<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
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: 000-27582
---------
CELLULARVISION USA, INC.
------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3853788
- ------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
505 PARK AVENUE
NEW YORK, NEW YORK 10022
- ------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 751-0900
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed
since last report)
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
--- ---
The number of outstanding shares the registrant's common stock, par value U.S.
$.01 per share, as of, September 30, 1996 was 16,000,000.
Total number of pages in this Report including Exhibits, if any:
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
Page(s)
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as of December 31,
1995 and the Nine Months Ended September 30,
1996 (unaudited).................................................1
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1995 and the
Three and Nine Months Ended September 30, 1996 (unaudited)......2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and the
Nine Months Ended September 30, 1996 (unaudited).................3-4
Notes to Consolidated Financial Statements (unaudited)...........5-6
ITEM 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations....................7-9
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings......................................9-10
ITEM 2 -- Changes in Securities..................................10
ITEM 3 -- Defaults Upon Senior Securities........................10
ITEM 4 -- Submission of Matters to a Vote
of Security Holders............................10
ITEM 5 -- Other Information......................................10
ITEM 6 -- Exhibits and Reports on Form 8-K.......................11
Signature Page...................................................12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- FINANCIAL STATEMENTS
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................... $ 3,536,354 $ 25,710,378
Accounts receivable, net of allowance
for doubtful accounts of $133,730 and
$71,913.................................... 410,141 383,148
Due from affiliates......................... - 571,684
Prepaid expenses and other.................. 228,803 261,190
Deferred offering costs 1,619,972 -
------------ ------------
Total current assets........... 5,795,270 26,926,400
Property and equipment, net of
accumulated depreciation of
$981,466 and $2,254,970................. 6,321,768 11,090,042
Intangible assets, net of accumulated
amortization of $39,564 and $62,962..... 97,177 127,472
Debt placement fees......................... 622,678 221,020
Other noncurrent assets..................... 158,594 642,465
------------ ------------
Total assets................... $ 12,995,487 $ 39,007,399
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable............................ $ 355,490 $ 1,003,207
Accrued liabilities......................... 2,246,349 980,887
Due to affiliates........................... 1,294,812 -
Note payable to affiliate................... 3,521,257 -
Other current liabilities................... 24,799 16,843
------------ ------------
Total current liabilities...... 7,442,707 2,000,937
Convertible exchangeable
subordinated notes payable.......... 12,576,324 -
Exchange notes.............................. 6,295,017 6,254,709
------------ ------------
Total liabilities.............. 26,314,048 8,255,646
Commitments and contingencies (Note 8)
Stockholders' (deficit) equity:
Common Stock, ($.01 par value;
40,000,000 shares authorized;
12,395,142 and 16,000,000 shares
issued and outstanding).................. 123,951 160,000
Preferred Stock, ($.01 par value; 20,000,000
shares authorized; none issued and
outstanding)
Additional paid-in capital.................. 6,401,454 58,267,533
Deficit accumulated during the development
stage.................................... (19,843,966) (27,675,780)
------------ ------------
Stockholders' (deficit) equity................... (13,318,561) 30,751,753
------------ ------------
Total liabilities and
Stockholders' (deficit)
equity.......................... $ 12,995,487 $ 39,007,399
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
JANUARY 1, 1992
(DATE OF
THREE MONTHS NINE MONTHS INCEPTION)
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, TO SEPTEMBER 30,
1995 1996 1995 1996 1996
------- ----- ------ ------ --------
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 433,476 $ 550,424 $ 587,201 $ 1,428,529 $ 2,731,746
------------ ------------ ------------ ------------ ------------
Expenses:
Service costs........................ 186,010 186,725 265,089 725,749 1,394,443
Selling, general and
administrative.................... 1,849,266 2,223,817 4,122,849 7,018,434 17,837,245
Management fees...................... 677,330 2,024,911 - 4,494,941
Depreciation and amortization........ 344,937 543,692 580,471 1,595,082 3,283,499
------------ ------------ ------------ ------------ ------------
3,057,543 2,954,234 6,993,320 9,339,265 27,010,128
------------ ------------ ------------ ------------ ------------
Operating loss................ (2,624,067) (2,403,810) (6,406,119) (7,910,736) (24,278,382)
Interest income.......................... 105,821 443,224 365,156 961,184 1,991,722
Interest expense......................... (756,514) (238,229) (1,878,290) (882,262) (5,389,120)
------------ ------------ ------------ ------------ ------------
Net loss...................... $ (3,274,760) $ (2,198,815) $ (7,919,253) $ (7,831,814) $(27,675,780)
============ ============ ============ ============ ============
Net lost per common share $(.26) $(.14) $(.64) $(.51)
------------ ------------ ------------ ------------
Weighted average number of share of
common stock 12,395,142 16,000,000 12,395,142 15,434,274
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, JANUARY 1, 1992
--------------------------------------- (DATE OF INCEPTION)
TO SEPTEMBER 30,
-----------------
1995 1996 1996
------------------ ------------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(7,919,253) $(7,831,814) $ (27,675,780)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.... 580,471 1,595,082 3,283,499
Amortization of placement fees... 145,426 58,832 411,467
Provision for doubtful accounts.. 44,644 283,939 486,047
Stock compensation expense....... 150,000 150,000
Changes in assets and liabilities:
Accounts receivable................. (291,851) (256,946) (869,198)
Prepaid expenses and other.......... (57,929) (32,387) (72,736)
Accounts payable and accrued
liabilities....................... 375,350 1,600,112 2,547,604
Other current liabilities........... (1,331) (7,956) 14,593
Due to affiliates................... 1,784,539 (1,866,496) 2,783,344
Accrued interest.................... 1,553,716 4,955 3,876,296
Other noncurrent assets............. (56,974) (483,871) (642,465)
------------------ ------------------- -----------------
Net cash used in
operating activities..... (3,843,192) (6,786,550) (15,707,329)
------------------ ------------------- -----------------
Cash flows from investing activities:
Intangibles......................... (903) (53,693) (190,434)
Property and equipment additions.... (4,906,012) (6,339,958) (16,778,325)
Proceeds from sale of property
and equipment..................... 79,051 2,608,261
Purchase of available-for-sale
securities........................ (6,907,826) (26,916,209)
Maturities of available-for-sale
securities........................ 12,007,597 26,916,209
------------------ ------------------- -----------------
Net cash provided by (used in)
investing activities........... 271,907 (6,393,651) (14,360,498)
------------------ ------------------- -----------------
Cash flows from financing activities:
Advance to HCM stockholders......... - - (3,000,000)
Contributions....................... - - 10,821,878
Distribution........................ (39,844) (13,889) (1,336,614)
Convertible exchangeable subordinated
notes payable..................... - 15,000,000
Proceeds from sale of stock......... - 41,850,000 41,850,000
Repayment of note payable affiliate. (3,521,257) (3,521,257)
Payment of deferred offering costs.. - (2,960,629) (3,060,491)
Placement costs..................... (65,946) - (975,311)
------------------ ------------------- -----------------
Net cash (used in) provided by
financing activities.......... (105,790) 35,354,225 55,778,205
------------------ ------------------- -----------------
Net (decrease) increase in
cash and cash equivalents..... (3,677,075) 22,174,024 25,710,378
Cash and cash equivalents, beginning of
period................................. 7,421,171 3,536,354 -
------------------ ------------------- -----------------
Cash and cash equivalents, end of period. $ 3,744,096 $ 25,710,378 $ 25,710,378
================== =================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, JANUARY 1, 1992
--------------------------------- (DATE OF INCEPTION)
TO SEPTEMBER 30,
----------------------
1995 1996 1996
------------- ------------------ ---------------------
<S> <C> <C> <C>
Supplemental Cash Flow Disclosures:
Cash paid for interest during the period - $ 877,309 $ 877,309
Noncash transactions:
Common stock issued for convertible debt - 12,731,450 12,731,450
Write-off of debt placement fees
in connection with conversion of debt for
common stock - 342,826 342,826
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. They do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. However, except for the events disclosed in Note 2, there has been
no other material change in the information disclosed in the notes to the
consolidated financial statements for the Company's fiscal period ended
September 30, 1996, as compared to the year ended December 31, 1995.
In the opinion of the Management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
2. INITIAL PUBLIC OFFERING
The Company completed its Initial Public Offering which was
consummated on February 13, 1996. The net proceeds to the Company from the
Initial Public Offering, after deducting underwriting discounts and
commissions of $1.05 per share and approximately $2.5 million in other
expenses, were $39,350,000.
Immediately prior to the Initial Public Offering, the Company
effected the following events (collectively, the "Incorporation
Transactions"): (i) $10 million principal amount of the convertible
exchangeable subordinated notes was converted into 4,547 shares of Common
Stock pursuant to their conversion provisions, (ii) the Company issued an
aggregate of 93,180 shares of Common Stock to the stockholders of HCM (the
"Founders") in exchange for all outstanding capital stock of HCM, and the
holders of certain partnership interests of CVNY in exchange for all of their
partnership interests in CVNY, and (iii) the Company effected a
133.0236284-for-1 stock split of the outstanding shares of Common Stock and
issued an aggregate of 13,000,000 shares of Common Stock to the holders
thereof. As a result of the consummation of the Incorporation Transactions,
the Company is the sole stockholder of HCM, the managing general partner of
CVNY, and CVNY continues to carry on its business as an indirect wholly owned
subsidiary of the Company.
Stockholders' equity, and all per share data, have been restated to
give retroactive recognition to the stock split in prior periods.
3. LEGAL PROCEEDINGS
In February 1996, a suit was filed against the Company alleging that
the Company caused the U.S. Army to breach a contract with the plaintiff
wherein the plaintiff was to have an exclusive right to provide cable
television services at an army base located in Brooklyn, New York. The suit
alleges that by entering into a franchise agreement with the Army which grants
the Company the right to enter the army base to build, construct, install,
operate and maintain its multi-channel broadband cellular television system,
the Company induced the Army to breach its franchise agreement with the
plaintiff. The Army has advised the Company that it has the right to award the
franchise to the Company and the Company is continuing to provide service to
the army base. The suit seeks $1 million in damages. Discovery has been
substantially completed and based on the information available to the Company,
the Company has filed a motion to dismiss the case. While the Company cannot
predict whether such motion will necessarily be successful, it has been
advised by counsel that it has a strong factual basis for obtaining a
successful result. The Company does not believe, that in the event an adverse
judgment is rendered, the effect would be material to the Company's financial
position but it could have a material effect on operating results in the
period in which the matter is resolved.
5
<PAGE>
CELLULARVISION USA, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1995, a purported class action suit was filed against
the Company in New York State Supreme Court alleging that the Company had
engaged in a systematic practice of installing customer premises equipment in
multiple dwelling units without obtaining certain landlord or owner consents
allegedly required by law. The suit seeks injunctive relief and $4 million in
punitive damages. The Company, believes, based upon advice of counsel, that
this suit is likely to be resolved without a material adverse effect on the
financial condition of the Company, but could have a material effect on
operating results in the period which the matter is resolved.
4. FINANCING
On July 29, 1996 the Company distributed a preliminary offering
memorandum in connection with its offering of approximately $235 million
aggregate principal amount of Senior Notes due 2006. The Company intended to
use the proceeds of this offering for the expansion of its communications and
entertainment services to cover most of the New York Primary Metropolitan
Statisctical Area ("PMSA") and the potential expansion of its existing
licensed territory to include the entire New York Basic Trading Area.
Due to adverse changes in market conditions within the high yield
sector of the financial market during August 1996, the offering was withdrawn
prior to pricing the issue. It is contemplated that the Company will return to
the long-term debt capital markets in the future when market conditions are
more favorable to obtain the capital necessary to complete the buildout of its
system.
The Company is able to control the timing of deployment of capital
resources based on the variable cost nature of the business and the
incremental fixed cost per transmitter site constructed. The Company's current
business strategy is based on rapid subscriber growth. Should capital
conservation measures be required, the Company may slow the rate of subscriber
growth or delay additional transmitter deployment, enabling the Company to
operate for an extended period of time.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the corresponding
discussion and analysis included in the Company's Report on Form 10-K for the
year ended December 31, 1995.
RESULTS OF OPERATIONS
The Company has completed construction of seven transmitters. These
cells create a service area of 768,000 homes in Brooklyn and Queens, and
300,000 homes in Manhattan. Five additional sites are under construction which
will bring the total at year-end to 12 transmitters, covering almost 50% of
the 3.2 million homes in the PMSA.
The Company had previously planned to complete 19 cells by year-end
1996, but reduced this to 12 to better coordinate the construction of cells
and the rollout of a focused marketing program as the cells are completed.
The Company continued its pattern of consistent subscriber growth
during the third quarter and has approximately 9,500 customers as of November
14, 1996. This represents a 46% increase since the Company reported 6,500
subscribers on August 15, 1996. The additional cells planned for launch in
November and December will provide substantial additional marketable territory
and will enable sales and marketing to expand their "run rate" of sales
significantly, to reach a rate of 1,000 sales per week in early 1997.
The Pay-to-Basic ratio (the number of premium channels subscribed to,
divided by the aggregate number of subscribers) was 231% for the third quarter
of 1996. The Company launched an in-house telemarketing effort in October.
This team has had immediate success upgrading subscribers to premium packages
during installation pre-calls and "welcome" calls.
The Pay-Per-View buy rate (the number of pay-per-view events
purchased per month, divided by the aggregate number of subscribers) was 27%
for the third quarter of 1996.
As part of its on-going market trial, the Company continued to
install modems for high speed Internet access. The Company also demonstrated a
"non-line-of-sight" telephony system, and began negotiations with NYNEX to
secure interconnection and resale agreements.
Nine and Three Months Ended September 30, 1996 Compared to
Nine and Three Months Ended September 30, 1995.
Revenue increased $842,000 from $587,000 for the nine months ended
September 30, 1995 to $1,429,000 for the nine months ended September 30, 1996
and increased $117,000 from $433,000 for the three months ended September 30,
1995 to $550,000 for the three months ended September 30, 1996. These
increases in revenue are due primarily to an increase in subscribers and the
addition of premium and pay-per-view services during the second quarter of
1995.
Operating expenses increased $2,346,000 from $6,993,000 for the nine
months ended September 30, 1995 to $9,339,000 for the nine months ended
September 30, 1996 and decreased $104,000 from $3,058,000 for the three months
ended September 30, 1995 to $2,954,000 for the three months September 30,
1996. This increase for the nine month period is primarily attributable to
costs associated with the Company's commercial roll-out, including service
costs, selling, general and administrative expenses, and depreciation and
amortization, offset in part by the decrease in management fees due to the
termination of the management agreement with the Bell Atlantic Corporation as
of December 31, 1995. The decrease for the three month period is primarily
attributable to the reduction of the Bell Atlantic Management fees offset in
part by an increase in selling, general, and administrative expenses and
depreciation and amortization.
7
<PAGE>
Service costs increased $461,000 from $265,000 for the nine months
ended September 30, 1995 to $726,000 for the nine months ended September 30,
1996 and increased $1,000 from $186,000 for the three months ended September
30, 1995 to $187,000 for the three months ended September 30, 1996. These
increases are due primarily to fees paid to providers of television
programming which increase with the growth of revenues and subscribers. The
slight increase for the three months is attributable to subscribers switching
to packages for which service costs are lower and the Company negotiating
improved revenue sharing agreements for Pay-Per-View events.
Selling, general and administrative expenses increased $2,895,000
from $4,123,000 for the nine months ended September 30, 1995 to $7,018,000 for
the nine months ended September 30, 1996 and increased $375,000 from
$1,849,000 for the three months ended September 30, 1995 to $2,224,000 for the
three months ended September 30, 1996. These increases are primarily
attributable to headcount-related costs (as the Company's employee base rose
from 58 at September 30, 1995 to 88 at September 30, 1996), and legal costs
primarily associated with the FCC licensing process.
Management fees decreased $2,025,000 from $2,025,000 for the nine
months ended September 30, 1995 to $0 for the nine months ended September 30,
1996 and decreased $677,000 from $677,000 for the three months ended September
30, 1995 to $0 for the three months September 30, 1996. The decrease in
management fees is attributable to the termination of the management agreement
with the Bell Atlantic Corporation as of December 31, 1995.
Depreciation and amortization increased $1,015,000 from $580,000 for
the nine months ended September 30, 1995 to $1,595,000 for the nine months
ended September 30, 1996 and increased $199,000 from $345,000 for the three
months ended September 30, 1995 to $544,000 for the three months ended
September 30, 1996. These increases were due primarily to the purchase and
installation of customer premises equipment, equipment for the Company's
transmitter sites, and the continued build-out of the Company's customer
service/administrative facilities.
Interest expense decreased $996,000 from $1,878,000 for the nine
months ended September 30, 1995 to $882,000 for the nine months ended
September 30, 1996 and $519,000 from $757,000 for the three months ended
September 30, 1995 to $238,000 for the three months ended September 30, 1996.
These decreases are due primarily to the conversion of approximately $12.6
million of convertible exchangeable subordinated notes payable to common stock
in conjunction with the IPO, and the repayment of approximately $3.5 million
notes payable from the proceeds of the IPO which occurred in February 1996.
Interest income increased $596,000 from $365,000 for the nine months
ended September 30, 1995 to $961,000 for the nine months ended September 30,
1996 and $337,000 from $106,000 for the three months ended September 30, 1995
to $443,000 for the three months ended September 30, 1996. These increases are
primarily due to the interest earned on the proceeds of the IPO not yet
expended.
Net loss for the nine months ended September 30, 1996 was $7,832,000
compared to a net loss of $7,919,000 for the nine months ended September 30,
1995. The net loss for the three months ended September 30, 1996 was
$2,199,000 compared to $3,275,000 for the three months ended September 30,
1995. The decrease in net loss is due primarily to reduced interest expense
and increased interest income due primarily to proceeds received from the IPO.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company consummated the Initial Public Offering
of 3,333,000 shares of Common Stock (including an aggregate of 333,000 shares
sold by certain shareholders of the Company) at the initial offering price of
$15.00 per share. The net proceeds to the Company from the Initial Public
Offering, after deducting underwriting discounts and commissions of $1.05 per
share and approximately $2.5 million of other expenses, were approximately
$39.4 million.
With the proceeds from the initial public offering, the Company paid
approximately $3.6 million in principal and interest to Bell Atlantic
Corporation to satisfy the note payable at December 31, 1995. In addition, the
Company paid $3 million of offering costs during the first and second
quarters.
8
<PAGE>
For the nine months ended September 30, 1996, the Company expended
$6.8 million on operating activities. Of these expenditures, $2.3 million
related to payments of liabilities and obligations incurred during the fourth
quarter of 1995.
For the nine months ended September 30, 1996, the Company expended
$6.4 million on property and equipment additions, consisting primarily of
transmitter equipment and customer premises equipment, as the Company
continues its buildout of its infrastructure and adds to its subscriber base.
The Company anticipates 1996 capital expenditures of approximately
$12 million, which includes the cost of completing construction of five
additional cell sites during the fourth quarter, an additional head-end
facility, purchasing customer premises equipment, related installation costs
and various office- and warehouse- related costs. The actual amount of costs
for such capital expenditures may differ. As of September 30, 1996 the Company
had approximately $3.0 million of equipment deposits paid to CellularVision
Technology & Telecommunications ("CT&T") pursuant to the financial
requirements of CT&T's vendors.
On July 17, 1996, by unanimous vote, the FCC adopted the First Report
and Order and Fourth NPRM. The FCC commented in the First Report and Order and
Fourth NPRM that "it is vital to the LMDS industry to commence the licensing
process as soon as possible," and stated that it intends "to resolve all
remaining issues on an expedited timeframe." Accordingly, the formal comment
cycle in response to the Fourth NPRM began on August 12, 1996 and concluded on
August 22, 1996, an accelerated timeframe which the Company believes reflects
the FCC's commitment to conclude this proceeding promptly. Thus, with the
close of the Fourth NPRM's comment cycle, the Company expects the FCC before
the end of 1996 to adopt a Second Report and Order in this proceeding,
including final service, auction and eligibility rules for LMDS, and
addressing the proposed allocation of 300 MHz in the 31 GHz band for LMDS.
Additionally, the FCC could address the issue of the Company's tentative
Pioneer's Preference at that time. If the FCC takes final action on the
remaining LMDS rules in 1996, as expected, LMDS auctions could commence by the
end of the first quarter of 1997.
Because of these FCC actions, the Company believes that it has an
unprecedented opportunity to expand its service territory and operations by
participating in the LMDS spectrum auctions. It is anticipated that this may
create significant additional capital requirements, beyond the resources
currently available to the Company. Therefore, the Company is actively
exploring debt financing alternatives and potential strategic relationships to
ensure maximum flexibility in pursuing these growth opportunities.
The Company has recorded net losses and negative operating cash flow
in each period of its operations since inception. While such losses and
negative operating cash flow are attributable to the start-up costs incurred
in connection with the roll-out of the Company's system, the Company expects
to continue experiencing operating losses and negative cash flow for at least
one year as a result of its planned expansion within the New York PMSA.
The Company is able to control the timing of deployment of capital
resources based on the variable cost nature of the business and the
incremental fixed cost per transmitter site constructed. The Company's current
business strategy is based on rapid subscriber growth. Should capital
conservation measures be required, the Company may slow the rate of subscriber
growth or delay additional transmitter deployment, enabling the Company to
operate for an extended period of time.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
In February 1996, a suit was filed against the Company alleging that
the Company caused the U.S. Army to breach a contract with the plaintiff
wherein the plaintiff was to have an exclusive right to provide cable
television services at an army base located in Brooklyn, New York. The suit
alleges that by entering into a franchise agreement with the Army which grants
the Company the right to enter the army base to build, construct, install,
operate and maintain its multi-channel broadband cellular television system,
the Company induced the Army to breach its franchise agreement with the
plaintiff. The Army has advised the Company that it has the right to award the
franchise to the Company and the Company is continuing to provide service at
the army base. The suit seeks $1 million in damages. Discovery has been
substantially completed and based on the information available to the Company,
the Company has filed a motion to dismiss the case. While the Company cannot
predict whether such motion will necessarily be successful, it has been
advised by counsel that it has a strong factual basis for obtaining a
successful result. The Company does not believe that in the event an adverse
judgment is rendered, the effect would be material to the Company's financial
position but it could have a material effect on operating results in the
period in which the matter is resolved.
In November 1995, a purported class action suit was filed against the
Company in New York State Supreme Court alleging that the Company had engaged
in a systematic practice of installing customer premises equipment in multiple
dwelling units without obtaining certain landlord or owner consents allegedly
required by law. The suit seeks injunctive relief and $4 million in punitive
damages. The Company, believes, based upon advice of counsel, that this suit
is likely to be resolved without a material adverse effect on the financial
condition of the Company, but could have a material effect on operating
results in the period in which the matter is resolved.
Since the date of the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1996, there have been no material developments with
respect to any other legal proceedings reported in Item 1 to such report.
ITEM 2 -- CHANGES IN SECURITIES
None.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
The Company has previously reported a possible claim for a consulting
fee from Peter Rinfret, one of its directors. Mr. Rinfret no longer asserts
such a claim.
10
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None
b. Current Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during
the period beginning January 1, 1996 and ending September 30, 1996.
11
<PAGE>
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.
CELLULARVISION USA, INC.
Date: November 14, 1996 By: /s/Charles N. Garber
--------------------------
Charles N. Garber
Chief Financial Officer
12
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<PERIOD-END> SEP-30-1996
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0
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