<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number 0-23694
--------------
Nucentrix Broadband Networks, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 73-1435149
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
200 Chisholm Place, Suite 200, Plano, Texas 75075
--------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 423-9494
---------------------
N/A
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check [X] whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares Outstanding
Class as of October 31, 2000
----- ----------------------
<S> <C>
Common Stock, $.001 par value 10,288,935
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 26,217 $ 28,932
Restricted assets - investment in debt securities ......... 251 251
Subscriber receivables, net of allowance for
doubtful accounts of $244 and $407, respectively ........ 991 1,342
Other receivables ......................................... 835 934
Prepaid expenses and other ................................ 1,514 1,228
----------- -----------
Total current assets ........................... 29,808 32,687
Systems and equipment, net ........................................ 45,479 55,993
License and leased license investment, net ........................ 70,945 73,310
Note and lease receivables ........................................ 2,849 3,212
Other assets, net ................................................. 3,546 3,609
----------- -----------
Total assets ................................... $ 152,627 $ 168,811
=========== ===========
Current liabilities:
Accounts payable and accrued expenses ..................... $ 17,505 $ 18,579
Current portion of long-term debt ......................... 1,972 1,845
----------- -----------
Total current liabilities ...................... 19,477 20,424
----------- -----------
Long-term debt, less current portion .............................. 13,454 14,671
Other long-term liabilities ....................................... 3,610 3,671
Commitments and contingencies (note 7)
Stockholders' equity:
Preferred stock, $.01 par value; 15,000,000 shares
authorized; none issued ............................. -- --
Common stock, $.001 par value; 30,000,000 shares
authorized, 10,228,735 and 10,099,717 shares
outstanding at September 30, 2000, and
December 31,1999, respectively ....................... 10 10
Additional paid-in capital ................................ 148,939 147,279
Accumulated deficit ....................................... (32,863) (17,244)
----------- -----------
Total stockholders' equity ..................... 116,086 130,045
----------- -----------
Total liabilities and stockholders' equity ..... $ 152,627 $ 168,811
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
NUCENTRIX BROADBAND NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR
(NOTE 2)
----------------------------------------
THREE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Revenues .................................... $ 14,697 $ 17,592
Operating expenses:
System operations ...................... 6,984 8,042
Selling, general and administrative .... 8,655 8,394
Depreciation and amortization .......... 6,508 6,467
------------------ ------------------
Total operating expenses ............ 22,147 22,903
Operating loss ...................... (7,450) (5,311)
Other income (expense):
Interest income ........................ 519 376
Interest expense ....................... (339) (272)
Other income (expense), net ............ 824 (179)
------------------ ------------------
Total other income (expense) ........ 1,004 (75)
------------------ ------------------
Loss before reorganization costs
and extraordinary item ............ (6,446) (5,386)
Reorganization costs ........................ -- (459)
------------------ ------------------
Loss before extraordinary item ......... (6,446) (5,845)
Extraordinary item:
Gain on debt forgiveness ............... -- --
------------------ ------------------
Net income (loss) ........................... $ (6,446) $ (5,845)
================== ==================
Net loss per common share -
basic and diluted ..................... $ (0.63) $ (0.58)
================== ==================
Weighted average shares outstanding -
basic and diluted ........................... 10,185 10,060
================== ==================
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
--------------------------------------- ------------------
NINE MONTHS PERIOD FROM PERIOD FROM
ENDED EFFECTIVE DATE TO JANUARY 1, 1999,
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 TO EFFECTIVE DATE
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues ....................................$ 46,838 $ 34,865 $ 18,466
Operating expenses:
System operations ...................... 21,645 16,229 8,599
Selling, general and administrative .... 25,197 17,246 9,156
Depreciation and amortization .......... 20,821 12,249 6,104
------------------ ------------------ ------------------
Total operating expenses ............ 67,663 45,724 23,859
Operating loss ...................... (20,825) (10,859) (5,393)
Other income (expense):
Interest income ........................ 1,512 744 423
Interest expense ....................... (1,039) (581) (321)
Other income (expense), net ............ 4,733 521 2
------------------ ------------------ ------------------
Total other income (expense) ........ 5,206 684 104
------------------ ------------------ ------------------
Loss before reorganization costs
and extraordinary item ............ (15,619) (10,175) (5,289)
Reorganization costs ........................ -- (602) (2,311)
------------------ ------------------ ------------------
Loss before extraordinary item ......... (15,619) (10,777) (7,600)
Extraordinary item:
Gain on debt forgiveness ............... -- -- 173,783
------------------ ------------------ ------------------
Net income (loss) ...........................$ (15,619) $ (10,777) $ 166,183
================== ================== ==================
Net loss per common share -
basic and diluted .....................$ (1.54) $ (1.07) N/A
================== ================== ==================
Weighted average shares outstanding -
basic and diluted ........................... 10,150 10,035 N/A
================== ================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
(NOTE 2) (NOTE 2)
------------------------------------------ ------------------
PERIOD FROM PERIOD FROM
NINE MONTHS ENDED EFFECTIVE DATE TO JANUARY 1, 1999,
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 TO EFFECTIVE DATE
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................... $ (15,619) $ (10,777) $ 166,183
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Gain on forgiveness of debt .................... -- -- (173,783)
Non-cash stock compensation .................... 112 -- --
Depreciation and amortization .................. 20,821 12,249 6,104
Gain on sale of assets ......................... (4,846) -- --
Changes in assets and liabilities:
Restricted cash ............................. -- 385 --
Subscriber and other receivables ............ 450 624 (954)
Prepaid expenses and other .................. 272 123 (158)
Accounts payable, accrued expenses and
other liabilities ........................... (1,240) 1,248 5,057
------------------ ------------------ ------------------
Net cash provided by (used in)
operating activities ..................... (50) 3,852 2,449
------------------ ------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of assets ........................ 5,330 -- --
Purchases of systems and equipment .................. (5,787) (7,715) (5,081)
Expenditures for licenses and leased licenses ....... (2,749) (46) (16)
Proceeds from note receivable ....................... 363 158 138
------------------ ------------------ ------------------
Net cash used in investing
activities ............................... (2,843) (7,603) (4,959)
------------------ ------------------ ------------------
Cash flows from financing activities:
Payments on short-term borrowings and notes
payable ............................................. (227) (224) (241)
Payments on long-term debt .......................... (1,097) (717) (335)
Proceeds from exercise of stock options ............. 1,502 1,056 --
------------------ ------------------ ------------------
Net cash provided by (used in)
financing activities ..................... 178 115 (576)
------------------ ------------------ ------------------
Net decrease in cash and cash equivalents ................ (2,715) (3,636) (3,086)
Cash and cash equivalents at beginning of period ......... 28,932 27,590 30,676
------------------ ------------------ ------------------
Cash and cash equivalents at end of period ............... $ 26,217 $ 23,954 $ 27,590
================== ================== ==================
Cash paid for interest ................................... $ 1,022 $ 503 $ 391
================== ================== ==================
Cash paid for reorganization costs ....................... $ 535 $ 820 $ 2,311
================== ================== ==================
Non-cash activities:
Capital leases and other ............................ $ 294 -- --
================== ================== ==================
Common stock issued for channel license ............. $ 45 -- --
================== ================== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
NUCENTRIX BROADBAND NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
(1) Description of Business
Nucentrix Broadband Networks, Inc. (the "Company") provides broadband
wireless services in medium and small markets across Texas and the
Midwestern United States. The Company controls up to 196 megahertz
("MHz") of radio spectrum in the 2.1 gigahertz ("GHz") and 2.5 - 2.7
GHz band licensed by the Federal Communications Commission ("FCC") in
94 markets (including four markets for which the Company has entered
into a definitive agreement or letter of intent to acquire). This
spectrum commonly is referred to as Multipoint Distribution Service or
"MDS," Multichannel Multipoint Distribution Service or "MMDS" and
Instructional Television Fixed Service or "ITFS." The Company currently
provides high-speed wireless Internet access service under temporary
developmental FCC licenses in two markets.
At October 31, 2000, the Company provided wireless subscription
television service in 58 markets, including an offering of up to 185
digital channels from DIRECTV, Inc. and its distributors in over 50
markets.
(2) Financial Restructuring
On December 4, 1998, the Company filed a voluntary, pre-negotiated Plan
of Reorganization (the "Plan") under Chapter 11 of the U.S. Bankruptcy
Code ("Bankruptcy Code"). On March 15, 1999, the U.S. Bankruptcy Court
for the District of Delaware confirmed the Plan, and the Company
consummated the Plan on April 1, 1999 (the "Effective Date").
The Company adopted Fresh Start Reporting as of the Effective Date, in
accordance with American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"). Fresh Start
Reporting resulted in a new reporting entity with assets and
liabilities adjusted to estimated fair value and beginning retained
earnings set to zero. Liabilities subject to compromise were adjusted
to zero in connection with their cancellation under the Plan. In
connection with the debt discharge, the Company recorded an
extraordinary gain of approximately $174.0 million on the Effective
Date.
As a result of the application of Fresh Start Reporting and the
reorganization of the Company on the Effective Date, financial
information in the accompanying condensed consolidated financial
statements for the three and nine months ended September 30, 2000, and
for the period from the Effective Date to September 30, 1999
(collectively, the "Successor Period"), is presented on a different
basis than the financial information for the period from January 1,
1999, to the Effective Date (the "Predecessor Period"). Accordingly,
such information is not comparable.
Federal 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. Management has
elected to apply the required reduction first to tax basis in
depreciable assets, and then to net operating loss carryforwards. The
amount of reduction in the tax basis of depreciable assets was
approximately $96 million, leaving approximately $143 million in
remaining basis in depreciable assets. The amount of reduction in net
operating loss carryforwards was approximately $78 million, leaving
approximately $233 million in remaining net operating loss
carryforwards.
5
<PAGE> 6
(3) Liquidity and Capital Resources
The Company's condensed consolidated financial statements have been
presented on a going concern basis which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business.
The Company anticipates that additional capital will be required to
fully implement its long-term business strategy. The Company currently
expects that, based on existing Internet deployment plans, cash on
hand, cash generated from operations and equipment financing from Cisco
Systems, Inc. ("Cisco"), will be sufficient to fund operations through
the second quarter of 2001. The Company currently estimates that it
will require an additional $15 million to $25 million in cash to fund
its business plan through the end of 2001. The Company may seek
additional capital 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 require
revision.
Options for raising additional capital include the sale of debt or
equity securities, borrowings under secured or unsecured loan
arrangements, including 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. If the
Company is unable to obtain financing in a timely manner and on
acceptable terms, management has developed and intends to implement a
plan that allows the Company to continue to operate in the normal
course of business at least through the fourth quarter of 2001. More
specifically, this plan would include delaying, reducing or eliminating
the launch of new broadband wireless Internet systems, reducing or
eliminating new video subscriber installations and related marketing
expenditures, and reducing or eliminating other discretionary
expenditures.
(4) Principles of Consolidation
The condensed consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Significant
intercompany balances and transactions between the entities have been
eliminated in consolidation.
(5) Interim Financial Information
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all
adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's financial position as of
September 30, 2000, and the results of operations and cash flows for
the three and nine months ended September 30, 2000, and the period from
January 1, 1999, to the Effective Date and from the Effective Date to
September 30, 1999. These results are not necessarily indicative of the
results to be expected for the full fiscal year. The accompanying
financial statements are for interim periods and should be read in
conjunction with the 1999 audited consolidated financial statements of
the Company included in the Company's 1999 Form 10-K (as amended by
Form 10-K/A).
(6) Net Loss Per Common Share - Basic and Diluted
The Company has presented (1) basic loss per share, computed on the
basis of the weighted average number of common shares outstanding
during the period, and (2) diluted loss per share, computed on the
basis of the weighted average number of common shares and all dilutive
potential common shares outstanding during the period. Options to
purchase 736,200 shares and warrants to purchase 825,000 shares of the
Company's common stock issued and outstanding at September 30, 2000,
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
reorganized 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.
6
<PAGE> 7
(7) Commitments and Contingencies
Certain former directors and officers of the Company, to whom the
Company may have indemnity obligations, are defendants in one purported
class action securities lawsuit, styled Thompson, et al. v. David E.
Webb, et al., (98-371-D), in State District Court in Kleburg County,
Texas. This action alleges, among other things, various violations of
state securities laws. In June 2000, the plaintiffs' counsel in this
matter notified counsel for defendants that the maximum amount of
damages sought by the plaintiffs in this matter was $700 million. The
plaintiffs previously had indicated in a statement of the case that
their purported class damage models indicated total damages of $70.5
million.
Certain former officers and directors of the Company, to whom the
Company also may have indemnity obligations, were defendants in a
federal securities action styled Coates, et al. v. Heartland Wireless
Communications, Inc., et al. (3-98-CV-0452-D), in U.S. District Court
for the Northern District of Texas. In June 2000, the court dismissed
the plaintiffs' claims in this matter, with prejudice. In July 2000,
the Company received notice that the plaintiffs intended to appeal the
District Court's decision to the U.S. Circuit Court of Appeals for the
Fifth Circuit.
The Company also is a party to four purported class action lawsuits
alleging that the Company overcharged its customers for administrative
late fees in violation of various states' laws. The most recent such
lawsuit, filed against the Company in State District Court in Patricio
County, Texas, in September 2000, is styled Ortiz, et al. v. Nucentrix
Broadband Networks, Inc. (S-00-5731-CV-B). The plaintiff in the Ortiz
action is represented by the same counsel who has filed similar
lawsuits against the Company in Brooks, Nueces and Duval Counties,
Texas. The Ortiz action alleges that the Company's administrative late
fees are unenforceable and usurious. The plaintiff seeks to represent a
class consisting of all persons who have entered into a contract to
receive subscription television services from the Company or paid the
Company an administrative late fee since December 4, 1998. The
plaintiff in Ortiz seeks (1) a declaration that the administrative late
fees charged by the Company are usurious and unenforceable and that
these late fees should be returned to the purported class, (2) an
injunction prohibiting the Company from charging more than the maximum
legal interest rate, and (3) recovery of statutory penalties and
interest, attorneys' fees, prejudgment and post-judgment interest and
costs.
The Company, certain former directors and officers of the Company to
whom the Company may have indemnity obligations, certain subsidiaries
of the Company, and other parties are defendants in a purported civil
class action lawsuit filed in October 2000 and alleging violation of
the federal Racketeering Influenced and Corrupt Organizations Act
("RICO"). This case is styled Nolen, et al. v. Nucentrix Broadband
Networks, Inc., et al. (L-00CV134), and is pending in U.S. District
Court for the Southern District of Texas, Laredo Division. The
plaintiff in the Nolen action is represented by the same counsel who
filed the state court lawsuits described in the preceding paragraph.
The Nolen action alleges that the Company and other defendants together
caused the collection of an unlawful debt comprised of a service fee
for subscription television services and an administrative late fee, in
violation of RICO. The plaintiff seeks to represent a class consisting
of all persons from whom any of the defendants has collected a late
fee. The plaintiff in Nolen seeks disgorgement and payment of
unspecified restitution to members of the purported class, as well as
treble damages, attorneys' fees, interest and costs.
The Company intends to vigorously defend all of the matters discussed
above. 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 and/or cash flows of the Company.
In September 1999, two former stockholders of Heartland Wireless
Communications, Inc. filed a motion in U.S. Bankruptcy Court to revoke
the order confirming the Plan. The Company intends to vigorously oppose
the
7
<PAGE> 8
motion, and it is not possible at this time to predict the effect of
any action by the Bankruptcy Court to revoke the Plan.
The Company 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 condensed
consolidated financial statements, the ultimate effects of such other
matters are not expected to have a material adverse effect on the
consolidated financial condition, results of operations or cash flows
of the Company.
The Company has entered into a Memorandum of Agreement with Cisco.
Under the agreement with Cisco, the Company is obligated to purchase at
least $13.0 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 and related
deployment costs.
(8) Segment Reporting
Historically the Company has been considered to have a single
reportable segment: the distribution of subscription television
services. However, based on the Company's current business strategy to
become a leading provider of broadband wireless services in its
markets, and its plans to provide broadband wireless Internet access in
approximately 10 to 20 of its markets by the end of 2001, the Company
expects to be comprised of two reportable segments by the end of 2000:
(i) distribution of subscription television services and (ii) delivery
of IP-based services. The Company measures segment profit as EBITDA.
EBITDA is defined as earnings before interest, taxes, depreciation and
amortization and nonrecurring items. Information regarding operating
segments as of and for the quarter and nine months ended September 30,
2000, and September 30, 1999, is presented in the following tables. For
comparison purposes, references to the nine months ended September 30,
1999, represent the combined amounts for the period of January 1, 1999,
through the Effective Date and the period from the Effective Date
through September 30, 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
REVENUES INTERSEGMENT
FROM EXTERNAL REVENUE
CUSTOMERS (EXPENSE) EBITDA
-------------- -------------- --------------
<S> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Subscription television services
segment $ 14,587 $ (1,032) $ 2,824
IP-based services segment 110 1,032 (3,263)
Other -- -- (503)
-------------- -------------- --------------
Total $ 14,697 $ -- $ (942)
============== ============== ==============
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Subscription television services
segment $ 17,565 $ (1,278) $ 2,848
IP-based services segment 27 1,278 (1,510)
Other -- -- (182)
-------------- -------------- --------------
Total $ 17,592 $ -- $ 1,156
============== ============== ==============
</TABLE>
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<PAGE> 9
<TABLE>
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
REVENUES INTERSEGMENT
FROM EXTERNAL REVENUE
CUSTOMERS (EXPENSE) EBITDA
------------- --------- --------
<S> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Subscription television services
segment $ 46,547 $ (3,447) $ 7,410
IP-based services segment 291 3,447 (6,376)
Other -- -- (1,038)
-------- -------- --------
Total $ 46,838 $ -- $ (4)
======== ======== ========
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Subscription television services
segment $ 53,292 $ (3,580) $ 7,168
IP-based services segment 39 3,580 (3,132)
Other -- -- (1,935)
-------- -------- --------
Total $ 53,331 $ -- $ 2,101
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EBITDA $ (942) $ 1,156 $ (4) 2,101
Depreciation and amortization (6,508) (6,467) (20,821) (18,353)
-------- -------- -------- --------
Operating loss (7,450) (5,311) (20,825) (16,252)
Interest income 519 376 1,512 1,167
Interest expense (339) (272) (1,039) (902)
Other income (expense), net 824 (179) 4,733 523
-------- -------- -------- --------
Loss before reorganization costs
and extraordinary item $ (6,446) $ (5,386) $(15,619) $(15,464)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
TOTAL ASSETS AT
SEPTEMBER 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Subscription television services segment $ 43,570 $ 56,937
IP-based services segment 78,325 82,787
Other
30,732 29,909
-------- --------
Total $152,627 $169,633
======== ========
</TABLE>
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<PAGE> 10
Intersegment revenue (expense) represents a charge from the IP-based
services segment to the subscription television services segment for
the use of shared assets. The "other" category includes corporate
expenses, other income and assets not considered part of the two
primary operating segments.
EBITDA is widely used by analysts, investors and other interested
parties in the Internet, cable television and telecommunications
industries. EBITDA is also a widely accepted financial indicator of a
company's ability to incur and service indebtedness. EBITDA is not a
financial measure determined by 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 not be comparably calculated from one company to another.
(9) Exchange of Equity Interest in Wireless One, Inc.
In July 2000, the Company exchanged 547,783 shares of common stock in
Wireless One, Inc. ("Wireless One") for approximately $700,000,
pursuant to Wireless One's plan of reorganization under Chapter 11 of
the Bankruptcy Code. After this exchange, the Company retained no
equity interest in Wireless One. Losses recorded in prior years for
Wireless One reduced the Company's investment to zero. Accordingly, the
proceeds have been classified as a gain on sale of assets and included
in other income in the condensed consolidated statement of operations
for the three months ended September 30, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Quarterly Report on Form 10-Q, we will refer to Nucentrix Broadband
Networks, Inc., a Delaware corporation, as "the Company," "we," "us" and "our."
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 and pending transactions, are
intended to identify forward-looking statements. Such statements reflect our
current view of 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 the ability to
obtain and maintain Multipoint Distribution Service ("MDS")
and Multichannel Multipoint Distribution Service ("MMDS")
licenses and MDS/MMDS and Instructional Television Fixed
Service ("ITFS") spectrum leases,
o the outcome of regulatory proceedings relating to the
allocation of additional spectrum in the United States for
third generation, or "3G," mobile wireless services, as
described in Item 5,
o the capabilities of the technology platform we intend to use
for broadband wireless services,
o our ability to successfully and timely fund and build out our
planned broadband wireless network,
o with respect to pending transactions, completing definitive
documents, satisfying our due diligence efforts and obtaining
required third party consents, including consent of the
Federal Communications Commission ("FCC"),
o those matters discussed under "Risk Factors" in Part I of our
Annual Report on Form 10-K for 1999 (as amended by Form
10-K/A), and
o those matters discussed elsewhere in this document.
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.
OVERVIEW
We provide broadband wireless Internet and wireless subscription
television services using up to 196 megahertz ("MHz") of radio spectrum licensed
by the FCC in the 2.1 gigahertz ("GHz") and 2.5 - 2.7 GHz range, primarily in
medium and small markets across Texas and the Midwestern United States. This
spectrum commonly is referred to as Multipoint Distribution Service or "MDS,"
Multichannel Multipoint Distribution Service or "MMDS" and Instructional
Television Fixed Service or "ITFS." We own the basic trading area ("BTA")
authorization, or otherwise license or lease MDS/MMDS/ITFS spectrum, in 94
markets covering an estimated 9.4 million total households, including four
markets covering an estimated 708,000 total households for which we have entered
into a definitive agreement or letter of intent to acquire.
Our business strategy is to become a leading provider of broadband
wireless services using our high-capacity radio spectrum in our markets. We
currently provide always-on, high-speed wireless Internet access service under
temporary developmental FCC licenses to over 285 accounts serving an estimated
2,240 end users in Austin and Sherman-Denison, Texas, primarily to medium-sized
and small businesses, small offices/home offices and telecommuters. Our service
offerings include Internet access from 128 Kbps to 1.54 Mbps, or up to 50 times
faster than service provided over standard dial-up telephone lines. Through a
national independent contractor, we also provide value-added services such as
technical support, e-mail, Web hosting and design and domain name service.
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In February 2000, we announced a strategic alliance and agreement with
Cisco Systems, Inc. ("Cisco"), to pursue testing and deployment of broadband
wireless services using Vector Orthogonal Frequency Multiplexing, or "VOFDM"
technology on a Cisco Powered Network(R). The agreement includes two field
trials in Austin and Amarillo, Texas. We successfully completed the initial
phase of the Austin field trial in August 2000, and expect to complete the
Amarillo field trial in December 2000.
In August 2000, we filed over 400 applications with the FCC to provide
digital two-way communications services in 70 of our markets. All such
applications must meet FCC interference protection rules or contain the consent
of co-channel and adjacent channel licensees in our markets and neighboring
markets. All complete applications that have not been opposed within 120 days
after the issuance of a public notice by the FCC on the two-way filings will be
granted. We expect the FCC to issue the public notice in November 2000. Although
we believe we will receive two-way authorizations to replace our developmental
authorizations in Austin and Sherman-Denison, there can be no assurance that we
will receive such authorizations in these or other markets.
Historically, we have used our spectrum to provide wireless
subscription television services. We presently have wireless subscription
television transmission facilities constructed and operating in 58 markets in
nine states. At October 31, 2000, we had approximately 112,260 wireless
subscription television customers, including approximately 103,930 customers who
subscribed only to programming service provided over our MDS/MMDS/ITFS spectrum,
and 8,330 "combo" subscribers who subscribed to both our MDS/MMDS/ITFS
programming service and to DIRECTV programming service sold by us. In addition,
at October 31, 2000, there were approximately 19,950 customers who received only
DIRECTV programming sold by us.
Our business strategy contemplates a decline in wireless subscription
television subscribers, revenues and earnings before interest, taxes,
depreciation and amortization and nonrecurring items ("EBITDA") in 2000 and
beyond, as we allocate more of our spectrum and other resources to develop and
expand our broadband wireless Internet access and other broadband wireless
Internet protocol ("IP")-based businesses.
Cisco Systems and Cisco Powered Network are trademarks of Cisco
Systems, Inc. DIRECTV is a registered trademark of DIRECTV, Inc., a subsidiary
of the Hughes Electronics unit of General Motors Corporation.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000,
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
As a result of the application of Fresh Start Reporting, in connection
with our Plan of Reorganization (the "Plan") that became effective April 1, 1999
(the "Effective Date"), financial information in the accompanying unaudited
condensed consolidated financial statements for the period from the Effective
Date to September 30, 1999, and the three and nine months ended September 30,
2000 (collectively, the "Successor Period"), is presented on a different basis
than the financial information for the period from January 1, 1999, to the
Effective Date (the "Predecessor Period"). Accordingly, such information is not
comparable. However, for purposes of comparison discussions in this report,
references to the nine months ended September 30, 1999, represent the combined
amounts for the period of January 1, 1999, through the Effective Date and the
period from the Effective Date through September 30, 1999.
Revenues; Subscribers. Our revenues consist primarily of monthly fees
paid by wireless subscription television subscribers for basic programming,
premium programming, equipment rental and other miscellaneous fees, revenue from
our agency relationships with DIRECTV and its distributors, as well as fees
generated from start-up Internet operations in Austin and Sherman-Denison,
Texas. Our revenues for the third quarter of 2000 were $14.7 million, compared
to $17.6 million for the third quarter of 1999. Revenues for the nine months
ended September 30, 2000, were $46.8 million, compared to $53.3 million for the
same period last year. The average number of wireless subscription television
subscribers for the three months ended September 30, 2000, was 116,699 compared
to 142,274 for the same period of 1999. For the nine months ended September 30,
2000, the average number of subscribers was 123,708 compared to 149,022 for the
nine months ended September 30, 1999. In addition, during the three and nine
months ended September 30, 2000, we had 17,236 and 15,875 average subscribers,
respectively, who received only DIRECTV programming sold
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by us. As of January 1, 2000, we do not include these customers in our reported
wireless subscription television subscriber base but we do receive certain
agency revenue from DIRECTV related to these accounts, as well as equipment
lease payments from a portion of these customers. We also do not include these
customers or their related revenues in our calculation of recurring average
revenue per subscriber. Prior year calculations have been revised to conform
with this presentation.
The decline in revenues over the periods presented resulted primarily
from fewer total wireless subscription television subscribers as we continued to
shift our principal focus from providing wireless subscription television
services to developing and expanding our broadband wireless IP-based services.
Other factors contributing to a loss in subscribers over the periods presented
were decreased marketing of MDS/MMDS/ITFS subscription television services,
overall increased competition for cable television services, and a loss of
subscribers in Austin in the second quarter of 1999, which resulted from a
subscription television technology conversion that caused some existing video
subscribers to fall outside of the coverage range of the new technology. We no
longer offer programming provided solely over MMDS frequencies in seven of our
markets as we prepare to reallocate the use of spectrum in these markets for
two-way broadband wireless services, although we continue to offer MDS/MMDS/ITFS
and DIRECTV programming in combination with one another in these markets.
Recurring average revenue per subscriber was $35.31 and $35.44 for the
three and nine months ended September 30, 2000, respectively, compared to $35.66
and $35.38 for the same periods last year. Internet service revenues for the
three and nine months ended September 30, 2000, were $110,000 and $291,000,
respectively.
System Operations Expense. System operations expense includes
programming costs, channel lease payments, labor and overhead relating to
service calls and churn, transmitter site and tower rentals, certain repairs and
maintenance expenditures and Internet service costs. Programming costs (with the
exception of minimum payments) and channel lease payments (with the exception of
certain fixed payments) are variable expenses based on the number of
subscribers. Systems operations expense was $7.0 million, or 47.5% of revenues,
for the third quarter of 2000, compared to $8.0 million, or 45.7% of revenues,
for the same period in 1999. For the nine months ended September 30, 2000,
system operations expense was $21.6 million, or 46.2% of revenues, compared to
$24.8 million, or 46.6% of revenues, for the comparable prior year period.
System operations expense decreased over both periods primarily due to lower
programming expense as a result of lower subscriber count and a larger
proportion of DIRECTV subscribers, which have lower programming costs. System
operations expense as a percent of revenue was higher for the three months ended
September 30, 2000, compared to the same period last year, primarily due to
higher costs under certain spectrum leases that were renegotiated in preparation
for providing two-way broadband services. Average monthly churn was 3.0% and
2.9% for the quarter and nine months ended September 30, 2000, respectively,
compared to 3.1% and 2.9% for the same periods last year.
Selling, General and Administrative ("SG&A") Expense. SG&A expense for
the third quarter of 2000 was $8.7 million, or 58.9% of revenues, compared to
$8.4 million, or 47.7% of revenues, for the same period last year. For the nine
months ended September 30, 2000, SG&A expense was $25.2 million, or 53.8% of
revenues, compared to $26.4 million, or 49.5% of revenues, for the same period
last year. Internet SG&A costs, which include (i) costs related to the launch of
broadband wireless Internet access and other IP-based services, (ii) costs
related to our two operating Internet markets in Austin and Sherman-Denison,
Texas, and (iii) allocable corporate overhead, were $2.0 million and $3.6
million for the quarter and nine months ended September 30, 2000, compared to
$661,000 and $1.5 million for the same prior year periods. The increase in
Internet SG&A expense during the current year was primarily due to increased
costs for technology trials and for building the field and corporate
organizations to develop and support the Internet business, as well as an
increase in the allocation to Internet of existing corporate resources. These
increases, combined with increased costs to improve service at our customer care
center, more than offset decreases due to savings from the consolidation of
certain offices and management in our video markets, and lower bad debt expense
due to improved collections.
Depreciation and Amortization. Depreciation and amortization expense
includes depreciation of systems and equipment and amortization of license and
leased license investment and other intangibles. Our policy is to capitalize the
excess of direct costs of subscriber installations over installation fees in our
subscription television business. These
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direct costs include reception materials and equipment on subscriber premises
and installation labor and overhead. These direct costs are capitalized as
systems and equipment in the accompanying condensed consolidated balance sheets.
Depreciation and amortization expense was $6.5 million and $20.8 million for the
three and nine months ended September 30, 2000, respectively, compared to $6.5
million and $18.4 million for the same periods last year. The increase in
expense over the periods presented is primarily due to increased depreciation on
DIRECTV subscriber equipment resulting from more DIRECTV subscribers, and
increased depreciation on the excess of direct subscriber installation costs
over installation fees. Prior year depreciation on these assets had decreased
due to a write-down in September 1998 of certain long-lived assets, in
accordance with Statement of Financial Accounting Standards ("FAS") No. 121.
Operating Loss. We generated operating losses of $7.5 million and $20.8
million for the three and nine months ended September 30, 2000, respectively,
compared to $5.3 million and $16.3 million for the three and nine months ended
September 30, 1999, respectively. The increased losses during the periods
presented were primarily due to lower wireless subscription television revenues,
increased costs to improve service at our customer care center, additional
expenditures related to testing and deployment of fixed wireless broadband
services, and increased depreciation on DIRECTV subscriber equipment and
subscriber installation costs. These cost increases were partially offset by
lower programming expense, savings from consolidation of certain offices and
management in our video markets, and lower bad debt expense.
EBITDA. "EBITDA," or earnings before interest, taxes, depreciation and
amortization and nonrecurring items, is widely used by analysts, investors and
other interested parties in the Internet, cable television and
telecommunications industries. EBITDA is also a widely accepted financial
indicator of a company's ability to incur and service indebtedness. EBITDA is
not a financial measure determined by 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 not be comparably
calculated from one company to another. EBITDA was a negative $942,000 and
break-even for the three and nine months ended September 30, 2000, respectively,
compared to a positive $1.2 million and $2.1 million for the same periods in
1999. The decrease in EBITDA during the current quarter and year to date period
is primarily due to decreased subscription television revenues resulting from
fewer subscribers as we continue to shift our principal focus to developing and
expanding our wireless broadband IP-based services, and from start-up costs
related to our deployment of wireless broadband Internet operations.
Interest Income. Interest income was $519,000 and $1.5 million for the
three and nine months ended September 30, 2000, respectively, compared to
$376,000 and $1.2 million for the same periods last year. The increase in
interest income for the periods presented was due to higher earnings during the
current year on larger unrestricted cash balances.
Interest Expense. We incurred interest expense of $339,000 and $1.0
million for the three and nine months ended September 30, 2000, respectively,
compared to $272,000 and $902,000 for the three and nine months ended September
30, 1999, respectively. Interest expense increased slightly in 2000 because of
higher debt balances related to capital lease obligations incurred in connection
with the sale and leaseback of 34 tower sites that were sold during the fourth
quarter of 1999 and the first nine months of 2000.
Other Income/Expense. During the first and third quarters of 2000, we
received $3.8 million and $723,000, respectively, in exchange for our equity
interest in Wireless One, Inc. ("Wireless One"), which announced confirmation of
its plan of reorganization in November 1999. The entire amount received was
recognized as other income, as our investment balance had been reduced to zero
during 1997 as a result of Wireless One losses. Other income during the prior
year includes cash settlements from certain litigation matters.
Reorganization Costs. During the nine months ended September 30, 1999,
we incurred $2.9 million in expenses related to our reorganization under Chapter
11. These costs were for financial and legal advisors, accountants and
administrative costs. There were no reorganization costs in the current year.
Net Loss. We have recorded net losses since our inception. Net loss for
the quarter and nine months ended
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September 30, 2000, was $6.4 million ($0.63 per share) and $15.6 million ($1.54
per share), respectively, compared to $5.8 million ($0.58 per share) and $18.4
million for the quarter and nine months ended September 30, 1999 (excluding an
extraordinary gain on debt forgiveness of $173.8 million on the Effective Date,
relating to the reorganization of the Company).
The increase in net loss in the third quarter of 2000 compared to the
same period in 1999 was primarily due to a decrease in revenues from our
subscription television business discussed above, offset by a nonrecurring gain
of $723,000 in the third quarter of 2000 relating to the exchange of our equity
interest in Wireless One. The improvement in year-to-date net loss resulted
primarily from a nonrecurring gain of $4.5 million in the first nine months of
2000 on the Wireless One exchange, and from no reorganization costs in the first
nine months of 2000 compared to $2.9 million in such costs for the same period
last year, offset by decreased revenues from our subscription television
business. Earnings per share information has not been presented for the
Predecessor Period as the Company was reorganized on the Effective Date in
connection with our Plan and, accordingly, per share amounts are not comparable
between the Predecessor Period and Successor Period.
LIQUIDITY AND CAPITAL RESOURCES
The approval by the FCC of the use of MDS, MMDS and ITFS spectrum for
digital two-way communications services will allow us to use our spectrum to
provide broadband wireless services such as high-speed Internet access, voice
over IP ("VoIP") and/or fixed-wireless telephony services. The growth of our
business by using our spectrum to provide two-way communications services will
require substantial investment in capital expenditures for the development and
launch of broadband wireless services.
Cash used in operations was $50,000 during the nine months ended
September 30, 2000, compared to $6.3 million provided by operations for the same
period of 1999. The decrease in cash provided by operations resulted primarily
from current year recognition of deferred agency revenue received in the prior
year from the Company's alliance with DIRECTV and its distributors and from
payment of previously accrued reorganization costs.
Cash used in investing activities was $2.8 million during the nine
months ended September 30, 2000, compared to $12.6 million for the nine months
ended September 30, 1999. Cash used in investing activities decreased in the
current year primarily due to $4.5 million received in the first nine months of
2000 from the exchange of our equity interest in Wireless One. In addition, we
had lower expenditures for systems and equipment related to our subscription
television business, somewhat offset by higher expenditures for engineering,
legal, site acquisition and other costs related to the preparation of FCC
applications necessary to expand our broadband wireless operations to two-way
communications services.
Cash provided by financing activities was $178,000 during the nine
months ended September 30, 2000, compared to cash used in financing activities
of $461,000 during the comparable period in 1999. Cash used by financing
activities in the current year included principal payments on our BTA debt and
on capital leases related to the sale and leaseback of 34 of our communications
towers. This was more than offset by $1.5 million in cash proceeds received from
the exercise of employee stock options. Cash used in the first nine months of
1999 was for principal payments on our BTA debt, capital lease obligations and
other notes payable, several of which have been fully repaid, offset by $1.1
million in cash proceeds from employee stock option exercises.
At October 31, 2000, we had approximately $26.6 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. $399,000 of restricted cash represents bank certificates of deposit
pledged as collateral for long-term operating leases and are, therefore,
considered non-current and included in other assets on the accompanying
condensed consolidated balance sheets.
FUTURE CASH REQUIREMENTS
Our goal is to become a leading provider of broadband wireless services
in our markets. To implement this
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strategy, we plan to (1) offer high-speed Internet access service to
medium-sized and small businesses, SOHOs, telecommuters and residential
consumers in 10 to 20 markets by the end of 2001, (2) increase our geographic
scope for broadband wireless services by acquisitions or business combinations
and (3) offer telephony services, including VoIP and/or fixed-wireless
telecommunications services.
We estimate that a launch of a new broadband wireless network system
providing high-speed Internet access in a typical market will involve an initial
expenditure of approximately $500,000 to $900,000 for network equipment,
depending upon the system design and type and sophistication of the equipment.
In addition, we estimate that the acquisition and installation of each new
Internet subscriber will cost between $1,500 and $1,800 depending upon the type
of customer. 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 subscription
television 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.
The Company anticipates that additional capital will be required to
fully implement its long-term business strategy. The Company currently expects
that, based on existing Internet deployment plans, cash on hand, cash generated
from operations and equipment financing from Cisco, will be sufficient to fund
operations through the second quarter of 2001. The Company currently estimates
that it will require an additional $15 million to $25 million in cash to fund
its business plan through the end of 2001. The Company may seek additional
capital 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 require revision.
Options for raising additional capital include the sale of debt or
equity securities, borrowings under secured or unsecured loan arrangements,
including 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. If the Company is unable to obtain financing in a timely
manner and on acceptable terms, management has developed and intends to
implement a plan that allows the Company to continue to operate in the normal
course of business at least through the fourth quarter of 2001. More
specifically, this plan would include delaying, reducing or eliminating the
launch of new broadband wireless Internet systems, reducing or eliminating new
video subscriber installations and related marketing expenditures, and reducing
or eliminating other discretionary expenditures.
COMMITMENTS AND CONTINGENCIES
Certain former directors and officers of the Company, to whom we may
have indemnity obligations, are defendants in a purported class action
securities lawsuit. This action alleges, among other things, various violations
of state securities laws. A second securities lawsuit against former directors
and officers of the Company was dismissed in June 2000 by the U.S. District
Court for the Northern District of Texas, although the Company has received
notice that the plaintiffs in this case intend to appeal the District Court's
decision. In addition, we are a party to several purported class action lawsuits
alleging that we overcharged our customers for administrative late fees,
including one administrative late fee lawsuit alleging violation of the federal
Racketeering Influenced and Corrupt Organizations Act. We intend 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 we do not expect such an
adverse outcome, we believe 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 and/or cash flows of the Company. In September
1999, two former stockholders of Heartland Wireless Communications, Inc. filed a
motion in U.S. Bankruptcy Court to revoke the order confirming our Plan which
became effective in April 1999. 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.
As discussed in Item 5, "Other Information," various industry parties
have requested, and government organizations have initiated, proceedings to
study, identify and authorize additional radio frequencies for third generation,
or "3G," mobile wireless services worldwide. Several frequency bands will be
studied in this process. One of the frequency bands under consideration for such
services is 2500 - 2690 MHz, in which we hold substantially all of
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our MDS/MMDS/ITFS fixed wireless FCC licenses and spectrum leases. We intend to
vigorously oppose any effort to share or reallocate any of our spectrum for 3G
services. However, we cannot predict how these various proceedings will be
resolved. We could be required to share part or all of these frequencies with 3G
mobile services, or relocate part or all of our fixed wireless services to
another frequency band. Although the National Telecommunications Information
Administration's Plan to Select Spectrum, which is discussed below in Item 5,
recognizes that additional spectrum may have to be found or other accommodations
will have to be made for relocated licensees to continue their operations, it is
impossible to determine at this time what impact, if any, spectrum sharing or
relocation would have on the consolidated financial condition, results of
operations or cash flows of the Company.
Under our agreement with Cisco, we are obligated to purchase at least
$13.0 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 and related
deployment costs. In the alternative, we may pursue other financing, or purchase
such equipment with available cash.
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 prices, if necessary, to keep pace with inflationary increases in
costs.
RECENTLY ISSUED ACCOUNTING PRINCIPLE
In June 1998 the Financial Accounting Standards Board issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No.
133"), which was amended by FAS No. 137 issued in July 1999 and FAS No. 138
issued in June 2000. FAS No. 137 delayed the effective date of FAS No. 133. FAS
No. 133 is now effective for all interim and annual periods of the Company
commencing January 1, 2001. Given the Company's current and anticipated
derivative activities, management does not believe the adoption of FAS No. 133
should have a material effect on the Company's consolidated financial condition
or results of operations.
RECENT EVENTS
In August 2000, we closed the sale of a final tower site to SBA Towers,
Inc. for approximately $200,000 in connection with a previously disclosed sale
and leaseback transaction.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in marketable securities
(which consist of commercial paper). At September 30, 2000, our marketable
securities were recorded at a fair value of approximately $650,000, with an
overall weighted average return of approximately 6% and an overall weighted
average life of less than one 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 (8.3%) 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 September 30, 2000. The fair value of
our long-term debt at September 30, 2000, is estimated to be $15.4 million based
on the overall rate of the long-term debt of 10% and an overall maturity of
seven 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 currently are not evaluating the
future use of any such financial instruments.
We currently do not have any exposure to foreign currency transaction
gains or losses. All other business transactions are in U.S. dollars.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in certain legal proceedings as described in note 7 of
the notes to condensed consolidated financial statements included in Part I,
Item 1 of this report, which discussion is incorporated herein by reference. For
additional information regarding these proceedings, see "Item 3 - Legal
Proceedings" in our Annual Report on Form 10-K (as amended by Form 10-K/A) for
1999, and "Part II, Item 1 - Legal Proceedings" in our Quarterly Reports on Form
10-Q for the quarters ended March 31, 2000, and June 30, 2000. We also are 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 the Company's consolidated financial condition, results of
operations or cash flows.
ITEM 5. OTHER INFORMATION
As discussed below, industry parties have requested, and various
government organizations have initiated, proceedings to study, identify and
authorize additional radio frequencies for third generation, or "3G," mobile
wireless services worldwide. Several frequency bands will be studied in this
process. One of the frequency bands under consideration for such services is
2500 - 2690 MHz, in which we hold substantially all of our MDS/MMDS/ITFS fixed
wireless FCC licenses and spectrum leases. We intend to vigorously oppose any
effort to share or reallocate any of our spectrum for 3G services. However, we
currently cannot predict how these various proceedings will be resolved. We
could be required to share part or all of these frequencies with 3G mobile
services, or relocate part or all of our fixed wireless services to another
frequency band. Although the NTIA Plan to Select Spectrum, which is discussed
below, recognizes that additional spectrum may have to be found or other
accommodations will have to be made for relocated licensees to continue their
operations, it is impossible to determine at this time what impact, if any,
spectrum sharing or relocation would have on the operations of the Company.
WRC-2000
In June 2000, the International Telecommunication Union ("ITU")
concluded a World Radiocommunication Conference ("WRC-2000") in Istanbul,
Turkey. Among other things, WRC-2000 adopted nonbinding resolutions inviting
countries to make available, based on market demand and other national
considerations, additional spectrum in the following frequency bands for the
terrestrial component of International Mobile Telecommunications ("IMT-2000") or
3G mobile wireless services worldwide: (i) 806-960 MHz, (ii) 1710-1885 MHz, and
(iii) 2500-2690 MHz. In connection with WRC-2000, the ITU estimated that as much
as 160 MHz of additional spectrum would be needed to meet projected demands in
the highest traffic areas worldwide by 2010.
WRC-2000 also adopted nonbinding resolutions requesting the ITU's
Radiocommunication Sector to conduct studies on: (i) the implications and
possibilities of sharing of services allocated in the identified frequency bands
with IMT-2000 services, (ii) harmonizing frequency arrangements for the
implementation of IMT-2000 in the bands, (iii) ways to facilitate global roaming
within the bands, (iv) spectrum demand forecasts, (v) adapting mobile
radiocommunication technologies (including IMT-2000) for developing countries,
(vi) maintaining a database of national studies and decisions on selection of
spectrum for IMT-2000, and (vii) providing a fixed wireless access interface
using IMT-2000 technologies. WRC-2000 instructed that these studies be completed
before the next World Radiocommunication Conference or before June 2003,
whichever is earlier.
The resolutions adopted by WRC-2000 expressly recognized that not all
countries may need all of the IMT-2000 bands identified at WRC-2000, and that
not all countries may be able to implement IMT-2000 in all of those frequency
bands, due to usage by, and investment in, existing services. WRC-2000 also
noted that its resolutions did not establish any regulatory priority with
respect to these bands, nor did the resolutions preclude the use of the bands
for any application of the services to which they currently are allocated.
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Petitions for Rulemaking
In July 2000, the Cellular Telecommunications Industry Association
("CTIA") filed a Petition for Rule Making with the FCC, requesting that the FCC
begin the process of designating additional spectrum for 3G services in a manner
consistent with WRC-2000. In addition, in April 2000 the Satellite Industry
Association ("SIA") filed a Petition for Rule Making with the FCC requesting
that the FCC allocate the 2500 - 2520 MHz and 2670 - 2690 MHz frequency bands
for use by Mobile Satellite Service operators to develop 3G services. The CTIA
petition and SIA petition are referred to together as the "Petitions." A number
of interested parties, including the Company, filed responses to the Petitions
with the FCC in August 2000.
Executive Memorandum
On October 13, 2000, President Clinton signed an Executive Memorandum
(the "Executive Memorandum") that directs federal agencies to work with the
private sector and the FCC to identify radio spectrum needed for 3G services.
Specifically, the Executive Memorandum directed the Secretary of Commerce to
work with the FCC to develop a plan by October 20, 2000, to select spectrum for
3G services and to issue, by November 15, 2000, an interim report on current
spectrum uses and the potential for realloction or sharing of the frequency
bands identified at WRC-2000 for 3G services. The Executive Memorandum set forth
a timetable of July 2001 for identifying additional spectrum for 3G services,
and September 30, 2002, for auctioning licenses to competing applicants. The
Executive Memorandum further directs the Secretaries of Defense, Treasury,
Transportation and the heads of any other executive department or agency that is
currently authorized to use spectrum identified at WRC-2000 to participate and
cooperate in this process.
Plan to Select Spectrum
On October 20, 2000, the National Telecommunications Information
Administration ("NTIA") issued a Plan to Select Spectrum (the "NTIA Plan")
pursuant to the Executive Memorandum. The NTIA Plan states that, in addition to
the three frequency bands identified at WRC-2000, the following frequency bands
would be given full consideration in formulating a final allocation order for 3G
services in the United States: 698 - 746 MHz, 746 - 764 MHz, 776 - 794 MHz, 1850
- 1990 MHz, 2110 - 2150 MHz and 2160 - 2165 MHz. The NTIA Plan noted that
extensive studies for certain of these candidate bands would not be required to
provide a factual basis for the NTIA and FCC to identify and allocate spectrum
for 3G services. The NTIA Plan further stated that for license holders that may
be required to relocate, additional spectrum may have to be found, or other
accommodations will have to be made to continue their operations.
The NTIA Plan generally provides for two reports to determine whether,
and under what circumstances, the 1755 - 1850 MHz and 2500 - 2690 MHz bands
could be made available for 3G wireless systems and the costs and operating
impacts of such action to the incumbent users, as well as to consider other
relevant information regarding the 806 - 960 MHz and other frequency bands
identified in the preceding paragraph. The first report, an interim report due
November 15, 2000, is expected to (i) describe 3G system requirements, (ii)
describe incumbent systems in these frequency bands, and (iii) evaluate
possibilities for sharing, segmenting or relocating existing services from these
bands for 3G services. A second report, due March 1, 2001, is expected to (i)
finalize information from the first report, (ii) describe other candidate bands
for 3G services, (iii) identify alternate bands to support incumbent services,
and (iv) evaluate the costs and benefits of spectrum sharing, segmentation and
relocation (and various combinations thereof) for 3G services.
The NTIA Plan also indicates that the FCC intends to (i) initiate a
Notice of Proposed Rule Making by December 31, 2000, to propose spectrum
allocations for 3G services, (ii) issue a Report and Order to allocate spectrum
for 3G services in July 2001, and (iii) complete auctions of spectrum for 3G
services by September 30, 2002.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Plan of Reorganization under Chapter 11 of the U. S.
Bankruptcy Code (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated January 19,
1999).
2.2 Order Confirming the Plan of Reorganization Under Chapter 11
of the U.S. Bankruptcy Code, dated as of March 15, 1999
(incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-1 filed with the SEC on June
17, 1999, No. 333-80929).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (the "March 1999 10-Q")).
3.2 Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the March 1999 Form 10-Q).
*27 Financial Data Schedule (EDGAR filing only).
-----------
*Filed herewith.
(b) REPORTS ON FORM 8-K
None.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: November 13, 2000 NUCENTRIX BROADBAND NETWORKS, INC.
By: /s/ Carroll D. McHenry
----------------------------------------
Carroll D. McHenry
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ J. David Darnell
----------------------------------------
J. David Darnell
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ------------
<S> <C>
2.1 Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy
Code (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated January 19, 1999).
2.2 Order Confirming the Plan of Reorganization Under Chapter 11
of the U.S. Bankruptcy Code, dated as of March 15, 1999
(incorporated by reference to Exhibit 2.2 to the Company's
Registration Statement on Form S-1 filed with the SEC on June
17, 1999, No. 333-80929).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 (the "March 1999 10-Q")).
3.2 Restated Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the March 1999 Form 10-Q).
*27 Financial Data Schedule (EDGAR filing only).
</TABLE>
-----------
*Filed herewith
