,680 1,096 29
Tulsa, OK 328,108 8,319 33(4)
Uvalde/Sabinal, TX 18,713 1,304 33
Vandalia, IL 94,938 1,506 20
Waco, TX 114,379 4,891 33(8)
Watonga, OK 24,185 868 33(9)
Weatherford, OK 29,284 723 33
Wichita Falls, TX 65,910 4,152 33
Woodward, OK 14,322 2,244 33
--------- --------- ---------
Total-- Existing Markets 5,274,056 143,910 1,620
========= ========= =========
</TABLE>
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- --------------
(1) Includes about 22,000 subscribers of DIRECTV programming sold and serviced
by us.
(2) 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.
(3) Eight MMDS channels are currently authorized under a special temporary
authorization from the FCC. These channels are subject to pending applications
for permanent authority at the FCC that we believe are available for grant.
(4) One MDS channel is available for license through our ownership of the BTA.
(5) We have leases with two prospective ITFS applicants for eight additional
ITFS channels that we believe will be available in the FCC's next ITFS new
station filing window.
(6) Four ITFS channels are subject to applications pending proceedings at the
FCC, which we believe will be granted. 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 operate the Radcliffe/Story City, Iowa market under a management
agreement with CS Wireless, which is terminable on 30 days notice by either
party. CS Wireless has agreed to assign to us its rights to the assets and
channel leases for this market upon FCC approval of the assignment of certain
other MMDS and WCS spectrum rights and the closing of a master agreement with CS
Wireless. See "Recent Transactions -- CS Wireless Transaction."
(8) Two MDS channels are available for license through our ownership of the BTA.
(9) One MDS channel is subject to a pending application at the FCC that we
believe is available for grant.
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<TABLE>
<CAPTION>
TOTAL CHANNELS
UNCONSTRUCTED MARKETS HOUSEHOLDS EXPECTED(1)
--------------------- ---------- -----------
<S> <C> <C>
Altus, OK 27,529 33
Amarillo/Borger, TX 134,314 29
Bartlesville/Ponca City, OK 81,564 33
Burnet, TX 51,359 32
Casper, WY 31,554 13
Charleston, WV 185,583 4
Cheyenne, WY 34,279 13
Columbia, MO 103,910 21
Des Moines, IA 227,572 33
El Dorado, AR 79,821 16
El Paso, TX 237,595 25
Elk City, OK 26,270 25
Fayetteville, AR(2) 109,910 33
Fischer, TX 444,035 25
Flagstaff, AZ 46,150 6
Forrest City, AR 174,040 20
Fort Smith, AR(2) 101,955 33
Great Bend, KS 54,404 33
Hays, KS 29,330 33
Holdenville, OK 49,061 33
Jefferson City, MO 47,488 13
Lake City, FL 51,790 16
Lenapah, OK 56,708 33
Longview, TX 106,164 4
Lufkin, TX 71,664 13
Magnolia, AR 59,005 22
Ottawa/LaSalle, IL 240,995 16
Paducah/Mayfield, KY 77,157 33
Palestine/Kossuth, TX 72,684 33
Searcy, AR 77,704 33
Springfield/Decatur, IL 107,033 8
Springfield, MO 145,194 33
Topeka, KS 113,665 33
Tyler, TX 126,050 21
--------- ---------
Total-- Unconstructed Markets 3,583,536 804
Total-- All Company Markets 8,857,592 2,424
========= =========
</TABLE>
- -------------------
(1) The number of channels expected includes channels (a) that are either
licensed to us or leased to us from other license holders, (b) for which we have
filed or because of our BTA ownership have the exclusive right to file license
applications with the FCC which we expect to be granted in 2000, or (c) to which
we otherwise expect to acquire license or lease rights in 2000.
(2) We have entered into a letter of intent with the owner of the Fayetteville
and Fort Smith, Arkansas systems to acquire these systems. The transaction is
expected to close in the second or third quarter of 2000 and is subject to
negotiation of definitive documentation and customary closing conditions.
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WCS SPECTRUM TO BE ACQUIRED FROM CS WIRELESS
<TABLE>
<CAPTION>
ESTIMATED
BANDWIDTH TOTAL
MARKETS(1) (MHz) HOUSEHOLDS
---------- ----- ----------
<S> <C> <C>
Abilene, TX 20 64,446
Amarillo/Borger, TX 20 134,314
Austin, TX 20 441,732
Gainesville, TX 20 40,848
Hamilton, TX 20 31,754
Longview, TX 20 106,164
Lubbock, TX 20 113,357
Midland/Odessa, TX 20 119,556
Mt. Pleasant, TX 20 58,531
O'Donnell, TX 20 66,666
Olton, TX 20 27,606
Paris, TX 20 43,326
Sherman/Denison, TX 20 111,665
Shreveport, LA 20 161,765
Temple/Killeen, TX 20 140,213
Texarkana, TX 20 81,680
Tyler, TX 20 126,050
Waco, TX 20 114,379
Wichita Falls, TX 20 65,910
---------
Total 2,049,962
=========
</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 "Recent Transactions -- CS Wireless
Transaction."
NETWORKS
We transmit and/or receive signals through the air via microwave
frequencies from facilities, referred to as "base stations" or "cell sites" for
our wireless broadband Internet business, or "headends" for our wireless cable
business, to an antenna and other customer premises equipment at each customer's
location. Each base station includes a tower, transmit and receive antennas,
waveguide, transmitters and other equipment. The base station also includes a
central piece of equipment, a broadband router, that houses various network
components, including (i) air interface cards that interface to wireless
signals, (ii) router cards to transfer Internet protocol ("IP") traffic, and
(iii) port adapters for SONET and other high-capacity backhaul and backbone
lines. Each headend includes a transmission tower, transmit antennas, waveguide,
transmitters and satellite reception equipment.
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, 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 a broadband router at a base
station. 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 Internet backbone
providers.
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<PAGE> 13
We plan to use a sectorized, single and/or multi-cell design for our
two-way Internet access service. With traditional MMDS transmissions, the signal
is transmitted in a 360 degree omni-directional pattern. Sectorizing
transmissions in a cell design (either single or multi-cell) will divide channel
service areas into sectors, and allow re-use of frequencies in non-adjacent
sectors, increasing the bandwidth capacity for each channel used in the network
design. Cellularization of channels in certain markets could increase both the
number of households our signal can reach and the market's available bandwidth
capacity; however, this type of system design is more expensive to construct
than a single-cell system.
Subscription Television. Subscription television 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 that transmits to 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 have entered into an
agreement with ISP Alliance, Inc. ("ISPA"), a leading supplier of systems and
operational support for ISPs, to provide this customized 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. 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.
We provide field and technical support to our Internet and wireless cable
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 company-owned and operated centralized customer care center and our
existing base of technical services personnel.
SALES AND MARKETING
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 ISPs, value added resellers
and systems integrators.
Subscription Television Service. Our subscription television service is
marketed under our "Heartland Cable Television" brand, often in association with
DIRECTV programming. Our marketing is
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<PAGE> 14
designed to take advantage of DIRECTV's national campaigns and heavy use of
national media. Our campaigns include direct mail and selected outdoor
materials. 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 Access Equipment. MMDS Internet access equipment and customer
premises equipment such as routers, modems, Ethernet switches, wireless
interface equipment, transceivers and antennas currently are available from a
variety of sources such as Cisco, AB Access, ADC Telecommunications, Andrew,
California Amplifier, Conifer, Hybrid Networks, Newbridge Networks, TSI and
Vyyo.
In February 2000, we announced a strategic alliance and agreement with
Cisco to pursue testing and deployment of fixed-wireless broadband services
using VOFDM technology on a Cisco Powered Network. Under this agreement, we
expect to launch at least 20 markets using VOFDM technology and Cisco base
station and certain customer premises equipment by the end of 2001. The
agreement also provides for equipment and other financing, as well as technical
and marketing support. Cisco Systems and Cisco Powered Network are registered
trademarks of Cisco Systems, Inc.
Wireless Cable Equipment. We use subscriber and headend equipment for our
wireless cable and DIRECTV business from a variety of suppliers, including ADC
Telecommunications, Andrew, Blonder- Tongue, California Amplifier, Comwave,
Conifer, General Instrument, Scientific-Atlanta, Passive Devices and PerfectTen
Satellite Distributing.
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
Single Family Unit ("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
these new subscribers. We currently market DIRECTV programming to SFU
subscribers in over 50 markets.
In October 1997, we entered into a seven-year agreement with DIRECTV to
provide DIRECTV programming to Multiple Dwelling Units ("MDUs"), such as
apartment buildings and condominium complexes. The MDU agreement is
substantially similar to the SFU agreement for this programming. We currently
offer DIRECTV programming to residential MDUs in 50 markets. DIRECTV is a
registered trademark of DIRECTV, Inc., a subsidiary of the Hughes Electronics
unit of General Motors Corporation.
Video Programming. We generally offer our subscribers local off-air VHF/UHF
channels from affiliates of ABC, NBC, CBS and Fox and other local independent
broadcast stations, as well as HBO, HBO2, Cinemax, Showtime, Disney, ESPN, CNN,
USA, WTBS, Discovery, the Nashville Network, A&E and other cable programming.
The channels and programming that we offer in each market varies depending upon
the amount of spectrum capacity controlled in each market. We are required to
obtain the consent of local network affiliates to retransmit their signals.
Additionally, we are required to maintain contracts with cable programmers like
HBO and ESPN, which generally require payment on a per subscriber basis.
14
<PAGE> 15
COMPETITION
High-Speed Internet Competition
The Internet access market is highly competitive. We face competition from
many Internet access and service providers with significantly greater financial
resources, well-established brand names and large, existing customer bases. Our
competition in this industry includes:
Internet Service Providers. ISPs provide Internet access to residential and
business customers. These companies can:
o provide Internet access over ILECs' networks at or below ISDN speeds,
o offer DSL-based access using their own DSL services, or DSL services
offered by ILECs and others, and
o have significant and sometimes nationwide marketing presences and
combine these with strategic or commercial alliances with DSL-based
competitive carriers. Significant ISPs include America Online ("AOL"),
Concentric Network (which in January 2000 announced its intent to merge
with NEXTLINK Communications), EarthLink (which completed its merger
with Mindspring Enterprises in February 2000), PSINet and Verio.
Incumbent Local Exchange Carriers. ILECs, such as SBC Communications, GTE,
Ameritech and US WEST 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. For example, in October
1999, SBC announced plans to invest $6 billion to upgrade its telephone networks
to offer DSL service to 77 million customers by 2002. The incumbent carriers
generally have an established brand name in their service areas and possess
sufficient capital to deploy DSL services rapidly.
Interexchange Carriers. Many of the interexchange carriers, such as AT&T,
MCI WorldCom and Sprint, are expanding their capabilities to support high-speed,
end-to-end networking services. These carriers have deployed large scale
networks, have large numbers of existing business and residential customers and
enjoy strong name recognition. These companies increasingly are bundling their
services to include high- speed local access combined with metropolitan and wide
area networks, and a full range of Internet services and applications. Other
carriers, such as Level 3 Communications and Qwest Communications are building
and managing high-capacity, nationwide IP-based networks and partnering with
ISPs to offer a range of services to businesses and consumers.
Competitive Local Exchange Carriers. Certain DSL-based CLECs, including
NorthPoint Communications, Covad Communications Group, Rhythms NetConnections,
Jato Communications and DSL.net are offering DSL-based data services. We expect
other competitive carriers to offer similar services in the future. Also,
traditional CLECS, including Allegiance Telecom and McLeodUSA, have extensive
fiber-based networks in numerous metropolitan areas and are capable of providing
voice and high-speed data services to businesses.
Cable Modem Service Providers. Cable modem service providers, like
Roadrunner, @Home Networks and @Work Networks and their cable partners,
currently offer to consumers and businesses high- speed Internet access over
hybrid fiber coaxial cable networks. Where deployed, these networks provide
15
<PAGE> 16
local access services similar to our services, and in some cases at higher
speeds. In January 2000, AOL, which provides Internet access to over 20 million
customers, announced an agreement to acquire Time Warner, Inc., which owns
broadband cable infrastructure serving up to 13 million subscribers. We expect
the combination of these two companies to represent significant competition to
the residential broadband Internet access market.
Other Wireless and Satellite Service Providers. We also may face
competition from other fixed- wireless service providers, including Teligent,
NEXTLINK Communications, Winstar Communications and Advanced Radio Telecom. AT&T
has also announced plans to expand its fixed-wireless network to compete for
voice and high-speed data customers in businesses and residences. We also may
face competition from satellite-based systems. Motorola Satellite Systems,
Hughes Communications (a subsidiary of General Motors), EchoStar Communications,
Teledesic 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. In addition, companies such as SkyBridge, iSky and
Gilat Satellite Networks have announced plans to deploy two-way satellite
broadband networks to provide Internet access and other services in the United
States and globally.
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. We believe
the principal competitive factors that we face include:
o transmission speed,
o reliability of service,
o ability to bundle services,
o price performance,
o customer support,
o brand recognition,
o operating experience, and
o capital availability.
See "Risk Factors--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" for
a further discussion of competition in this industry.
Other Telephony Services
We also will face intense competition from other providers of telephony
transmission services as we implement wireless telecommunications services and
VoIP. This competition will be increased because MMDS spectrum traditionally has
not been used to deliver telephony services, and consumer acceptance of such
services delivered across MMDS spectrum is unknown at this time. Many of the
existing providers of telephony services, such as ILECs and CLECs, have
significantly greater financial and other resources than us and better
established brand awareness in their service areas.
16
<PAGE> 17
Subscription Television Competition
The subscription television business also is highly competitive, and many
of our competitors have significantly greater resources and channel capacity
than we have. Our competition in the subscription television market includes:
Hardwire Cable. Our principal subscription television competitors are
traditional hardwire cable operators such as AT&T Broadband & Internet Services
(formerly TeleCommunications, Inc.) and Time Warner Entertainment. Hardwire
cable companies generally are well established and known to our potential
customers and have significantly greater financial and other resources than we
have. In addition, these competitors are also bundling additional services with
their cable TV services, such as high-speed Internet access and content, to
enhance their products.
Direct Broadcast Satellite ("DBS"). DBS service is available from DIRECTV
and Echostar Communications. We compete with many retail distributors of DIRECTV
and other DBS services. In November 1999, Congress enacted legislation allowing
DBS providers to offer local television stations. We do not expect DBS providers
to offer local stations into a majority of our existing local markets for some
time, if at all, because of the size of these markets; however, the growth of
DBS service has been significant since it was first launched, and we expect that
the DBS service providers will continue to be significant competitors for
subscription television customers.
Interexchange Carriers. AT&T has combined its current consumer
long-distance, wireless and Internet services units with cable,
telecommunications and high-speed Internet access capacity. 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 multichannel 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;
o issue, revoke, modify and renew station licenses,
o approve the assignment and/or transfer of control of such licenses,
o approve the location and technical parameters of MDS, MMDS and ITFS
transmission facilities (headends and base stations),
o regulate the kind, configuration and operation of equipment used by
MDS, MMDS and ITFS systems,
o impose certain equal employment opportunity and other periodic
reporting requirements on MDS, MMDS and ITFS operators, and
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<PAGE> 18
o review and approve/disapprove certain terms of airtime lease
agreements.
MDS, MMDS and ITFS Licenses. In our markets, a total of 32 six-MHz channels
and one four-MHz channel are available in the MDS, MMDS and ITFS frequency
bands. The FCC can license the 13 MDS and MMDS channels directly to commercial
entities for full-time operation without programming restrictions. Except in
limited circumstances, the FCC generally can license 20 ITFS channels only to
qualified non-profit educational organizations. Each of the ITFS channels must
broadcast programming for educational purposes a minimum of 20 hours per week.
The remaining air time on ITFS channels may be leased for commercial use,
without further programming restrictions except that the ITFS license holder, at
its option, must be entitled to recapture up to an additional 20 hours of air
time per channel per week for educational programming.
The FCC began the establishment of the MMDS spectrum in 1974 with the
allocation of two channels (MDS-1 and MDS-2/2A). In 1983, the FCC reallocated a
total of eight ITFS channels to the MMDS spectrum to satisfy a growing demand
for the delivery of video entertainment programming to subscribers and to
provide competition to hard-wired cable television systems. Simultaneous with
this reallocation of spectrum, the FCC amended its rules for the remaining ITFS
channels to permit ITFS licensees, subject to their meeting certain educational
programming requirements, to lease excess capacity to commercial MMDS service
providers. ITFS channels originally had been allocated solely for educational
purposes.
In 1985, the FCC established a lottery procedure for awarding MDS and MMDS
station licenses. In 1990, the FCC shifted to a one-day cut-off period
application process, under which all mutually exclusive MDS and MMDS licenses
were issued on essentially a first-come, first-served basis. In 1995, the FCC
adopted rules under which MDS and MMDS applications for new stations would be
subject to a competitive bidding process, or spectrum auction. The FCC generally
considers applications to be mutually exclusive if 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 BTAs. Each BTA authorization holder is
permitted to apply for, and following FCC grant, to construct facilities to
provide services over any unlicensed MDS or MMDS channel within the BTA, and has
preferred rights to the available ITFS frequencies within the BTA, subject to
the superior rights of any qualified ITFS applicant. The MDS and MMDS licenses
issued or applied for before the BTA auction are commonly referred to as
"incumbent" MDS/MMDS licenses, while the MDS and MMDS station authorizations
issued pursuant to BTA ownership are commonly referred to as "BTA" MDS/MMDS
licenses.
The application and licensing process for ITFS stations is different from
those for MDS and MMDS stations. In 1995, the FCC adopted a national filing
window system. Under this system the FCC accepts applications for licenses for
new ITFS stations or major changes to existing ITFS licenses only if they are
filed within specific windows, typically five days, set by the FCC. Applications
filed in a particular window are subject only to competing proposals filed in
that same window. Where two or more applications are filed within the same
window and are predicted to cause each other harmful electrical interference,
licenses are awarded by the FCC pursuant to a comparative selection process.
In 1998, the FCC, acting pursuant to the Balanced Budget Act of 1997,
tentatively concluded that competing ITFS applications should be subject to
auction, or competitive bidding. However, because the FCC was uncertain at the
time whether its conclusion correctly reflected Congress's intent with regard to
the treatment of competing ITFS applications, it decided not to proceed
immediately with the auction of ITFS applications and to first seek
Congressional guidance on the matter. In April 1999, having received no
18
<PAGE> 19
specific guidance from Congress, the FCC reaffirmed its previous decision to use
spectrum auctions to resolve competing ITFS applications. The FCC did, however,
state that it would amend its rules regarding ITFS auctions if Congress were to
specify a change to the FCC's auction authority in this regard.
Generally, in the case of MDS, MMDS and ITFS stations, the FCC issues the
station licensee a conditional license, allowing construction of the station to
commence. The station may be constructed and operated only in accordance with
the parameters set forth in the license. Channel transmission generally must
begin within one year of grant of the conditional license in the case of
incumbent MDS/MMDS licenses, 18 months in the case of ITFS licenses and five
years for BTA MDS/MMDS licenses. If channel construction deadlines for a license
are not met, then (1) the FCC may revoke the license or (2) in the case of the
BTA licenses, reduce the license service area if less than two-thirds of the
population of the BTA service area is capable of being reached by a station
signal by the expiration of the five-year BTA build-out period. Although FCC
rules permit parties to request extensions of channel construction deadlines,
the FCC is not required to grant extensions. We believe that we have satisfied
all construction deadlines relating to our licensed stations except for those
licenses for which the deadline has not yet passed or for which we have received
an extension.
MDS, MMDS and ITFS licenses generally have terms of 10 years. All
"incumbent" MDS/MMDS licenses expire on May 1, 2001. All BTA MDS/MMDS licenses
expire on March 28, 2006. Licenses may be renewed through applications filed
with the FCC within a certain period before expiration of the license term, and
petitions to deny applications for renewal may be filed by other parties during
certain periods following the filing of such applications. The FCC may revoke or
cancel licenses for violations of the Communications Act or the FCC's rules and
policies, whether or not related to the license under review. Alien ownership
exceeding prescribed levels and 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 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.
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<PAGE> 20
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. 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 already 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.
WCS Licenses. In February 1997, the FCC reallocated and assigned the use of
the frequencies at 2305-2320 MHz and 2345-2360 MHz to 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 "Recent Transactions
- -- CS Wireless Transaction."
Transmission. The FCC also regulates transmitter locations and signal
strengths. The operation of an MDS, MMDS and ITFS system typically requires the
co-location of a commercially viable number of channels operating with common
technical characteristics. To co-locate channels, an applicant must demonstrate
that its proposed signal does not violate interference standards in the
FCC-protected area of previously-authorized MDS, MMDS and ITFS stations. An MDS
and MMDS license holder generally is protected from interference from another
MDS or MMDS operator within a 35-mile radius of the base station called a
"protected service area." An ITFS license holder generally is entitled to
protection from electrical interference to all of its receive sites. In
addition, an ITFS station is entitled to a 35-mile protected service
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<PAGE> 21
area (1) during the use of the station's excess channel capacity by an MMDS
operator if it has requested and received a protected service area from the FCC
or (2) from all MDS, MMDS and ITFS station licensees that implement two-way
digital operations.
Two-Way Authorization. In September 1998, the FCC amended its rules to
allow for the use of MMDS spectrum for fixed, two-way digital voice, video and
data communications. As amended, these rules are referred to as the "two-way
rules." The two-way rules became final in July 1999, and in March 2000, the FCC
announced an initial, one-week filing window to last from July 3-10, 2000 in
which to file applications for two-way services. Under the two-way rules, the
FCC:
o permits MDS, MMDS and ITFS licensees to provide digital two-way
communications services,
o 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,
o simplifies and streamlines the licensing process for two-way
authorizations and ITFS major modifications, and
o 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,
subject to certain limitations, to "shift" required ITFS educational programming
to any MDS, MMDS or ITFS channel within the same operating system, "load" ITFS
programming on to less than the total number of channels licensed to a
particular ITFS licensee or "swap" their channels for other channels in the same
market. However, channel swaps represent changes in licensees and require the
filing of applications with the FCC and receipt of FCC approval.
The FCC has stated that it will, from July 3-10, 2000, hold a one-time,
initial one-week filing window for two-way applications. 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
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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. Should we use our licensed and leased
MDS, MMDS and ITFS channels for the provision of Internet access service, we do
not anticipate that compliance with these laws will have an adverse impact on
us. However, 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.
Regulation of Telecommunications Services. If we begin providing wireless
telecommunications services, we will be subject to FCC and state regulation of
our interstate and intrastate telecommunications 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 and other multichannel video service providers 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 certain cable programming on fair and
non-discriminatory terms. If a wireless cable operator is unable to obtain
program services owned by cable operators on what it considers to be fair and
non-discriminatory terms, then it may file a complaint with the FCC. Access to
certain programming may be impeded or delayed as a result.
Copyright. Under the Federal copyright laws, permission from the copyright
holder generally must be secured before certain video programs may be
retransmitted. Under Section 111 of the Copyright Act of
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1976, certain "cable systems," including wireless cable providers, are entitled
to engage in the secondary transmission of broadcast 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. There can be no assurances that Congress will not adopt
legislation affecting this or 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. As an antenna structure owner, we are subject to FAA
regulation and FCC registration for the construction, maintenance and lighting
of transmission towers and by certain local zoning regulations affecting
construction of towers and other facilities. Federal environmental regulations
and state and local environmental land use, and zoning regulations may also
apply.
RECENT TRANSACTIONS
Strategic Alliance with Cisco Systems, Inc. In February 2000, we entered
into a Memorandum of Agreement on the principal terms of a Strategic
Relationship, Supply and Support Agreement with Cisco to pursue testing and
deployment of fixed-wireless broadband services on a Cisco Powered Network.
Under this agreement, we plan to launch at least 20 markets using VOFDM
technology and Cisco base station and certain customer premises equipment by the
end of 2001. The agreement also provides for equipment and other financing, as
well as technical and marketing support.
Fayetteville and Fort Smith, Arkansas Acquisition. In March 2000, we
entered into a letter of intent to acquire all of the MMDS wireless broadband
assets in Fayetteville and Fort Smith, Arkansas for $4.2 million in common stock
of Nucentrix. These markets are contiguous with our existing BTAs in northeast
Oklahoma and southwest Missouri, and cover over 200,000 total households. The
transaction is subject to customary closing conditions, including due diligence,
completion of definitive agreements and receipt of all required regulatory
approvals. We expect to close this transaction in the second or third quarter of
2000.
SBA Tower Sale. In December 1999, we closed the sale of 30 communications
towers to SBA Towers, Inc. ("SBA") for approximately $6.2 million. The sale of
four additional tower sites was closed into escrow, pending satisfaction of
certain closing conditions specific for each site. The conditions to the release
from escrow of one of the escrowed tower sites occurred in first quarter 2000
and it has been released from escrow, with an additional $200,000 paid to us.
Approximately $200,000 will be paid to us for each of the remaining escrowed
sites for which the closing conditions are satisfied on or before April 17,
2000. We will retain any tower sites for which the conditions are not satisfied
on or before April 17, 2000. We lease back from SBA space on the towers that
have been transferred to SBA for our wireless broadband Internet and video
operations under antenna site agreements with an initial term of 10 years and
three five-year renewal terms at our option.
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Wireless One Equity Exchange. In January 2000, we exchanged 2,911,725
shares of common stock in Wireless One, Inc. for approximately $3.8 million,
pursuant to Wireless One's plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code. We expect to exchange the remainder of our 547,783 shares of
Wireless One common stock for approximately $700,000 in the first quarter of
2000.
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 in
Austin, Corpus Christi, El Paso and Killeen, Texas, and WCS frequencies in 19
markets, an operating wireless cable system in Radcliffe/Story City, Iowa with
approximately 1,400 subscribers, and certain subscriber equipment. We also
agreed to assign MMDS channel rights and related equipment in Portsmouth, New
Hampshire to CS Wireless. Following this transaction, we retained no equity
interest or corporate governance rights in CS Wireless.
We have received FCC approval of the assignment to us of the MDS-1
channels. We have until May 2, 2000, to consummate this transfer. If we have not
consummated the transfer by that time, we intend to request an extension from
the FCC. We also have agreed with CS Wireless, upon execution of a two-way
interference coordination agreement, to file for FCC approval of the assignment
to us of the WCS spectrum. We have executed a spectrum lease with CS Wireless
giving us the exclusive right to use the MDS-1 channels, subject to certain
pre-existing leasehold interests, and the WCS spectrum pending consummation of
these assignments. Upon consummation of these assignments, we have agreed to
cancel a promissory note issued by CS Wireless to us, the outstanding balance of
which, prior to December 2, 1998, was approximately $2.3 million.
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 or intend to use in connection with our wireless broadband network
services. We consider these intellectual property rights important to our
business. We also have federal registrations pending on the marks CYBERWAVE,
HEARTNET and CLEAR CHOICE TV and on a stylized heart design mark. We also own
common law trademark rights in and have United States trademark registrations on
the trademarks HEARTLAND WIRELESS COMMUNICATIONS, INC., HEARTLAND WIRELESS
COMMUNICATIONS, INC. and design, HEARTLAND CABLE TELEVISION and in the stylized
mark HEARTLAND. Because of the recognition of these trademarks in the
subscription television markets in which we operate, we consider these
intellectual property rights important to our business.
EMPLOYEES
As of February 29, 2000, we had approximately 630 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.
REORGANIZATION
On December 4, 1998, we filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan") and disclosure statement under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the
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District of Delaware (In re Heartland Wireless Communications, Inc., Case No.
98-2692 (JJF)). We filed the 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, which became
effective on April 1, 1999 (the "Effective Date"). As of the Effective Date we
changed our name from Heartland Wireless Communications, Inc., to Nucentrix
Broadband Networks, Inc.
As of the Effective Date:
o all previously issued and outstanding common stock, options granted
under our stock option plans, warrants and any other equity interests
in Nucentrix were canceled,
o holders of the Old Senior Notes received 9,700,000 shares of newly
issued common stock, and
o 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, subject to downward adjustment in
the event of a sale or merger of our company.
We also are obligated under the Plan to issue warrants to acquire an
additional 275,000 shares of common stock at an exercise price of $27.63 per
share, subject to downward adjustment in the event of a sale or merger of our
company. 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 "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 "Item 3. Legal
Proceedings."
We also may be required to issue additional shares of common stock to
settle miscellaneous unsecured claims under our Plan, 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
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miscellaneous unsecured claims, if these claims are allowed by the bankruptcy
court. As of February 29, 2000, we had issued 9,757 additional shares of our
common stock to settle some of these claims.
In September 1999, we received notice that a Motion to Revoke Order of
Confirmation had been filed pro se in the U.S. Bankruptcy Court for the District
of Delaware by two former stockholders of Heartland Wireless Communications,
Inc., seeking to revoke the order of the bankruptcy court confirming our Plan.
The motion asserts that we procured the order confirming our Plan by
fraudulently undervaluing our enterprise value, and seeks to set aside the
order. We have filed a motion to dismiss the motion to revoke, believe the
motion to revoke is without merit and intend to vigorously oppose the motion to
revoke. Our motion to dismiss the motion to revoke is under consideration by the
bankruptcy court.
RISK FACTORS
Our business operations and the implementation of our business strategy are
subject to significant risks inherent in our business, including, without
limitation, the risks and uncertainties described below. 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 radio 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 some of 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 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 to date. 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.
WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NECESSARY TO IMPLEMENT OUR
BUSINESS STRATEGY ON SATISFACTORY TERMS AND CONDITIONS.
To implement our long-term business strategy, we will need additional
capital for capital expenditures, operating expenses for system development and
acquisition costs, including debt that may be assumed in future acquisitions. We
plan to finance these activities by debt or equity financings, secured or
unsecured credit facilities, joint ventures or other arrangements. We cannot
assure you that we will be able to obtain the financing we will need to fund the
implementation of our business strategy on satisfactory terms and conditions, if
at all. If we incur additional debt, we may have to dedicate a substantial
portion of our cash flow from operations to the payment of principal and
interest, which may cause us to be more vulnerable to competitive pressures and
economic downturns. If we fail to obtain additional financing in a timely manner
and on acceptable terms, we may have to delay, reduce or eliminate the launch of
new high-speed Internet access systems.
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THE INTERNET ACCESS MARKET IS HIGHLY COMPETITIVE. BECAUSE MANY COMPETITORS IN
OUR MARKETS ARE WELL- ESTABLISHED AND HAVE RESOURCES SIGNIFICANTLY GREATER THAN
THOSE AVAILABLE TO US, WE MAY NOT BE ABLE TO ESTABLISH A SIGNIFICANT NUMBER OF
INTERNET ACCESS CUSTOMERS IN OUR MARKETS.
As we enter the high-speed Internet access market, we will be forced to
compete with numerous service providers, including the following:
o other ISPs, which have developed high-speed access capabilities such as
DSL along with their existing services,
o ILECs, which are providing DSL-based services in addition to their
existing wide area, metropolitan and local area networks,
o interexchange carriers, which are expanding their networks to support
high-speed local access, including DSL-based services and a full range
of Internet services and applications,
o CLECs, which are offering DSL-based data and other services,
o cable modem service providers offering high-speed access services to
consumers and businesses, and
o other fixed-wireless and satellite data service providers, which have
deployed or are developing broadband two-way data and voice services.
Many of our competitors are well-established and have larger and better
developed networks and systems, longer-standing relationships with customers and
suppliers, greater name recognition and significantly greater financial,
technical and marketing resources than we have. Many of these companies can
subsidize competing services with revenues from other services and have ready
access to capital markets. As competition increases in the high-speed Internet
access market, we anticipate intensified downward pricing pressure for our
services. We have not obtained significant market share in either of the two
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.
WE CANNOT PREDICT WHETHER WE WILL BE SUCCESSFUL IN IMPLEMENTING OUR BUSINESS
STRATEGY BECAUSE IT INCLUDES OPERATIONS THAT HAVE NOT BEEN WIDELY DEPLOYED ON A
COMMERCIAL BASIS. OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE COULD
IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY.
Our primary business strategy of providing wireless broadband 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:
o lack of consumer acceptance,
o difficulty in obtaining financing,
o competition from providers using more traditional and commercially
proven sources for these services,
o advances in competing technologies, and
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o changes in laws and regulations.
We have launched our high-speed Internet access service in only two of our
existing markets, and we cannot assure you that consumers will accept our
service as a commercially viable alternative to other means of Internet access.
To date we have not conducted tests involving wireless local loop or VoIP
services over our spectrum. We 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.
WE CANNOT ASSURE YOU THAT THE TECHNOLOGY WE HAVE CHOSEN FOR OUR NETWORK PLATFORM
WILL PROVIDE THE CAPACITY, COVERAGE AND RELIABILITY THAT WE NEED TO BE
COMPETITIVE WITH OTHER SERVICE PROVIDERS. IF THIS TECHNOLOGY PROVES UNRELIABLE,
THEN DEMAND FOR OUR SERVICES AND OUR ABILITY TO TIMELY IMPLEMENT OUR BUSINESS
STRATEGY COULD BE ADVERSELY AFFECTED.
In April 2000, we will begin conducting field trials with Cisco using VOFDM
technology as a network platform for delivering wireless broadband Internet and
voice services. We believe a VOFDM- based platform will increase our network
capacity, coverage and reliability capabilities by addressing line-of- sight,
interference and multipath fading problems that can occur in wireless
environments. However, the technology is largely unproven in point-to-multipoint
and commercial applications. We cannot assure you that this technology will
provide the advantages we expect. Our failure to achieve or maintain reliable
service capabilities could significantly reduce or delay consumer demand for our
services.
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, lease and maintain MDS and MMDS spectrum
licenses, and to lease ITFS 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 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.
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
telecommunications or VoIP services, we will be subject to FCC and state
regulation of our interstate and intrastate telecommunications services,
respectively.
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WE DEPEND ON FCC-REGULATED LICENSES AND CHANNEL LEASES. THE FAILURE TO MAINTAIN
CHANNEL RIGHTS IN CERTAIN MARKETS COULD ADVERSELY AFFECT OUR ABILITY TO TIMELY
IMPLEMENT OUR BUSINESS STRATEGY.
We depend upon licenses granted to us by the FCC and leases with other FCC
license holders for access to channel capacity necessary to operate our Internet
and video businesses. These licenses are subject to renewal as determined by the
FCC. FCC licenses also specify channel construction deadlines by which channel
transmissions must begin, which, if not met, would permit the FCC to revoke the
license. We cannot assure you that:
o the FCC will renew our licenses as their initial terms expire,
o our channel lessors will continue to hold valid licenses for their
channels,
o we will be able to renew our channel leases on terms acceptable to us,
or
o the FCC will grant requests for extensions of construction deadlines.
The failure to maintain FCC licenses and channel leases will reduce the
total number of channels available for our use. If we fail to maintain
sufficient FCC licenses or channel leases in markets where we operate or in
which we intend to launch two-way Internet access service, then the resulting
reduction in channel capacity could have a material adverse effect on our
ability to:
o serve our existing Internet access and subscription television customer
base,
o serve increasing customer demand for high-speed Internet access
service, and
o add services such as VoIP or wireless telecommunications 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.
In addition, the majority of our ITFS channel leases do not currently
contemplate two-way use of our spectrum. We intend to initially use licenses
that we own for our Internet service. We plan to negotiate amendments to certain
of our existing ITFS channel leases or new ITFS 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 or new ITFS channel leases to permit two- way Internet or
other two-way services on terms and conditions that are acceptable to us.
TWO-WAY SYSTEMS REQUIRE REGULATORY APPROVAL. WE WILL BE REQUIRED TO OBTAIN
REGULATORY APPROVAL FOR OUR CURRENT AND 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. The FCC has
announced that the first opportunity to file these applications, or "filing
window," will occur from July 3-10, 2000. The application process will require
us to engineer a network configuration and channel-use plan for the use of our
frequencies in each market where we intend to launch a two-way system, including
Austin and Sherman-Denison, Texas, which we currently operate under temporary
developmental authorizations from the FCC. The applications must meet FCC
interference protection rules or contain the consent of other MMDS licensees in
these markets and adjacent markets. We cannot assure you that:
o we will be able to complete the necessary processes to enable us to
file two-way applications for each of our markets,
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o applications filed will not be preempted or otherwise limited by
previously or concurrently filed applications of other operators, or
o we will be able to obtain the necessary cooperation and consents from
channel licensees in our markets or adjacent markets to enable us to
use our spectrum for two-way communication services.
If we do not receive all required consents in a particular market or we are
not able to design a two- way system that will meet the FCC's interference
protection rules, we will be unable to obtain authorization to implement a
two-way system in that market.
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. As of December 31, 1999, $13.7 million in principal
amount of this debt remained 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.
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 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.
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PURSUING ACQUISITION OR OTHER STRATEGIC OPPORTUNITIES WILL INVOLVE MANAGEMENT
TIME AND EXPENSE AND COULD ADVERSELY AFFECT OUR OPERATIONS.
Part of our growth strategy involves acquiring additional MMDS spectrum
licenses to increase our scale and geographic service area. We also may explore
alliances with traditional ISPs, DSL providers, other fixed-wireless providers
and CLECs. The pursuit of acquisition or other strategic opportunities will
place significant demands on the time and attention of our senior management and
will involve considerable financial and other costs relating to:
o identifying and investigating acquisition candidates or strategic
partners,
o negotiating acquisition or other agreements,
o integrating acquired businesses with our existing operations, and
o operating new technologies
In addition, employees and customers of acquired businesses may sever their
relationship with these businesses during or after such an acquisition. We
cannot assure you that we will be able to successfully consummate any
acquisitions or successfully integrate into our operations any business or
assets which we may acquire.
INTENSE COMPETITION EXISTS IN THE SUBSCRIPTION TELEVISION MARKET. WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS
WITH SIGNIFICANTLY GREATER FINANCIAL RESOURCES. OUR FAILURE TO MAINTAIN AND
EXPAND OUR WIRELESS CABLE SUBSCRIBER BASE COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
The subscription television business is also 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 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 the 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 certain of
our DIRECTV offerings generate more favorable returns than our stand-alone MMDS
offering, and our DIRECTV offerings allow us to use MMDS spectrum for other
purposes, we have shifted the focus of our sales and marketing efforts to
emphasize sales of DIRECTV service. We depend on our contracts with DIRECTV to
provide DIRECTV service. Our SFU and 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.
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<PAGE> 32
OUR CURRENT 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 current 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 cell sites 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. Although we
expect a VOFDM technology platform to mitigate line of sight restrictions on our
services, we cannot assure you that we will be able to effectively implement a
VOFDM technology platform or that it will mitigate line of sight restrictions.
BUILDING OWNERS CONTROL ACCESS TO CERTAIN STRATEGIC RECEIVE SITES.
We may be required to obtain rights from building owners to install our
antennas and other equipment to provide service to our business customers. We
cannot assure you that we will be able to obtain, at costs or on terms
acceptable to us, the access rights necessary to expand our services as planned.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGY CHANGES.
The high-speed Internet access industry is subject to rapid technological
change, frequent new service introductions and evolving industry standards. We
believe that our future success will depend largely on our ability to anticipate
or adapt to such changes and to offer, on a timely basis, services that meet
evolving standards. We cannot predict the extent to which competitors using
existing or currently undeployed methods of delivery of Internet access services
will compete with our services. We cannot assure you that:
o existing, proposed or undeveloped technologies will not render our
fixed-wireless systems less profitable or less viable,
o we will have the resources to acquire new technologies or to introduce
new services that could compete with future technologies, or
o we will be successful in responding to technological changes in a
timely and cost effective manner.
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 asserted a claim against us relating to this issue, someone may assert
a claim of that type in the future and
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<PAGE> 33
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.
TWO FORMER STOCKHOLDERS HAVE FILED A MOTION TO REVOKE THE ORDER OF THE U.S.
BANKRUPTCY COURT CONFIRMING OUR PLAN. IF THE ORDER IS REVOKED, THE DISCHARGE OF
OUR DEBT MAY BECOME INEFFECTIVE AND WE COULD BE PLACED BACK IN REORGANIZATION
UNDER CHAPTER 11 OF THE U.S. BANKRUPTCY CODE.
On December 4, 1998, we filed our Plan. On March 15, 1999, the bankruptcy
court confirmed our Plan, which was approved by all classes of claims that voted
on the Plan (including stockholders) and became effective April 1, 1999. In
September 1999 we received notice that two former stockholders had filed a
motion pro se to revoke the order confirming our Plan, asserting that we
obtained the order by fraudulently undervaluing our assets. The bankruptcy court
may grant the motion and revoke the order of confirmation if and only if the
order was procured by fraud. If the bankruptcy court grants this motion, then
the court has broad authority to revoke the Order Confirming Plan of
Reorganization, grant relief to protect any entity that acquired rights in good
faith reliance on the order, and revoke the discharge of our debt. If the court
revoked the discharge of our debt, we could be placed back in reorganization
under Chapter 11 of the U.S. Bankruptcy Code. We have filed a motion to dismiss
the motion to revoke, believe the motion to revoke is without merit and intend
to vigorously oppose the motion to revoke. Our motion to dismiss the motion to
revoke is under consideration by the bankruptcy court.
ITEM 2. PROPERTIES
We lease approximately 24,000 square feet of office space for our executive
offices in Plano, Texas. We lease approximately 9,600 square feet of space for
telemarketing, customer care operations and training facilities in Denison,
Texas. We believe that the facilities described above are leased at fair market
value and are adequate for the foreseeable future.
The principal physical assets of our operating systems consist of satellite
signal reception equipment, radio transmitters and transmission antennas and
customer premises equipment. We lease space or have options to lease space for
our wireless broadband Internet and video operations on about 100 communications
towers, including 30 towers that we sold to SBA in December 1999 and first
quarter 2000. The leases and options have terms from one to 15 years.
ITEM 3. LEGAL PROCEEDINGS
Chapter 11 Proceeding. On December 4, 1998, we filed our Plan. On March 15,
1999, the bankruptcy court confirmed the Plan, which became effective on April
1, 1999. See "Reorganization" in Item 1.
Motion to Revoke Order of Confirmation. In September 1999, we received
notice that a Motion to Revoke Order of Confirmation had been filed pro se in
the U.S. Bankruptcy Court for the District of Delaware (No. 98-2692-JJF) by two
former stockholders of Heartland Wireless Communications, Inc., seeking to
revoke the order of the bankruptcy court confirming our Plan under Chapter 11 of
the U.S. Bankruptcy Code. The motion asserts that we procured the order
confirming our Plan by fraudulently undervaluing our enterprise value, and seeks
to set aside the order. While it is not feasible to predict or determine the
final outcome of this proceeding, and while management does not expect such an
outcome, an adverse outcome in this proceeding could result in the discharge of
our debt under our Plan being revoked
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<PAGE> 34
and we could be placed back in reorganization under Chapter 11. We have filed a
motion to dismiss the motion to revoke, believe the motion to revoke is without
merit and intend to vigorously oppose the motion to revoke. Our motion to
dismiss the motion to revoke is under consideration by the bankruptcy court.
Securities Litigation. Nucentrix and certain of its former officers and
directors are co-defendants in a stockholder action originally 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
plaintiffs filed an amended complaint on January 4, 1999. On July 8, 1999, for
the second time, the court granted defendants' motion to dismiss the plaintiffs'
complaint for failure to state a claim. The court granted plaintiffs' permission
to file an amended complaint for a second time, which the plaintiffs have filed
and to which the defendants have responded.
Three of our former officers and directors are co-defendants in a purported
class action lawsuit originally filed in July 1998 in State District Court in
Kleburg County, Texas. Nucentrix originally was a named defendant in this
lawsuit, which is styled Thompson, et al. v. David E. Webb, et al. (98-371-D),
but was dismissed as a named defendant in May 1999. In March 2000, in a fifth
amended petition, the plaintiffs added KPMG LLP as a named defendant. The
Thompson action seeks to represent a class consisting of anyone who acquired the
common stock of Nucentrix from November 15, 1995, to March 20, 1997.
Plaintiffs in the Thompson action allege state securities laws violations,
misrepresentation and civil conspiracy claims against the three former officers
and directors. The petition alleges that, during the purported class period,
defendants caused Nucentrix to misstate material facts concerning Nucentrix's
subscriber base and omit to disclose the need for a material write-down of
accounts receivable relating to its wireless cable subscriber base. Plaintiffs'
action further claims that Nucentrix violated generally accepted accounting
principles by allegedly (1) failing to recognize revenue properly, (2) failing
to adequately reserve for doubtful accounts receivable, (3) failing to write off
certain capitalized installation and equipment costs, and (4) using
unrealistically long amortization periods. The plaintiffs also allege that KPMG
LLP, Nucentrix's independent auditors during the purported class period, issued
false audit reports on Nucentrix's financial statements during this time.
The plaintiffs seek unspecified compensatory and punitive damages, costs
and expenses, including attorneys' fees and experts' fees, as well as injunctive
relief relating to any proceeds derived from defendants' stock sales, if any.
The plaintiffs have alleged in a statement of the case that their purported
class damage models indicate retention damages of $35.4 million and selling
damages of $35.1 million, for total damages of $70.5 million. Three of our
former officers and directors remain named defendants. Nucentrix's liability to
these officers and directors with respect to this lawsuit is limited under our
Plan as described below. This matter is currently set for trial in August 2000.
Our By-Laws as in effect prior to the Effective Date of our Plan 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
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<PAGE> 35
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
former directors and officers who are parties to the Coates or Thompson actions
may have a claim for indemnification against us to the extent they incur
liabilities resulting from or incur expenses in defending these actions. The
treatment of any such claims is provided for in our Plan.
Under Section 11.5 of our Plan, we are obligated, to the extent permitted
under the DGCL, to indemnify persons who served as officers or directors of
Nucentrix on or after April 25, 1997, for certain liabilities arising as a
result of such persons having served as an officer or director of Nucentrix,
including, subject to the limitations described below, liabilities arising out
of their being named as a defendant in the Coates or Thompson actions. We refer
to our obligation under Section 11.5 of our Plan as "Assumed Indemnity
Obligations." Our Assumed Indemnity Obligations do not apply, however, with
respect to any liability arising from acts or omissions occurring prior to April
25, 1997, if the liability is based on (1) a breach of their duty of loyalty to
us or our stockholders, (2) acts or omissions taken not in good faith and not in
a manner they reasonably believed to be in or not opposed to our best interest
or which involve intentional misconduct, gross negligence or a knowing violation
of law, or (3) any transaction from which the director of officer derived any
improper personal benefit. Claims asserted by former directors and officers of
Nucentrix which are not covered by our Assumed Indemnity Obligations, to the
extent allowed by the bankruptcy court, would be classified as Class 6 Indemnity
Claims under our Plan. Under Section 4.6 of our Plan, holders of Class 6
Indemnity Claims allowed by the bankruptcy court would be entitled to recover on
account of such claims only to the extent of any available coverage under our
corporate liability insurance, including any self-insured retention under those
policies.
All of our former officers and directors of Nucentrix who are defendants in
the Coates and Thompson actions, other than two former officers and directors
who are defendants in each of the Coates and Thompson actions, served as
officers or directors after April 25, 1997, and, therefore, are beneficiaries of
the Assumed Indemnity Obligations. To the extent the two former officers and
directors who are not, or any other former or current officer or director who
otherwise is determined not to be, entitled to the benefit of the Assumed
Indemnity Obligations incur liability in any of these lawsuits, we believe that
any claim they may assert against us for indemnification, to the extent allowed
by the bankruptcy court, would be treated as Class 6 Indemnity Claims under our
Plan and their recovery would be limited to any available proceeds of our
corporate liability insurance. To the extent any of the other former or current
officers or directors incur any liability in any of these lawsuits, we would be
obligated to indemnify such persons as part of our Assumed Indemnity
Obligations, subject to the exceptions described above, to the extent the
proceeds of our corporate liability insurance are insufficient to cover such
liabilities.
To the extent plaintiffs in the Coates and Thompson actions are entitled to
any recovery from us and the bankruptcy court allows any claim they may file
against us, we believe any such claim for recovery would be classified under our
Plan 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, each holder of a Bondholder Litigation Claim that is allowed by
the bankruptcy court will be entitled to receive, in full satisfaction of such
claim, (1) a pro rata portion of any liability insurance proceeds that remain
after the satisfaction of our Assumed Indemnity Obligations and payments made on
Class 6 Indemnity Claims and (2) if insurance proceeds are insufficient to
satisfy such claim in full, a pro rata portion of the 275,000 warrants that we
are obligated to issue under our Plan, 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
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<PAGE> 36
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, 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 are vigorously defending the Coates and, on behalf of our former
directors and officers that are parties thereto, Thompson actions. While it is
not feasible to predict or determine the final outcome of these proceedings or
to estimate the amounts or potential range of loss for these matters, and while
management does not expect such an adverse outcome, management believes that an
adverse outcome in one or more of these proceedings against one or more persons
entitled to the benefit of Assumed Indemnity Obligations which, in the
aggregate, exceeds or otherwise is excluded from applicable insurance coverage,
could have a material adverse effect on our financial condition, results of
operations or cash flows.
Late Fee Litigation. Nucentrix is a party to a purported class action
lawsuit filed in May 1998 and pending in State District Court in Brooks County,
Texas, styled Garcia, et al. v. Heartland Wireless Communications, Inc. d/b/a
Heartland Cable Television (98-60898-1). The lawsuit alleges that the
administrative late fees charged by Nucentrix are not reasonably related to the
costs incurred by Nucentrix as a result of late payment of accounts. The
plaintiff seeks to certify a class to represent all persons receiving cable
service from Nucentrix or who have been charged a late fee by Nucentrix. The
plaintiff seeks a declaration that any contractual provisions for Nucentrix's
late fees are void or usurious, and seek unspecified money damages, interest,
attorneys' fees and costs. We believe that the plaintiff's claims in the Garcia
case are barred by, among other things, the order confirming our Plan entered by
the bankruptcy court on March 15, 1999, for plaintiff's failure to file a proof
of claim in our Chapter 11 proceedings, and that the plaintiff is entitled to no
recovery under the Plan. We have filed a motion with the bankruptcy court to
permanently enjoin and dismiss this matter. The bankruptcy court has heard oral
arguments on the motion, but has not rendered a decision.
Nucentrix also is a party to a purported class action filed in December
1998 in State District Court in Nueces County, Texas styled Ysasi, et al. v.
Heartland Wireless Communications, Inc. (98-6430-B). The plaintiffs in the Ysasi
action have filed a fifth amended original petition and class action complaint,
which alleges that our administrative late fees are unenforceable and usurious.
The plaintiffs seek to represent a class consisting of all persons who paid a
$6.00 administrative fee on their accounts since December 4, 1998. The
plaintiffs seek (1) a declaration that the administrative late fee charged by us
was usurious, (2) an injunction enjoining Nucentrix from charging more than 6%
on overdue payments on accounts in Texas, and (3) recovery of statutory
penalties and interest, 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,
and while management does not expect such an adverse outcome, management
believes that an adverse outcome in one or more of these proceedings could have
a material adverse effect on our financial condition, results of operations or
cash flows.
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Other. Nucentrix is a party, from time to time, to routine litigation
incident to our business. We do not believe that any other pending litigation
matter will have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
As discussed under "Reorganization" in Part I., Item 1., all shares of our
common stock outstanding as of the April 1, 1999, Effective Date of our Plan
were canceled and we issued 10,000,000 shares of common stock to certain
creditors. Beginning April 5, 1999, our newly issued common stock began trading
on the over-the-counter bulletin board quotation system under the symbol "NCNX."
On August 10, 1999, the common stock was approved for quotation on The Nasdaq
Stock Market, where it began trading on August 12, 1999, under the symbol
"NCNX."
The low and high bid prices of the common stock on the over-the-counter
bulletin board quotation system for the period April 5, 1999, through August 11,
1999, were as follows:
<TABLE>
<CAPTION>
LOW High
------ ------
<S> <C> <C>
April 5, 1999 -- June 30, 1999 $13.00 $39.25
July 1, 1999 -- August 11, 1999 $24.00 $30.25
</TABLE>
The low and high bid prices of the common stock as reported on The Nasdaq Stock
Market for the period August 12, 1999, through December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
LOW High
------ ------
<S> <C> <C>
August 12, 1999 -- September 30, 1999 $24.00 $28.13
October 1, 1999 -- December 31, 1999 $19.63 $25.88
</TABLE>
The last reported sale price of the common stock on The Nasdaq Stock Market
on March 27, 2000, was $35.00. We have not provided market price information for
periods before April 5, 1999, because, as a result of our reorganization, our
capital structure and financial condition before the Effective Date was
substantially different than after the Effective Date.
The number of record holders of common stock as of February 29, 2000, was
approximately 10, although we believe there are up to 1,200 beneficial owners of
our common stock.
DIVIDENDS
We have not paid any cash dividends on our common stock, and do not intend
to pay cash dividends in the foreseeable future. Our Board of Directors may
reexamine our dividend policy from time to time. However, if we raise capital in
the future through financings obtained from outside sources, the terms of
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<PAGE> 38
these financings may restrict or prohibit us from paying any dividends on our
common stock.
RECENT SALES OF UNREGISTERED SECURITIES.
Effective April 1, 1999, we issued 10,000,000 shares of common stock and
warrants to purchase 825,000 shares of our common stock (the "Issued
Securities") pursuant to our Plan. We also are obligated pursuant to the Plan to
issue (1) warrants to acquire an additional 275,000 shares of common stock to
certain classes of or claims against and/or interests in Nucentrix, which will
become issuable upon the resolution of certain pending litigation claims, and
(2) a yet to be determined number of additional shares of common stock to
satisfy certain miscellaneous unsecured claims that may be allowed by the
bankruptcy court (the "Future Securities" and, together with the Issued
Securities, the "Securities"). The Issued Securities were, and the Future
Securities will be, issued pursuant to the Plan under Section 1145(a) of the
Bankruptcy Code. Therefore, the issuance of the Securities is exempt from the
registration requirements of Section 5 of the Securities Act. However, pursuant
to Section 1145(c) of the Bankruptcy Code, the issuance of the Securities
pursuant to the Plan is deemed a public offering of the Securities and,
therefore, the Securities are not "restricted securities" for purposes of Rule
144 promulgated under the Securities Act. In accordance with the Plan, the
Securities were, or will be, distributed to certain creditors of and/or interest
holders in the registrant in exchange for claims against and/or interests in
Nucentrix. See "Reorganization" in Item 1.
As of February 29, 2000, we had issued 9,757 shares of common stock
pursuant to the Plan as described in clause (2) of the preceding paragraph.
The issuance of shares of common stock upon the exercise of the warrants
issued, or to be issued, pursuant to the Plan also will be exempt from the
registration requirements of the Securities Act pursuant to Section 1145(a)(2)
of the Bankruptcy Code and, pursuant to Section 1145(c) of the Bankruptcy Code,
such shares will not be "restricted securities" for purposes of Rule 144.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary historical financial and other data
for Nucentrix. As a result of the application of Fresh Start Reporting,
financial information as of December 31, 1999, and for the period from the
Effective Date to December 31, 1999 (the "Successor Period"), is presented on a
different basis than the financial information as of and for each of the years
in the four year period ended December 31, 1998, and for the period from January
1, 1999, to the Effective Date (collectively, the "Predecessor Period"). See
"Reorganization" in Item 1. The selected historical financial data presented
below as of and for each of the years in the five year period ended December 31,
1999, is derived from the audited Consolidated Financial Statements of
Nucentrix. Historically, we have used our spectrum primarily to deliver
subscription television services and, therefore, our historical results are not
necessarily indicative of our future results as we implement our business
strategy as described in "Part 1., Item 1. Business." You should read the
financial data below together with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with Nucentrix's
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this document.
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------------- --------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
EFFECTIVE DATE TO JANUARY 1, 1999, YEAR ENDED DECEMBER 31,
DECEMBER 31, TO ------------------------------------------------------------
1999 EFFECTIVE DATE 1998 1997 1996 1995
--------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Data:
Revenues .................... $ 52,009 $ 18,466 $ 73,989 $ 78,792 $ 56,017 $ 15,300
Operating expenses:
System operation ......... 23,767 8,599 35,790 39,596 21,255 4,893
Selling, general and
administrative ........ 26,125 9,156 36,367 42,255 42,435 11,887
Depreciation and
amortization(1)(2) .... 19,167 6,104 39,550 65,112 39,323 6,234
Impairment of long-
lived assets(2) ....... -- -- 105,791 -- -- --
--------- --------- --------- --------- --------- ---------
Total operating
expenses ................. 69,059 23,859 217,498 146,963 103,013 23,014
--------- --------- --------- --------- --------- ---------
Operating loss .............. (17,050) (5,393) (143,509) (68,171) (46,996) (7,714)
Interest income
(expense), net ........... 334 102 (34,436) (34,321) (18,166) (10,857)
Equity in losses of
affiliates ............... -- -- (30,340) (32,037) (18,612) (1,369)
Other income
(expense) ................ 483 2 (10) (54) 4,981 (247)
--------- --------- --------- --------- --------- ---------
Loss before reorganization
costs, income taxes and
extraordinary item ....... (16,233) (5,289) (208,295) (134,583) (78,793) (20,187)
Reorganization costs(3) ..... (1,011) (2,311) (3,266) -- -- --
--------- --------- --------- --------- --------- ---------
Loss before income taxes
and extraordinary item ... (17,244) (7,600) (211,561) (134,583) (78,793) (20,187)
Income tax benefit .......... -- -- -- -- 28,156 4,285
--------- --------- --------- --------- --------- ---------
Loss before
extraordinary item ....... (17,244) (7,600) (211,561) (134,583) (50,637) (15,902)
Extraordinary item .......... -- 173,783 -- -- 10,424 --
--------- --------- --------- --------- --------- ---------
Net income (loss) ........... $ (17,244) $166,183 $(211,561) $(134,583) $ (61,061) $ (15,902)
========= ========= ========= ========= ========= =========
Net loss per new common
share-- basic and
diluted(4) ............... $ (1.71) N/A N/A N/A N/A N/A
========= ========= ========= ========= ========= =========
</TABLE>
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<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
-------------- ------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
EFFECTIVE DATE JANUARY 1,
TO 1999, TO YEAR ENDED DECEMBER 31,
DECEMBER 31, EFFECTIVE ------------------------------------------------------
1999 DATE 1998 1997 1996 1995
-------------- --------- ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(5) ........................ $ 2,117 $ 711 1,832 (3,059) (7,673) (1,480)
Net cash provided by (used
in) operating activities ...... 5,593 2,449 (8,377) (41,646) (22,754) (6,474)
Net cash provided by (used
in) investing activities ...... (3,949) (4,959) (2,038) 6,826 (34,169) (96,703)
Net cash provided by (used
in) financing activities ...... (302) (576) (1,730) (1,955) 113,376 114,334
Capital Expenditures ............. 10,199 2,550 13,473 29,712 95,680 46,034
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------ ----------------------------------------------------------
AS OF AS OF DECEMBER 31,
DECEMBER 31, ----------------------------------------------------------
1999 1998 1997 1996 1995
------------ --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents ............. $ 28,932 $ 30,676 $ 42,821 $ 79,596 $ 23,143
Restricted assets ......... 650 1,011 10,333 30,007 18,739
Systems and equipment,
net(2) .................. 55,993 61,037 122,653 145,797 60,649
License and leased
license investment,
net(2) .................. 73,310 79,703 123,369 129,725 60,421
Total assets .............. 168,811 186,032 372,134 515,364 205,405
Long-term debt,
including current
portion ................. 16,516 16,277 308,196 303,538 141,652
Liabilities subject to
compromise(3) ........... -- 322,781 -- -- --
Total stockholders'
equity (deficit) ........ 130,045 (165,090) 46,408 180,847 51,688
</TABLE>
- -------------------
(1) We changed the useful lives for depreciating the nonrecoverable portion of
subscriber installation costs in 1997 and 1996, and for amortizing license
and leased license costs and excess of cost over fair value of net assets
acquired in 1996. See Notes 1(g) and 1(h) to the Consolidated Financial
Statements.
(2) During the second and third quarters of 1998, in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 121, we wrote down channel
licenses and leases, systems and equipment and other long-lived assets to
estimated fair value, which resulted in a non-cash impairment charge of
$105.8 million. See Note 2 to the Consolidated Financial Statements.
(3) We filed a voluntary petition for reorganization under Chapter 11 of the
U.S. Bankruptcy Code on December 4, 1998. Our Plan was confirmed on March
15, 1999, and became effective on April 1, 1999. Accordingly, we have
reclassified our Old Senior Notes and Old Convertible Notes, which were
subject to compromise in the reorganization, to "Liabilities Subject to
Compromise" at December 31, 1998. See Note 8 to the Consolidated Financial
Statements. Expenses related to our reorganization, such as professional
fees and administrative expenses, are classified as "Reorganization costs."
(4) Loss per basic and dilutive common share for each period presented has been
calculated using the provisions of SFAS No. 128, "Earnings per Share,"
which is effective for periods ending after December 15, 1997, and requires
restatement of all prior period loss per share data. Earnings per share
information has not been presented for the Predecessor Period because
Nucentrix was recapitalized on the Effective Date, in connection with the
Plan, and accordingly, per share amounts are not comparable between the
Predecessor Period and the Successor Period. See Note 1(l) to the
Consolidated Financial Statements.
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(5) "EBITDA" represents earnings before interest, taxes, depreciation and
amortization and non-recurring items. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
and/or incur indebtedness. However, EBITDA is not a financial measure
determined under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of operating
results or to cash flows as a measure of funds available for discretionary
or other liquidity purposes. EBITDA may be calculated differently from
company to company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our business strategy is to become a leading provider of fixed-wireless
broadband network services using our high-capacity radio spectrum in medium and
small markets. We currently provide always-on high- speed wireless Internet
access service under temporary developmental FCC licenses to over 170 accounts
serving approximately 1,360 end users in two of our 92 markets, primarily to
medium-sized and small businesses. We launched our first such Internet market,
Sherman-Denison, Texas, in February 1999 followed by our second market, Austin,
Texas, in May 1999. In February 2000, we announced a strategic alliance and
agreement with Cisco, to pursue testing and deployment of fixed-wireless
broadband services using VOFDM technology on a Cisco Powered Network. The
agreement includes two field trials to be completed between September 2000 and
the end of 2000. We expect to launch at least 20 total markets by the end of
2001 using this technology.
Historically, we have used our spectrum to provide subscription television
services. Our business strategy contemplates a decline in revenues, video
subscribers and EBITDA from the subscription television business in 2000 and
beyond, as we develop and expand our wireless broadband Internet and other
IP-based businesses. Our historical results are not necessarily indicative of
our future results as we implement our business strategy.
Reorganization. On the April 1, 1999, Effective Date, we consummated our
Plan to convert, among other things, approximately $325 million of senior and
subordinated debt and accrued interest into common stock. As a result of the
application of Fresh Start Reporting, financial information in the Consolidated
Financial Statements as of December 31, 1999, and for the period from the
Effective Date to December 31, 1999 (the "Successor Period"), is presented on a
different basis than the financial information as of December 31, 1998, for the
year ended December 31, 1998, and for the period January 1, 1999, to the
Effective Date (collectively, the "Predecessor Period"). Accordingly, such
information is not comparable. The Predecessor Period includes operations
through March 31, 1999, plus the gain on debt forgiveness recognized on the
Effective Date. The Successor Period includes operations from the Effective Date
through December 31, 1999. See "Reorganization" in Item 1.
Revenues. Our revenues currently consist primarily of monthly fees paid by
wireless cable subscribers for basic programming, premium programming equipment,
rental and other miscellaneous fees, as well as fees generated from start-up
Internet operations in Austin and Sherman-Denison, Texas. Unless the context
requires otherwise, all references to "subscribers" or "systems" are to our
wireless cable subscribers and systems because revenues and subscribers from our
Internet business were immaterial in 1999.
System Operations Expenses. System operations expenses include channel
lease payments, wireless cable programming costs, labor and overhead and costs
related to service calls and disconnects, transmitter site and tower rentals and
certain repairs and maintenance expenditures. Programming costs, with the
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exception of minimum payments, channel lease payments and repairs and
maintenance, are variable expenses based on the number of subscribers.
Depreciation and Amortization Expense. Depreciation and amortization
expense includes depreciation of systems and equipment, amortization of license
and leased license investment and amortization of the subscriber value and
excess of cost over fair value of net assets acquired. Our policy is to
capitalize the excess of direct costs of subscriber installations over
installation fees. These direct costs include reception materials and equipment
on subscriber premises and installation labor and, prior to 1998, certain
overhead charges and direct commissions. These direct costs are capitalized as
systems and equipment in the Condensed Consolidated Balance Sheet included
elsewhere in this document.
EBITDA. EBITDA, or earnings before interest, taxes, depreciation and
amortization and non- recurring items, is widely used by analysts, investors and
other interested parties in the Internet, cable television and telecommunication
industries. EBITDA is also widely accepted as a financial indicator of a
company's ability to incur and service indebtedness. EBITDA is not a financial
measure determined by generally accepted accounting principles and should not be
considered an alternative to net income as a measure of operating results or to
cash flows as a measure of funds available for discretionary or other liquidity
purposes. EBITDA may not be comparably calculated from one company to another.
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1999.
The following table summarizes the operating results for the year ended
December 31, 1999, in comparison to the years ended December 31, 1998 and 1997
(the "Predecessor Periods"), combining the 1999 results for the 1999 Predecessor
Period (January 1, 1999, through the Effective Date) with the Successor Period
(Effective Date through December 31, 1999). The most significant impact of the
Plan was a decrease in depreciation and amortization expense due to the
write-down of certain long-lived assets to estimated fair value, a decrease in
interest expense due to the extinguishment of liabilities subject to compromise,
and a one-time, nonrecurring gain on extinguishment of liabilities subject to
compromise. Specific trends addressed within the discussion of operating results
will refer to the combined results as presented in this table (in thousands),
unless otherwise noted:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 70,475 $ 73,989 $ 78,792
Systems operations expense 32,366 35,790 39,596
Selling, general and administrative expense 35,281 36,367 42,255
Depreciation and amortization 25,271 39,550 65,112
Interest income 1,583 2,659 5,546
Interest expense 1,147 37,095 39,867
Equity in losses of affiliates 0 30,340 32,037
Reorganization costs 3,322 3,266 --
Net cash provided by (used in ) operating 8,042 (8,377) (41,646)
activities
Net cash provided by (used in) investing (8,908) (2,038) 6,826
activities
Net cash used in financing activities (878) (1,730) (1,955)
</TABLE>
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Revenues. Our revenues were $70.5 million in 1999, $74.0 million in 1998
and $78.8 million in 1997, representing a 4.7% decrease from 1998 to 1999 and a
6% decrease from 1997 to 1998.
Average subscribers for the year ended December 31, 1999, were
approximately 155,000 compared to approximately 170,000 subscribers at December
31, 1998. The decline in revenues from 1998 to 1999 resulted primarily from
fewer total subscription television subscribers as we continued to shift our
principal focus from subscription television service to developing our wireless
broadband IP-based services. This decline was partially offset by $3 million of
additional revenues recognized from our agency relationships with DIRECTV and
its distributors. All of the 1999 revenue was recorded during the fourth quarter
of 1999. The amounts attributable to the first, second and third quarters of
1999 were $380,000, $458,000 and $1 million, respectively, representing an
increase in reported revenues. The quarterly information for the first, second
and third quarters of 1999 has been restated in Note 15 to the Consolidated
Financial Statements to reflect the recognition of this revenue for the
appropriate quarterly period. Additional factors contributing to a loss in
subscribers from 1998 to 1999 were:
o our first system-wide price increase in the fourth quarter of 1998,
which resulted in increased disconnects by video subscribers in 1999,
o decreased marketing of MMDS subscription television services and
overall increased competition for cable television services, and
o loss of subscribers in Austin in the second quarter of 1999 as a result
of a technology conversion that caused some existing subscribers to
fall outside of the coverage range of the new technology.
Average monthly recurring revenue per subscriber was $33.67 for the twelve
months ended December 31, 1999, compared to $33.40 for the same period last
year. This increase was due to an increase in the percentage of subscribers
purchasing DIRECTV packages which have a higher average revenue in the year
installed.
We expect revenues and video subscribers to continue to decline in 2000 as
we continue to transition our business from subscription television to wireless
broadband Internet and other IP-based services. We do not expect the decline to
be offset materially by an increase in revenues from our Internet business in
2000, as we do not expect to complete field trials for our new Internet services
technology platform until between September 2000 and the end of 2000, and expect
to receive two-way operating licenses after completion of these trials. We
believe that the decline in revenues and total subscription television
subscribers will be offset by revenues from our Internet business to a greater
degree in 2001 and beyond, as we intend to launch our wireless Internet access
service in at least 20 markets by the end of 2001.
The decrease in revenues from 1997 to 1998 was due primarily to a decrease
in average subscribers from 184,000 in 1997 to 170,000 in 1998. This decline in
subscribers resulted from:
o stricter credit policies for approving new customers, which, although
contributing to a decline in revenues, reduced churn and bad debt
expense,
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o slower than anticipated sales force hirings,
o the delayed launch of our marketing plan for our combined DIRECTV
offerings until the third quarter of 1998,
o an increase as of January 1, 1998, and November 1, 1998, in our
equivalent basic unit, or "EBU," conversion rate for calculating MDU
subscribers, and
o the transfer of one operating system, and its associated revenues, to
CS Wireless in December 1997.
Although total revenues and subscribers decreased from 1997 to 1998,
average monthly recurring revenue per subscriber increased to $33.40 in 1998
from $32.93 in 1997. This was due to a greater percentage of our subscribers
purchasing premium packages and pay-per-view services at higher average
subscription rates as lower-priced wireless cable packages were replaced with
upgraded offerings.
At December 31, 1999, we had approximately 145,000 subscribers compared
with approximately 170,000 at December 31, 1998, and approximately 184,000 at
December 31, 1997. We had 58 operating systems at December 31, 1999, compared to
57 at December 31, 1998, and 58 at December 31, 1997.
System Operations Expense. System operations expenses were $32.4 million,
$35.8 million and $39.6 million for the years ended December 31, 1999, 1998 and
1997, respectively. As a percentage of revenues, system operations expenses were
46% in 1999, 48% in 1998 and 50% in 1997.
The decrease in system operations expense from 1998 to 1999 was primarily
due to lower service call expense as a result of fewer subscribers and lower
programming costs due to a larger proportion of DIRECTV subscribers, which have
lower or no programming costs to Nucentrix. In addition, disconnect expense was
reduced as average monthly churn decreased to 3.1% for the twelve months ended
December 31, 1999, compared to 3.3% for the twelve months ended December 31,
1998.
The decrease in system operations expense from 1997 to 1998 was due
primarily to lower programming costs as a percent of revenues as more
subscribers migrated to our combination DIRECTV/MMDS offering which has lower
programming costs or to our DIRECTV-only offering which has no programming costs
to Nucentrix. This decrease was slightly offset by programming rate increases
from certain providers. In addition, compared to 1998, we experienced higher
service call and disconnect expense during 1997 due to:
o installation corrections at certain subscriber households,
o recovery of equipment from disconnected subscribers, and
o higher churn in 1997.
Selling, General and Administrative ("SG&A") Expense. SG&A expense was
$35.3 million in 1999, $36.4 million in 1998 and $42.3 million in 1997. As a
percent of revenues, SG&A expense was 50% for 1999, 49% for 1998 and 54% for
1997.
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SG&A expense for the twelve months ended December 31, 1999, included $1.5
million in costs associated with our Internet operations, which primarily
included labor and marketing expenses incurred to launch the Austin and
Sherman-Denison markets. Excluding Internet costs and revenues, SG&A would have
been 48% of revenues for the twelve months ended December 31, 1999. SG&A expense
decreased for the twelve months ended December 31, 1999, compared to the twelve
months ended December 31, 1998, due to decreased video marketing costs and
savings from consolidation of certain market offices and management, slightly
offset by increased expenditures to improve service at our customer care center
and start-up costs for the Internet service business.
The decrease in SG&A expense in 1998 compared to 1997 was due to:
o lower bad debt expense resulting from improved credit screening and
collections procedures, and
o labor savings and efficiencies realized from field operational
improvements and consolidation of management and staff in certain
markets.
Depreciation and Amortization. Depreciation and amortization expense was
$25.3 million in 1999, $39.6 million in 1998 and $65.1 million in 1997.
The decrease in depreciation and amortization expense from 1998 to 1999 was
due to a write down of certain long-lived assets to estimated fair market value
during 1998 in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of."
Depreciation and amortization expense decreased in 1998 compared to 1997
partially due to a nonrecurring charge to depreciation expense of $9.0 million
during the third quarter of 1997. This charge was comprised of three components:
o $6.1 million related to the third quarter 1997 write-off of equipment
not recovered from subscriber homes,
o $1.7 million related to the write-off of obsolete subscriber equipment
that was not available for future use, and
o $1.2 million related to the effects of a reduction in the estimated
useful life of the nonrecoverable portion of subscriber installation
costs from four years in 1996 to three years in the third quarter of
1997.
In addition to the reasons outlined above, depreciation and amortization
decreased in 1998 compared to 1997 due to the write down of certain long-lived
assets to estimated fair market value during 1998 in accordance with SFAS No.
121. The carrying value of these assets was reduced by:
o an impairment charge of $17.7 million to write down the carrying value
of our undeveloped licenses to estimated fair market value during the
second quarter of 1998,
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o an impairment charge of $6.8 million to reduce our excess basis in our
36% equity interest in CS Wireless during the second quarter of 199
(written off to equity in losses of affiliates),
o an impairment charge of $18.9 million to write down the carrying value
of our operating licenses and leased license investments to estimated
fair market value during the third quarter of 1998,
o an impairment charge of $44.5 million to write down the carrying value
of our systems and equipment to estimated fair market value during the
third quarter of 1998, and
o an impairment charge of $24.7 million to write down the carrying value
of our excess of cost over fair value to estimated fair market value
during the third quarter of 1998.
The amortization periods related to the nonrecoverable portion of
installation costs for new subscribers over the periods presented reflect our
best estimates of the expected useful lives of such costs at the time of
implementation. In the third quarter of 1997, we reassessed our estimate of
useful lives and reduced our estimate from four to three years. We based this
reduction primarily on cumulative results of operation through September 30,
1997, that indicated a lower than anticipated retention rate of subscribers in
markets where we offered 20 channels or less and in markets where prior
promotional campaigns had begun to expire. A three-year useful life is the
equivalent of a 2.8% churn rate. We currently believe that a consolidated
monthly churn rate of 2.8% to 3.2% can be achieved and maintained in our
existing markets.
Impairment of Long-Lived Assets. We continually review components of our
business for possible impairment of assets based on, among other things, changes
in technology, competition, consumer habits and business climate. SFAS No. 121
addresses the accounting for impairment of long-lived assets to be disposed of
and certain identifiable intangibles and goodwill related to those assets,
provides guidelines for recognizing and measuring impairment losses, and
requires that the carrying amount of impaired assets be reduced to estimated
fair value.
During the second quarter of 1998, we reviewed the assets associated with
certain undeveloped markets including certain of the markets listed in the
"Unconstructed Markets" table under the heading "Existing and Unconstructed
Markets" in Item 1 and concluded that:
o cash flows from operations would not be adequate to fund the capital
outlay required to build out such markets, and
o because of our default on our interest payment on the Old 13% Notes in
the second quarter of 1998, outside financing for the build-out of
these markets was not readily available prior to the consummation of a
financial restructuring.
Therefore, in accordance with SFAS No. 121, the channel licenses and leases in
these undeveloped markets were individually evaluated and written down to
estimated fair value, resulting in a non-cash impairment charge of $17.7 million
in the second quarter of 1998.
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Throughout the second and third quarters of 1998, we analyzed various
recapitalization and restructuring alternatives with the assistance of our
financial advisors, Wasserstein Perella and Co., Inc., including consensual,
out-of-court alternatives. In October 1998, we announced that we intended to
pursue a prenegotiated plan of reorganization by filing a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. This event caused us to evaluate
all of our long-lived assets for impairment, according to the requirements of
SFAS No. 121 and to write those assets down to fair market value. We retained
the services of another third party to assist in performing the allocation of
fair market value. This resulted in a non-cash impairment charge of $88.1
million for the third quarter of 1998. The impairment included write-downs of
systems and equipment in the amount of $44.5 million, license and leased license
investment in the amount of $18.9 million and the excess of cost over fair value
in the amount of $24.7 million.
Operating Loss. We generated operating losses of $22.4 million, $143.5
million and $68.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Excluding the write-down of long-lived assets to estimated fair
market value in the second and third quarters of 1998, operating loss for the
twelve months ended December 31, 1998, was $37.7 million reflecting an
improvement of $15.3 million in 1999 compared to 1998. This was primarily due to
lower programming costs, decreased subscription television marketing expenses,
savings from consolidation of certain markets and lower depreciation expense
resulting from the write-down of long-lived assets during 1998. Excluding the
write-down of assets in 1998, operating loss decreased from 1997 to 1998 due to
lower programming costs resulting from fewer subscribers, operational
improvements and efficiencies in our operating markets and lower churn and bad
debt expense.
Consolidated EBITDA, excluding non-recurring items, was $2.8 million for
the twelve months ended December 31, 1999, as compared to $1.8 million for the
twelve months ended December 31, 1998 and negative $3.1 million for the twelve
months ended December 31, 1997. We expect EBITDA to decline in 2000 as we
continue to transition our business from subscription television to wireless
broadband Internet and other IP-based services.
Interest Income. Interest income was $1.6 million in 1999, $2.7 million in
1998 and $5.5 million in 1997. The decrease in interest income from 1998 to 1999
was due to higher interest earnings in the first quarter of 1998 on larger
escrowed balances segregated for the payment of interest on the Old Senior
Notes, which was paid in April 1998, combined with lower overall cash balances
in the current year due to payment of reorganization costs.
Interest income decreased from 1997 to 1998 due to higher interest earnings
during 1997 on larger escrowed balances segregated for the payment of interest
on the Old Senior Notes and higher interest earnings on a note receivable that
was partially repaid during the second and third quarters of 1997.
Interest Expense. We incurred interest expense of $1.1 million in 1999,
$37.1 million in 1998 and $39.9 million in 1997. Interest expense decreased from
1998 to 1999 because we discontinued the accrual of interest and the
amortization of deferred debt issuance costs on our Old Senior Notes and Old
Convertible Notes upon filing the voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code on December 4, 1998. See "Reorganization" in Item 1. If
interest had continued to be accrued, total interest expense would have been
$12.6 million for the period from January 1, 1999, through the Effective Date.
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Interest expense during 1998 and 1997 consisted primarily of:
o non-cash interest related to the Old Convertible Notes,
o interest on our Old 13% Notes issued in March 1995,
o interest on our Old 14% Notes issued in December 1996,
o interest on debt incurred in conjunction with the BTA auction.
The slight decrease in interest expense from 1997 to 1998 resulted from our
voluntary Chapter 11 filing on December 4, 1998, at which time interest ceased
to accrue on the impaired debt (the Old Convertible Notes and the Old Senior
Notes). See "Reorganization" in Item 1. If interest had continued to be accrued,
total interest expense would have been $39.9 million for the year ended December
31, 1998.
Equity in Losses of Affiliates. We had no equity in losses of affiliates
for the twelve months ended December 31, 1999, compared to losses of $30.3
million and $32 million during the twelve months ended December 31, 1998 and
1997, respectively. During the twelve months ended December 31, 1999, 1998 and
1997, we owned approximately 20% of the outstanding common stock of Wireless One
and at December 31, 1998 and 1997, we owned approximately 36% of the outstanding
common stock of CS Wireless. Losses recorded in prior years for Wireless One
reduced our investment balance to zero in November 1997, although we still owned
approximately 20% of the outstanding common stock. In January 2000, we exchanged
2,911,725 shares of common stock in Wireless One for approximately $3.8 million,
pursuant to Wireless One's plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code. We expect to exchange the remainder of our 547,783 shares of
Wireless One common stock for approximately $700,000 in the first quarter of
2000.
During the twelve months ended December 31, 1998, we wrote off $6.8 million
of our excess cost in CS Wireless and our remaining investment balance of $11.7
million based on losses incurred by CS Wireless. In December 1998, we sold our
36% equity interest in CS Wireless to CAI Wireless Systems, Inc. Accordingly, no
losses from affiliates were recorded in the twelve months ended December 31,
1999. See "Recent Transactions -- CS Wireless Transaction -- Wireless One Equity
Exchange" in Item 1.
Income Tax Benefit. At December 31, 1999, and before taking into
consideration the effects of the reorganization, we had an estimated $366.8
million net operating loss carryforward for income tax purposes. No income tax
benefit was recorded for the years ended December 31, 1999, 1998 and 1997. The
net operating loss carryforward will be reduced in connection with the
reorganization. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Effects of Reorganization."
Reorganization Costs. During each of the twelve months ended December 31,
1999, and December 31, 1998, we incurred $3.3 million in expenses related to our
reorganization under Chapter 11 of the U.S. Bankruptcy Code. These costs were
for financial and legal advisors, accountants and administrative costs. See
"Reorganization" in Item 1.
Gain on Debt Forgiveness. In connection with our reorganization under
Chapter 11, on the April 1, 1999, Effective Date of our reorganization we
recorded an extraordinary gain of approximately $174 million reflecting the
extinguishment of liabilities subject to compromise in exchange for common stock
and warrants. Upon consummation of our Plan on April 1, 1999, our Old Senior
Notes and Old Convertible Notes
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totaling approximately $318 million, including the interest accrued thereon and
associated unamortized discounts and debt issuance costs, were canceled and
exchanged for 10 million shares of newly-issued common stock and warrants to
acquire 825,000 shares of common stock, with a combined estimated fair value of
$144.2 million as of the Effective Date. This extraordinary gain is not taxable
to us pursuant to Federal income tax law because it arose in connection with our
recapitalization under Chapter 11 of the U.S. Bankruptcy Code. It will, however,
result in a permanent Tax Attribute Reduction. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Effects of
Reorganization."
Net Loss. We have recorded net losses since our inception. Excluding the
extraordinary gain on debt forgiveness discussed above, we incurred a net loss
of $7.6 million for the period from January 1, 1999, to the Effective Date and a
net loss of $17.2 million for the period from the Effective Date to December 31,
1999. For the twelve months ended December 31, 1998 and 1997, we incurred a net
loss of $212 million and $134.6 million, respectively. The improvement in net
loss from 1998 to 1999 (excluding impairment charges of $106 million in 1998)
resulted from;
o lower programming costs,
o lower depreciation expense resulting from the write-down of long-lived
assets during 1998,
o lower interest expense due to the cancellation of approximately $318
million in debt in our financial restructuring,
o cost savings from consolidation of certain market offices and
management, and
o decreased subscription television marketing expenses.
Excluding the write-down of assets in 1998, net loss decreased by $29 million
from 1997 to 1998 due to lower programming costs due to fewer subscription
television subscribers, operational improvements and efficiencies in our
operating markets and lower disconnect costs due to lower churn and bad debt
expense. Earnings per share information has not been presented for the
Predecessor Period as Nucentrix was recapitalized on the Effective Date, in
connection with our Plan and, accordingly, per share amounts are not comparable
between the Predecessor Period and the Successor Period.
BALANCE SHEET AS OF DECEMBER 31, 1999, COMPARED TO THE BALANCE SHEET AS OF
DECEMBER 31, 1998
On December 4, 1998, we filed our Plan. Prior to April 1, 1999, our
obligations that were eligible for compromise under the Plan were classified as
Liabilities Subject to Compromise on our Consolidated Balance Sheet as of
December 31, 1998. See Note 8 of Notes to Consolidated Financial Statements,
included elsewhere in this Form 10-K. As of December 4, 1998, we discontinued
the accrual of interest and amortization of deferred debt issuance costs and
discounts to notes payable related to Liabilities Subject to Compromise.
On April 1, 1999, the Plan became effective and we adopted Fresh Start
Reporting in accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7"). Fresh Start Reporting resulted in
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a new reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities Subject to Compromise were
adjusted to zero in the debt discharge portion of the Fresh Start Reporting. All
outstanding common stock, stock options and warrants were canceled and new
common stock and warrants were issued. See Note 1 of Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K.
In addition to the impact of Fresh Start Reporting on our balance sheet,
other material changes in balance sheet accounts since the Effective Date were
as follows:
o the increase in accounts payable and accrued liabilities from 1998 to
1999 resulted from increased deferred revenue related to our agency
relationships with DIRECTV and its distributors as previously
described,
o in the fourth quarter of 1999 we sold 30 of our communications towers
to SBA Towers for approximately $6.2 million. We leased back space on
the towers that have been transferred to SBA and recorded a lease
obligation of $2.1 million and a deferred gain of $3.8 million which
were the primary causes for the increase in other long-term
liabilities.
CHANGES IN METHOD FOR REPORTING SUBSCRIBERS
Periodically, we may implement price increases or create new program
offerings that upgrade our basic program price structure. Upon such occurrence,
we also may update our methodology for reporting subscribers in MDUs who are
billed in bulk to the MDU owner. These "bulk" MDU subscribers are converted to
SFU subscribers for reporting purposes using an equivalent basic unit ("EBU")
rate that corresponds to our most utilized current pricing tier for basic
programming for SFU subscribers. This rate is divided into the total revenue
from bulk subscribers to get an "equivalent" number of subscribers for reporting
purposes. Consequently, when this rate is increased, the number of equivalent
subscribers will change and normally decrease. The following EBU rate revisions
occurred during the periods presented herein:
o effective March 31, 1998, our EBU rate was increased to $24.99,
resulting in a decrease of approximately 4,000 reported subscribers,
and
o effective November 1, 1998, the EBU rate was increased to $26.99,
resulting in a decrease of approximately 600 reported subscribers.
LIQUIDITY AND CAPITAL RESOURCES
The wireless broadband business is capital-intensive. Since inception, we
have spent funds to lease or otherwise acquire MMDS channel rights in various
markets and operating systems, to construct operating systems and to finance
initial system operating losses. Our primary sources of capital have been
subscription fees, debt financing, the sale of common stock and the sale of MMDS
channel rights that were not essential to our business strategy. The approval by
the FCC of the use of MMDS spectrum for digital two-way communications services
allows us to use our spectrum to provide wireless broadband services such as
high- speed Internet access services, VoIP and wireless telecommunications
services. The growth of our business
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by using our spectrum to provide two-way communications services will require
substantial investment in capital expenditures for the development and launch of
wireless broadband services.
Cash provided by operations was $8.0 million during the twelve months ended
December 31, 1999, compared to cash used in operations of $8.4 million during
the twelve months ended December 31, 1998, representing an increase of $16.5
million. During the second quarter of 1998, we paid $8.8 million in interest on
our Old Senior Notes. No interest was paid on the Old Senior Notes after that
time, as we discontinued accruing interest on these notes when we filed our
bankruptcy petition on December 4, 1998. The debt was discharged effective April
1, 1999, upon confirmation of our Plan. In 1999, we received approximately
$700,000 in settlement of certain litigation matters and we realized savings
from lower programming costs due to fewer subscribers. Cash used in operations
decreased $33.3 million from 1997 to 1998 primarily due to the following:
o nonpayment in 1998 of accrued interest on the Old Senior Notes,
o lower programming costs as a result of fewer subscribers,
o improved subscriber receivable collection experience, and
o labor savings and efficiencies and improved collections at the market
level.
Cash provided by/used in investing activities principally relates to the
construction of additional operating systems, the acquisition and installation
of subscriber equipment, the upgrade of transmission equipment in certain
markets and the acquisition of wireless cable channel rights and operating
systems, partially offset by the sale of wireless cable channel rights that are
not a part of our strategic plan. Cash used in investing activities increased to
$9 million during the twelve months ended December 31, 1999, from $2 million
during the same period in 1998. The increase in cash used resulted from $9.4
million received in 1998 from the sale of debt securities held in our escrow
account for payment of interest on our Old 14% Senior Notes. This was partially
offset in 1999 by proceeds from the sale and lease back of 30 communications
towers for approximately $6.2 million. Cash used in investing activities
increased by $8.9 million from 1997 to 1998. During 1998, cash used by investing
activities included the sale of debt securities held in our escrow account for
payment of interest on the Old 14% Senior Notes, the sale of our equity interest
in CS Wireless for $1.5 million, purchases of subscriber equipment, the upgrade
of transmission equipment and purchases of new equipment for additional channels
authorized by the FCC in certain markets. During 1997, investing activities
included receipt of approximately $15.0 million in cash for payment on a note
receivable from CS Wireless, $3.5 million in cash from the sale of a partial
interest in our investment in a Mexican wireless cable company, sales of debt
securities totaling $19.9 million and the acquisition of two operating systems
in Oklahoma for $1.6 million.
Cash used in financing activities was $878,000 during the twelve months
ended December 31, 1999, compared to $1.7 million in the twelve months ended
December 31, 1998. The decrease in cash used was due to lower payments on
capital lease obligations and other notes payable in 1999 as certain obligations
were fully repaid, proceeds from the exercise of stock options in 1999, slightly
offset by higher payments on our BTA debt, for which principal payments
commenced in the fourth quarter of 1998. Cash used in financing activities was
$1.7 million in 1998 and $2.0 million in 1997. Cash used during 1998 and 1997
was primarily for principal payments on obligations related to capital leases
and various prior period cable system acquisitions.
51
<PAGE> 52
At February 29, 2000, we had approximately $32.7 million of unrestricted
cash and cash equivalents and $650,000 in restricted cash representing
collateral securing various outstanding letters of credit to certain of our
vendors.
FUTURE CASH REQUIREMENTS
Our goal is to become a leading provider of wireless broadband services in
our markets. To implement our business strategy we intend to:
o offer high-speed Internet access service to medium-sized and small
businesses in at least 20 markets by the end of 2001,
o increase our geographic scope for wireless broadband network services
by acquisitions or business combinations, and
o offer telephony services, including wireless telecommunications and
VoIP services.
We estimate that a launch of a new wireless broadband network system
providing high-speed Internet access in a typical non-operating market will
involve the initial expenditure of approximately $500,000 to $750,000 for
network equipment depending upon the system design and type and sophistication
of the equipment, assuming that we are able to lease rooftop or tower space
rather than constructing new towers. We believe that incremental base station
costs to launch an Internet service in one of our existing systems will be
$300,000 to $600,000 per base station. In addition, we estimate that the
acquisition and installation of each new Internet subscriber will cost
approximately $1,700. This includes charges for equipment, labor, overhead and
direct commissions. This may be offset partially by installation and other
up-front fees. Other launch costs include the cost of securing adequate space
for marketing facilities in markets not previously operating a wireless cable
video business, as well as costs related to employees. As a result of these
costs, operating losses are likely to be incurred by a system during the
start-up period.
In December 1999, we closed the sale of 30 of our communications towers for
approximately $6.2 million. The sale of four additional tower sites was closed
into escrow, pending satisfaction of certain closing conditions specific for
each site. The conditions to the release from escrow of one of the escrowed
tower sites occurred in the first quarter 2000 and it has been released from
escrow, with an additional $200,000 paid to us. Approximately $200,000 will be
paid to us for each of the remaining escrowed sites for which the closing
conditions are satisfied on or before April 17, 2000. We also received $3.8
million in the first quarter of 2000 in exchange for our equity interest in
Wireless One, which announced confirmation of its plan of reorganization in
November 1999.
Although we do not expect to generate sufficient cash flow to fully
implement our long-term business strategy without additional capital or
financing, we currently expect that cash on hand and cash generated from
operations plus the Wireless One equity exchange, and equipment financing under
our strategic alliance with Cisco, will be sufficient to fund operations and
capital requirements at least until the end of 2000. We may seek additional
capital or financing in 2000 if:
o we accelerate our business strategy and/or Internet market build-out
schedule,
52
<PAGE> 53
o we consummate any significant acquisitions or alliances,
o we determine that market conditions are appropriate for such financing,
or
o our current operating assumptions prove to be inaccurate.
In any event, we likely will seek additional capital or financing before
the end of 2001 to enable us to fully implement our long-term business strategy.
Options include the sale of debt or equity securities, borrowings under secured
or unsecured loan arrangements, including additional vendor equipment financing,
and sales of assets. We cannot assure you that such financing will be available
in a timely manner and on satisfactory terms.
EFFECTS OF REORGANIZATION
Our company and certain of our subsidiaries file a consolidated federal
income tax return. Subsidiaries in which we own less than 80% of the voting
stock will file separate federal income tax returns. We have had no material
state or federal income tax expense since inception. As of December 31, 1999 and
before taking into consideration the effects of the reorganization, we had
approximately $366.8 million in net operating losses for U.S. federal income tax
purposes, expiring in years 2013 through 2019. We estimate that approximately
$38 million of the above losses relate to various acquisitions and as such are
subject to certain limitations.
Federal income tax law generally requires that the amount of income from
discharge of indebtedness that occurs in connection with a Chapter 11 bankruptcy
be used to reduce federal tax attributes. Generally, the reduction is applied to
reduce net operating loss carryforwards, followed by other tax attributes
including the basis of certain assets and the tax basis of subsidiary stock
("Tax Attribute Reduction"). An election exists to reduce the basis of
depreciable assets first, which can be favorable under certain circumstances.
The election is required to be made on a federal income tax return filed on a
timely basis for the tax year that includes the date of the debt discharge.
Management is currently considering the impact of the election, and whether such
an election would be favorable to the Company.
In addition to the permanent Tax Attribute Reduction, the Company also must
limit the annual deduction of pre-bankruptcy net operating losses and "built-in
deductions" to an amount no greater than the fair market value of the Company
immediately after the reorganization, multiplied by the long-term tax exempt
rate. The annual limitation applicable to the Company's pre-bankruptcy net
operating losses and "built-in" deductions is currently estimated to be
approximately $7.3 million.
We adopted Fresh Start Reporting on the April 1, 1999, Effective Date of
our Plan in accordance with SOP 90-7. Fresh Start Reporting resulted in a new
reporting entity with assets and liabilities adjusted to fair value and
beginning retained earnings set to zero. Liabilities subject to compromise also
were adjusted to zero in the debt discharge portion of the Fresh Start Reporting
entry. In addition, on the Effective Date our outstanding common stock was
canceled and newly issued shares of common stock and warrants were distributed
to certain creditors in satisfaction of their claims against us. In connection
with the debt discharge, Nucentrix recorded an extraordinary gain of
approximately $174 million.
53
<PAGE> 54
COMMITMENTS AND CONTINGENCIES
Certain former directors and officers of Nucentrix, to whom we may have
indemnity obligations, are defendants in two securities lawsuits, one of which
is a purported class action lawsuit. These actions allege, among other things,
various violations of federal and state securities laws. Nucentrix also is a
party to two purported class action lawsuits alleging that Nucentrix overcharged
its customers for administrative late fees. Nucentrix intends to vigorously
defend the above matters. While it is not feasible to predict or determine the
final outcome of these proceedings or to estimate the amounts or potential range
of loss with respect to these matters, and while management does not expect such
an adverse outcome, management believes that an adverse outcome in one or more
of these proceedings that exceeds or otherwise is excluded from applicable
insurance coverage could have a material adverse effect on the consolidated
financial condition, results of operations or cash flows of Nucentrix. We also
received notice in September 1999 that a motion to revoke the order confirming
our Plan had been filed in U.S. Bankruptcy Court by two former stockholders of
Heartland Wireless Communications. We intend to vigorously oppose the motion,
and it is not possible at this time to predict the effect of any action by the
Bankruptcy Court to revoke the Plan. See "Legal Proceedings" in Item 3.
Under our agreement with Cisco, we are obligated to purchase at least $13
million in base station and customer premises equipment from Cisco through the
end of 2001, subject to Cisco meeting certain equipment test trial and other
conditions. As part of our strategic alliance, Cisco has offered a financing
facility of up to $16.25 million for the purchase of such equipment. In the
alternative, we may pursue other financing, or purchase such equipment with
available cash. See "Recent Transactions -- Strategic Alliance with Cisco
Systems, Inc." in Item 1.
INFLATION
We do not believe that inflation has had or is likely to have any
significant impact on our operations. We believe that we will be able to
increase subscriber rates, if necessary, to keep pace with inflationary
increases in costs.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity," which requires
that all derivatives be recognized in the statement of financial position as
either assets or liabilities and measured at fair value. In addition, all
hedging relationships must be designated, reassessed and documented pursuant to
the provisions of SFAS No. 133. In July 1999, the Financial Accounting Standards
Board issued SFAS No. 137, which delayed the effective date of SFAS No. 133.
SFAS 133 is now effective for all fiscal quarters and for all fiscal years
beginning after June 15, 2000. We expect that the adoption of SFAS 133 will not
have an impact on our results of operations, financial condition or cash flows.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the staff's views in applying General Accepted Accounting Principles
to revenue recognition and accounting for deferred costs in the financial
54
<PAGE> 55
statements. Based on our current revenue recognition policies, SAB 101 is not
expected to materially impact our financial position, results of operations or
cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We are exposed to market risk from changes in marketable securities (which
consist of commercial paper). At December 31, 1999, our marketable securities
were recorded at a fair value of approximately $650,000, with an overall
weighted average return of approximately 5% and an overall weighted average life
of less than 1 year. The marketable securities held by us have exposure to price
risk, which is estimated as the potential loss in fair value due to a
hypothetical change of 50 basis points (10% of our overall average return on
marketable securities) in quoted market prices. This hypothetical change would
have an immaterial effect on the recorded value of the marketable securities.
We are not exposed to material future earnings or cash flow fluctuations
from changes in interest rates on long-term debt since 100% of our long-term
debt is at a fixed rate as of December 31, 1999. The fair value of our long-term
debt at December 31, 1999, was estimated to be $16.5 million based on the
overall rate of the long-term debt of 10% and an overall maturity of 7 years
compared to terms and rates currently available in long-term financing markets.
To date, we have not entered into any derivative financial instruments to manage
interest rate risk and are currently not evaluating the future use of any such
financial instruments.
We do not currently have any exposure to foreign currency transaction gains
or losses. All other business transactions are in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is included on pages F-1 through
F-21 of this annual report on Form 10-K, which information is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is included in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 2000 and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is included in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 2000 and is incorporated herein
by reference.
55
<PAGE> 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is included in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 2000 and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is included in the Company's Proxy Statement for
its Annual Meeting of Stockholders to be held in 2000 and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements are filed as part of this Form 10-K:
<TABLE>
<S> <C>
Independent Auditors' Report...................................................................F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998...................................F-2
Consolidated Statements of Operations for the period from the Effective Date
to December 31, 1999, the period from January 1, 1999, to
the Effective Date, and for the two years ended
December 31, 1998.....................................................................F-3
Consolidated Statements of Stockholders' Equity for the
two years ended December 31, 1998, for the period from January
1, 1999, to the Effective Date and the period from the
Effective Date to December 31, 1999...................................................F-4
Consolidated Statements of Cash Flows for the period from the
Effective Date to December 31, 1999, the period from
January 1, 1999 to the Effective Date, and for the two years ended
December 31, 1998.....................................................................F-5
Notes to Consolidated Financial Statements.....................................................F-6
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this
Form 10-K:
<TABLE>
<S> <C>
Schedule II - Valuation and Qualifying Accounts.......................................S-1
</TABLE>
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the
financial statements or notes thereto.
56
<PAGE> 57
3. EXHIBITS
Exhibits followed by an (*) constitute management contracts or compensatory
plans or arrangements.
EXHIBIT
NUMBER DESCRIPTION
2.1 -- Registrant's Plan of Reorganization under Chapter
11 of the United States Bankruptcy Code
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated
January 19, 1999).
2.2 -- Order Confirming Registrant's Plan of
Reorganization Under Chapter 11 of the Bankruptcy
Code, dated as of March 16, 1999 (incorporated by
reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1, Registration
No. 333-80929 (the "Form S-1")).
3.1 -- Amended and Restated Certificate of Incorporation
of Registrant, (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 Form 10-Q")).
3.2 -- Restated Bylaws of Registrant (incorporated by
reference to Exhibit 3.2 to the March 1999 Form
10-Q).
4.1 -- Specimen Nucentrix Broadband Networks, Inc. Stock
Certificate (incorporated by reference to Exhibit
4.1 to the Form S-1).
4.2 -- Registration Rights Agreement dated as of April 1,
1999, between the Registrant and the selling
stockholders named therein (incorporated by
reference to Exhibit 4.2 to the Form S-1).
10.1* -- Registrant's First Amended and Restated 1999 Share
Incentive Plan (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8, Registration No. 333-
79913).
10.2 -- Office Lease, dated April 10, 1996, between Merit
Office Portfolio Limited Partnership and the
Registrant for the Registrant's Plano, Texas
office (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 ("June 1996 Form
10-Q")).
10.3 -- Cooperative Marketing Agreement between the
Registrant and DIRECTV, dated November 12, 1997,
and the following related agreements between the
Registrant and DIRECTV: Transport Agreement, DSS
Receiver Support Agreement and Subscriber Payment
Agreement (incorporated by reference to Exhibit
10.16 to the Registrant's Annual Report on Form
10-K for the Fiscal Year ended December 31, 1997
(the "1997 Form 10-K")).
10.4 -- Agreement between DIRECTV and the Registrant,
dated April 5, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998
(the "June 1998 Form 10-Q")).
57
<PAGE> 58
+10.5 -- Amendment dated December 3, 1999 to Agreement
between DIRECTV and the Registrant, dated April 5,
1998.
10.6 -- Registrant's Performance Incentive Compensation
Plan (incorporated by reference to Exhibit 10.17
to the 1997 Form 10-K).
10.7* -- Employment Agreement between the Registrant and
Carroll D. McHenry dated as of March 6, 1998
(incorporated by reference to Exhibit 10.18 to the
1997 Form 10-K).
10.8* -- Employment Agreement between the Registrant and J.
Curtis Henderson dated as of April 8, 1998
(incorporated by reference to Exhibit 10.4 to the
June 1998 Form 10-Q).
10.9* -- Employment Agreement between the Registrant and
Marjean Henderson dated as of April 8, 1998
(incorporated by reference to Exhibit 10.5 to the
June 1998 Form 10-Q).
10.10* -- Employment Agreement between the Registrant and
Frank H. Hosea dated as of November 3, 1998
(incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1998).
10.11* -- Nonqualified Stock Option Agreement between
Registrant and Carroll D. McHenry dated as of
April 1, 1999 (incorporated by reference to
Exhibit 10.15 to the Form S-1).
10.12* -- Nonqualified Stock Option Agreement between
Registrant and Marjean Henderson dated as of April
1, 1999 (incorporated by reference to Exhibit
10.16 to the Form S-1).
10.13* -- Nonqualified Stock Option Agreement between
Registrant and J. Curtis Henderson dated as of
April 1, 1999 (incorporated by reference to
Exhibit 10.17 to the Form S-1).
10.14* -- Nonqualified Stock Option Agreement between
Registrant and Frank H. Hosea dated as of April 1,
1999 (incorporated by reference to Exhibit 10.19
to the Form S-1.
10.15 -- Registrant's Warrant Agreement, dated as of April
1, 1999 (incorporated by reference to Exhibit 10.2
to the March 1999 Form 10- Q).
+10.16 -- Master Agreement, dated as of December 2, 1998,
among the Registrant, CS Wireless Systems, Inc.
and CAI Wireless Systems, Inc.
+21.1 -- List of Subsidiaries.
+23.1 -- Consent of KPMG LLP.
+27.1 -- Financial Data Schedule (EDGAR Filing only).
+27.2 -- Financial Data Schedule (EDGAR Filing only).
- ----------
+ Filed herewith.
58
<PAGE> 59
(b) REPORTS ON FORM 8-K
Nucentrix filed a Current Report on Form 8-K/A dated December 22, 1999,
regarding (A) the effectiveness of a "shelf" registration statement
registering the offer and sale of 3.8 million shares of common stock of
Nucentrix acquired in Nucentrix's reorganization under Chapter 11 of the
U.S. Bankruptcy Code, (B) Nucentrix's current business and business
strategy and (C) certain risk factors relating to Nucentrix's business.
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NUCENTRIX BROADBAND NETWORKS, INC.
Date: March 27, 2000 By: /s/ Carroll D. McHenry
-------------------------------------
Carroll D. McHenry
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Carroll D. McHenry Chairman of the Board, March 27, 2000
- ----------------------------------- President and Chief
Carroll D. McHenry Executive Officer (Principal
Executive Officer)
/s/ Marjean Henderson Senior Vice President and March 27, 2000
- ----------------------------------- Chief Financial Officer
Marjean Henderson (Principal Financial Officer)
/s/ Amy E. Ivanoff Controller (Principal March 27, 2000
- ----------------------------------- Accounting Officer)
Amy E. Ivanoff
/s/ Richard B. Gold Director March 23, 2000
- -----------------------------------
Richard B. Gold
/s/ Terry S. Parker Director March 25, 2000
- -----------------------------------
Terry S. Parker
/s/ Neil S. Subin Director March 26, 2000
- -----------------------------------
Neil S. Subin
/s/ R. Ted Weschler Director March 27, 2000
- -----------------------------------
R. Ted Weschler
</TABLE>
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Nucentrix Broadband Networks, Inc.
(formerly Heartland Wireless Communications, Inc.):
We have audited the accompanying consolidated balance sheets of Nucentrix
Broadband Networks, Inc. (formerly Heartland Wireless Communications, Inc.) and
subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the periods
from January 1, 1999 to April 1, 1999, the effective date of the reorganization
discussed in the fourth paragraph below (the "Effective Date"), and from the
Effective Date to December 31, 1999, and for each of the years in the two-year
period ended December 31, 1998. In connection with our audits of the
consolidated financial statements, we also have audited the accompanying
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nucentrix Broadband
Networks, Inc. (formerly Heartland Wireless Communications, Inc.) and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the periods from January 1, 1999 to the
Effective Date and from the Effective Date to December 31, 1999 and for each of
the years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 1(b) to the consolidated financial statements, upon
consummation of a prenegotiated Plan of Reorganization under Chapter 11 of the
United States Bankruptcy Code on the Effective Date, the Company adopted fresh
start reporting in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. As a result of the application of
fresh start reporting, the consolidated financial statements of Nucentrix
Broadband Networks, Inc. (formerly Heartland Wireless Communications, Inc.) and
subsidiaries for the period from the Effective Date to December 31, 1999 are
presented on a different cost basis than those for periods prior to the
Effective Date, and accordingly, are not directly comparable.
KPMG LLP
Dallas, Texas
February 18, 2000
F-1
<PAGE> 62
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
SUCCESSOR PREDECESSOR
(NOTE 1) (NOTE 1)
--------- ---------
AS OF DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................................................ $ 28,932 $ 30,676
Restricted assets -- investment in certificates of deposit ............................... 251 636
Subscriber receivables, net of allowance for doubtful
accounts of $407 and $348, respectively ................................................ 1,342 1,560
Other receivables ........................................................................ 934 1,312
Prepaid expenses and other ............................................................... 1,228 1,563
--------- ---------
Total current assets .............................................................. 32,687 35,747
--------- ---------
Systems and equipment, net (Notes 2 and 3) ................................................. 55,993 61,037
License and leased license investment, net (Notes 2 and 4) ................................. 73,310 79,703
Note and lease receivables (Notes 6 and 9) ................................................. 3,212 3,901
Other assets, net (Note 2) ................................................................. 3,609 5,644
--------- ---------
TOTAL ASSETS ...................................................................... $ 168,811 $ 186,032
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities (Note 5) ........................................ 18,579 $ 11,915
Current portion of long-term debt (Note 6) ............................................... 1,845 2,019
--------- ---------
Total current liabilities ......................................................... 20,424 13,934
--------- ---------
Long-term debt, less current portion (Note 6) .............................................. 14,671 14,258
Other long-term liabilities (Note 7) ....................................................... 3,671 149
Liabilities subject to compromise (Note 8) ................................................. -- 322,781
Stockholders' equity (Note 10):
Common stock, $.001 par value; authorized 50,000,000 shares, issued
19,795,521 shares at December 31, 1998; all canceled as of April 1, 1999
(Note 1(b)) ............................................................................ -- 20
Common stock, $.001 par value; authorized 30,000,000
shares, 10,099,717 shares outstanding as of December 31, 1999 .......................... 10 --
Preferred stock, $.01 par value; 15,000,000 shares
authorized, none issued ................................................................ -- --
Additional paid-in capital ............................................................... 147,279 261,943
Accumulated deficit ...................................................................... (17,244) (426,695)
Treasury stock at cost; 13,396 shares, all canceled
as of April 1, 1999 (Note 1(b)) ....................................................... -- (358)
--------- ---------
Total stockholders' equity (deficit) .............................................. 130,045 (165,090)
--------- ---------
Commitments and contingencies (Notes 4 and 13)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 168,811 $ 186,032
========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-2
<PAGE> 63
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 1) PREDECESSOR (NOTE 1)
----------- ----------------------------------------
PERIOD FROM PERIOD FROM
EFFECTIVE JANUARY 1,
DATE 1999
TO TO YEAR ENDED DECEMBER 31,
DECEMBER 31, EFFECTIVE ------------------------
1999 DATE 1998 1997
------------ ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ............................. $ 52,009 $ 18,466 $ 73,989 $ 78,792
Operating expenses:
System operations .................. 23,767 8,599 35,790 39,596
Selling, general and
Administrative ................... 26,125 9,156 36,367 42,255
Depreciation and amortization ...... 19,167 6,104 39,550 65,112
Impairment of long-lived assets
(Note 2) ......................... -- -- 105,791 --
--------- --------- --------- ---------
Total operating
expenses .................. 69,059 23,859 217,498 146,963
--------- --------- --------- ---------
Operating loss .............. (17,050) (5,393) (143,509) (68,171)
Other income (expense):
Interest income .................... 1,160 423 2,659 5,546
Interest expense ................... (826) (321) (37,095) (39,867)
Equity in losses of affiliates ..... -- -- (30,340) (32,037)
Other income (expense), net ........ 483 2 (10) (54)
--------- --------- --------- ---------
Total other income
(expense) ................. 817 104 (64,786) (66,412)
--------- --------- --------- ---------
Loss before reorganization
costs and extraordinary item ..... (16,233) (5,289) (208,295) (134,583)
Reorganization costs (Note 1) ........ (1,011) (2,311) (3,266) --
--------- --------- --------- ---------
Loss before extraordinary
Item ............................. (17,244) (7,600) (211,561) (134,583)
Extraordinary item -- gain
on extinguishment of
debt, net of tax (Notes 6 and 8) ... -- 173,783 -- --
--------- --------- --------- ---------
Net income (loss) ........... $ (17,244) $ 166,183 $(211,561) $(134,583)
========= ========= ========= =========
Net loss per new common
share-- basic and diluted
(Note 1(l)) ........................ $ (1.71) N/A N/A N/A
========= ========= ========= =========
Average shares outstanding --
Basic and diluted .................. 10,056 N/A N/A N/A
========= ========= ========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-3
<PAGE> 64
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------ PAID-IN ACCUMULATED ------------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ........ 19,594,481 $ 20 $ 261,652 $ (80,551) (10,252) $ (274) $ 180,847
Issuance of common stock to officer
(Note 10) ....................... 75,000 -- 159 -- -- -- 159
Issuance of common stock for 401(k)
Plan ............................ 19,046 -- 69 -- -- -- 69
Acquire shares from escrow ........ -- -- -- -- (3,144) (84) (84)
Net loss .......................... -- -- -- (134,583) -- -- (134,583)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 ........ 19,688,527 20 261,880 (215,134) (13,396) (358) 46,408
Issuance of common stock to officer
(Note 10) ....................... 10,000 -- 14 -- -- -- 14
Issuance of common stock for 401(k)
Plan ............................ 96,994 -- 49 -- -- -- 49
Net loss .......................... -- -- -- (211,561) -- -- (211,561)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 ........ 19,795,521 20 261,943 (426,695) (13,396) (358) (165,090)
Net income ........................ -- -- -- 166,183 -- -- 166,183
Cancellation of old common stock
pursuant to the Plan (Note 1(b)) (19,795,521) (20) (261,943) -- 13,396 358 (261,605)
Elimination of accumulated deficit
upon adoption of Fresh Start
Reporting (Note 1(b)) ........... -- -- -- 260,512 -- -- 260,512
Issuance of new common stock
pursuant to the Plan ............ 10,000,000 10 146,216 -- -- -- 146,226
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, EFFECTIVE DATE (NOTE 1(B)) 10,000,000 10 146,216 -- -- -- 146,226
Net loss .......................... -- -- -- (17,244) -- -- (17,244)
Additional shares issued pursuant
to the Plan (Note 1(b)) ......... 14,717 -- -- -- -- -- --
Exercise of employee stock options 85,000 -- 1,063 -- -- -- 1,063
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 ........ 10,099,717 $ 10 $ 147,279 $ (17,244) -- -- $ 130,045
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-4
<PAGE> 65
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 1) (NOTE 1) PREDECESSOR(NOTE 1)
-------------- -------------- ------------------------
PERIOD FROM PERIOD FROM
EFFECTIVE DATE JANUARY 1,
TO 1999 YEAR ENDED DECEMBER 31,
DECEMBER 31, TO ------------------------
1999 EFFECTIVE DATE 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ (17,244) $ 166,183 $(211,561) $(134,583)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation and amortization ....................... 19,167 6,104 39,550 65,112
Debt accretion and debt issuance cost
amortization ...................................... -- -- 5,686 4,985
Equity in losses of affiliates ...................... -- -- 30,340 32,037
Compensation expense related to issuance
of common stock ................................... -- -- 63 228
Write-down of assets due to
impairment ........................................ -- -- 105,791 --
Extraordinary item -- debt
extinguishment .................................... -- (173,783) -- --
Changes in operating assets and
liabilities, net of acquisitions:
Restricted assets ................................. 361 -- -- --
Subscriber and other receivables .................. 1,550 (954) (674) 3,194
Prepaid expenses and other ........................ 405 (158) (132) 830
Accounts payable, accrued expenses and
other liabilities ............................... 1,354 5,057 22,560 (13,449)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .......................... 5,593 2,449 (8,377) (41,646)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note
receivable -- affiliate ............................. -- -- 366 18,749
Proceeds from sale of investment in
affiliate ........................................... -- -- 1,534 --
Proceeds from sale of assets .......................... 6,072 -- 236 126
Purchases of systems and equipment .................... (10,078) (5,081) (13,473) (29,402)
Expenditures for licenses and leased
licenses ............................................ (121) (16) -- (310)
Purchases of other investments ........................ -- -- -- (900)
Purchase of debt securities ........................... -- -- (69) --
Proceeds from sale of debt securities ................. -- -- 9,368 19,935
Acquisitions, net of cash acquired .................... -- -- -- (1,622)
Collections of note and lease receivable .............. 178 138 -- 250
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .......................... (3,949) (4,959) (2,038) 6,826
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt issuance costs and consent
fees ................................................ -- -- -- (597)
Payments of long-term debt ............................ (1,032) (335) (327) --
Payments on short-term borrowings and
other notes payable ................................. (333) (241) (1,403) (1,358)
Proceeds from exercise of stock options ............... 1,063 -- -- --
--------- --------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES ................................... (302) (576) (1,730) (1,955)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ........................................... 1,342 (3,086) (12,145) (36,775)
Cash and cash equivalents at beginning of
period ................................................ 27,590 30,676 42,821 79,596
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ................................................ $ 28,932 $ 27,590 $ 30,676 $ 42,821
========= ========= ========= =========
Cash paid for interest ................................. $ 762 $ 391 $ 10,416 $ 31,017
========= ========= ========= =========
Cash paid for reorganization costs ..................... $ 891 $ 2,311 $ 2,921 $ --
========= ========= ========= =========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
F-5
<PAGE> 66
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
(FORMERLY HEARTLAND WIRELESS COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Nucentrix Broadband Networks, Inc. (formerly Heartland Wireless
Communications, Inc.) ("Nucentrix" or the "Company") provides wireless broadband
services in medium and small markets in the central United States. The Company
controls up to 196 MHz of radio spectrum in the 2.1 and 2.5-2.7 GHz band
licensed by the Federal Communications Commission ("FCC") in 92 markets
(including two markets for which we have entered a letter of intent to acquire).
The Company currently provides high-speed wireless Internet access service under
temporary developmental FCC licenses in two markets, primarily to medium-sized
and small businesses, small offices/home offices ("SOHOs") and telecommuters.
At December 31, 1999, Nucentrix provided wireless subscription television
service in 58 markets, including an offering of up to 185 digital channels from
DIRECTV, Inc. ("DIRECTV") and its distributors in over 50 markets.
(b) Financial Restructuring
On December 4, 1998, Nucentrix filed a voluntary, prenegotiated Plan of
Reorganization (the "Plan") under Chapter 11 of the U.S. Bankruptcy Code, with
the prepetition support from holders of more than 70% in principal amount of its
13% Senior Notes ("Old 13% Notes") and 14% Senior Notes ("Old 14% Notes")
(collectively, "the Old Senior Notes" -- See Notes 6 and 8). On April 1, 1999
(the "Effective Date"), Nucentrix canceled all issued and outstanding common
stock, stock options and warrants and issued 10,000,000 shares of new common
stock and warrants to purchase 825,000 shares of common stock. Nucentrix also is
obligated under the Plan to issue warrants to purchase an additional 275,000
shares of common stock to certain classes of or claims against and/or interests
in Nucentrix, which will become issuable upon the resolution of certain pending
litigation claims.
Nucentrix continued business operations as a debtor-in-possession until the
Plan was fully consummated. Prior to April 1, 1999, the obligations of Nucentrix
that were eligible for compromise under the Plan were classified as Liabilities
Subject to Compromise on Nucentrix's Consolidated Balance Sheets as of December
31, 1998, and March 31, 1999 (See Note 8). As of December 4, 1998, Nucentrix
discontinued the accrual of interest and amortization of deferred debt issuance
costs and discounts to notes payable related to Liabilities Subject to
Compromise. On March 15, 1999, the U.S. Bankruptcy Court for the District of
Delaware confirmed the Plan, and Nucentrix consummated the Plan on April 1,
1999.
On April 1, 1999, Nucentrix adopted Fresh Start Reporting in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"). Fresh Start Reporting resulted in a new reporting entity
with assets and liabilities adjusted to fair value and beginning retained
earnings set to zero. Liabilities Subject to Compromise were adjusted to zero in
the debt discharge portion of the Fresh Start Reporting. In connection with the
debt discharge, Nucentrix recorded an extraordinary gain of approximately $174
million. The effects of the Plan and the application of Fresh Start Reporting on
the Company's Consolidated Balance Sheet at the Effective Date are as follows:
F-6
<PAGE> 67
<TABLE>
<CAPTION>
FRESH START REPORTING
PREDECESSOR ADJUSTMENTS SUCCESSOR
----------- ----------- ---------
<S> <C> <C> <C>
Current assets $ 33,931 33,931
Systems & equipment, net 61,909 (2,917)(A) 58,992
License and leased license investment, net 78,088 78,088
Note and lease receivables 3,763 3,763
Other assets, net (4,750)(B)
5,222 3,802 (A) 4,274
--------- --------- ---------
$ 182,913 $ (3,865) $ 179,048
========= ========= =========
Current liabilities $ 18,818 $ 18,818
Long-term debt, less current portion 13,855 13,855
Other liabilities 149 149
Liabilities subject to compromise 322,781 (322,781)(B) --
Stockholders' equity(deficit):
Old common stock 20 (20)(A) --
Additional paid-in capital 261,943 (261,943)(A) --
Accumulated deficit (434,295) 318,031 (B) --
116,264 (A)
Treasury stock - 13,396 shares at cost (358) 358 (A) --
New common stock -- 10 (A) 10
New additional paid-in capital -- 146,216 (A) 146,216
--------- --------- ---------
Total stockholders' equity (deficit) (172,690) 318,916 146,226
--------- --------- ---------
$ 182,913 $ (3,865) $ 179,048
========= ========= ===========
</TABLE>
(A) Reflects the issuance of new shares of Nucentrix common stock to the
holders of Old Senior Notes and 9% Convertible Notes ("Old Convertible
Notes"), and the allocation of reorganization value to identifiable
tangible and intangible assets based on the estimated fair value of
the assets, and the adjustment to eliminate the Company's common stock
outstanding as of the Effective Date (which was canceled pursuant to
the Plan) and to reset beginning retained earnings of the Company to
zero in accordance with Fresh Start Reporting.
(B) Reflects the discharge of debt and write-off of related unamortized
debt discounts and debt issuance costs.
As a result of the application of Fresh Start Reporting, financial
information in the accompanying Consolidated Financial Statements as of December
31, 1999, and for the period from the Effective Date to December 31, 1999 (the
"Successor Period"), is presented on a different basis than the financial
information as of December 31, 1998, for the years ended December 31, 1998 and
1997, and for the period January 1, 1999, to the Effective Date (collectively,
the "Predecessor Period"). Accordingly, such information is not comparable. The
Predecessor Period includes operations through March 31, 1999, plus the gain on
debt forgiveness recognized on the Effective Date. The Successor Period includes
operations for the Effective Date through December 31, 1999.
Federal income tax law requires that the amount of income from discharge of
indebtedness that occurs in connection with a Chapter 11 bankruptcy be used to
permanently reduce federal tax attributes. These reductions may be applied to
one or more tax items, including but not limited to pre-bankruptcy net operating
loss carryforwards, the tax basis of certain assets and the tax basis of
subsidiary stock ("Tax Attribute Reduction"). Management currently is
considering the impact of alternatives available to the Company in performing
this Tax Attribute Reduction, but has not yet concluded which alternative it
will select. (See Note 11 for further discussion).
F-7
<PAGE> 68
(c) Liquidity
Nucentrix's Consolidated Financial Statements have been presented on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
Although the Company does not expect to generate sufficient cash flow to
fully implement its long-term business strategy without additional capital or
financing, it currently expects that cash on hand and cash generated from
operations, including the tower sale-leaseback transaction, along with the
exchange of its equity interest in Wireless One, Inc. ("Wireless One") (See Note
16) and equipment financing from Cisco Systems, Inc. ("Cisco") (See Note 13)
will be sufficient to fund operations and capital requirements at least until
the end of 2000. The Company may seek additional debt or equity or financing in
2000 if it accelerates its business strategy or Internet build-out schedule,
consummates any significant acquisitions or alliances, determines that market
conditions are appropriate for such financing or determines that its current
operating assumptions are inaccurate.
In any event, the Company likely will seek additional debt or equity
financing before the end of 2001 to enable it to fully implement its long-term
business strategy. Options include the sale of debt or equity securities,
borrowings under secured or unsecured loan arrangements, including additional
vendor equipment financing, and sales of assets. The Company can provide no
assurance that such financing will be available in a timely manner or on
satisfactory terms.
(d) Principles of Consolidation
The Consolidated Financial Statements include the accounts of Nucentrix and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(e) Cash and Cash Equivalents
Nucentrix considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Cash and cash
equivalents consist of money market funds, certificates of deposit, overnight
repurchase agreements and other investment securities.
(f) Restricted Assets
Restricted assets consist of bank certificates of deposit with an original
maturity of less than one year. These investments are considered held to
maturity and are stated at amortized cost which approximates fair value. The
Company has pledged these certificates of deposit as letters of credit primarily
for operating leases.
Other assets include $399,000 in restricted investments in bank
certificates of deposit pledged as collateral for long-term operating leases.
Although these certificates of deposit have original maturities of less than one
year, the Company must renew them for the length of the lease and such
investments are therefore classified as long-term assets.
(g) Systems and Equipment
Systems and equipment used for subscription television services are
recorded at cost and include the cost of transmission equipment as well as the
excess of direct costs of subscriber installations over installation fees (See
Note 3). Upon installation, depreciation and amortization of systems and
equipment is recorded on a straight-line basis over the estimated useful lives,
from three to twenty years.
F-8
<PAGE> 69
The direct costs of video subscriber installations include reception
materials and equipment on subscriber premises and installation labor which are
amortized over the useful life of the asset (presently seven years) for the
recoverable portion and the estimated average subscription term (presently three
years) for the nonrecoverable portion of such costs. The nonrecoverable portion
of the cost of a subscriber installation becomes fully depreciated upon
subscriber disconnect. The amortization period of the nonrecoverable portion of
subscriber installation costs was reduced from four to three years in the third
quarter of 1997, to correspond to Nucentrix's estimate of average subscription
term. The effects of these changes in estimate were to increase 1997
depreciation expense by $1.2 million, and increase 1997 net loss by $1.2
million. In the third quarter of 1997, Nucentrix charged operations for $6.1
million for the write-off of installed subscriber equipment which was deemed
unrecoverable from lost subscribers and $1.7 million for the write-off of
obsolete subscriber equipment.
(h) License and Leased License Investment
License and leased license investment includes costs incurred to acquire
and/or develop wireless broadband channel rights and are amortized over 15 years
beginning with inception of service in each market.
During the third quarter of 1998, Nucentrix wrote down the value of its
operating licenses to estimated fair market value in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(See Note 2). The re-valued licenses are being amortized over the average
remaining life of 12.5 years.
(i) Impairment of Long Lived Assets
In January 1996, Nucentrix adopted SFAS No. 121, which requires that
long-lived assets and certain intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future net cash lows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the net asset exceeds the fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell (See Note 2).
(j) Revenue Recognition
Revenues from subscribers are recognized as service is provided. Revenue
from agency relationships with DIRECTV and its distributors are recognized as
earned. Amounts paid in advance are recorded as deferred revenue and included in
accrued liabilities in the accompanying financial statements.
(k) Income Taxes
Nucentrix utilizes the asset and liability method for accounting for
deferred income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Based on the foregoing policy, deferred tax assets net of
deferred tax liabilities have been fully reserved.
F-9
<PAGE> 70
(l) Net Loss Per Common Share -- Basic and Diluted
The Company has presented (1) basic loss per share, computed on the basis
of the weighted average number of common shares outstanding during the period,
and (2) diluted loss per share, computed on the basis of the weighted average
number of common shares and all dilutive potential common shares outstanding
during the period. Options to purchase 713,000 shares and warrants to purchase
825,000 shares of the Company's common stock have not been included in the
calculation of diluted loss per share because their effects are antidilutive.
Earnings per share information has not been presented for the Predecessor Period
as the Company was recapitalized on the Effective Date in connection with the
Plan, and accordingly, per share amounts are not comparable between the
Predecessor and Successor Periods.
(m) Use of Estimates
Preparation of Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(n) Concentrations of Credit Risk and Accounts Receivable
Nucentrix's subscribers and the related accounts receivable are primarily
residential subscribers that are concentrated in nine states in the central
United States. Nucentrix establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of specific subscribers, historical
trends and other information.
(o) Other Assets
At December 31, 1999, other assets included amounts allocated to subscriber
value and excess reorganization value. These assets are amortized on a straight
line basis over the estimated useful lives of three years and 15 years
respectively. During 1998, other assets consisted principally of debt issuance
costs related to the issuance of Nucentrix's long-term debt. These costs were
amortized, straight-line, over the term of the related indebtedness. Nucentrix
discontinued the amortization of deferred debt issuance costs upon filing the
Plan on December 4, 1998. The carrying value of these costs of $4.75 million was
adjusted to zero when Nucentrix adopted Fresh Start Reporting on April 1, 1999.
(p) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
(q) Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). As
such, compensation expense is recorded on the date of grant to the extent the
current market price of the underlying stock exceeds the exercise price. The
Company has provided pro forma disclosures as if the fair value-based method of
accounting for these plans, as prescribed by SFAS No. 123, "Accounting for
Stock-Based Compensation," had been applied.
F-10
<PAGE> 71
(r) Comprehensive Income
Effective January 1, 1998, Nucentrix adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial statements.
Comprehensive income includes net income and other comprehensive income which is
generally comprised of changes in the fair value of available-for-sale
marketable securities, foreign currency translation adjustments and adjustments
to recognize additional minimum pension liabilities. For the periods from
January 1, 1999 to the Effective Date and from the Effective Date to December
31, 1999, and for each of the years in the two-year period ended December 31,
1998, comprehensive income and net income are the same amount.
(s) Segment Reporting
In January 1998, Nucentrix adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 requires that public
companies report operating segments based upon how management allocates
resources and assesses performance. Based on the criteria outlined in SFAS No.
131, Nucentrix is comprised of a single reportable segment -- distribution of
wireless subscription television programming.
(2) IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of 1998, Nucentrix reviewed the assets associated
with certain undeveloped markets and determined that (i) cash flows from
operations would not be adequate to fund the capital outlay required to build
out such markets, and (ii) because of Nucentrix's default on its interest
payment on the Old 13% Notes in the second quarter of 1998, outside financing
for the build-out of these markets was not readily available prior to the
consummation of a financial restructuring. Therefore, in accordance with SFAS
No. 121, the channel licenses and leases in these undeveloped markets were
individually evaluated and written down to estimated fair value, resulting in a
non-cash impairment charge of $17.7 million in the second quarter of 1998.
Throughout the second and third quarters of 1998, Nucentrix analyzed
various recapitalization and restructuring alternatives with the assistance of
Wasserstein Perella & Company ("WP&Co."), including consensual, out-of-court
alternatives. In October 1998, Nucentrix announced that it intended to file a
voluntary prenegotiated plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code (See Note 1(b)). This event caused Nucentrix to evaluate all of
its long-lived assets for impairment according to the requirements of SFAS No.
121. Nucentrix retained the services of a third party to assist in performing a
fair market valuation of substantially all of Nucentrix's assets. This valuation
resulted in a non-cash impairment charge during the third quarter of 1998 of
$105.8 million, as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF WRITE-DOWNS
--------------------------
<S> <C>
Systems and equipment ....................... $ 44,510
License and leased license investment ....... 36,550
Excess of cost over fair value of net
assets acquired ......................... 24,731
--------
Total ............................. $105,791
========
</TABLE>
Nucentrix's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both could be reduced in
the future due to changes in, among other things, technology, government
regulation, available financing, interference issues or competition.
F-11
<PAGE> 72
(3) SYSTEMS AND EQUIPMENT
Systems and equipment consists of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Equipment awaiting installation ................... $ 1,910 $ 4,233
Subscriber premises equipment and installation
costs ........................................... 35,016 26,309
Transmission equipment and system
construction costs .............................. 27,183 31,170
Office furniture and equipment .................... 4,340 1,813
Buildings and leasehold improvements .............. 438 461
------- -------
68,887 63,986
Accumulated depreciation and amortization ......... 12,894 2,949
------- -------
55,993 $61,037
======= =======
</TABLE>
In the fourth quarter of 1999, Nucentrix sold 30 of its communication
towers to SBA Towers, Inc. ("SBA Towers") for approximately $6.2 million in a
transaction accounted for as a sale-leaseback (see Note 6). This transaction
resulted in a deferred gain of approximately $3.8 million. The sale of four
additional tower sites was closed into escrow, pending satisfaction of certain
closing conditions specific for each site. The conditions to the release from
escrow of one of the escrowed tower sites occurred in first quarter 2000 and it
has been released from escrow, with an additional $200,000 paid to the Company.
Approximately $200,000 will be paid to the Company for each of the remaining
escrowed sites for which the closing conditions are satisfied on or before April
17, 2000.
(See Note 2 for discussion of systems and equipment written down in the
third quarter of 1998).
(4) FCC LICENSES AND OPERATING LEASES
Nucentrix depends on leases with third parties for some of its channel
rights. Under FCC rules, the base term of each lease cannot exceed the term of
the underlying FCC license. FCC licenses generally must be renewed every ten
years. All licenses are subject to renewal by the FCC. 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. The remaining initial terms of most of
Nucentrix's operating channel leases range from two to six years. However, the
majority of Nucentrix's channel leases do not currently contemplate two-way use
of its spectrum. Nucentrix intends to initially use licenses that it owns for
two-way services. Nucentrix plans to negotiate amendments or new leases to
certain channel leases to provide for two-way use of the leased channels to the
extent it determines that additional channel capacity is needed. Channel lease
agreements generally require payments based on the greater of specified minimums
or amounts based upon various subscriber levels or revenues.
Channel lease agreements generally require payments based on the greater of
specified minimums or amounts based upon various subscriber levels or revenues.
Channel lease payments generally begin upon the completion of construction of
transmission equipment and facilities and upon approval for operation under FCC
rules. For certain leases, payments begin upon grant of the channel rights.
Channel lease expense was $900,000, $2.7 million, $3.0 million and $3.6 million
for the periods from January 1, 1999, to the Effective Date, and from the
Effective Date to December 31, 1999, and for the years ended December 31, 1998
and 1997, respectively.
Nucentrix also has other operating leases for office space, vehicles,
equipment and transmission tower space. Rent expense incurred in connection with
these leases was $1 million, $2.7 million, $4.2 million and
F-12
<PAGE> 73
$3.4 million for the periods from January 1, 1999, to the Effective Date, and
from the Effective Date to December 31, 1999, and for the years ended December
31, 1998 and 1997, respectively.
Future minimum lease payments due under noncancellable leases at December
31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CHANNEL OPERATING
DECEMBER 31 LEASES LEASES
- ----------- ------ ------
<S> <C> <C>
2000 ........ 2,887 1,346
2001 ........ 2,865 888
2002 ........ 2,352 698
2003 ........ 1,852 493
2004 ........ 1,513 177
</TABLE>
(5) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consists of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accounts payable ................................... $ 1,083 $ 319
Accrued programming .............................. 2,394 2,798
Subscriber deposits .............................. 959 730
Deferred revenue (Note 1(j)) ..................... 6,891 1,041
Accrued sales, property and franchise taxes ...... 2,640 2,260
Accrued compensation ............................. 1,406 681
Other accrued expenses and other liabilities ..... 3,206 4,086
------- -------
$18,579 $11,915
======= =======
</TABLE>
As of December 31, 1998, accrued interest on the Old Senior Notes and Old
Convertible Notes has been reclassified to Liabilities Subject to Compromise.
(See Notes 1(b), 6 and 8).
(6) LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Capital leases ............ $ 2,776 $ 960
Other notes payable ....... 13,740 15,317
-------- --------
16,516 16,277
Less current portion .... (1,845) (2,019)
-------- --------
14,671 $ 14,258
======== ========
</TABLE>
In December 1999, Nucentrix entered into capital lease agreements with SBA
Towers to lease back space on 30 towers which Nucentrix sold to SBA Towers in
December 1999 (See Note 3). A lease obligation of $2.2 million was recorded in
connection with the leases, which have an initial term of 10 years, with three
(3) five-year renewal options. The Company also leases computer and office
equipment under capital leases, with remaining terms of one to three years.
Other notes payable at December 31, 1999 and 1998, relate to the
acquisition of BTAs from the FCC. The note payable to the FCC bears interest at
9.5%, payable quarterly over ten years beginning November 1996. Quarterly
principal payments are payable over the remaining eight years beginning November
1998.
Nucentrix and CS Wireless Systems, Inc. ("CS Wireless") entered into a
lease and purchase option agreement for certain of the BTAs (collectively, the
"Leased BTAs") awarded to Nucentrix at a total cost of approximately $5.2
million. Under this agreement, CS Wireless reimburses Nucentrix for principal
and
F-13
<PAGE> 74
interest paid to the FCC for the Leased BTAs. As of December 31, 1999, the
amount of FCC debt related to the Leased BTAs totaled $3.2 million and has been
recorded as a receivable.
Aggregate maturities of long-term debt as of December 31, 1999, for the
five years ending December 31, 2004, are as follows: 2000 -- $1.8 million; 2001
- -- $2.0 million; 2002 -- $2.1 million; 2003 -- $2.2 million; and 2004 -- $2.4
million.
Debt Cancellation Under the Plan
On April 1, 1999, under the terms of the Plan, the Old 13% Notes, Old 14%
Notes and Old Convertible Notes were canceled. The holders of the Old Senior
Notes and Old Convertible Notes received 9,700,000 and 300,000 shares,
respectively, of newly issued common stock in exchange for cancellation of their
debt. The holders of the Old Convertible Notes also received warrants to
purchase 825,000 shares of newly issued common stock. Accordingly, the Old
Senior Notes and Old Convertible Notes were considered eligible for compromise
and were reclassified from Long Term Debt to Liabilities Subject to Compromise
on the Consolidated Balance Sheet at December 31, 1998. (See Note 8). As of
December 4, 1998, Nucentrix discontinued the accrual of interest and
amortization of deferred debt issue costs and discounts on notes payable related
to Liabilities Subject to Compromise. If interest had continued to be accrued,
total interest expense would have been $39.9 million for the year ended December
31, 1998, and $12.6 million for the period from January 1, 1999 to the Effective
Date.
The following discussion of the Old 13% Notes, Old 14% Notes and Old
Convertible Notes relates to the balances at December 31, 1997, and to amounts
outstanding during 1998 prior to filing the Plan.
Old Convertible Notes
On November 30, 1994, Nucentrix consummated the $40.1 million private
placement of Old Convertible Notes. The Old Convertible Notes accreted at a rate
of 9%, compounded semiannually, to an aggregate principal amount of $62.4
million at November 30, 1999, with interest accruing and payable thereafter.
Old 13% Notes
In April 1995, Nucentrix consummated a private placement of $100.0 million
of Old 13% Notes and 600,000 warrants to purchase an equal number of shares of
common stock at an exercise price of $19.525 per share. For financial reporting
purposes, the warrants were valued at $4.2 million. In March 1996, Nucentrix
consummated a private placement of an additional $15.0 million of Old 13% Notes.
Interest on the notes was payable semiannually on April 15 and October 15.
Old 14% Notes
In December 1996, Nucentrix consummated a private placement of $125.0
million of Old 14% Notes. Nucentrix placed $22.0 million of the net proceeds
from the sale into an escrow account to fund the first three interest payments.
As of December 31, 1997, the escrow account amounted to $8.0 million, and was
used to make the April 15, 1998 interest payment.
F-14
<PAGE> 75
(7) OTHER LONG-TERM LIABILITIES
Other long-term liabilities at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Deferred gain on sale of towers (Note 3) 3,397 --
Deferred revenue (Note 1(j)) 125 --
Other 149 149
-------- -------
$ 3,671 $ 149
======== =======
</TABLE>
(8) LIABILITIES SUBJECT TO COMPROMISE
As more fully discussed in Note 6, on April 1, 1999, holders of the Old
Senior Notes received newly issued shares of common stock and the holders of the
Old Convertible Notes received newly issued shares of common stock and warrants
to purchase common stock in exchange for cancellation of their debt. At December
31, 1998, these amounts were considered eligible for compromise under the Plan
and were reclassified as Liabilities Subject to Compromise on Nucentrix's
Consolidated Balance Sheet at that date. Liabilities Subject to Compromise were
comprised of the following:
<TABLE>
<S> <C> <C>
Old 13% Notes: Principal Balance $ 115,000
Accrued Interest 16,943
Unamortized Discount (2,384)
Old 14% Notes: Principal Balance 125,000
Accrued Interest 11,083
Old Convertible Notes: Principal Balance and Accreted Interest 57,139
---------
$ 322,781
=========
</TABLE>
(9) ACQUISITIONS/DISPOSITIONS
CS Wireless Transaction
Effective December 2, 1998, Nucentrix, CAI Wireless Systems, Inc. ("CAI")
and CS Wireless signed a Master Agreement, pursuant to which CAI purchased
Nucentrix's 36% equity interest in CS Wireless for $1.5 million. In addition, CS
Wireless agreed to assign certain MDS-1 channel rights, 20 MHz of Wireless
Communications Service frequencies and an MMDS subscription television operating
system in Radcliffe, Iowa to Nucentrix. Nucentrix agreed to assign channel
rights and related equipment in Portsmouth, New Hampshire to CS Wireless. The
transfers and assignments will occur following FCC approval and the closing of a
master agreement with CS Wireless, at which time Nucentrix will cancel a
promissory note issued by CS Wireless to Nucentrix. The carrying value of this
note on Nucentrix's Consolidated Balance Sheet at December 31, 1999, was
$62,000. No gain or loss was recorded on this transaction.
(10) STOCKHOLDERS' EQUITY
(a) Stock Options
The First Amended and Restated 1999 Share Incentive Plan (the "New Stock
Option Plan") provides for the grant of options to purchase a maximum of 900,000
shares of common stock of the Company. Options are required to be granted at
exercise prices of not less than 100% of the fair market value of the common
stock. Options vest according to schedules set by the Compensation Committee of
the Board of Directors.
The 1994 Employee Stock Option and Non-Employee Director Plans
(collectively, the "Old Stock Option Plans") provided for the granting of
options to purchase a maximum of 1,950,000 and 50,000 shares of
F-15
<PAGE> 76
common stock, respectively. Options were granted at exercise prices of not less
than 100% of the fair market value of the common stock on the date of grant.
Options typically vested over a five-year period.
On April 1, 1999, the Effective Date of the Plan, the Old Stock Option
Plans were canceled and the New Stock Option Plan was adopted.
A summary of option activity during 1997, 1998 and 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1996 ....... 1,201,000 $ 18.50
Granted ................................ 867,000 $ 2.49
Canceled ............................... (711,000) $ 22.03
----------
Outstanding at December 31, 1997 ....... 1,357,000 $ 6.42
Granted ................................ 165,000 $ 3.33
Canceled ............................... (72,000) $ 7.19
----------
Outstanding at December 31, 1998 ....... 1,450,000 $ 6.03
Canceled on April 1, 1999 .............. (1,450,000) $ 6.03
----------
-- --
Granted under New Stock Option Plan .... 807,000 $ 12.50
Exercised .............................. (85,000) $ 12.50
Canceled ............................... (9,000) $ 12.50
----------
Outstanding at December 31, 1999 ....... 713,000
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED-
AVERAGE WEIGHTED- NUMBER WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/99 LIFE PRICE 12/31/99 PRICE
--------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 12.50 713,000 6.25 years $ 12.50 397,480 $ 12.50
</TABLE>
At December 31, 1998 and 1997, the number of options exercisable and the
weighted average exercise prices of those options were 719,000 and 552,000 and
$9.73 and $11.27, respectively.
The per share weighted average fair value of stock options granted during
fiscal years 1999, 1998 and 1997, was $8.52, $1.16 and $1.70, respectively, on
the dates of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield .... 0% 0% 0%
Stock price volatility ..... 81% 131% 80%
Risk-free interest rate .... 5.1% 5.5% 6.0%
Expected option term ....... 5 years 5 years 5 years
</TABLE>
Nucentrix applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no compensation cost has been recorded for its stock
options in the Consolidated Financial Statements. Had Nucentrix determined
compensation based on the fair value at the grant date for its stock options
under SFAS No. 123, net loss and loss per share would have been increased as
indicated below:
F-16
<PAGE> 77
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
---------------- ------------------------------------------
PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER 31,
EFFECTIVE DATE TO JANUARY 1, 1999 ------------------------
DECEMBER 31,1999 TO EFFECTIVE DATE 1998 1997
----------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common
stockholders:
As reported ............................... $ (17,244) $ 166,183 $(211,561) $(134,583)
Pro forma SFAS No. 123 .................... $ (21,758) $ 166,183 $(213,077) $(137,126)
Net loss per share--Basic and Diluted:
As reported ............................... $ (1.71) $ N/A $ N/A $ N/A
Pro forma for SFAS No. 123 ................ $ (2.16) $ N/A $ N/A $ N/A
</TABLE>
Pro forma net loss reflects only options granted after 1994. Compensation
cost is reflected over the options' vesting period of three to five years.
(b) Old Common Stock to Officers
In April 1998 and April 1997, Nucentrix issued 10,000 shares and 75,000
shares of common stock, respectively, to officers of Nucentrix. The quoted
market price of the shares on the grant date has been expensed in the
accompanying Consolidated Financial Statements. This common stock was canceled
on April 1, 1999, the Effective Date of the Plan.
(11) INCOME TAXES
Income tax benefit for the periods from the Effective Date to December 31,
1999, and from January 1, 1999, to the Effective Date, and for the years ended
December 31, 1998 and 1997, differed from the amount computed by applying the
U.S. federal income tax rate of 35% to loss before income taxes as a result of
the following:
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
----------------- -----------------------------------------
PERIOD FROM PERIOD FROM YEAR ENDED DECEMBER 31,
EFFECTIVE DATE TO JANUARY 1, 1999 -----------------------
DECEMBER 31, 1999 TO EFFECTIVE DATE 1998 1997
----------------- ----------------- -------- ---------
<S> <C> <C> <C> <C>
Computed "expected" tax expense (benefit) ....... $ (6,035) $ 58,164 $(73,890) $(47,104)
Amortization and write-down of goodwill ......... 337 113 9,300 738
Discharge of debt ............................... -- (64,300) -- --
Loss for which no tax benefit was recognized .... 6,043 6,175 68,812 49,058
State income tax ................................ (345) (152) (4,222) (2,692)
-------- -------- -------- --------
$ -- $ -- $ -- $ --
======== ======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998, are presented below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ......... $ 124,647 $ 119,709
Subscriber receivables ................... 151 129
Debt restructuring ....................... 1,229 906
Asset impairment ......................... 28,080 29,992
Systems and equipment .................... 7,964 4,779
Deferred revenue ......................... 1,674 --
Other .................................... 3,375 1,247
--------- ---------
Total gross deferred tax assets ............ 167,120 156,762
Less valuation allowance ................... (162,802) (151,253)
--------- ---------
Net deferred tax assets .................. 4,318 5,509
Deferred tax liabilities:
License and leased license investment .... (4,318) (5,509)
--------- ---------
Net deferred tax liability ................. $ -- $ --
========= =========
</TABLE>
The net changes in the total valuation allowance for the periods from
January 1, 1999, to the Effective Date and from the Effective Date to December
31, 1999, and for the years ended December 31, 1998 and
F-17
<PAGE> 78
1997, were increases of $2.6 million, $8.9 million, $82.6 million and $48.6
million in 1999, 1998 and 1997, respectively. In assessing the realizability of
deferred tax assets, Nucentrix considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets depends on the generation of future
taxable income during the periods in which those temporary differences become
deductible. Nucentrix considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon these considerations, Nucentrix has fully
reserved all deferred tax assets to the extent such assets exceed deferred tax
liabilities.
As of December 31, 1999, and before taking into consideration the effects
of the Plan (See Note 1(b)), Nucentrix had approximately $366.8 million of
federal income tax loss carryforwards which expire in years 2013 through 2019.
Nucentrix estimates that approximately $38.0 million of the above carryforwards
relate to various acquisitions and are subject to certain limitations.
As a result of the cancellation of the Old Senior Notes, Old Convertible
Notes and common stock outstanding at the Effective Date, and the issuance of
new shares of common stock and warrants in accordance with the Plan, federal
income tax law requires that the amount of income from the extinguishment of
this indebtedness be used to permanently reduce federal tax attributes.
Generally, the reduction is applied to reduce pre-bankruptcy net operating loss
carryforwards, followed by other tax attributes, including the basis of certain
assets and the tax basis of subsidiary stock. Alternatively, an election is
available to reduce the basis of fixed assets first, which can be favorable in
certain circumstances. The cancellation of the Liabilities Subject to Compromise
(see Note 8), which resulted in an extraordinary gain of $174 million in the
accompanying Consolidated Statement of Operations, will not be treated as
taxable income under the alternative.
At the present time management has not yet selected which Tax Attribute
Reduction alternative will best meet its business objectives and maximize future
tax benefits. Accordingly, the net operating loss carryforward and deferred tax
assets and liabilities presented above will be revised to reflect the
alternative selected by management after that alternative is selected. However,
the Company does not believe that the prospective Tax Attribute Reduction will
have a material impact on the Company's Consolidated Financial Statements.
In addition to the permanent Tax Attribute Reduction, the Company also must
limit the annual deduction of pre-bankruptcy net operating losses and "built-in
deductions" to an amount no greater than the fair market value of the Company
immediately after the restructuring, multiplied by the long-term tax exempt
rate. This annual limitation is currently estimated to be approximately $7.3
million.
(12) RELATED PARTY TRANSACTIONS
During 1999, Nucentrix leased office space from entities owned by certain
former officers and directors of Nucentrix for which the expense amounted to
approximately $19,000 for the period from January 1, 1999, to the Effective
Date, $58,000 for the period from the Effective Date to December 31, 1999,
$205,000 in 1998 and $171,000 in 1997. In connection with its restructuring,
Nucentrix terminated approximately 56,000 square feet of such leases.
Nucentrix paid and/or accrued $181,000 in 1997 to an affiliate of a former
officer and director of Nucentrix for certain administrative services.
In 1997, Nucentrix, CS Wireless, Wireless One and CAI formed Wireless
Enterprises, LLC ("Wireless Enterprises"). Wireless Enterprises is a programming
cooperative that negotiates programming and marketing services with suppliers of
programming. In 1998 and 1997, Nucentrix paid approximately $24.5 million and
$15.5 million, respectively, to Wireless Enterprises as reimbursement of
programming expenses and for other
F-18
<PAGE> 79
administrative services. The Company did not purchase programming from Wireless
Enterprises during 1999.
(13) COMMITMENTS AND CONTINGENCIES
Certain former directors and officers of the Company, to whom the Company
may have indemnity obligations, are defendants in two securities lawsuits, one
of which is a purported class action lawsuit. These actions allege, among other
things, various violations of federal and state securities laws. The Company
also is a party to two purported class action lawsuits alleging that the Company
overcharged its customers for administrative late fees. The Company intends to
vigorously defend these matters. While it is not feasible to predict or
determine the final outcome of these proceedings or to estimate the amounts or
potential range of loss with respect to these matters, and while management does
not expect such an adverse outcome, management believes that an adverse outcome
in one or more of these proceedings that exceeds or otherwise is excluded from
applicable insurance coverage could have a material adverse effect on the
consolidated financial condition, results of operations or cash flows of the
Company. The Company also received notice in September 1999 that a motion to
revoke the order confirming its Plan had been filed in U.S. Bankruptcy Court by
two former stockholders of Heartland Wireless Communications, Inc. The Company
intends to vigorously oppose the motion, and it is not possible at this time to
predict the effect of any action by the Bankruptcy Court to revoke the Plan.
Nucentrix also is a party to other legal proceedings, a majority of which
are incidental to its business. In the opinion of management, and after
consideration for amounts recorded in the accompanying Consolidated Financial
Statements, the ultimate effects of such other matters are not expected to have
a material adverse effect on the consolidated financial condition or results of
operations of Nucentrix.
Nucentrix has entered into a series of noncancellable agreements to
purchase entertainment programming for retransmission which expire through 2000.
The agreements generally require monthly payments based upon the number of
subscribers to Nucentrix's systems, subject to certain minimums.
Nucentrix has entered into a Memorandum of Agreement with Cisco. Under the
agreement with Cisco, the Company is obligated to purchase at least $13 million
in base station and customer premises equipment from Cisco through the end of
2001, subject to Cisco meeting certain equipment test trial and other
conditions. As part of its strategic alliance with the Company, Cisco has
offered a financing facility of up to $16.25 million for the purchase of such
equipment.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of Nucentrix's financial instruments at December 31, 1999 and 1998. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Restricted assets -- investments
in bank certificates of deposit .... $ 650 $ 650 $ 1,011 $ 1,011
Note receivable from affiliate ........ 3,212 3,212 3,901 3,901
Old Senior Notes ...................... -- -- (237,616) (57,616)
Old Convertible Notes and other
Notes payable ....................... 16,516 16,516 (73,416) (18,354)
</TABLE>
The fair value of cash and cash equivalents, accounts receivable and
accounts payable approximate the carrying amounts of these assets and
liabilities because of the short maturity of these instruments.
F-19
<PAGE> 80
The carrying value of bank certificates of deposit approximates fair value
since the term of the underlying deposits is short-term at the reporting date.
The carrying amount of note receivable from affiliate approximates fair value
since the interest rate equates to the market rate of interest. The fair values
of the Old Senior Notes are based on market quotes obtained from WP&Co. The fair
values of the Old Convertible Notes and other notes payable are based on
management's estimates derived from market quotes obtained from WP&Co.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited financial data of Nucentrix for each
quarter of fiscal years 1999 and 1998.
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
----------- -------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999:
Revenues ............................. $ 18,466 $ 17,269 $ 17,592 $ 17,148
Operating loss ....................... (5,393) (5,551) (5,311) (6,188)
Net loss ............................. (7,600) (4,935) (5,845) (6,464)
Net loss per common share -- basic
and diluted ....................... N/A (0.49) (0.58) (0.64)
<CAPTION>
PREDECESSOR
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Revenues ............................. $ 19,099 $ 18,622 $ 18,213 $ 18,055
Operating loss ....................... (10,642) (27,412) (101,329) (4,126)
Net loss ............................. (25,202) (50,641) (123,000) (12,718)
Net loss per common share -- basic
and diluted ....................... N/A N/A N/A N/A
</TABLE>
During the fourth quarter of 1999, Nucentrix revised its method of
recognizing revenue from its agency relationships with DIRECTV and its
distributors. The effect of this change on the first, second and third quarters
of 1999 was an increase in reported revenues of $380,000, $458,000 and $1
million, respectively, and an increase in reported depreciation expense of
$151,000, $287,000 and $432,000, respectively. The effect of this change on
first quarter net income before extraordinary item was an increase of $229,000.
The impact of this change on the second and third quarters was a decrease in net
loss and loss per basic and diluted common share of $171,000 and $0.02, and
$568,000 and $0.06, respectively. These quarters have been restated to reflect
this change.
During the second quarter of 1998, Nucentrix recorded an impairment charge
of $17.7 million to write down the value of its non-operating licenses to fair
market value and wrote off $6.8 million of its excess basis in its investment in
CS Wireless. During the third quarter of 1998, Nucentrix recorded an impairment
of charge of $88 million related to the write down of its operating assets to
estimated fair market value and wrote off $11.7 million of its remaining
investment in CS Wireless.
F-20
<PAGE> 81
(16) SUBSEQUENT EVENTS
(a) Sale of Investment in Wireless One, Inc.
In January 2000, the Company exchanged 2,911,725 shares of common stock in
Wireless One for approximately $3.8 million, pursuant to Wireless One's plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company expects
to exchange its remaining 547,783 shares of Wireless One common stock for
approximately $700,000 in the first quarter of 2000. Losses recorded in prior
years for Wireless One reduced the Company's investment to zero in 1997.
(b) Fayetteville and Fort Smith, Arkansas Acquisition (Unaudited)
In March 2000, the Company entered into a letter of intent to acquire all
of the MMDS wireless broadband assets in Fayetteville and Fort Smith, Arkansas
for $4.2 million in common stock of the Company. The Company expects to close
this transaction in the second or third quarter of 2000. The transaction is
subject to negotiation of definitive documentation and customary closing
conditions, including receipt of all required regulatory approvals.
F-21
<PAGE> 82
SCHEDULE II
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts ..... $ 348 1,691 -- (1,632)(a) $ 407
======== ===== ========== ====== ========
Valuation allowance for deferred
tax assets ......................... $151,253 -- 11,549(b) -- $162,802
======== ===== ========== ====== ========
Year ended December 31, 1998:
Allowance for doubtful accounts ..... $ 340 1,649 -- (1,641)(a) $ 348
======== ===== ========== ====== ========
Valuation allowance for deferred
tax assets ......................... $ 68,697 -- 82,556(b)$ -- $151,253
======== ===== ========== ====== ========
Year ended December 31, 1997:
Allowance for doubtful accounts ..... $ 5,468 3,465 -- (8,593)(a) $ 340
======== ===== ========== ====== ========
Valuation allowance for
deferred tax assets ................ $ 20,011 -- 48,686(b) -- $ 68,697
======== ===== ========== ====== ========
</TABLE>
- ---------------
(a) Accounts written off.
(b) Recognized as a component of deferred tax assets.
(c) Allocation of assets from the CableMaxx acquisitions.
S-1
<PAGE> 83
INDEX TO EXHIBITS
Exhibits followed by an (*) constitute management contracts or compensatory
plans or arrangements.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 -- Registrant's Plan of Reorganization under Chapter
11 of the United States Bankruptcy Code
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated
January 19, 1999).
2.2 -- Order Confirming Registrant's Plan of
Reorganization Under Chapter 11 of the Bankruptcy
Code, dated as of March 16, 1999 (incorporated by
reference to Exhibit 2.2 to the Registrant's
Registration Statement on Form S-1, Registration
No. 333-80929 (the "Form S-1")).
3.1 -- Amended and Restated Certificate of Incorporation
of Registrant, (incorporated by reference to
Exhibit 3.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999
(the "March 1999 Form 10-Q")).
3.2 -- Restated Bylaws of Registrant (incorporated by
reference to Exhibit 3.2 to the March 1999 Form
10-Q).
4.1 -- Specimen Nucentrix Broadband Networks, Inc. Stock
Certificate (incorporated by reference to Exhibit
4.1 to the Form S-1).
4.2 -- Registration Rights Agreement dated as of April 1,
1999, between the Registrant and the selling
stockholders named therein (incorporated by
reference to Exhibit 4.2 to the Form S-1).
10.1* -- Registrant's First Amended and Restated 1999 Share
Incentive Plan (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8, Registration No. 333-
79913).
10.2 -- Office Lease, dated April 10, 1996, between Merit
Office Portfolio Limited Partnership and the
Registrant for the Registrant's Plano, Texas
office (incorporated by reference to Exhibit 10.1
to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 ("June 1996 Form
10-Q")).
10.3 -- Cooperative Marketing Agreement between the
Registrant and DIRECTV, dated November 12, 1997,
and the following related agreements between the
Registrant and DIRECTV: Transport Agreement, DSS
Receiver Support Agreement and Subscriber Payment
Agreement (incorporated by reference to Exhibit
10.16 to the Registrant's Annual Report on Form
10-K for the Fiscal Year ended December 31, 1997
(the "1997 Form 10-K")).
10.4 -- Agreement between DIRECTV and the Registrant,
dated April 5, 1998 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998
(the "June 1998 Form 10-Q")).
+10.5 -- Amendment dated December 3, 1999 to Agreement
between DIRECTV and the Registrant, dated April 5,
1998.
10.6 -- Registrant's Performance Incentive Compensation
Plan (incorporated by reference to Exhibit 10.17
to the 1997 Form 10-K).
10.7* -- Employment Agreement between the Registrant and
Carroll D. McHenry dated as of March 6, 1998
(incorporated by reference to Exhibit 10.18 to the
1997 Form 10-K).
10.8* -- Employment Agreement between the Registrant and J.
Curtis Henderson dated as of April 8, 1998
(incorporated by reference to Exhibit 10.4 to the
June 1998 Form 10-Q).
10.9* -- Employment Agreement between the Registrant and
Marjean Henderson dated as of April 8, 1998
(incorporated by reference to Exhibit 10.5 to the
June 1998 Form 10-Q).
10.10* -- Employment Agreement between the Registrant and
Frank H. Hosea dated as of November 3, 1998
(incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1998).
10.11* -- Nonqualified Stock Option Agreement between
Registrant and Carroll D. McHenry dated as of
April 1, 1999 (incorporated by reference to
Exhibit 10.15 to the Form S-1).
10.12* -- Nonqualified Stock Option Agreement between
Registrant and Marjean Henderson dated as of April
1, 1999 (incorporated by reference to Exhibit
10.16 to the Form S-1).
10.13* -- Nonqualified Stock Option Agreement between
Registrant and J. Curtis Henderson dated as of
April 1, 1999 (incorporated by reference to
Exhibit 10.17 to the Form S-1).
10.14* -- Nonqualified Stock Option Agreement between
Registrant and Frank H. Hosea dated as of April 1,
1999 (incorporated by reference to Exhibit 10.19
to the Form S-1.
10.15 -- Registrant's Warrant Agreement, dated as of April
1, 1999 (incorporated by reference to Exhibit 10.2
to the March 1999 Form 10- Q).
+10.16 -- Master Agreement, dated as of December 2, 1998,
among the Registrant, CS Wireless Systems, Inc.
and CAI Wireless Systems, Inc.
+21.1 -- List of Subsidiaries.
+23.1 -- Consent of KPMG LLP.
+27.1 -- Financial Data Schedule (EDGAR Filing only).
+27.2 -- Financial Data Schedule (EDGAR Filing only).
</TABLE>
- ----------
+ Filed herewith.
<PAGE> 1
EXHIBIT 10.5
"***" Confidential portions of this Agreement have been omitted and filed
separately with the Securities and Exchange Commission under a Confidential
Treatment Request, pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
Frank Hosea
Senior Vice President
Video Operations
Nucentrix Broadband Networks, Inc.
200 Chisholm Place, Suite 200
Plano, Texas 75075
RE: Amendment to SFU Agreement
Dear Frank:
Reference is made to that certain SFU Agreement made as of April 5, 1998, as
amended from time to time (the "SFU Agreement"), by and between Heartland
Wireless Communications, Inc. and DIRECTV, Inc. The parties wish to amend the
terms of the SFU Agreement as described below, effective as of December 1, 1999
(except as otherwise set forth below).
1. The name of the party, Heartland Wireless Communications, Inc., shall be
changed to Nucentrix Broadband Networks, Inc.
2. All references to DSS System shall be changed to DIRECTV System.
3. Section E(2) of the Agreement shall be deleted in its entirety and replaced
with the following:
"Company hereby agrees and acknowledges that, in order to receive the
Subsidy as set forth herein, Company must either (a) sell such DIRECTV
System to Qualifying Subscribers or (b) provide such DIRECTV System through
a rent, lease, rent-to-own or lease-to-own model to Qualifying Subscribers
who subscribe to both DIRECTV programming and Company's cable programming
services. In addition, the rent, lease, rent-to-own or lease-to-own
model/arrangement must be in compliance with any and all applicable
federal, state and local laws, statutes, codes, rules, regulations,
ordinances or otherwise."
4. The following shall be added as new Section C(3):
"Company shall not represent that DIRECTV Programming Packages may be
obtained on any different terms or rates, shall not impose additional or
different terms and shall not offer customers any discount, rebate, or
other material benefits in consideration for subscribing to them, except as
expressly authorized by DIRECTV
<PAGE> 2
in writing. Notwithstanding any failure by a Qualifying Subscriber (as
defined below) to pay his/her rent or lease free, if any, of a DIRECTV
System, Company shall not disconnect or otherwise attempt to disconnect any
Qualifying Subscriber's DIRECTV Programming Package without the prior
written consent of DIRECTV."
5. Effective as of August 29, 1999, Exhibit B shall be amended such that the
Percentage of DIRECTV Programming Package Revenue Per Calendar Month
(Continuing Service Fee) shall be "***" for all DIRECTV Programming
Packages.
Except as set forth herein, all terms of the SFU Agreement shall remain
unmodified and in full force and effect. Kindly acknowledge your agreement to
the foregoing terms by signing in the space provided below.
Sincerely,
DIRECTV, INC.
By: /s/ James B. Arnold
-------------------------------------
James B. Arnold
AGREED, ACCEPTED AND ACKNOWLEDGED:
Nucentrix Broadband Networks, Inc.
By: /s/ Frank Hosea
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Date: 12/3/99
------------------------------
<PAGE> 1
EXHIBIT 10.16
MASTER AGREEMENT
AMONG
HEARTLAND WIRELESS COMMUNICATIONS, INC.,
CS WIRELESS SYSTEMS, INC.
AND
CAI WIRELESS SYSTEMS, INC.
DATED AS OF DECEMBER 2, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Preamble......................................................................................................1
Section 1 - Defined Terms.....................................................................................2
Section 2 - CS Wireless Common Stock..........................................................................4
Section 3 - Transfers of Assets and Leases of Spectrum Rights at the Stage I Closing..........................5
Section 4 - Cancellation of Heartland Long-Term Note and Related Transactions at the
Stage II Closing.........................................................................................6
Section 5 - Stage I and Stage II Closing Dates................................................................7
Section 6 - FCC Cooperation and Related Spectrum Matters......................................................7
Section 7 - Conditions to All of the Parties' Obligations.....................................................8
Section 8 - Representations and Warranties of the Parties....................................................12
Section 9 - Covenants of All of the Parties..................................................................19
Section 10 - Covenants of Heartland..........................................................................20
Section 11 - Covenants of CS Wireless........................................................................21
Section 12 - Releases and Indemnification....................................................................23
Section 13 - Termination....................................................................................24
Section 14 - Further Assurances..............................................................................25
Section 15 - No Waiver.......................................................................................25
Section 16 - Miscellaneous...................................................................................25
</TABLE>
i
<PAGE> 3
Exhibits
Exhibit A - Resignation of Heartland Directors and Heartland Independent
Director
Exhibit B - CS Wireless FCC Assets Spectrum Lease
Exhibit C - Heartland FCC Assets Spectrum Lease
Exhibit D - Amendment to BTA Lease and Option Agreement
Exhibit E - BTA Lease and Option Agreement
Exhibit F - Form of CS Wireless Senior Noteholder Consent
Schedules
3(a)(i) - Customer Premises Equipment
3(a)(ii) - CS Wireless FCC Assets
3(b) - Heartland FCC Assets
4(a)(i) - CS Leases
4(a)(ii) - Radcliffe Non-FCC Assets
4(b)(i) - Heartland Leases
4(b)(ii) - Portsmouth Non-FCC Assets
8(a)(ii) - Title to Heartland Assets
8(a)(v) - Heartland Compliance with Laws
8(a)(vi) - Heartland leased FCC Assets
8(a)(vii) - Heartland Litigation
8(a)(x) - Condition of Portsmouth Non-FCC Assets
8(b)(ii) - Title to CS Wireless Assets and Leases
8(b)(v) - CS Compliance with Laws
8(b)(vi) - Construction Completion Dates
8(b)(vii) - CS Wireless Litigation
8(b)(x) - Condition of CPE and Radcliffe Non-FCC Assets 8(c)(iii)
- CAI Litigation
ii
<PAGE> 4
MASTER AGREEMENT
Master Agreement dated as of the 2nd day of December, 1998 (this
"Agreement") by and among Heartland Wireless Communications, Inc., a Delaware
corporation having its principal place of business located at 200 Chisholm
Place, Suite 200, Plano, Texas 75075 ("Heartland"), CAI Wireless Systems, Inc.,
a Connecticut corporation having its principal place of business located at 18
Corporate Woods Boulevard, Third Floor, Albany, New York 12211 ("CAI") and CS
Wireless Systems, Inc., a Delaware corporation having its principal place of
business located at 1101 Summit Avenue, Plano, Texas 75074 ("CS Wireless").
R E C I T A L S
WHEREAS, the parties hereto are parties to that certain Participation
Agreement (as defined herein), pursuant to which each of Heartland and CAI
contributed wireless cable assets or the stock of entities owning wireless cable
assets to CS Wireless in exchange for CS Common Stock (as defined herein); and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, Heartland received 3,578,834 shares
of CS Wireless Common Stock, which amount was subsequently increased to
3,836,035 shares of CS Wireless Common Stock as a result of the issuance by CS
Wireless to Heartland of an additional 257,201 shares of CS Wireless Common
Stock in satisfaction of that certain true-up obligation owed to Heartland under
Section 9.6(a) of the Participation Agreement; and
WHEREAS, in connection with the consummation of the transactions
contemplated by the Participation Agreement, CS Wireless issued to Heartland the
Heartland Long-Term Note (as defined herein) in the principal amount of
$15,000,000, which promissory note matures on February 21, 2006; and
WHEREAS, there is $2,335,276.00 outstanding on the Heartland Long-Term Note
as of November 30, 1998; and
WHEREAS, simultaneously with the consummation of the transactions
contemplated by the Participation Agreement, the parties hereto entered into
that certain Stockholders' Agreement (as defined herein), which agreement
requires, among other things, that Heartland and CAI vote their shares of CS
Wireless Common Stock in favor of a board of directors comprised of four members
designated by CAI and three members designated by Heartland, and that
significant decisions affecting CS Wireless requires the approval of at least
70% of the directors of CS Wireless so that neither CAI nor Heartland can
unilaterally make significant decisions affecting CS Wireless; and
WHEREAS, the parties have disagreed about various matters regarding the
operations, valuation, governance and future of CS Wireless; and
WHEREAS, with due regard to their respective fiduciary duties to various
constituencies including the respective stockholders and creditors of CS
Wireless, CAI and Heartland, the parties wish to terminate Heartland's ongoing
participation in the governance of CS Wireless on a basis that
<PAGE> 5
after prolonged negotiation, investigation and consultation with advisors, the
parties believe to be fair and in the best interests of the parties and their
respective constituents while ensuring that the future operations of Heartland
and CS Wireless and their respective successors can be separated without
unnecessary disruption to either party; and
WHEREAS, CAI desires to purchase from Heartland and Heartland desires to
sell to CAI all of the 3,836,035 shares of CS Wireless Common Stock owned by
Heartland, on and subject to the terms and conditions set forth herein; and
WHEREAS, CS Wireless desires to assign and transfer to Heartland certain
MDS-1 channels, all assets relating to the Radcliffe, Iowa market, WCS Spectrum
in 19 markets and certain other equipment, and Heartland desires to assign and
transfer to CS Wireless any and all ownership and leasehold interests in MMDS
and MDS channels in the Portsmouth, New Hampshire market, including, but not
limited to, the MMDS E Group and MDS H1 - 3 channels, together with any and all
assets used by Heartland in the Portsmouth market; and
WHEREAS, the parties hereto desire to cooperate with each other with
respect to proposed two-way use of their MMDS, MDS and ITFS spectrum in
contiguous and adjacent markets, including, but not limited to, reaching an
agreement with respect to a comprehensive two-way frequency utilization plan,
cooperation with respect to the implementation of such, timely provision of
requisite interference consent agreements and such other actions as may be
consistent with supporting each other's necessary or desirable filings at the
FCC (as defined herein) in connection with two-way applications; and
WHEREAS, the parties hereto desire to settle certain claims they have
against each other; and
WHEREAS, the parties shall continue to own and lease spectrum rights in
contiguous and adjacent markets, the value of which rights would be materially
adversely affected absent agreement with respect to interference and related
uses arising out of the contemplated two-way applications of such spectrum.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
contained herein, each of the parties hereto agree as follows.
Section 1. Defined Terms. As used in this Agreement, the following terms
shall have the respective meanings set forth below:
"Bankruptcy Code" means the United States Bankruptcy Code, as heretofore
and hereafter amended, and as codified as 11 U.S.C. Sections 101 et seq.
"BTA" means Basic Trading Area, as such term is used by the FCC to denote
geographic areas in connection with the public auction of available spectrum in
the Multipoint and/or Multichannel Distribution Service.
"BTA Lease and Option Agreement" means that certain BTA Lease and Option
Agreement
2
<PAGE> 6
dated October 31, 1997 by and between CS Wireless and Heartland.
"CPE" means Customer Premises Equipment listed on Schedule 3(a)(i) attached
hereto.
"Communications Act" means the Communications Act of 1934, as amended, 47
U.S.C. Sections 151 et seq.
"CS Leases" means the spectrum leases listed on Schedule 4(a)(i) attached
hereto.
"CS Senior Notes" means $400,000,000 aggregate principal amount of Series B
11-3/8% Senior Notes due 2006 of CS Wireless Systems, Inc.
"CS Wireless Common Stock" means the common stock, par value $.001 per
share, of CS Wireless.
"CS Wireless FCC Assets" means the FCC licenses owned by CS Wireless and
listed on Schedule 3(a)(ii) attached hereto.
"Encumbrance" shall have the meaning given to such term in Section 8(a)(i).
"FCC Approvals" shall have the meaning given to such term in Section 3(b).
"Governmental Authority" means (a) the government of (i) the United States
of America or any State or other political subdivision thereof, or (ii) any
jurisdiction in which any party hereto or any of such party's subsidiaries
conducts all or any part of its business, or which has jurisdiction over any
properties of any party hereto, as the case may be, or (b) any entity exercising
executive, legislative, judicial, regulatory or administrative functions of, or
pertaining to, any such government.
"Heartland FCC Assets" means the FCC licenses owned by Heartland and listed
on Schedule 3(b) attached hereto.
"Heartland Leases" means the spectrum leases listed on Schedule 4(b)(i)
attached hereto.
"Heartland Long-Term Note" means that certain Subordinated Promissory Note
dated February 23, 1996 and issued by CS Wireless to Heartland in the principal
amount of $15,000,000.
"Hosea" means Frank H. Hosea.
"Participation Agreement" means the Participation Agreement dated as of
December 12, 1995 by and among CAI, Heartland and CS Wireless, as amended by
Amendment No. 1 to the Participation Agreement dated as of February 23, 1996
among the parties thereto.
"Portsmouth Non-FCC Assets" means all assets owned by Heartland and used in
connection with the operation of the channels pursuant to the Heartland FCC
Assets and Heartland Leases, including, without limitation, the assets listed on
Schedule 4(b)(ii) attached hereto.
3
<PAGE> 7
"Radcliffe Non-FCC Assets" means all assets owned by CS Wireless and used
in connection with the Radcliffe, IA wireless cable system, including, without
limitation, the assets listed on Schedule 4(a)(ii) attached hereto.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Agreement" means that certain Administrative Services Agreement
dated as of February 23, 1996 by and between Heartland and CS Wireless.
"Stage I Closing" shall have the meaning given to such term in Section
5(a).
"Stage I Closing Date" shall have the meaning given to such term in Section
5(a).
"Stage I Transactions" shall have the meaning given to such term in Section
5(a).
"Stage II Closing" shall have the meaning given to such term in Section
5(b).
"Stage II Closing Date" shall have the meaning given to such term in
Section 5(b).
"Stage II Transactions" shall have the meaning given to such term in
Section 5(b).
"Stockholders' Agreement" means that certain Stockholders' Agreement dated
as of February 23, 1996 by and among CS Wireless, CAI and Heartland.
Section 2. CS Wireless Common Stock.
(a) At the Stage I Closing (as defined below), Heartland shall sell,
assign, transfer, convey and deliver to CAI, and CAI shall purchase, accept and
assume from Heartland, all of Heartland's right, title and interest in and to
3,836,035 shares of CS Wireless Common Stock owned by Heartland, which shares
represent the entire equity interest in CS Wireless owned by Heartland as of the
date hereof.
(b) The parties hereto agree that upon the consummation of the Stage I
Transactions (as defined below), Heartland shall cease to have any equity
interest in CS Wireless and the Stockholders' Agreement shall, without further
action by the parties, permanently and irrevocably lapse and terminate with no
further force or effect, and each of the parties thereto shall be relieved of
their obligations thereunder, with the same force and effect and as if the
parties had never entered into such agreement. Upon such Stage I Closing, the
resignation of each of the Heartland Directors and the Heartland Independent
Director (as such terms are defined in the Stockholders' Agreement) from the
Board of Directors of CS Wireless, in the form attached hereto as Exhibit A,
shall become immediately effective without further action by the parties;
provided, however, that any indemnification obligations of CS Wireless to each
of the Heartland Directors, the Heartland Independent Directors and Hosea under
CS Wireless' certificate of incorporation, by-laws, contracts, insurance
policies (to the extent applicable) or otherwise existing as of the date hereof
shall survive such resignation, and CS Wireless expressly agrees to assume any
such indemnification obligation in any bankruptcy proceeding filed by or against
CS Wireless.
4
<PAGE> 8
Section 3. Transfers of Assets and Leases of Spectrum Rights at the Stage I
Closing.
At the Stage I Closing:
(a) CS Wireless shall, in partial satisfaction of the Heartland Long-Term
Note, which shall cease to accrue interest from and after the Stage I Closing
Date:
(i) sell, assign, transfer, convey and deliver to Heartland, Heartland
shall purchase, accept and assume from CS Wireless, all of CS Wireless'
right, title and interest in and to the CPE listed on Schedule 3(a)(i);
(ii) lease to Heartland, and Heartland shall lease from CS Wireless
all of CS Wireless' right, title and interest in and to the CS Wireless FCC
Assets. The CS Wireless FCC Assets shall be leased pursuant to the Lease
Agreement set forth as Exhibit B attached hereto. Within ten (10) business
days of the signing of this Agreement, CS Wireless and Heartland together
shall file with the FCC the necessary applications for the consent of the
assignment of the CS Wireless FCC Assets; and
(iii) pay Heartland Three Hundred Sixty-six Thousand and 00/100
Dollars ($366,000.00), payable in immediately available funds by wire
transfer in accordance with written wire transfer instructions previously
delivered by Heartland to CS Wireless;
(b) Heartland shall lease to CS Wireless, and CS Wireless shall lease from
Heartland all of Heartland's right, title and interest in and to the Heartland
FCC Assets. The Heartland FCC Assets shall be leased pursuant to the Lease
Agreement set forth as Exhibit C attached hereto. Within ten (10) business days
of the signing of this Agreement, CS Wireless and Heartland together shall file
with the FCC the necessary applications for the consent of the assignment of the
Heartland FCC Assets (such consent, together with the consent of the FCC
contemplated by Section 3(a)(ii) above, the "FCC Approvals");
(c) CAI shall pay Heartland One Million Five Hundred Thirty-four Thousand
and 00/100 Dollars ($1,534,000.00), payable in immediately available funds by
wire transfer in accordance with written wire transfer instructions previously
delivered by Heartland to CAI; and
(d) Heartland and CS Wireless shall execute and deliver an amendment to the
BTA Lease and Option Agreement in the form attached hereto as Exhibit D, which
amendment shall correct certain ground elevation parameters of Heartland's
Sherman, Texas market to reflect a previously proposed or licensed facility and
correct certain operating parameter of CS Wireless' Fort Worth, Texas market.
The parties acknowledge that it is impracticable for Heartland to inspect, test
and select the CPE before the Stage I Closing. Accordingly, CS Wireless shall
make the CPE available for inspection by Heartland representatives during normal
business hours and Heartland shall inspect, test and select the CPE on or before
the Stage II Closing. CS Wireless shall make available for inspection at CS
Wireless' offices or warehouse facilities the CPE listed on Schedule 3(a)(i) at
the following locations:
5
<PAGE> 9
(Model 8607 BN55) Scientific Atlanta San Antonio
converter boxes (with remote)
(Model 5508 W or WP) Tocom converter boxes Dallas
(with remote)
(Cal Amp 2040\011 or PacMono 3191i Dallas
or 3192i) Dipoles, PCS filtered and tested
In the event that CS Wireless does not make available for delivery to Heartland
on or before the Stage II Closing the CPE listed on Schedule 3(a)(i), CS
Wireless shall immediately pay to Heartland cash in an amount equal to the
difference between $354,000 and the value (as established pursuant to Schedule
3(a)(i)) of the CPE made available for delivery at the Stage II Closing.
For a period of One Hundred Eighty (180) days following the earlier of the (i)
Stage II Closing or (ii) the date on which Heartland accepts a unit of CPE made
available by CS Wireless, Heartland shall have the right to return such unit of
CPE which is not in good working order for the purpose for which it was
intended. Upon timely receipt of any returned unit, CS Wireless shall
immediately (i) pay to Heartland cash in an amount equal to the value of such
item as established in Schedule 3(a)(i) or (ii) repair or replace such unit. If
CS Wireless elects to repair or replace such unit, Heartland shall have a period
of Forty-five (45) days to determine whether such repaired or replacement unit
is in good working order for the purpose for which it was intended. Except as
provided herein, CS Wireless hereby disclaims all warranties, express or
implied, including without limitation any warranties under the UCC or otherwise
implied by law. CS Wireless shall use all reasonable commercial efforts to
assist Heartland in enforcing the terms of any manufacturer's warranty
applicable to any unit of CPE delivered to Heartland pursuant to the terms
hereof.
Section 4. Cancellation of Heartland Long-Term Note and Related
Transactions at the Stage II Closing.
At the Stage II Closing:
(a) CS Wireless shall sell, assign, transfer, convey and deliver to
Heartland, and Heartland shall purchase, accept and assume from CS Wireless, all
of CS Wireless' right, title and interest in and to the CS Wireless FCC Assets,
the lessee's interest under the CS Leases and the Radcliffe Non-FCC Assets;
(b) Heartland shall sell, assign, transfer, convey and deliver to CS
Wireless, and CS Wireless shall purchase, accept and assume from Heartland, all
of Heartland's right, title and interest in and to the Heartland FCC Assets, the
lessee's interest under the Heartland Leases and the Portsmouth Non-FCC Assets;
(c) CS Wireless shall pay Heartland One Hundred Thousand and 00/100 Dollars
($100,000.00), payable by wire transfer in immediately available funds in
accordance with written
6
<PAGE> 10
wire instructions previously delivered by Heartland to CS Wireless; and
(d) Heartland shall cancel the Heartland Long-Term Note and deliver such
cancelled promissory note to CS Wireless.
CS Wireless acknowledges and agrees that Heartland shall not assume any
liabilities, obligations or commitments of CS Wireless or any affiliates thereof
relating to or arising out of the operation of the CS Wireless FCC Assets, the
CS Leases or Radcliffe Non-FCC Assets prior to the Stage II Closing Date
including, without limitation, any liabilities associated with employees arising
prior to the Stage II Closing Date who are hired by Heartland from and after the
Stage II Closing Date.
Heartland acknowledges and agrees that CS Wireless shall not assume any
liabilities, obligations or commitments of Heartland or any affiliate thereof
relating to or arising out of the operation of the Heartland FCC Assets,
Heartland Leases or Portsmouth Non-FCC Assets prior to the Stage II Closing
Date.
Section 5. Stage I and Stage II Closing Dates.
(a) The sale and transfer of the CS Wireless Common Stock by Heartland to
CAI, and the sale and transfer of the CPE, the cash payments by each of CS
Wireless and CAI to Heartland contemplated under Section 3, the lease from CS
Wireless to Heartland of the CS Wireless FCC Assets and the lease from Heartland
to CS Wireless of the Heartland FCC Assets (collectively, the "Stage I
Transactions") shall occur at the offices of Heartland, 200 Chisholm Place,
Suite 200, Plano, Texas 75075, at 11:30 a.m., at a closing (the "Stage I
Closing") on December 2, 1998, or at such other time as the parties hereto may
agree (the "Stage I Closing Date").
(b) The sale and transfer of the CS Wireless FCC Assets, the CS Leases, the
Radcliffe Non-FCC Assets, the Heartland FCC Assets, the Heartland Leases and the
Portsmouth Non-FCC Assets, the cash payment by CS Wireless to Heartland
contemplated under Section 4 and the cancellation and delivery of the Heartland
Long-Term Note (collectively, the "Stage II Transactions") shall occur at the
offices of Heartland, 200 Chisholm Place, Suite 200, Plano, Texas 75075, at
11:30 a.m., at a closing (the "Stage II Closing") on January 30, 1999 or, if
later, 3 business days after receipt of the final FCC Approvals, or at such
other time as the parties hereto may agree (the "Stage II Closing Date").
Section 6. FCC Cooperation and Related Spectrum Matters. As a material
inducement to each of the parties to enter into this Agreement and as additional
consideration for the transactions contemplated by Sections 2, 3 and 4 above,
the parties hereto agree as follows:
(a) The parties hereto will cooperate with each other to the maximum extent
possible in agreeing to enter into interference agreements requested by the
other party that are necessary to facilitate the FCC's grant of applications
filed or sponsored by the other party, as more fully described in Article V of
the BTA Lease and Option Agreement, dated October 31, 1997 by and between
Heartland and CS Wireless and their affiliates (hereinafter the "BTA Lease and
Option Agreement"), which agreement is attached hereto as Exhibit D and
incorporated herein by this
7
<PAGE> 11
reference. Heartland and CS Wireless hereby expressly agree to abide by the BTA
Lease and Option Agreement, and that the BTA Lease and Option Agreement,
together with this Agreement, supersedes any other agreements to the contrary;
provided, however, that neither Heartland nor CS Wireless shall be required to
breach any pre-existing agreements with third parties as a result of this
Agreement, or pay monetary or other consideration not otherwise due.
(b) (i) With respect to markets in which Heartland and CS Wireless have
contiguous or adjacent interests, including, without limitation, Dallas and Fort
Worth, Texas, Heartland and CS Wireless agree to give high priority to resolving
issues surrounding CS Wireless' developmental application for two-way authority
in Dallas/Fort Worth, Texas and to cooperate in an expeditious manner so as to
permit the other party to file two-way transmission applications in such markets
during the first FCC filing window (with priority given to CS Wireless'
Dallas/Fort Worth market) to (A) agree on a comprehensive two-way frequency
utilization plan, (B) implement such plan and (C) provide the other party with
requisite interference consent agreements in support of such party's two-way
applications, as long as such applications meet each party's mutually agreed
upon technical parameters, consistent with FCC rules.
(ii) Notwithstanding anything to the contrary, CS Wireless and
Heartland agree that the preferred use of the MDS-1 and MDS-2 channels, as
well as the WCS Spectrum, shall be for upstream transmissions, and that
both parties will take all reasonable and appropriate steps to accommodate
the other party's applications for and the use of such spectrum so long as
such applications meet the mutually agreed upon technical parameters,
consistent with FCC rules.
(c) Notwithstanding anything in the FCC's rules to the contrary, for
purposes of this Agreement, the interference protection criteria applicable to
the WCS Spectrum shall be governed by the FCC rules in 47 C.F.R. Part 21, as
such rules are amended from time to time, applicable to MMDS spectrum licensed
pursuant to BTA authorizations. For example, the maximum power flux density
application to the WCS Spectrum shall be equal to or less than - 73 dbw/m2 at
the BTA or partitioned service area boundary(ies), or as otherwise provided in
any successor rule or regulation of the FCC for MMDS spectrum licensed pursuant
to BTA authorizations.
(d) Heartland hereby acknowledges its obligation to cooperate with CS
Wireless in resolving a dispute with the licensee of the G group channels in
Grand Rapids, Michigan, Call Sign WLS-950, including, but not limited to,
assigning the lease to CS Wireless on an expeditious basis and permitting CS
Wireless to negotiate and execute an excess capacity lease agreement directly
with the licensee. Notwithstanding anything to the contrary, nothing in this
Section 6(d) shall require Heartland to pay any amount of consideration to the
licensor of such channels or to CS Wireless, or to expend any other amounts
related to such channels, including, without limitation, construction, tower
lease, engineering, legal or other fees.
Section 7. Conditions to All of the Parties' Obligations.
(a) The respective obligations of Heartland, CAI and CS Wireless to
consummate the Stage I Transactions, as appropriate, are subject to the
fulfillment prior to or on the Stage I Closing Date of the following conditions
(each of which may be waived in whole or in part by the party
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being benefitted thereby in its sole discretion):
(i) Representations and Warranties. The representations and warranties
of Heartland, CAI and CS Wireless contained in this Agreement shall be
complete and correct in all material respects when made and at the Stage I
Closing Date.
(ii) Compliance. Each of Heartland, CAI and CS Wireless shall have
performed and complied in all material respects with all agreements and
conditions contained in this Agreement required to be performed or complied
with by each of them prior to or on the Stage I Closing Date.
(iii) Compliance Certificates. Each of Heartland, CAI and CS Wireless
shall have delivered to the other an Officer's Certificate dated the Stage
I Closing Date, certifying (A) that the conditions specified in subsections
(i) and (ii) of this Section 7(a), solely as such conditions relate to the
certifying party, have been fulfilled, (B) as to resolutions adopted by the
Board of Directors of Heartland, CAI and CS Wireless, as the case may be,
which certificate shall have attached thereto a copy of such resolutions,
and (C) as to such other corporate proceedings relating to the
authorization, execution and performance of the transactions contemplated
hereby.
(iv) Board Authorizations. The Board of Directors of each of
Heartland, CAI and CS Wireless shall have approved this Agreement and the
transactions contemplated hereby, and shall have authorized, empowered and
directed any or all of their corporate officers to execute and deliver this
Agreement and such agreements, certificates, instruments and other
documents and to take any and all other actions that may be deemed
necessary or desirable by the officer taking such action to give effect to
this Agreement and the transactions contemplated hereby.
(v) Transactions Permitted under Applicable Law. On the Stage I
Closing Date, the Stage I Transactions contemplated by this Agreement shall
(A) be permitted by the laws and regulations of each jurisdiction or
Governmental Authority, including, without limitation, the FCC, to which
Heartland, CAI or CS Wireless or any of their respective affiliates, as the
case may be, is subject, and (B) not violate any applicable law or
regulation.
(vi) Certain Proceedings and Regulatory Matters. At the Stage I
Closing, none of the parties hereto shall be subject to any judgment, writ,
order, decree or injunction of any court of competent jurisdiction which
restrains, enjoins or otherwise prohibits the consummation of the Stage I
Transactions, nor shall there be pending any suit, action, investigation,
inquiry or other proceeding by any person (including, without limitation,
any Governmental Authority) that (A) seeks injunctive or other relief or
remedies in connection with such transactions or that makes consummation of
the Stage I Transactions subject to significant uncertainty, (B) could
prevent or make illegal the consummation of the Stage I Transactions
contemplated hereby, or (C) imposes or would be reasonably expected to
impose any remedy, condition or restriction on a party hereto which, in its
reasonable judgment, is material and adverse to such party.
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<PAGE> 13
(vii) Third Party Authorization, Consent, etc. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities, if
any, and any lender to any of the parties hereto, in connection with the
transactions contemplated hereby shall have been obtained, including,
without limitation, the consent of the holders of at least a majority of
aggregate principal amount of the CS Senior Notes, which consent shall be
in substantially the form of Exhibit F attached hereto.
(viii) Bankruptcy Proceedings. In the event that Heartland or CS
Wireless shall have commenced a case under title 11 of the United States
Code (the "Bankruptcy Code"), the court(s) having jurisdiction over such
case(s) shall have entered an order (or orders, if both Heartland and CS
Wireless are debtors under the Bankruptcy Code) (a) authorizing the
assumption of this Agreement and the BTA Lease Agreement and (b) approving
the transactions contemplated herein, and such order(s) shall become final
and non-appealable; provided, however, nothing herein shall preclude the
parties from consummating the transactions contemplated herein if the
parties, in their discretion, waive the requirement that such order(s) be
final and non-appealable. No notice of such waiver of this or any other
condition to CAI's obligations to consummate the transactions contemplated
hereby need be given except to Heartland, as explicitly required in this
Agreement, it being the intention of the parties hereto that CAI shall be
entitled to, and is not waiving, the protections of Section 363(m) of the
Bankruptcy Code, the mootness doctrine, and any similar statute or body of
law if either or both of the Stage I and Stage II Closings occurs in the
absence of a final and non-appealable order.
(ix) Proceedings and Documents. All corporate and other proceedings in
connection with the Stage I Transactions contemplated by this Agreement and
all documents and instruments incident to such transactions shall be
reasonably satisfactory to Heartland, CAI and CS Wireless, as the case may
be, and each party hereto shall have received all such counterpart
originals or certified or other copies of such documents as it may
reasonably request.
(b) The obligations of Heartland and CS Wireless to consummate the Stage II
Transactions are subject to the fulfillment prior to or on the Stage II Closing
Date of the following conditions (each of which may be waived in whole or in
part by the party being benefitted thereby in its sole discretion):
(i) Consummation of Stage I Transactions. The Stage I Transactions
shall have been consummated.
(ii) Representations and Warranties. The representations and
warranties of Heartland and CS Wireless contained in this Agreement shall
be complete and correct in all material respects when made and at the Stage
II Closing Date (except to the extent that such representations and
warranties relate specifically to an earlier date).
(iii) Compliance. Each of Heartland and CS Wireless shall have
performed and complied in all material respects with all agreements and
conditions contained in this
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<PAGE> 14
Agreement required to be performed or complied with by each of them prior
to or on the Stage II Closing Date.
(iv) Compliance Certificates. Each of Heartland and CS Wireless shall
have delivered to the other an Officer's Certificate dated the Stage II
Closing Date, certifying that (A) the conditions specified in subsections
(i) through (iii) of this Section 7(b), solely as such conditions relate to
the certifying party, have been fulfilled, (B)(1) resolutions adopted by
the Board of Directors of Heartland and CS Wireless delivered at the Stage
I Closing, and (2) such other corporate proceedings relating to the
authorization, execution and performance of the transactions contemplated
hereby are still in full force and effect and have not been rescinded,
modified or amended.
(v) Transactions Permitted under Applicable Law. On the Stage II
Closing Date, the Stage II Transactions shall (A) be permitted by the laws
and regulations of each jurisdiction or Governmental Authority, including,
without limitation, the FCC, to which Heartland or CS Wireless or any of
their respective affiliates, as the case may be, is subject, and (B) not
violate any applicable law or regulation.
(vi) Certain Proceedings and Regulatory Matters. At the Stage II
Closing, none of the parties hereto shall be subject to any judgment, writ,
order, decree or injunction of any court of competent jurisdiction which
restrains, enjoins or prohibits the consummation of the Stage II
Transactions contemplated by this Agreement, nor shall there be pending any
suit, action, investigation, inquiry or other proceeding by any person
(including, without limitation, any Governmental Authority) that (A) seeks
injunctive or other relief or remedies in connection with such transactions
or that makes consummation of the Stage II Transactions subject to
significant uncertainty, (B) could prevent or make illegal the consummation
of the Stage II Transactions contemplated hereby, of (C) imposes or would
be reasonably expected to impose any remedy, condition or restriction on a
party hereto which, in its reasonable judgment, is material and adverse to
such party.
(vii) Third Party Authorization, Consent, etc. All required
authorizations, consents, approvals or waivers of any third party,
including, without limitation, consents of Governmental Authorities, if
any, and any lender to any of the parties hereto, in connection with the
Stage II Transactions contemplated hereby shall have been obtained.
(viii) Proceedings and Documents. All corporate and other proceedings
in connection with the Stage II Transactions contemplated by this Agreement
and all documents and instruments incident to such transactions shall be
reasonably satisfactory to Heartland, CAI and CS Wireless, as the case may
be, and each party hereto shall have received all such counterpart
originals or certified or other copies of such documents as it may
reasonably request.
(ix) Due Diligence Complete. Each of Heartland and CS Wireless shall
have completed their business and legal due diligence investigation of the
assets to be transferred under Section 4, the results of which shall be
reasonably acceptable to the party performing such investigation.
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<PAGE> 15
(c) The obligations of CAI and CS Wireless to consummate the Stage I
Transactions are subject to the fulfillment prior to or on the Stage I Closing
Date, of the following condition (which may be waived in whole or in part by the
party being benefitted thereby in its sole discretion):
(i) Resignation of Heartland Directors. The Heartland Directors and
the Heartland Independent Director shall have resigned from the Board of
Directors of CS Wireless, and all committees thereof effective as of the
Stage I Closing Date.
Section 8. Representations and Warranties of the Parties.
(a) Heartland Representations and Warranties. As a material inducement to
CAI and CS Wireless to enter into this Agreement and effect the transactions
contemplated hereby, Heartland hereby represents and warrants that:
(i) Title to CS Wireless Common Stock Held by Heartland. Heartland has
and, subject to the terms and conditions of this Agreement, will sell,
assign, transfer, convey and deliver, good and indefeasible title to
3,836,035 shares of CS Wireless Common Stock, which shares comprise
Heartland's entire equity interest in CS Wireless, free and clear of any
security interest, claim, lien, pledge, option, encumbrance, charge,
agreement, voting trust, proxy or other restriction (each, an
"Encumbrance"), other than those Encumbrances created or existing by virtue
of the Stockholders' Agreement.
(ii) Title To Heartland Assets Transferred Hereunder. Except as set
forth on Schedule 8(a)(ii) attached hereto, Heartland has and, subject to
the terms and conditions of this Agreement, will sell, assign, transfer,
convey and deliver, good and indefeasible title to (or a valid leasehold
interest in) all of the Heartland FCC Assets, the Heartland Leases and the
Portsmouth Non-FCC Assets transferred hereunder, free and clear of any and
all Encumbrances.
(iii) Organization and Qualification. Heartland is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of
its business requires such qualification. Heartland has all corporate and
other necessary power and authority, and the legal right, to own or to hold
under lease the properties it purports to own or hold under lease and to
transact the business it transacts and proposes to transact. Heartland has
all corporate and other necessary power and authority, and the legal right,
to execute and deliver this Agreement, and each of the other documents
contemplated hereby to which it is or is to be a party, and to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
(iv) Authorization. The execution, delivery and performance of this
Agreement by Heartland does not and will not (A) conflict with or result in
a breach of the terms, conditions or provisions of, (B) constitute a
default under, (C) result in the creation of any Encumbrance upon any of
the Heartland FCC Assets or Heartland Leases pursuant to, (D)
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<PAGE> 16
give any third party the right to modify, terminate or accelerate any
obligation under, (E) result in a violation of, or (F) require any
authorization, consent, approval, exemption or other action by or notice or
declaration or filing with any Governmental Authority or any other Person
(other than as has been duly made or obtained) pursuant to, the charter or
bylaws of Heartland, or any law, statute, rule or regulation to which
Heartland or any of its assets is subject, or any agreement, instrument,
order, judgment or decree to which Heartland or any of its assets is
subject.
(v) Compliance with Laws. Except as set forth on Schedule 8(a)(v),
Heartland is in compliance in all material respects with all laws, rules
and regulations applicable to the Portsmouth Non-FCC Assets, the Heartland
FCC Assets and Heartland Leases (including obtaining all authorizations,
consents, approvals, orders, licenses, exemptions from, and making all
filings or registrations or qualifications with, any Governmental
Authority), the noncompliance with which reasonably could have a material
adverse effect on such assets or the use thereof, and Heartland is in
compliance in all material respects with all provisions of applicable FCC
licenses including, without limitation, any build-out requirements and
other obligations, and with all leases, subleases and sublicenses to it of
MMDS or MDS channels comprising the Heartland FCC Assets or the Heartland
Leases, as the case may be. The FCC licenses and channel leases comprising
the Heartland FCC Assets and Heartland Leases conform in all material
respects to all applicable laws, ordinances, codes, licensing requirements,
rules and regulations, and Heartland has not received any notice to the
contrary. Except as set forth on Schedule 8(a)(v), there are no proceedings
or complaints or, to the best of Heartland's knowledge, investigations
pending before or by any Governmental Authority which could reasonably be
expected to have a material adverse effect on any FCC license or channel
lease comprising the Heartland FCC Assets or Heartland Leases. All
applications, reports, fees, filings and other submissions required under
the Communications Act relating to the Heartland FCC Assets and Heartland
Leases have been made or paid in a timely fashion.
(vi) FCC Licenses. Schedule 3(b) attached hereto correctly sets forth
all of the FCC licenses comprising the Heartland FCC Assets and correctly
sets forth the termination date of each such FCC license, and Schedule
4(b)(i) attached hereto identifies all FCC licenses and the owner thereof
with respect to each of the leased channels comprising the Heartland
Leases. Each FCC license comprising the Heartland FCC Assets or the
Heartland Leases allowing the construction or the operation of radio
station facilities by a lessor of channel capacity who is obligated to
lease the capacity of the radio station (in whole or in part) under a lease
agreement or management/option agreement listed on Schedules 3(b) or
4(b)(i) attached hereto is in full force and effect, and, to the best of
Heartland's knowledge, neither the licensee of such FCC license nor the FCC
license is subject to any complaint, investigation or proceeding by or
before the FCC, or on appeal from the FCC, which looks toward or would
result in the revocation, modification or non-renewal of the FCC license.
Except as set forth on Schedule 8(a)(vi), each of such FCC licenses for an
MMDS or MDS station has a construction completion date which has not
elapsed or, if such date has elapsed, a request to the FCC to extend that
date for at least six (6) months has been properly filed and is pending, or
an application for certification or completion of construction has been
properly filed. Except as set forth on Schedule 8(a)(vi), the FCC has
granted one or more
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<PAGE> 17
FCC licenses to each lessor of the channel capacity subject to the lease
and lease/option agreements comprising the Heartland FCC Assets or the
Heartland Leases allowing that lessor to construct and/or operate each
radio station required for the lessor to provide to lessee under each such
agreement executed by such lessor the channel capacity subject to that
agreement.
(vii) Litigation. Except as set forth on Schedule 8(a)(vii), there is
no action, suit, proceeding, arbitration, litigation or government
proceeding (including, without limitation, those related to FCC,
environmental or similar matters), or inquiry or investigation by any
Governmental Authority known to Heartland, in each case domestic or
foreign, pending against, or involving the Heartland FCC Assets, the
Heartland Leases or the Portsmouth Non-FCC Assets or the use thereof which
(A) questions the validity of this Agreement or any action taken or to be
taken by Heartland pursuant to or in connection with this Agreement, (B) is
required to be, and has not been, so disclosed in the filings with the SEC
by Heartland (and such proceedings as are summarized in such SEC filings
are accurately described in all material respects), or (C) could reasonably
be expected to materially adversely affect the FCC licenses or channel
leases comprising the Heartland FCC Assets and the Heartland Leases or the
operation of the channels and transmission facilities relating thereto.
(viii) No Violation, etc. Heartland has not violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of
Heartland relating to the Heartland FCC Assets, the Heartland Leases or the
Portsmouth Non-FCC Assets, and Heartland has not received notice of any
such violation. Heartland is not subject to, or has reason to believe it
may become subject to, any material liability (contingent or otherwise) or
corrective or remedial obligation arising under any environmental law, rule
or regulation relating to the Heartland FCC Assets, the Heartland Leases or
the Portsmouth Non-FCC Assets.
(ix) Copyright Matters. Heartland has submitted all requisite notices
(if any are required) under the Copyright Act for the carriage of all
Broadcast Stations as currently carried over any of the Heartland FCC
Assets. Heartland has filed in a timely manner with the Copyright Office
all required documents, instruments and statements of account and have
remitted payments of all required royalty fees with respect to compulsory
licenses provided for in Section III of the Copyright Act for the carriage
of broadcast signals in connection with the Heartland FCC Assets. Heartland
is not liable to any Person for copyright infringement under the Copyright
Act as a result of its business operations relating to the Heartland FCC
Assets and the Heartland Leases. There have been no inquiries received from
the Copyright Office or any other party, which questioned such statements
of account or any copyright royalty payments made by Heartland with respect
to the Heartland FCC Assets or Heartland Leases, and no claim, action or
demand for copyright infringement or for non-payment of royalties is
pending or, to the knowledge of Heartland, threatened against Heartland
with respect to the Heartland FCC Assets or Heartland Leases.
(x) Condition of Portsmouth Non-FCC Assets. Except as set forth on
Schedule
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<PAGE> 18
8(a)(x) and except for ordinary wear and tear, the Portsmouth Non-FCC
Assets are in good working order for the purpose for which they were
intended. All transmitters included in the Portsmouth Non-FCC Assets used
in the Portsmouth market meet all material applicable FCC acceptance and
frequency stability requirements.
(xi) No Interference Caused by Portsmouth Market. With respect to its
Portsmouth market, Heartland has not received any written complaint that
it, or any channels used in its Portsmouth market, is causing interference
to any reception, transmission or detection system.
(b) CS Wireless Representations and Warranties. As a material inducement to
Heartland and CAI to enter into this Agreement and effect the transactions
contemplated hereby, CS Wireless hereby represents and warrants that:
(i) Title to CPE and Radcliffe Non-FCC Assets. CS Wireless has and,
subject to the terms and conditions of this Agreement, will sell, assign,
transfer, convey and deliver, good and indefeasible title to the CPE and
Radcliffe Non-FCC Assets, free and clear of any and all Encumbrances.
(ii) Title to CS Wireless FCC Assets and CS Leases Transferred
Hereunder. Except as set forth on Schedule 8(b)(ii) attached hereto, CS
Wireless has and, subject to the terms and conditions of this Agreement,
will sell, assign, transfer, convey and deliver, good and indefeasible
title to (or a valid leasehold interest in) all of the CS Wireless FCC
Assets and CS Leases transferred hereunder, free and clear of any and all
Encumbrances.
(iii) Organization and Qualification. CS Wireless is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of
its business requires such qualification. CS Wireless has all corporate and
other necessary power and authority, and the legal right, to own or to hold
under lease the properties it purports to own or hold under lease and to
transact the business it transacts and proposes to transact. CS Wireless
has all corporate and other necessary power and authority, and the legal
right, to execute and deliver this Agreement, and each of the other
documents contemplated hereby to which it is or is to be a party, and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
(iv) Authorization. The execution, delivery and performance of this
Agreement by CS Wireless does not and will not (A) conflict with or result
in a breach of the terms, conditions or provisions of, (B) constitute a
default under, (C) result in the creation of any Encumbrance upon any of
the CPE, the Radcliffe Non-FCC Assets, the CS Leases or the CS Wireless FCC
Assets pursuant to, (D) give any third party the right to modify, terminate
or accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by
or notice or declaration or filing with any Governmental Authority or any
other Person (other than as has been duly made or obtained)
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<PAGE> 19
pursuant to, the charter or bylaws of CS Wireless, or any law, statute,
rule or regulation to which CS Wireless or any of its assets is subject, or
any agreement, instrument, order, judgment or decree to which CS Wireless
or any of its assets is subject.
(v) Compliance with Law. Except as set forth on Schedule 8(b)(v), CS
Wireless is in compliance in all material respects with all laws, rules and
regulations applicable to the CPE, the Radcliffe Non-FCC Assets, the CS
Leases and the CS Wireless FCC Assets (including obtaining all
authorizations, consents, approvals, orders, licenses, exemptions from, and
making all filings or registrations or qualifications with, any
Governmental Authority), the noncompliance with which reasonably could have
a material adverse effect on such assets or the use thereof, and CS
Wireless is in compliance in all material respects with all provisions of
applicable FCC licenses including, without limitation, any build-out
requirements and other obligations, and with all leases, subleases and
sublicenses to it of MMDS, MDS, or ITFS channels comprising the CS Wireless
FCC Assets and CS Leases, as the case may be. The FCC licenses and channel
leases comprising the CS Wireless FCC Assets and CS Leases conform in all
material respects to all applicable laws, ordinances, codes, licensing
requirements, rules and regulations, and CS Wireless has not received any
notice to the contrary. Except as set forth on Schedule 8(b)(v), there are
no proceedings or complaints or, to the best of CS Wireless' knowledge,
investigations pending before or by any Governmental Authority which could
reasonably be expected to have a material adverse effect on any FCC license
or channel lease comprising the CS Wireless FCC Assets or CS Leases. All
applications, reports, fees, filings and other submissions required under
the Communications Act relating to the CS Wireless FCC Assets and CS Leases
have been made or paid in a timely fashion.
(vi) FCC Licenses. Schedule 3(a)(ii) attached hereto correctly sets
forth all of the FCC licenses comprising any portion of the CS Wireless FCC
Assets and correctly sets forth the termination date of each such FCC
license, and Schedule 4(a)(i) identifies all FCC licenses and the owner
thereof with respect to each of the leased channels comprising the CS
Leases. Each FCC license comprising the CS Wireless FCC Assets or CS Leases
allowing the construction or the operation of radio station facilities by a
lessor of channel capacity who is obligated to lease the capacity of the
radio station (in whole or in part) under a lease agreement or
management/option agreement listed on Schedules 3(a)(ii) or 4(a)(i)
attached hereto is in full force and effect, and, to the best of CS
Wireless' knowledge, neither the licensee of such FCC license nor the FCC
license is subject to any complaint, investigation or proceeding by or
before the FCC, or on appeal from the FCC, which looks toward or would
result in the revocation, modification or non-renewal of the FCC license.
Except as set forth on Schedule 8(b)(vi), each of such FCC licenses for an
ITFS, MMDS or MDS station has a construction completion date which has not
elapsed or, if such date has elapsed, a request to the FCC to extend that
date for at least six (6) months has been properly filed and is pending, or
an application for certification of completion of construction has been
properly filed. Except as set forth on Schedule 8(b)(vi), the FCC has
granted one or more FCC licenses to each lessor of the channel capacity
subject to the lease and lease/option agreements comprising the CS Wireless
FCC Assets or the CS Leases allowing that lessor to construct and/or
operate each radio station required for the lessor to provide to lessee
under each such agreement executed by such lessor the channel capacity
subject to that agreement.
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<PAGE> 20
(vii) Litigation. Except as set forth on Schedule 8(b)(vii), there is
no action, suit, proceeding, arbitration, litigation or government
proceeding (including, without limitation, those related to FCC,
environmental or similar matters), or inquiry or investigation by any
Governmental Authority known to CS Wireless, in each case domestic or
foreign, pending against (or circumstances that may give rise to the same),
or involving the CPE, the CS Wireless FCC Assets, the CS Leases or the
Radcliffe Non-FCC Assets or the use thereof which (A) questions the
validity of this Agreement or any action taken or to be taken by CS
Wireless pursuant to or in connection with this Agreement, (B) is required
to be, and has not been, so disclosed in the filings with the SEC by CS
Wireless (and such proceedings as are summarized in such SEC filings are
accurately described in all material respects), or (C) could reasonably be
expected to materially adversely affect the FCC licenses or channel leases
comprising the CS Wireless FCC Assets or CS Leases or the operation of the
channels and transmission facilities relating thereto.
(viii) No Violation, etc. CS Wireless has not violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of
CS Wireless relating to the CPE, the CS Wireless FCC Assets, the CS Leases
or the Radcliffe Non-FCC Assets, and CS Wireless has not received notice of
any such violation. CS Wireless is not subject to, or has reason to believe
it may become subject to, any material liability (contingent or otherwise)
or corrective or remedial obligation arising under any environmental law,
rule or regulation relating to the CPE, the CS Wireless FCC Assets, the CS
Leases or the Radcliffe Non-FCC Assets.
(ix) Copyright Matters. CS Wireless has submitted all requisite
notices (if any are required) under the Copyright Act for the carriage of
all Broadcast Stations as currently carried over any of the CS Wireless FCC
Assets. CS Wireless has filed in a timely manner with the Copyright Office
all required documents, instruments and statements of account and have
remitted payments of all required royalty fees with respect to compulsory
licenses provided for in Section III of the Copyright Act for the carriage
of broadcast signals in connection with the CS Wireless FCC Assets. CS
Wireless is not liable to any Person for copyright infringement under the
Copyright Act as a result of its business operations relating to the CS
Wireless FCC Assets and CS Leases. There have been no inquiries received
from the Copyright Office or any other party, which questioned such
statements of account or any copyright royalty payments made by CS Wireless
with respect to the CS Wireless FCC Assets or CS Leases, and no claim,
action or demand for copyright infringement or for non-payment of royalties
is pending or, to the knowledge of CS Wireless, threatened against CS
Wireless with respect to the CS Wireless FCC Assets or CS Leases.
(x) Condition of CPE and Radcliffe Non-FCC Assets. Except as set forth
on Schedule 8(b)(x) and except for ordinary wear and tear, the CPE and the
Radcliffe Non-FCC Assets are in good working order for the purpose for
which they were intended. All transmitters included in the Radcliffe
Non-FCC Assets used in the Radcliffe market meet all material applicable
FCC acceptance and frequency stability requirements.
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<PAGE> 21
(xi) No Interference Caused by Radcliffe Market, CS Wireless FCC
Assets or CS Leases. With respect to its Radcliffe market, CS Wireless has
not received any written complaint that it, or any channels used in its
Radcliffe market or otherwise comprising CS Wireless FCC Assets and CS
Leases, is causing interference to any reception, transmission or detection
system.
(c) As a material inducement to Heartland and CS Wireless to enter into
this Agreement and effect the transactions contemplated hereby, CAI hereby
represents and warrants that as of the date hereof:
(i) Organization and Qualification. CAI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified as a foreign
corporation and in good standing in each other jurisdiction in which the
ownership, lease or operation of its property and assets or the conduct of
its business requires such qualification. CAI has all corporate and other
necessary power and authority, and the legal right, to own or to hold under
lease the properties it purports to own or hold under lease and to transact
the business it transacts and proposes to transact. CAI has all corporate
and other necessary power and authority, and the legal right, to execute
and deliver this Agreement, and each of the other documents contemplated
hereby to which it is or is to be a party, and to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated
hereby and thereby.
(ii) Authorization. The execution, delivery and performance of this
Agreement by CAI does not and will not (A) conflict with or result in a
breach of the terms, conditions or provisions of, (B) constitute a default
under, (C) give any third party the right to modify, terminate or
accelerate any obligation under, (D) result in a violation of, of (E)
require any authorization, consent, approval, exemption or other action by
or notice or declaration or filing with any Governmental Authority or any
other Person (other than as has been duly made or obtained) pursuant to,
the charter or bylaws of CAI, or any law, statute, rule or regulation to
which CAI or any of its assets in subject, or any agreement, instrument,
order, judgment or decree to which CAI or any of its assets is subject.
(iii) Litigation. Except as set forth on Schedule 8(c)(iii), there is
no action, suit, proceeding, arbitration, litigation or government
proceeding (including, without limitation, those related to FCC,
environmental or similar matters), or inquiry or investigation by any
Governmental Authority known to CAI, in each case domestic or foreign,
pending against or involving CAI which (A) questions the validity of this
Agreement or any action taken or to be taken by CAI pursuant to or in
connection with this Agreement or (B) is required to be, and has not been,
so disclosed in the filings with the SEC by CAI (and such proceedings as
are summarized in such SEC filings are accurately described in all material
respects).
(iv) No Violation, etc. CAI has not violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of
CAI, and CAI has not received notice of any such violation. CAI
18
<PAGE> 22
is not subject to, or has reason to believe it may become subject to, any
material liability (contingent or otherwise) or corrective or remedial
obligation arising under any environmental law, rule or regulation.
(v) Investment Representation. CAI is purchasing the CS Wireless
Common Stock for its own account and not with a view to the public
distribution thereof. CAI acknowledges that the CS Wireless Common Stock
has not been registered under the Securities Act , and that such shares may
be resold only if registered pursuant to the provisions of the Securities
Act, or if an exemption from registration is available.
Section 9. Covenants of All of the Parties.
(a) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially reasonable
efforts to bring about the fulfillment of the conditions precedent to the
Stage I Closing.
(ii) Subject to the terms and conditions provided herein, each of the
parties hereto agrees to (A) use commercially reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable law and regulation to
consummate and make effective the Stage I Transactions in accordance with
the terms of this Agreement, perform each of its obligations hereunder,
including without limitation, the obligations of the parties set forth in
Section 6 hereof, and (B) cooperate following the Stage I Closing in the
taking of any actions necessary or desirable in order to effect the
purposes of this Agreement with respect to the Stage I Transactions.
(iii) Each party hereto shall promptly inform each of the other
parties hereto of any circumstance or set of circumstances which could
reasonably be expected to impair such party's ability to perform any of its
obligations under this Agreement.
(b) Unless otherwise indicated:
(i) Each of the parties hereto agrees to use commercially reasonable
efforts to bring about the fulfillment of the conditions precedent to the
Stage II Closing.
(ii) Subject to the terms and conditions provided herein, each of the
parties hereto agrees to (A) use commercially reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable law and regulation to
consummate and make effective the Stage II Transactions in accordance with
the terms of this Agreement and (B) cooperate following the Stage II
Closing in the taking of any actions necessary or desirable in order to
effect the purposes of this Agreement with respect to the Stage II
Transactions.
(iii) Each party hereto shall promptly inform each of the other
parties hereto of any circumstance or set of circumstances which could
reasonably be expected to impair such party's ability to perform any of its
obligations under this Agreement.
19
<PAGE> 23
Section 10. Covenants of Heartland. In addition to the covenants set forth
in Section 9 above:
(a) Between the date hereof and the Stage I Closing, Heartland shall:
(i) Retain and safeguard the CS Wireless Common Stock held by it, and
maintain such CS Wireless Common Stock free and clear of any and all
Encumbrances and shall not allow, permit or suffer to exist any
Encumbrance, sale, assignment, lease, waiver of rights or granting of a
proxy with respect to, voting agreement or trust affecting other than the
Stockholders' Agreement, or otherwise transfer or dispose of the CS
Wireless Common Stock held by Heartland.
(ii) Within three business days of its commencement of a case under
the Bankruptcy Code, if prior thereto the Stage I Closing has not occurred,
(a) file with the bankruptcy court a motion (together with appropriate
supporting papers) requesting the bankruptcy court to enter, an order in
form and substance reasonably acceptable to CAI and CS Wireless (1)
authorizing Heartland to assume this Agreement, (2) approving the
transactions contemplated herein, and (3) authorizing Heartland to assume
the BTA Lease Agreement, and (b) seek a hearing on such motion to be held
within 20 days of the date of the filing thereof.
(b) Between the date hereof and the Stage II Closing, Heartland shall:
(i) Use its reasonable efforts (A) to cause to be maintained in full
force and effect, and (B) to cause the holders to renew when required to
prevent the lapse of, all FCC-issued licenses, conditional licenses and
authorizations comprising any portion of the Heartland FCC Assets or
Heartland Leases.
(ii) Use reasonable efforts to perform each and every obligation of
the lessee under any and all excess channel capacity lease agreements or
MDS transmission capacity lease agreements comprising any portion of the
Heartland FCC Assets or Heartland Leases.
(iii) Use reasonable efforts to cause each of its lessors to prosecute
in good faith and diligently pursue each MDS application and ITFS
application for facilities subject to a lease agreement with Heartland that
comprise any portion of the Heartland FCC Assets or Heartland Leases.
(iv) Operate the Heartland FCC Assets in the ordinary course of
business in accordance with past practices for such operation (except where
such conduct would conflict with any covenant or other obligation of
Heartland under this Agreement).
(v) Promptly notify CAI and CS Wireless in writing of any unusual or
material developments with respect to the business or operations of any of
the Heartland FCC Assets or Heartland Leases and of any material changes in
any of the information contained in Heartland's representation and
warranties contained in this Agreement.
20
<PAGE> 24
(vi) Subsequent to its commencement of a case under the Bankruptcy
Code, seek bankruptcy court approval of, and use its best efforts to
obtain, an order in form and substance reasonably acceptable to CAI and CS
Wireless (1) authorizing the assumption of this Agreement, (2) approving
the transactions contemplated herein, and (3) authorizing Heartland to
assume the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, Heartland shall not
allow, permit or suffer to exist:
(i)The creation, assumption or permitting to exist of any Encumbrance,
other than the lien for taxes not yet due and payable, on any of the
Heartland FCC Assets or Heartland Leases.
(ii) The sale, assignment, lease, waiver of rights with respect to,
sublease or other transfer or disposal of any and all FCC-issued licenses,
conditional licenses and authorizations, or the lessee's leasehold interest
in any excess channel capacity lease agreements or MDS transmission
capacity lease agreements comprising any portion of the Heartland FCC
Assets or Heartland Leases.
(iii) Any material action, or material failure to act under excess
channel capacity lease agreements or MDS transmission capacity lease
agreements comprising any portion of the Heartland FCC Assets or Heartland
Leases, which would constitute a default or a potential default thereunder
(assuming that any requirements of notice or lapse of time have occurred).
Section 11. Covenants of CS Wireless. In addition to the covenants set
forth in Section 9 above:
(a) Between the date hereof and the Stage I Closing,
(i) CS Wireless shall retain and safeguard the CS Wireless Non-FCC
Assets and the CS Wireless FCC Assets held by it, and maintain such CS
Wireless Non-FCC Assets free and clear of all Encumbrances and shall not
allow, permit or suffer to exist any Encumbrance, sale, assignment, lease,
waiver of rights with respect to, or otherwise transfer or dispose of the
CS Wireless Non-FCC Assets and the CS Wireless FCC Assets held by CS
Wireless; and
(ii) Within three business days of its commencement of a case under
the Bankruptcy Code, if prior thereto the Stage I Closing has not occurred,
(a) file with the bankruptcy court a motion (together with appropriate
supporting papers) requesting the bankruptcy court to enter, an order in
form and substance reasonably acceptable to Heartland and CAI (1)
authorizing CS Wireless to assume this Agreement, (2) approving the
transactions contemplated herein, and (3) authorizing CS Wireless to assume
the BTA Lease Agreement, and (b) seek a hearing on such motion to be held
within 20 days of the date of the filing thereof.
21
<PAGE> 25
(b) Between the date hereof and the Stage II Closing, CS Wireless shall:
(i) Use its reasonable efforts (A) to cause to be maintained in full
force and effect, and (B) to cause the holders to renew when required to
prevent the lapse of, all FCC-issued licenses, conditional licenses and
authorizations comprising any portion of the CS Wireless FCC Assets or CS
Leases.
(ii) Use reasonable efforts to perform each and every obligation of
the lessee under any and all excess channel capacity lease agreements or
MDS transmission capacity lease agreements comprising any portion of the CS
Wireless FCC Assets or CS Leases.
(iii) Use reasonable efforts to cause each of its lessors to prosecute
in good faith and diligently pursue each MDS application and ITFS
application for facilities subject to a lease agreement with CS Wireless
that comprise any portion of the CS Wireless FCC Assets or CS Leases.
(iv) Operate the CS Wireless FCC Assets in the ordinary course of
business in accordance with past practices for such operation (except where
such conduct would conflict with any covenant or other obligation of CS
Wireless under this Agreement).
(v) Promptly notify Heartland and CAI in writing of any unusual or
material developments with respect to the business or operations of any of
the CS Wireless FCC Assets or CS Leases and of any material changes in any
of the information contained in CS Wireless' representation and warranties
contained in this Agreement.
(vi) Subsequent to its commencement of a case under the Bankruptcy
Code, seek bankruptcy court approval of, and use its best efforts to
obtain, an order in form and substance reasonably acceptable to Heartland
(1) authorizing the assumption of this Agreement, (2) approving the
transactions contemplated herein, and (3) authorizing CS Wireless to assume
the BTA Lease and Option Agreement.
(c) Between the date hereof and the Stage II Closing, CS Wireless shall not
allow, permit or suffer to exist:
(i) The creation, assumption or permitting to exist of any
Encumbrance, other than the lien for taxes not yet due and payable, on any
of the CS Wireless FCC Assets or CS Leases. (ii) The sale, assignment,
lease, waiver of rights with respect to, sublease or other transfer or
disposal of any and all FCC-issued licenses, conditional licenses and
authorizations, or the lessee's leasehold interest in any excess channel
capacity lease agreements or MDS transmission capacity lease agreements
comprising any portion of the CS Wireless FCC Assets or CS Leases.
(iii) Any material action, or material failure to act under excess
channel capacity lease agreements or MDS transmission capacity lease
agreements comprising any portion
22
<PAGE> 26
of the CS Wireless FCC Assets or CS Leases, which would constitute a
default or a potential default of the lessee thereunder (assuming that any
requirements of notice or lapse of time have occurred).
Section 12. Releases and Indemnification. As further consideration for the
transactions contemplated hereby, the parties agree as follows:
(a) At the Stage I Closing, without further action by the parties, CS
Wireless shall release and forever discharge Heartland, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees, successors and
assigns from any and all actions claims, liabilities, damages, demands,
responsibility and accountability of every nature whatsoever ("Claims"), whether
known or unknown, which CS Wireless ever had, then has or may have for, upon or
by reason of any matter, cause or thing whatsoever against Heartland arising out
of that certain Administrative Services Agreement dated as of February 23, 1996
(the "Services Agreement") by and between Heartland and CS Wireless, including,
without limitation, CS Wireless Systems, Inc. v. Heartland Wireless
Communications, Inc.; Cause No. 98-CI-15104; 225th District Court, Bexar County,
Texas, from the beginning of the world to the Stage I Closing Date, or which CS
Wireless may from and after the Stage I Closing Date have against Heartland by
reason of any matter, act, omission, cause or event arising solely out of the
Services Agreement, which has occurred or which has been done or suffered to be
done before the Stage I Closing Date. CS Wireless hereby agrees to withdraw,
with prejudice, CS Wireless Systems, Inc. v. Heartland Wireless Communications,
Inc.; Cause No. 98-CI-15104; 225th District Court, Bexar County, Texas on or
before the Stage I Closing.
(b) At the Stage I Closing, without further action by the parties,
Heartland shall release and forever discharge CS Wireless, its subsidiaries,
affiliates, stockholders, officers, directors, agents, employees, successors and
assigns from any and all Claims, whether known or unknown, which Heartland ever
had, then has or may have for, upon or by reason of any matter, cause or thing
whatsoever against CS Wireless arising out of the Services Agreement and any
Claim capable of being asserted in connection therewith from the beginning of
the world to the Stage I Closing Date, or which Heartland may hereafter have
against CS Wireless by reason of any matter, act, omission, cause or event
arising solely out of the Services Agreement, which has occurred or which has
been done or suffered to be done before the Stage I Closing Date.
(c) At the Stage I Closing, without further action by the parties, each of
the parties hereto shall release and forever discharges the other parties
hereto, their respective subsidiaries, affiliates, stockholders, officers,
directors, agents, employees, successors and assigns from any and all Claims,
whether known or unknown, which each such party ever had, then has or may have
for, upon or by reason of any matter, cause or thing whatsoever against the
other parties hereto arising solely out of the Participation Agreement or the
Stockholders' Agreement from the beginning of the world to the Stage I Closing
Date, or which each such party may hereafter have against the other parties
hereto by reason of any matter, act, omission, cause or event arising solely out
of the Participation Agreement or the Stockholders' Agreement, which has
occurred or which has been done or suffered to be done before the date hereof.
(d) CS Wireless acknowledges and ratifies the terms and conditions of that
certain Separation Agreement dated as of October 19, 1998 (the "Separation
Agreement") by and between
23
<PAGE> 27
Frank H. Hosea ("Hosea") and CS Wireless. CS Wireless acknowledges that (i)
Hosea has been employed by Heartland as Senior Vice President - Video Operations
and (ii) Hosea's employment by Heartland does not violate or breach the
Non-Compete Restrictions as defined and set forth in Section 5 of the Separation
Agreement or any non-disclosure covenants contained in Paragraph 9(a) of the
Employment Agreement dated as of April 2, 1997 or the Non-Disclosure Agreement
dated as of April 2, 1997 between Hosea and CS Wireless. Notwithstanding
anything to the contrary set forth in this Section 12(d), CS Wireless'
acknowledgment set forth herein shall not modify or constitute a waiver of CS
Wireless' rights to enforce Hosea's non-disclosure covenants relating to any
person or entity other than Heartland or its existing wholly-owned subsidiaries
set forth in Section 2 of the Separation Agreement or Hosea's obligations
relating to any person or entity other than Heartland or its existing
wholly-owned subsidiaries under the Employment Agreement and Non-Disclosure
Agreement referred to above CS Wireless expressly agrees to assume the
Separation Agreement described above in any bankruptcy proceeding filed by or
against CS Wireless.
(e) Notwithstanding anything to the contrary, CAI shall indemnify and hold
Heartland harmless from any and all Claims arising from or in connection with
CAI's purchase from Heartland of the CS Wireless Common Stock at the Stage I
Closing pursuant to Section 2 of this Agreement, including any such Claims
arising from, in connection with, or related to any subsequent disposition or
transfer of the CS Wireless Common Stock by CAI; provided, however, any
liability of CAI to Heartland arising by operation of this Section 12(e) arising
from, in connection with, or related to a subsequent disposition or transfer of
the CS Wireless Common Stock by CAI to CS Wireless shall be deemed fully
satisfied by CAI with the return to CS Wireless of any and all consideration
received by CAI from CS Wireless for such disposition or transfer, and
thereafter, Heartland shall no longer have any claim for indemnification against
CAI under this Section 12(e).
(f) In the event CS Wireless commences a bankruptcy proceeding, CAI shall
use its best efforts in its capacity as a stockholder of CS Wireless, and shall
cause the CAI Directors and CAI Independent Directors (each as defined in the
Stockholders' Agreement) to use their best efforts, recognizing and taking into
consideration the various fiduciary duties owed by such directors to various CS
Wireless constituencies, to cause (i) CS Wireless to fulfill its obligations to
the Heartland Directors, the Heartland Independent Directors and Hosea, and (ii)
CS Wireless to treat its indemnity obligations to the Heartland Directors, the
Heartland Independent Directors and Hosea no less favorably than CS Wireless
treats its indemnity obligations to any other person who has served, is serving
or may hereafter serve as a member of the board of directors of CS Wireless.
Section 13. Termination.
(a) This Agreement may be terminated at any time prior to the Stage I
Closing by mutual written consent of the parties hereto.
(b) This Agreement shall terminate (without further action or notice (in
writing or otherwise) by any of the parties hereto), unless CAI and Heartland
shall have extended in writing date or the period set forth in this Section 13
(or any of the extended dates or periods), if the Stage I Closing shall not have
occurred by December 4, 1998.
(c) In the event of a termination of this Agreement in accordance with this
Section 13,
24
<PAGE> 28
this Agreement shall forthwith become void and of no further force and effect,
and there shall be no liability hereunder on the part of any party or its
affiliates, directors, officers, shareholders, agents or other representatives;
provided, however, that Sections 2(b), 13, 15 and 16, inclusive, shall survive
any termination of this Agreement, and (ii) nothing herein shall relieve any
party from liability for any breach of this Agreement; provided further,
however, that if the Stage I Closing shall have occurred prior to the
termination of this Agreement, Section 12 shall survive and nothing contained
herein shall limit, abridge or otherwise affect, or relieve any party from, the
continuing rights and obligations arising out of such Stage I Closing.
Section 14. Further Assurances. The parties hereto agree to take all
actions necessary or advisable, in the opinion of the party taking such action,
to effect the terms of the provisions hereof.
Section 15. No Waiver. Failure by any party hereto to insist on strict
performance or observance of any provision of this Agreement or to exercise any
right or remedy shall not be construed as a waiver of any right or remedy with
respect to any existing or subsequent breach or default.
Section 16. Miscellaneous.
(a) Entire Agreement. This Agreement and the exhibits and schedules
attached hereto and the BTA Lease and Option Agreement, as amended, constitute
the entire agreement among the parties with respect to the subject matter hereof
and supersedes any and all previous agreements, representations and
understandings among the parties hereto with respect to such matters whether
oral or in writing.
(b) Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of Delaware, without regard to the
principles of conflicts of laws thereof.
(c) Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validly or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
(d) No Third Party Beneficiaries. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. Except for the persons not parties to this Agreement who are
being released or indemnified pursuant to Section 12, nothing in this Agreement
shall create or be deemed to create any third party beneficiary rights in any
person not party to this Agreement, including, without limitation, (i) any
receiver appointed for any party hereto, or (ii) any trustee, responsible
officer or other person or entity appointed to manage business or property of
any party hereto in such party's case under any chapter of the Bankruptcy Code.
(e) Amendments. This Agreement may be amended, supplemented or modified,
and any provision hereof may be waived, only pursuant to a written instrument
making specific reference to this Agreement signed by each of the parties
hereto.
(f) Expenses. Each of the parties hereto shall be solely responsible for
its fees and
25
<PAGE> 29
expenses incurred in connection with the negotiation, execution, delivery and
performance of this Agreement and the transactions contemplated hereby.
(g) Counterparts. This Agreement may be executed by facsimile and in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(h) Public Announcements. The parties hereto will agree upon the timing and
content of an initial press release to be issued describing the transactions
contemplated by this Agreement, and will not make any public announcement
thereof prior to reaching such agreement unless required to do so by applicable
law or regulation.
(i) Names, Captions, etc. The name assigned this Agreement and the section
captions used herein are for convenience or reference only and shall not affect
the interpretation or construction thereof.
(j) No Strict Construction. The parties hereto have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of authorship of
any of the provisions of this Agreement.
(k) Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any provision of this Agreement was not
performed in accordance with its specific terms or was otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce the terms and
provisions hereof in any state or federal court in the State of Delaware, this
being in addition to any other remedy to which they are entitled at law or in
equity.
[The balance of this page intentionally left blank.]
26
<PAGE> 30
IN WITNESS WHEREOF, the parties hereto have executed this Agreement through
their duly authorized representatives on the day and year first above written.
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By: /s/ MARJEAN HENDERSON
-------------------------------------
Name: Marjean Henderson
Title: Sr. VP & CFO
CS WIRELESS SYSTEMS, INC.
By: /s/ DAVID E. WEBB
-------------------------------------
Name: David E. Webb
Title: Chief Executive Officer
CAI WIRELESS SYSTEMS, INC.
By: /s/ ILLEGIBLE
-------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
27
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME UNDER WHICH
SUBSIDIARY STATE OF INCORPORATION SUBSIDIARY DOES BUSINESS
---------- ---------------------- ------------------------
<S> <C> <C>
Heartland Cable Television, Inc. Delaware Heartland Cable Television, Inc.
Nucentrix Internet Services, Inc. Delaware Nucentrix Internet Services, Inc.
Nucentrix Spectrum Resources, Inc. Delaware Nucentrix Spectrum Resources, Inc.
</TABLE>
Note: We have omitted 34 wholly-owned subsidiaries which carry on the same line
of business as Nucentrix. All of these subsidiaries operate in the United
States.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Nucentrix Broadband Networks, Inc.:
(formerly Heartland Wireless Communications, Inc.)
We consent to incorporation by reference in the registration statement (No.
333-79913) on Form S-8 of Nucentrix Broadband Networks, Inc. of our report dated
February 18, 2000, relating to the consolidated balance sheets of Nucentrix
Broadband Networks, Inc. (formerly Heartland Wireless Communications, Inc.) and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the periods
from January 1, 1999 to April 1, 1999, the effective date of the reorganization
discussed in the paragraph below (the "Effective Date"), and from the Effective
Date to December 31, 1999, and for each of the years in the two-year period
ended December 31, 1998, and the related financial statement schedule, which
report appears in the December 31, 1999 annual report on Form 10-K of Nucentrix
Broadband Networks, Inc.
Our report states that upon consummation of a prenegotiated Plan of
Reorganization under Chapter 11 of the United States Bankruptcy Code on the
Effective Date, the Company adopted fresh start reporting in accordance with
American Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. As
a result of the application of fresh start reporting, the consolidated financial
statements of Nucentrix Broadband Networks, Inc. (formerly Heartland Wireless
Communications, Inc.) and subsidiaries for the period from the Effective Date to
December 31, 1999 are presented on a different cost basis than those for periods
prior to the Effective Date, and accordingly, are not directly comparable.
KPMG LLP
Dallas, Texas
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999<F1>
<PERIOD-END> DEC-31-1999
<CASH> 28,932
<SECURITIES> 251
<RECEIVABLES> 2,276
<ALLOWANCES> 407
<INVENTORY> 0
<CURRENT-ASSETS> 32,687
<PP&E> 55,993
<DEPRECIATION> 0
<TOTAL-ASSETS> 168,811
<CURRENT-LIABILITIES> 20,424
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 130,035
<TOTAL-LIABILITY-AND-EQUITY> 130,045
<SALES> 52,009
<TOTAL-REVENUES> 52,009
<CGS> 0
<TOTAL-COSTS> 69,059
<OTHER-EXPENSES> (1,643)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 826
<INCOME-PRETAX> (17,244)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,244)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,244)
<EPS-BASIC> (1.71)
<EPS-DILUTED> (1.71)
<FN>
<F1>THIS FINANCIAL DATA SCHEDULE INCLUDES INFORMATION FOR THE SUCCESSOR ENTITY
FROM THE EFFECTIVE DATE (APRIL 1, 1999) TO DECEMBER 31, 1999.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999<F1>
<PERIOD-END> APR-01-1999
<CASH> 27,590
<SECURITIES> 1,011
<RECEIVABLES> 3,826
<ALLOWANCES> 348
<INVENTORY> 0
<CURRENT-ASSETS> 33,931
<PP&E> 61,909
<DEPRECIATION> 0
<TOTAL-ASSETS> 182,913
<CURRENT-LIABILITIES> 18,818
<BONDS> 310,456
0
0
<COMMON> 20
<OTHER-SE> (172,710)
<TOTAL-LIABILITY-AND-EQUITY> 182,913
<SALES> 18,466
<TOTAL-REVENUES> 18,466
<CGS> 0
<TOTAL-COSTS> 23,859
<OTHER-EXPENSES> (425)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> (7,600)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 173,783
<CHANGES> 0
<NET-INCOME> 166,183
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>THIS FINANCIAL DATA SCHEDULE INCLUDES INFORMATION FOR THE PREDECESSOR ENTITY
FROM JANUARY 1, 1999 TO THE EFFECTIVE DATE (APRIL 1, 1999).
</FN>
</TABLE>
