SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 000-27582
CELLULARVISION USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3853788
(State or Other (I.R.S. Employer
Jurisdiction of Identification
Incorporation or Number)
Organization)
505 Park Avenue, New York, New York 10022
(Address of Principal Executive Offices)
(212) 751-0900
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X) No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the Registrant's Common Stock
held by nonaffiliates of the Registrant was $50,461,000 on March
26, 1997, based on the closing sale price of the Common Stock on
the NASDAQ National Market system on that date.
The number of shares of Common Stock outstanding as of
March 26, 1997 was 16,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Registrant's Proxy Statement for its Annual Meeting of
Stockholders scheduled to be held in May 1997.
CELLULARVISION USA, INC.
TABLE OF CONTENTS
PART I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 8 Consolidated Financial Statements and Supplementary Data
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial
Owners and Management
Item 13 Certain Relationships and Related Transactions
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K
The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for forward-looking statements. Certain
information included in this Annual Report on Form 10-K for the
years ended December 31, 1995 and 1996 is forward-looking, such
as information relating to future capital expenditures and the
effects of future regulation and competition. Such forward-
looking information involves important factors that could
significantly affect expected results in the future from those
expressed in any forward-looking statements made by, or on behalf
of, the Company. These factors include, but are not limited to,
uncertainties relating to economic conditions, government and
regulatory policies, pricing and availability of equipment,
technological developments and changes in the competitive
environment in which the Company operates. Each such forward-
looking statement is qualified by reference to the following
cautionary statements.
Changes in the factors set forth above may cause the
Company's results to differ materially from those discussed in
the forward-looking statements. The factors described herein are
those that the Company believes are significant to the forward-
looking statements contained herein and reflect management's
subjective judgment as of the date hereof (which is subject to
change). However, not all factors which may affect such forward-
looking statements have been set forth. The Company does not
undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
PART I
ITEM 1. BUSINESS
Overview
CellularVision USA, Inc. (together with its operating subsidiary,
CellularVision of New York, L.P. ("CVNY"), the "Company") owns and
operates a multichannel broadband cellular television system in an area
which includes New York City under a 1,000 MHz commercial license from
the Federal Communications Commission (the "FCC"). The Company has been
operating a 49-channel broadband cellular television system in portions
of Brooklyn on a limited basis since 1992. In December 1995, the FCC
granted the Company's 34 applications for additional commercial
transmitter sites. In 1996, the Company expanded its subscription
television services to cover approximately one-third of its licensed
service area, the 8.3 million population, New York Primary Metropolitan
Statistical Area ("PMSA"), a region consisting of New York City and
three suburban counties. Currently, there are approximately 2.9 million
people in the area covered by the Company's ten operational
transmitters in Brooklyn, Queens and Manhattan. The Company intends to
have 17 transmitters in operation by the end of 1997, which are
expected to give it access to subscribers throughout most of the New
York PMSA. The Company's transmitter permits are conditional upon, and
subject to conformance with the final FCC rules for Local Multipoint
Distribution Service ("LMDS").
On March 13, 1997, the FCC released its Second Report and Order,
Order on Reconsideration, and Fifth Notice of Proposed Rulemaking
("Second Report and Order") which adopted the service, auction and
eligibility rules for the nationwide licensing of LMDS. The FCC stated
in the Second Report and Order that it will commence processing the
Company's renewal application by placing the application on Public
Notice not later than 30 days after the March 13, 1997 release date of
the Order. The new LMDS service rules will apply to this renewal
application. As a result of its deployment efforts since 1992, and
based on the license renewal expectancy earned by the Company, the
Company believes the renewal application should be granted promptly by
the FCC.
The FCC's rules for LMDS set forth in the Second Report and Order
authorize the Company, upon receiving its license renewal, and future
providers of LMDS services in other areas, to offer a variety of two-
way broadband services, such as wireless local loop telephone services,
high speed data transmission (including Internet access), video
teleconferencing (including distance learning and telemedicine) and
interactive television (collectively, "Two-Way Services"). The Company
believes that future implementations of its multichannel broadband
cellular telecommunications system will not only support these two-way
services, but also be able to accommodate additional television channel
capacity through the use of digital compression and other techniques,
if and when the costs of such technologies make implementation
commercially feasible. In addition, the FCC rules for LMDS provide for
the granting, through a competitive auction process, of licenses to
offer these services in basic trading areas ("BTA's") throughout the
United States. The Company believes that, as a result of the licenses
awarded through this proposed auction process, a new segment of the
telecommunications industry will emerge based upon the multiple uses
for this wide band of spectrum. The Company expects to bid in the LMDS
auctions, alone or in partnership with others, to expand its operations
to other territories, thus leveraging the experience and expertise it
has obtained through operation of its existing LMDS system, presently
the only commercial operation of LMDS in the United States. The Company
believes it will be in the forefront of this new industry segment due
to its early operational start date, its unique LMDS operating
experience, and its existing commercial license to serve the nation's
largest media market.
In addition, pursuant to the Company's Pioneer's Preference
request, the FCC may grant the Company the option to purchase on a
discounted basis, an expansion of its existing licensed territory to
include the entire New York BTA, a region consisting of the New York
PMSA and 18 additional counties located in New York, New Jersey,
Connecticut and Pennsylvania, which would bring approximately 8.9
million additional people into the Company's service area. In the
Second Report and Order the FCC deferred action on the Company's
tentative Pioneer's Preference award and instead ordered a "peer
review" process, whereby the FCC would select a panel of technical,
non-FCC experts to review the Company's technology and advise the FCC
whether the Pioneer's Preference should be granted. The Company
believes, based on the 1994 General Agreement on Tariffs and Trade
("GATT") legislation and the FCC's prior determinations not to subject
parties to peer review whose Pioneer's Preference applications were
accepted for filing before September 1, 1994, that this is an
unnecessary regulatory requirement. The Company is currently seeking
FCC clarification on this issue. Accordingly, there can be no assurance
that the FCC will grant the Company's Pioneer's Preference.
Company History
Hye Crest Management, Inc., a predecessor of the Company ("Hye
Crest"), was formed in 1988 by Messrs. Shant S. Hovnanian, Bernard B.
Bossard and Vahak S. Hovnanian, directors of the Company (the
"Founders"). Prior to the consummation of the Incorporation
Transactions (as defined below), each of the Founders held one-third of
the outstanding capital stock of Hye Crest. In 1991, Hye Crest received
permission from the FCC to commence commercial broadcast operations
using the LMDS technology developed by Suite 12 Group, which was formed
in 1986 and is also owned by the Founders in equal shares ("Suite 12").
From 1986 through 1992, Suite 12's principal operations consisted of
the development of the LMDS technology. Hye Crest began service to
subscribers in 1992. Suite 12 permitted Hye Crest to use certain patent
rights, the LMDS technology, and head-end and transmitter equipment
supporting commercial broadcast operations under an informal
arrangement that was formalized in 1993 when (i) Suite 12 conveyed that
equipment to Hye Crest, and (ii) Suite 12's successor, CellularVision
Technology & Telecommunications, L.P. ("CT&T"), entered into a license
agreement (the "CT&T License Agreement") with CVNY. The Founders
collectively own 80%, and a subsidiary of Philips Electronics North
America Corporation ("Philips") holds 20%, of the outstanding equity
interests of CT&T.
CVNY was formed in 1993 and initially financed by the Founders to
carry on the business of Hye Crest and commercialize a multiple-use
cellular telecommunications service in the New York PMSA, beginning in
the Brighton Beach area of Brooklyn. Hye Crest contributed all of its
operations and assets, including its FCC commercial license, to CVNY in
exchange for managing general partnership interests constituting more
than 90% of CVNY's outstanding equity interests. For regulatory reasons
which are no longer applicable, Hye Crest temporarily held title to the
head-end facilities, which have now been transferred to CVNY. Suite 12
contributed an FCC experimental license to CVNY in exchange for limited
partnership interests. In July 1993, a subsidiary of Bell Atlantic
Corporation ("Bell Atlantic") became the Company's first corporate
investor. From 1993 to 1995, Bell Atlantic also provided certain start-
up operational and management services to the Company. In October
1993, Philips purchased an equity interest in the Company from its
Founders, and in December 1993, investment funds managed by affiliates
of J.P. Morgan & Co. Incorporated ("Morgan" and, together with Bell
Atlantic and Philips, the "Corporate Investors") invested in the
Company.
The Company was formed in October 1995 to serve as a holding
company for 100% of both Hye Crest and CVNY. In February 1996, the
Company consummated the initial public offering (the "Initial Public
Offering", "IPO") of shares of its common stock, par value $.01 per
share (the "Common Stock"). Immediately prior to the Initial Public
Offering, the Company consummated the following events (collectively,
the "Incorporation Transactions"): (i) Morgan converted $10 million
principal amount of the $15 million principal amount of convertible
exchangeable subordinated notes of CVNY (the "Morgan Notes") into 4,547
shares of Common Stock and exchanged $5 million principal amount,
together with interest accrued thereon as of December 15, 1995, for non-
convertible debt securities (the "Morgan Exchange Notes") of the
Company, (ii) the Company issued an aggregate of 93,180 shares of
Common Stock to the Founders in exchange for all outstanding capital
stock of Hye Crest, and to Bell Atlantic, Philips and Suite 12 in
exchange for all of their respective 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 Incorporation Transactions, the Company is the sole stockholder
of Hye Crest, which has no independent business, and CVNY is a wholly
owned subsidiary of the Company and continues to carry on its business.
In December 1995, the FCC approved the pro forma transfer of control of
CVNY from Hye Crest to the Company. In July, 1996, Hye Crest changed
its name to CellularVision Capital Corporation.
Business Strategy
The Company's strategy for successful operation is based upon the
following principles:
Capture New York Cable Television Market Share. The Company
intends to capture a significant portion of the 3.2 million-household
New York PMSA subscription television market by instituting a mass
marketing program highlighting the Company's dependable, high quality
picture and low prices. The Company currently offers 49 of the most
popular cable and broadcast television channels at prices 20% to 30%
less than its franchised cable competitors.
The Company's prompt, courteous and effective customer service
specialists are central to the differentiating the Company from
competitors. At present, the Company's average response time to a phone
call is under 10 seconds and over 90% of calls are answered within 30
seconds, a response time that is better than industry standards. The
Company offers same-day repair services, and customers' calls are
handled 24-hours a day.
Expand Business Class Market in New York. The Company has
implemented a strategy which brings business-oriented television
programming to workplaces in the New York City business and financial
community where cable television connections are now unavailable or not
economically viable. The Company has formed a strategic cross promotion
alliance with Bloomberg Information Television (BIT). The Company
currently markets a 14 channel "Business Class" service, featuring BIT
and other popular news and business channels, to offices in Lower and
Mid-town Manhattan.
Expand Service Territory; Pursue New Markets. Depending upon the
confirmation of the Company's tentative Pioneer's Preference and prices
paid at the LMDS auctions for other BTA licenses, the Company plans to
expand its service area to include the entire New York BTA, adding
approximately 8.9 million people to its service area. Under its
tentative Pioneer's Preference, if granted, the Company would have the
exclusive right to extend its license to add this additional territory
at a 15% discount from the average price paid at the LMDS auctions for
licenses in comparable service areas. The FCC has permitted broadband
Personal Communications Services Pioneer's Preference awardees to pay
for their licenses over five years, with interest only payments for the
first two years, at an interest rate equal to the five-year
U.S.Treasury Note plus 2.5 percent. The Company believes that it will
be permitted to pay for its Pioneer Preference license, if granted,
under similar terms, although there can be no assurance that this will
be the case. If the FCC does not grant the Company's Pioneer's
Preference, the FCC, can be expected to auction this remaining portion
of the New York BTA and the Company may then acquire this remaining
service area at auction.
Introduce Two-Way Broadband Services. The Company expects to be
among the first LMDS operators to introduce two-way services, such as
wireless local loop telephone services, high speed data transmission
(including Internet access), video teleconferencing (including distance
learning and telemedicine) and interactive television, which services
were authorized by the FCC in the rules for LMDS adopted in the Second
Report and Order.
In 1996 the Company introduced the first high-speed wireless modem
to the New York market. Field trails of a 500 Kbps modem began in
September 1996 and have been successfully completed. The $200 product
operates at data rates approximately 20 times faster than conventional
28.8 Kbps modems, and approximately 4 times faster than ISDN. The Company
recently began marketing trials that will continue until the expected
commercial launch later in 1997.
The CellularVision TM System
The Company's multichannel broadband cellular television system
operates in the 28 GHz frequency range. Prior to the development of the
Company's system, transmission of communication signals in the 28 GHz
frequency range was not commercially pursued apart from limited
satellite applications because technical impediments, such as intercell
interference and rainfade, were thought to be insurmountable. The
Company's system eliminates or significantly reduces these impediments
through the placement of its cells and its unique system architecture.
Video, telephone services ("telephony") or data signals
transmitted through the Company's system, such as television
programming, are received by the system from satellite transponders,
terrestrial microwave facilities and/or studios at a head-end. Signals
from the head-end are then transmitted to omnidirectional transmitters
or a small number of broad-beam transmitting antennas (each, a
"transmitter") located in each adjacent cell which, in turn, transmits
the signals to subscribers within the cell. Point-to-point relays (the
"relays"), which are installed with the transmitter, are used to
transmit signals to cells not adjacent to the head-end. The Company
then deploys small solid-state repeaters to transmit signals into
shadowed areas. The signal is received at the subscriber's premises by
a small (approximately six and five-eighths inches square) flat plate,
high-gain antenna connected to one or more fully-addressable set-top
converters. One remote control unit is provided with each set-top
converter.
Competitive Advantages
The Company's system has a number of significant cost and
technical attributes that the Company believes will affect its
competitiveness:
Low Cost Infrastructure. The Company believes that its system
offers a low cost, high quality and dependable alternative to both
franchised cable systems and satellite systems, such as Direct
Broadcast Satellite ("DBS"). The Company believes that it can
consistently offer substantially the same services at significantly
lower prices than franchised cable systems because the Company's system
does not require the extensive networks of cables and amplifiers or the
constant maintenance and repair of system architecture inherent in such
systems. DBS systems have a lower cost per household passed but involve
the expense associated with high-powered direct broadcast satellites.
Currently the subscriber is required to purchase receiving equipment
priced over $200 and pay up to an additional $200 for installation. In
addition, subscribers are required to pay monthly charges comparable to
cable rates. By comparison, the Company's subscribers have to pay up to
a $50 installation fee, all or a portion of which may be waived during
promotions, and monthly charges that are significantly lower than
comparable cable rates.
High Quality Picture. The Company's system has been designed to
deliver a generally superior picture quality as compared to the quality
generally characteristic of franchised cable or current MMDS systems.
In a franchised cable system, each time a television signal passes
through an amplifier, some measure of noise is added which results in a
grainier picture. As a result, franchised cable picture quality
generally degrades significantly depending on the distance the signal
travels from the head-end to the subscriber. Current MMDS systems lack
the FM video fidelity associated with the Company's system and the
Company believes that these systems are also generally subject to
perceptible interference. The Company's system, by contrast, has been
designed to deliver its subscribers a video picture without perceptible
interference under most conditions. The superior quality of the
Company's system is particularly striking on large-screen and
projection televisions, which amplify the distortions and graininess
characteristic of other transmission technologies.
Dependability. As compared to franchised cable systems, the
Company believes that its system provides a highly reliable signal
because there is no cable, amplifiers or processing and filtering
equipment between the transmitter which serves the subscriber and the
subscriber's household to potentially break or malfunction. Failure of
any one of these components in the chain may "black-out" large portions
of franchised cable systems, and diagnosis and repair efforts involve a
network consisting of hundreds of miles of cable and related relay
equipment, in contrast to the Company's simpler subscriber/cell
alignment. The Company's transmitter installations are fully redundant,
with automatic fault detection and switch-over to a back-up transmitter
and an uninterruptable power supply allowing continuous broadcasts
during temporary local power outages.
Compact Antenna. Unlike currently available MMDS systems, which
require rooftop mounted antennas of varying sizes up to three feet in
diameter, or DBS systems, which require an 18-inch outdoor dish aimed
directly at a satellite stationed low above the southern horizon, the
Company's antennas, in many cases, permit reception of signals when
mounted inside the subscriber's window, eliminating the need for
outdoor installations.
The Company believes that these antennas, in many cases, permit
delivery of its services to the apartment buildings and office towers
which are characteristic of much of its service territory without
extensive in-building wiring. This wiring is necessary not only in the
case of franchised cable, but also with wireless technologies such as
MMDS, Satellite Master Antenna ("SMATV") service and DBS, whose signals
require a direct line-of-sight to the transmitter, and, consequently,
in a densely populated urban environment such as New York City,
generally require rooftop antenna installation in apartment or office
buildings and internal wiring of the building to deliver service to
subscribers. Because the Company believes that its system will in many
cases be able to be installed for an individual subscriber without such
wiring, the Company expects that its marketing efforts will be
simplified.
Localized Programming and Advertising Options. The Company's
channel offerings can be localized on a cell-by-cell basis, permitting,
for example, channels targeted to demographic or linguistic groups in
particular neighborhoods, as well as micro-marketing. In comparison,
cable operators generally offer uniform programming throughout a
geographic service area, and DBS systems offer the same programming on
a nationwide basis and do not offer any local programming.
Accurate, High-Speed Data Transmission. The system's high signal-
to-noise ratio enables it to transmit large volumes of data at least as
accurately as fiber optic systems. This capability enables it to
support a high-speed, broadband data network for Internet access and
private data transmission applications.
Mitigation of the Multipath Phenomenon. Multipath is a phenomenon
in broadcast transmission which results in the reception of multiple
signals at the receiver (literally on multiple transmission paths)
which can severely degrade the picture and audio quality or cause
undesirable levels of errors in digital systems. Multipath can be a
severe drawback in systems such as VHF/UHF television and currently
available MMDS systems, which use AM modulation and relatively
broadbeam receive antennas. The Company's system, which employs FM
modulation and narrow beam receive antennas, can reject multipath
degradation of the signal. Because of this advantage, the Company
believes that its service will be relatively immune to the picture
"ghosting" and other degradations that result from multipath.
Large Spectrum Grant and Efficient Spectrum Usage. The Company
currently has the right to use 1,000 MHz of spectrum, one of the
largest blocks of spectrum ever awarded, and its system permits reuse
of this spectrum in each one of its cells. This may result in
advantages over competing technologies, such as MMDS systems, which
typically have access to a maximum of 200 MHz of fragmented spectrum
and use frequencies only once in a metropolitan area. The Company
believes that its spectrum-efficient system will enhance its ability to
provide localized programming and advertising options and, eventually,
to examine and address on a selective basis additional business
opportunities for two-way services as are permitted by the FCC in the
LMDS Second Report and Order. The Company, consistent with the rules
adopted in the Second Report and Order, will have exclusive access to
an additional 150 MHz of 31 GHz spectrum once its current NYPMSA
license is renewed, bringing its total spectrum grant to 1,150 MHz.
Future Two-Way Broadband Services
The Company expects that future implementations of its system will
support two-way services such as wireless local loop telephony, high
speed data transmission (including Internet access), video
teleconferencing (including distance learning and telemedicine) and
interactive television. The Company's system can support two-way
communication by inserting communication channels between the Company's
49 polarized video channels and transmitting such communication
channels in the opposite polarization. An alternative approach to this
configuration can be achieved through separation of the two-way
services in a separate band assigned to LMDS in the higher frequencies.
In the Second Report and Order, the FCC adopted flexible rules for LMDS
that will expand the range of services that the Company is authorized
to offer to its subscribers to include two-way services. Implementation
of such services will be predicated upon the availability of the
requisite two-way LMDS equipment, which the Company's suppliers and
other third parties currently have under development and, in the case
of interactive video, upon the emergence of available programming.
The Company believes that it will have a substantial competitive
advantage in providing these services to certain markets because of its
inherent ability to access many sites without the cost of installing
and maintaining telephone or fiber optic lines in a crowded
metropolitan environment, or accessing and wiring individual buildings.
This advantage will be enhanced in the case of potential two-way
customers who are already multichannel television subscribers. Thus,
residential subscribers may be offered an upgrade to telephony
services, interactive television and high speed data access services,
such as the Internet, and business subscribers who have subscribed to
Business Class Service may be offered high speed broadband links for
private data networks.
The Company has demonstrated a non-line-of-site, 28 GHz wireless
telephone link and video-telephony link using a prototype transceiver
that supports such services. A commercial version is currently under
development. The other hardware necessary to support two-way services
would consist of minor modifications to off-the-shelf equipment such as
switches and converters to permit existing input devices other than
television sets, such as telephones and computers, to be connected to
the system.
The Company believes that two-way services can be supported
without interference with its existing analog 49-channel multichannel
broadband cellular television system, and that this system will support
digital compression technologies when commercially viable, permitting a
significant increase in the number of cable channels and at the same
time permitting enhanced two-way services. Nonetheless, like any
wireless system, the Company's operations will ultimately be subject to
total bandwidth constraints, and the Company intends to manage its
service offerings to focus on high value-added telecommunications
markets for which the Company's technologies are best suited. Because
the Company's offerings of two-way services could potentially be
locally tailored on a cell-by-cell basis, various combinations of two-
way services could be deployed.
While the Company is not currently authorized to provide two-way
services, and may not be technically prepared to begin offering any of
these services on a commercial basis upon receiving authorization to do
so (which will occur upon renewal of its New York PMSA license), the
Company believes its system can be configured to support, and intends
to offer, some or all of the following two-way services:
Wireless local loop telephony. The Company's system could be
adapted to support ordinary voice telephony, giving customers equipped
with a two-way antenna the ability to plug both their television and
their telephone into the same specially adapted converter box, paying
for both services with a single monthly bill. Calls would be switched
either at a site co-located with the local telephone company, or at a
private switching facility. The Company believes deregulatory trends in
the telephone industry may make this type of alternate access service
an increasingly attractive business for the Company, either solely or
through an alliance with strategic partners. For this reason, the
Company has commenced negotiations with NYNEX, the local exchange
carrier, for an interconnection and resale agreement, and has begun
preparation of an application to the state authorities for the
necessary approvals to provide local telephone service.
High speed data transmission. Given the low cost of build-out, the
Company believes its system provides an attractive method of linking
wide area networks on a primary or back-up basis and providing
individuals and businesses with high speed data transmission, including
Internet access.
Video teleconferencing. The Company has demonstrated in tests the
capacity of its system to support full-duplex, full motion two-way
video teleconferencing, and is evaluating the purchase of equipment
that would support such a service among its subscribers within its
service territory in the future. The Company intends to select a
transmission standard that will permit an interface with video
teleconferencing systems in other areas. The system requires a standard
video camera and a two-way antenna/transceiver, and produces a quality
of service attainable today on a commercial basis only through
expensive fiber optic cabling and/or broadband satellite linkages.
Video teleconferencing has a number of applications, including personal
and business communications and specialized applications such as
distance learning and telemedicine.
Interactive television. The Company expects that demand will exist
in the future for a communications medium that can support interactive
television programming such as interactive home shopping, mass audience
participation programs and sophisticated, multiplayer video games. The
Company believes that its system's technical characteristics of low-
cost build-out (especially as compared with the cost of laying fiber
optic cable), high quality and two-way capability can make it a leading
technology supporting these services.
Current Operations
The Company is licensed by the FCC to conduct operations in the
New York PMSA and, based on the FCC's December 1995 grant of the
Company's 34 applications for additional commercial transmitter sites,
intends to deploy additional transmitters that will give it access to
subscribers throughout most of the New York PMSA by the end of 1997.
These grants are subject to modification to conform with the FCC's
final rules for LMDS. According to industry estimates, the New York
PMSA includes approximately 8.3 million people, of which the Company
believes a large proportion will be capable of being served by the
Company's system. In addition, if the FCC grants the Company a
Pioneer's Preference, under the FCC's most recent proposal, the Company
would be allowed to expand its service area to include the entire New
York BTA, of which the New York PMSA is a part, by paying a fee
representing the difference between the value of a license to serve the
New York BTA and the value of the Company's current commercial license
to serve the New York PMSA, subject to a 15% discount from the average
auction price paid at the LMDS auctions for licenses in comparable
service areas. See "_Industry Regulation." The expansion of the
Company's licensed territory to include all of the New York BTA would
bring an approximate addition of 8.9 million people into its service
area. However, the Commission in the Second Report and Order, decided
to subject the Company's Pioneer's Preference request to a peer review
process. Therefore, there can be no assurance that the FCC will grant
the Company's Pioneer's Preference.
The Company's head-end has been fully operational since 1992 and
is currently being used to transmit programming to the 10 operational
cells located in Brooklyn, Queens and Manhattan. In 1996, the Company
expanded its subscription television services to cover one-third of its
licensed service area, the 8.3 million people New York Primary
Metropolitan Statistical Area ("PMSA"), a region consisting of New York
City and three suburban counties. Currently, there are approximately
2.9 million people in the area covered by the Company's 10 operational
transmitters. The Company intends to have 17 transmitters in operation
by the end of 1997, which are expected to give it access to subscribers
throughout most of the New York PMSA. The Company's transmitter permits
are subject to modification to conform with the final rules for
LMDS.
The Company has leased space on 15 rooftops for its transmitters,
and believes that leased space on rooftops in New York City and other
locations in the New York PMSA will be readily available to serve as
additional transmitter sites. The Company is in negotiations for
rooftop space on four additional sites in New York City, for
transmitter deployment. The Company is actively pursuing over 50 sites
for its repeaters. The Company has letters of intent from landlords to
lease space at an additional 24 sites throughout the New York PMSA.
The Company offers subscribers a full range of local, basic and
premium programming choices. Since all of the Company's set-top
converters are fully addressable, the Company also offers regular pay-
per-view movies and special pay-per-view events. In addition, due to
its system architecture, the Company can vary programming and
advertising on a cell-by-cell basis in order to appeal to specific
demographic groups. For example, the Company currently carries Russian
language programming targeted to the large Russian-speaking population
of the Brighton Beach area of Brooklyn, New York.
The following table sets forth the Company's current channel line-
up:
Encore* The Disney Channel Univision (WXTV)
Plex* CNBC BET
Starz* C-SPAN The International Channel
Showtime* MSNBC Russian American Broadcasting
The Movie Channel* Headline News The Prevue Guide
Flix* CNN ESPN
HBO* Bloomberg Madison Square
Information Garden Network
Television
Cinemax* The Weather Channel MSG 2
Playboy Television* Nickelodeon MSG 3
Pay Per View Movies TV Food Network ESPN 2
Pay Per View Special MTV SportsChannel
Pay Per View Events VH-1 WCBS
USA Network E! Entertainment WNBC
TNT Comedy Central WNYW
Turner Classic Movies The Discovery Channel WABC
WTBS The Learning Channel WWOR
Lifetime Court TV WPIX
Arts & Entertainment Sci-Fi Channel WNET
* Denotes premium programming.
Marketing
Presently the Company's sales strategy incorporates a variety of
targeted tactics. Direct mail is used as a response vehicle as well as
a softener for door to door sales, consisting of an in-house sales
force complimented by subcontractors. The Company utilizes
telemarketing for both acquisition and retention purposes. In addition
to sales related calls, telemarketing representatives perform
installation reminder calls, customer research and welcome calls. As
the build-out of its system continues, the Company intends to augment
current efforts with mass marketing programs, including radio
advertising and print media, to bring about increased awareness of its
quality and cost advantages. At that time, the Company may supplement
its direct sales force by marketing subscriber-installed units through
consumer electronics and telephone retail stores.
Customer Service
The Company's prompt, courteous and effective customer service
specialists are central to differentiating the Company from competitors
and attracting and retaining subscribers. To offer superior customer
service as its subscriber base expands, the Company intends to provide
a ratio of customer service specialists to subscribers significantly
higher than that currently offered by its subscription television
competitors. Presently, the Company offers same-day repair services
and, customer's calls are handled 24-hours a day.
Competition
The telecommunications industry and all of its segments are highly
competitive. The Company competes with franchised cable systems and
also faces or may face competition from several other sources, such as
MMDS, SMATV, DBS, video service from telephone companies and television
receive-only satellite dishes. Moreover, The Telecommunications Reform
Act of 1996 (the "Telecommunications Reform Act"), which was passed by
the U.S. Congress and signed into law by President Clinton on February
8, 1996, eliminates restrictions that prohibit local telephone exchange
companies from providing video programming in their local telephone
service areas, thus potentially resulting in significant additional
competition from local telephone companies.
Pay television operators face competition from other sources of
entertainment, such as movie theaters and computer on-line services.
Further, premium movie services offered by cable television systems
have encountered significant competition from the home video industry.
In areas where several off-air television broadcasts can be received
without the benefit of cable television, cable television systems have
experienced competition from such broadcasters. Many actual and
potential competitors have greater financial, marketing and other
resources than the Company. No assurance can be given that the Company
will be able to compete successfully.
Franchised Cable. The Company believes that its primary
competition in providing video programming to subscribers is from
franchised cable operators. In the New York PMSA, these operators
include Time Warner, TCI and Cablevision, all of which are
significantly larger and have substantially greater financial resources
than the Company. The technology used by such operators is a cable
system which transmits signals from a head-end, delivering local and
satellite-delivered programming via a distribution network consisting
of amplifiers, cable and other components to subscribers. Regular
system maintenance is required due to flooding, temperature changes and
other events that may lead to equipment problems. To reduce these
problems, some traditional cable companies have begun installing hybrid
fiber-coaxial cable networks. Although hybrid fiber-coaxial plants may
substantially remedy the transmission and reception problems currently
experienced by coaxial cable distribution plants, hybrid fiber-coaxial
systems will still be subject to outages resulting from severed lines
and failure of electronic equipment, and are very expensive to install
and maintain.
Franchised cable systems cost significantly more to build and to
maintain than the Company's system. Although the Company believes its
head-end equipment costs are comparable to those of franchised cable
systems, the installation of cable and amplifiers required by
franchised cable operators is considerably more costly than the
installation of transmitters and repeaters required by the Company's
system. At present, the franchised cable systems in the Company's
service area offer 25 to 30 more channels than the Company's system,
although the Company believes that many of these channels carry less
frequently viewed programming. Moreover, the cellular architecture used
by the Company will permit it to vary its channel line-up on a cell-by-
cell basis, enabling it to offer the channels most in demand in
individual segments of the larger media market.
The Telecommunications Reform Act contains a provision that would
reduce the regulatory burden on the Company's franchised cable
competitors. See "_Industry Regulation-Telecommunications Reform Act."
Multichannel Multipoint Distribution Service. MMDS "wireless
cable" systems such as CAI Wireless Systems, Inc. use microwave AM
signals in the 2.5 to 2.7 GHz frequency band to transmit programming
directly from a head-end located on top of a local vantage point to
receive antennas currently up to three feet in diameter and generally
located on subscribers' rooftops. The Company believes that smaller
MMDS antennas may be under development. The microwave signal is then
converted to frequencies that can pass through conventional coaxial
cable to a set-top converter. The Company's system, which employs FM
modulation and narrow beam receive antennas, can reject multipath
degradation of the signal. Because of this advantage, the Company
believes that its service will be relatively immune to the picture
"ghosting" and other degradations that result from multipath phenomena.
The Company believes that this latter characteristic, unless mitigated
by future technical developments, will limit MMDS's suitability for
service in large urban areas. MMDS also operates with substantially
less spectrum than the Company's 1,000 MHz allocation, limiting its
video channel capacity. MMDS systems must aggregate spectrum from three
separate blocks of spectrum in the 2.5 to 2.7 GHz frequency range,
almost 70% of which spectrum is not available exclusively for wireless
cable operations and must be leased from and shared with educational
licensees, in order to provide a maximum 32 to 33 channels of video
programming under current technology. Therefore, as a result of MMDS's
limited spectrum and other technical constraints, the Company believes
that LMDS has a distinct advantage over MMDS in providing viable
competition in today's video programming marketplace.
Satellite Master Antenna Service ("SMATV"). SMATV service
operators such as Liberty Cable, typically receive signals from
satellites with small satellite dishes located on a rooftop and then
retransmit the signals by wire to units within a building or complex of
buildings. Additionally, the FCC permits point-to-point delivery of
video programming by SMATV operators with microwave licenses in the 18
GHz frequency band, which allows operators to realize economic
efficiencies by linking multiple buildings from a common head-end
without crossing public rights-of-way and avoiding the need for costly
head-end facilities at each building served. SMATV operators delivering
programming in these manners are not required to obtain a franchise
from local authorities.
Direct Broadcast Satellite ("DBS"). DBS service, which has
recently been introduced in the United States, consists of the
transmission of a high powered signal from a satellite directly to the
home user, who is able to receive the signal on a relatively small (18
inch diameter) dish mounted on a rooftop or in the yard. DBS service
does not deliver local television broadcast stations and requires the
purchase of receiving equipment at a significant cost to the
subscriber. The leading DBS provider currently requires its subscribers
to invest in receiving equipment which the Company believes currently
retails for approximately $200, and pay up to an additional $200 for
installation. DBS system operators must also incur costs related to
satellite launches and satellite maintenance and repair. DBS antennas
in the United States must be aimed directly at a satellite stationed
low above the southern horizon, and are therefore not generally
practicable in urban environments such as New York City where multiple
dwellings may block this line-of-sight.
Telephone Company Provision of Video Programming. The current
regulatory framework that traditionally prohibited local telephone
companies, also known as local exchange companies ("LECs"), from
providing video programming directly to subscribers in their telephone
service areas is evolving rapidly to permit LECs to play a broader role
in the competitive video marketplace. In this regard, the
Telecommunications Reform Act repealed the telco-cable cross-ownership
restriction, and allows LECs several options for providing video
services to their telephone customers under various regulatory
frameworks. Among other things, under the Telecommunications Reform
Act, LECs can provide video programming to customers in their telephone
service areas either as common carriers, cable systems or "open video
systems," an entirely new regulatory framework. In March 1996, the FCC
eliminated rules implementing the telco-cable cross-ownership
restriction, and commenced a rulemaking to implement the open video
systems framework in a way that will promote congressional goals of
flexible market entry, enhanced competition, diversity of programming
choices and increased consumer choice. In June 1996, the Commission
adopted streamlined certification and regulations under which LECs and
(non-LECs) can operate as open video systems providers under various
conditions. On October 11, 1996, the FCC certified the first open video
system. Since that time, additional certifications have been granted,
including three within various portions of the Company's NY PMSA.
While LEC delivery of video programming likely will require
extensive deployment of fiber optic transmission facilities and/or
highly sophisticated electronics at a substantial capital investment,
LECs could provide a significant source of competition in the future.
Television Receive-Only Satellite Dishes. Satellite dishes are
used by individuals and commercial establishments for direct reception
of video programming that is also shown on franchised cable and
wireless cable television systems. Satellite dishes are generally more
competitive in rural markets than in urban areas, principally because
rural subscribers do not have access to franchised cable. Satellite
dish service currently requires each subscriber to purchase and install
a seven-to-ten foot diameter satellite dish, at a cost in excess of
$3,000, although some operators have reduced those charges to as low as
$750 for limited offerings. Additionally, cable programming (e.g.,
ESPN, CNN, HBO) is delivered "scrambled," requiring owners of satellite
receivers to purchase descrambling units and pay annual authorization
fees directly to programming suppliers. In addition, satellite systems
do not deliver local broadcast television stations.
Regulatory History
The Company's FCC Licenses. The Company holds a fixed station
commercial license pursuant to a waiver of the FCC's rules in the Point-
to-Point Microwave Radio Service granted by the FCC in January 1991
which authorizes the Company to use the 27.5-28.5 GHz frequency band to
operate a multicell video delivery system throughout the New York PMSA.
The 1,000-plus square mile New York PMSA includes the five boroughs of
New York City, and Putnam, Rockland and Westchester counties. In its
1991 decision granting the Company's license, the FCC authorized the
location of the Company's first transmitter in Brighton Beach,
Brooklyn, and set forth a procedure for the filing of additional
applications for authority to operate additional transmitters
throughout the Company's authorized service area. The January 1991
decision authorized a 24-channel video system and was modified in March
1992 to authorize operation of a 49-channel system. In addition, on
December 7, 1995, the FCC granted the Company's 34 transmitter
applications, conditional upon and subject to conformance with the
final actions taken by the FCC in the LMDS Rulemaking proceeding.
The Company's license is the only commercial license for this
service granted by the FCC. This license was granted for a five-year
term rather than the general fixed service license term of ten years in
order to encourage the prompt deployment of the Company's system
throughout its authorized service area, and expired in February 1996. A
timely application for renewal of this fixed commercial station
license was filed on December 29, 1995. The FCC stated in the Second
Report and Order that it will commence processing the Company's renewal
application by placing the application on Public Notice not later than
30 days after the March 13, 1997 release date of the Order. The new
LMDS service rules will apply to this renewal application. While the
Company has an expectation of a renewal of this license, as a result of
its deployment efforts since 1992 and the FCC's adoption of a renewal
expectancy provision in the Second Report and Order, there is no
guarantee that the FCC will renew the license.
Under the FCC's rules, a license automatically stays in effect
pending FCC action on a timely filed renewal application. In addition,
the Communications Act of 1934 (the "Communications Act") provides
procedures under which any party in interest may file a Petition to
Deny the renewal of a fixed point-to-point microwave license by setting
forth specific allegations of fact sufficient to show that the
petitioner is a party in interest and that grant of the renewal
application would be prima facie inconsistent with the public interest,
convenience and necessity. While the Company is not aware of any facts
or circumstances to justify the filing of such a petition, there can be
no assurance that such a petition will not be filed, or to predict the
outcome of the FCC's deliberations on any such petition in advance.
In the First Report and Order the FCC grandfathered the Company's
continued operations in the 27.5-28.5 GHz spectrum (which the Company
currently is licensed to use) for a period of two years from the
release date of the First Report and Order, July 22, 1996, or until the
first GSO/FSS satellite intended to operate in the 28.35-28.50 GHz band
is launched, whichever occurs later. Additionally, under the
grandfather provision adopted by the FCC, the Company is authorized to
use the newly designated 150 MHz at 29.1-29.25 GHz for hub-to-
subscriber operations during the grandfathered period, thus allowing
the Company currently to use 1,150 MHz in the New York PMSA. At the
conclusion of the grandfathered period, the Company will be required to
cease its operations in the 28.35-28.50 GHz spectrum thus maintaining
its 1,000 MHz spectrum allocation, at 27.5-28.35 GHz and 29.1-29.25
GHz, along with an additional 150 MHz in the 31 GHz band, subject to
license renewal, as explained below. In addition, the Second Report and
Order confirms that the FCC will allow the renewed license to conform
to the final rules for LMDS, including the authorization of the Company
to offer the panoply of LMDS services the technology is expected to
offer.
The Company also holds an experimental license authorizing limited
market tests which was granted by the FCC in 1988 and has been renewed
for full two-year terms on a bi-yearly basis. Other entities hold
experimental licenses for LMDS use outside of the New York BTA as well.
In August 1993, the FCC approved the modification of this license to
authorize two-way video, voice and data transmissions with variable
modulation and bandwidth characteristics. On June 30, 1995, the Company
filed a timely application for renewal of its experimental license
which had an expiration date of September 1, 1995. The FCC granted the
renewal application, effective September 1, 1995, for a new two-year
license term. In addition, on November 26, 1996, the Company filed for
an experimental license in the 31.0-31.3 GHz in the New York BTA in
order to conduct limited market studies of various packages of video,
telephony and/or data services delivered through 31 GHz LMDS
technology. This application currently is pending before the FCC.
The FCC's LMDS Rulemaking Proceedings. The subscription television
service currently offered by the Company in New York is one example of
a diverse range of telecommunications services including two-way video,
telephony and data services, which could be supported by the Company's
system in the 28 GHz frequency band. This range of services developed
by the Company using the technology licensed from CT&T has become known
as LMDS. In response to a Petition for Rulemaking and Petition for
Pioneer's Preference filed by the Company in 1991, the FCC adopted a
Notice of Proposed Rulemaking, Order, Tentative Decision and Order on
Reconsideration ("First NPRM") in December 1992, which proposed to
redesignate the 27.5-29.5 GHz band for point-to-multipoint use, and to
license LMDS as a new service on a nationwide basis with the issuance
of two 1 GHz licenses per service area. At that time, the FCC also
tentatively granted the Company's request for a Pioneer's Preference,
by which the Company would be awarded a license for the service area of
its choice in recognition of its significant efforts in developing the
innovative LMDS technology.
On July 17, 1996, by unanimous vote, the FCC adopted the First
Report and Order and Fourth NPRM, which formally established a band
plan and sharing rules as previously proposed by the FCC in the Third
NPRM. This plan allocated to LMDS the 28 GHz frequency band nationwide,
850 MHz spectrum from 27.5-28.35 GHz on a primary basis for two-way
LMDS transmissions, with an additional non-contiguous 150 MHz from 29.1-
29.25 GHz to be shared on a co-primary basis with MSS systems. While
the sharing rules adopted for the 150 MHz limit LMDS to hub-to-
subscriber transmissions due to concerns about potential interference
between LMDS and MSS, in the First Report and Order the FCC stated that
it will revisit that limitation if the LMDS industry can demonstrate
definitively that LMDS return links do not interfere with MSS systems.
Further, in the Fourth NPRM portion of the decision, in an effort
to provide additional spectrum for LMDS, the FCC proposed to allocate
300 MHz from 31.0-31.3 GHz on a primary basis for two-way LMDS use. The
FCC reiterated the potential value of LMDS as "real competition" in
the local telephony and multichannel video distribution markets, and
stated that this additional spectrum would provide consumers access to
more choices in the new services and innovative technologies. The FCC
proposed to license the 850 MHz and 150 MHz blocks of 28 GHz spectrum,
together with the 300 MHz of 31 GHz spectrum as a single, 1.3 GHz block
of spectrum for LMDS licenses. The Fourth NPRM sought additional
comment on whether local exchange carriers and cable operators should
be permitted to hold an LMDS license in their service areas.
Moreover, in the First Report and Order, the FCC explicitly
recognized the role of the Company as the only commercial Licensee of
LMDS in the United States. Moreover, the FCC stated "its intention to
facilitate the development of LMDS in New York and the rest of the
nation," and noted that `permitting CellularVision to proceed with its
business plan and existing system design in the contiguous 1 GHz for
which it was originally licensed will help ensure a seamless transition
for CellularVision's customers as LMDS is licensed pursuant to the band
plan implemented in the Report and Order." Accordingly, demonstrating
its commitment to the Company's build-out of its system in the New York
PMSA, in the First Report and Order the FCC grandfathered the Company's
continued operations in the 27.5-28.5 GHz spectrum (which the Company
currently is licensed to use) for a period of two years from the
release date of the First Report and Order, July 22, 1996, or until the
first GSO/FSS satellite intended to operate in the 28.35-28.50 GHz band
is launched, whichever occurs later. Additionally, under the
grandfather provision adopted by the FCC, the Company is authorized to
use the newly designated 150 MHz at 29.1-29.25 GHz for hub-to-
subscriber operations during the grandfathered period, thus allowing
the Company currently to use 1,150 MHz in the New York PMSA. At the
conclusion of the grandfathered period, the Company will be required to
cease its operations in the 28.35-28.50 GHz spectrum thus maintaining
its 1000 MHz spectrum allocation, at 27.5-28.35 GHz and 29.1-29.25 GHz,
along with an additional 150 MHz in the 31 GHz band, subject to
license renewal, as explained below.
On March 13, 1997, the FCC adopted the LMDS Second Report and
Order in this proceeding, which includes service, auction and
eligibility rules for LMDS, and addresses the proposed allocation of
300 MHz in the 31 GHz band for LMDS. This Second Report and Order
largely concludes the LMDS rulemaking proceeding except for undecided
issues regarding the implementation of disaggregation and partitioning,
which is subject to a Fifth Notice of Proposed Rulemaking. FCC
officials have stated their intent to commence the nationwide licensing
of LMDS through spectrum auctions by the summer of 1997.
The FCC in the Second Report and Order provides for two LMDS
licenses per Basic Trading Area ("BTA"): one license for 1,150 MHz,
the other for 150 MHz, amounting to 1,300 MHz allocated to LMDS. In
addition to the non-contiguous 1 GHz of 28 GHz spectrum allocated to
LMDS in the First Report and Order, the FCC has allocated an additional
300 MHz in the 31 GHz band for LMDS, 150 MHz of which will be allocated
to one LMDS license, the other 150 MHz will be combined with the 1,000
MHz in the 28 GHz band.
The 1,150 MHz license will consist of: 850 MHz in the 27.5-28.35
GHz band on a primary protected basis; 150 MHz in the 29.1-29.25 GHz
band, at the present time for LMDS hub-to-subscriber transmissions
only, on a co-primary basis with Mobile Satellite Service (MSS)
systems; and 150 MHz in the 31.075-31.225 GHz band on a protected
basis. The 150 MHz license will consist of two 75 MHz bands located at
each end of the 300 MHz block in the 31.0-31.075 GHz and 31.225-31.3
GHz bands on a protected basis. LMDS licenses operating in this
bifurcated 31 GHz band will be required to afford interference
protection to incumbent licensees. Also, this second 150 MHz block can
be combined with the 1,150 MHz license to create a 1.3 GHz LMDS system.
In order to encourage competition in the video and telephony
markets, the FCC decided to substantially restrict local exchange
carriers ("LEC's") and cable companies from acquiring the 1,150 MHz
LMDS license. Under the rules adopted in the Second Report and Order,
LECs and cable companies will be ineligible to acquire a 20% or greater
ownership interest in an 1,150 MHz LMDS license in their service region
for a period of three years. An incumbent LEC or cable company is
considered `in-region' and, therefore, ineligible to acquire an 1,150
MHz license, if 10% of the BTA's population is within its authorized
service area. This eligibility restriction may be extended beyond the
three-year period by the FCC based on a determination that Incumbent
LECs or cable companies continue to have substantial market power.
Also, the eligibility restriction will be examined by the FCC at the
time of its annual review, the first of which will take place in the
year 2000, to determine whether competition in the local telephone and
video distribution industries has increased sufficiently to make these
restrictions unnecessary. Finally, upon a showing of good cause by a
petitioning LEC or cable company, the FCC may waive the eligibility
restriction on a case-by-case basis. Cable companies and LECs will be
able to bid on the 150 MHz license in their service area, as there is
no such eligibility restriction on this LMDS license.
In order to encourage small businesses to enter the LMDS industry,
the FCC has adopted several opportunity enhancing measures for
qualifying small businesses. The FCC will define a "small business" as
an entity whose average annual gross revenues, together with
controlling principals and affiliates for the three preceding years
does not exceed $40 million. A small business will be entitled to a 25%
bidding credit. Small businesses are also entitled to installment
payments at an interest rate based on the rate for U.S. Treasury
obligations of maturity equal to the license term (10yrs) fixed at the
time of licensing, plus 2.5%. Payments shall include interest only for
the first two years and payments of interest and principal amortized
over the remaining eight years. The rate of interest on ten-year US
Treasury obligations will be determined by taking the coupon rate of
interest on ten-year US Treasury notes most recently auctioned by the
Treasury Department before licenses are conditionally granted.
Moreover, entities with gross revenues exceeding $40 million but not
exceeding $75 million, will be entitled to a 15% bidding credit and the
same ten-year repayment plan as small businesses except interest and
principal will be amortized over the whole ten-year period.
The FCC also initiated a Fifth Notice of Proposed Rulemaking
("Fifth NPRM") to address the issues of disaggregation and partitioning
which will enable a licensee to assign a portion of its bandwidth or
geographic service area to another entity. The FCC tentatively
concluded to allow disaggregation and partitioning without imposing
substantial regulatory requirements and issued the Fifth NPRM to
solicit public comment regarding the most effective way to implement
partitioning and disaggregation for LMDS licensees.
In the LMDS Second Report and Order, the FCC deferred action on
the Company's tentative Pioneer's Preference award and instead ordered
a "peer review" process, whereby the FCC would select a panel of
technical, non-FCC experts to review the Company's technology and
advise the FCC whether the Pioneer's Preference should be granted. The
Company believes, based on the 1994 GATT legislation and the FCC's
prior determinations not to subject parties to peer review whose
Pioneer's Preference applications were accepted for filing before
September 1, 1994, that this is an unnecessary regulatory requirement.
The Company is currently seeking FCC clarification on this issue.
Accordingly, there can be no assurance that the FCC will grant the
Company's Pioneer's Preference.
Based on the Second Report and Order, wherein the FCC confirmed
that it will commence processing the Company's commercial license
renewal application for the New York PMSA within 30 days of the March
13, 1997 release of the Order, the outcome of the Pioneer's Preference
award has no impact on the Company's license to operate in the New York
PMSA. As previously stated by the FCC in the Third NPRM, the Pioneer's
Preference would apply only to the outer portion of the New York BTA
not covered by the Company's existing license for the PMSA. If the
Company ultimately is awarded the Pioneer's Preference, the Company
would be licensed to use the portion of the New York BTA outside the
New York PMSA pursuant to the FCC's band segmentation plan (i.e., 27.5-
28.35 GHz, 29.1-29.25 GHz and 30.0-30.3 GHz). While the remainder of
the New York BTA would be awarded to the Company without being subject
to a spectrum auction, under the FCC's most recent proposal the Company
would have the exclusive right to extend its license to add the portion
of the New York BTA not included in the 1,000-plus square mile area
covered by the Company's existing license for the New York PMSA by
paying a fee representing the difference between the value of a license
to serve the New York BTA and the value of the Company's current
commercial license to serve the New York PMSA, subject to a 15%
discount from the average price paid at the LMDS auctions for licenses
in comparable service areas. In addition, the FCC is considering the
adoption of conditions on the Company's Pioneer's Preference similar to
those placed on the Pioneer's Preferences granted to Personal
Communications Service licensees. If adopted, these conditions may
require the Company to construct the system subject to the Pioneer's
Preference using substantially the same technology upon which its
Pioneer's Preference award is based.
Industry Regulation
General. The proprietary LMDS technology licensed by the Company
from CT&T has been repeatedly recognized formally by the FCC as a
pioneering wireless communications innovation, opening a previously
underutilized frequency band for terrestrial applications. At present,
the Company is the only entity commercially licensed by the FCC to
transmit multichannel services in the 28 GHz frequency band. Moreover,
the unique LMDS technology is capable of providing a diverse range of
services, including interactive, high-quality video, telephony and data
services. Subsequent to the grant of the Company's commercial license
in 1991, the FCC in 1992 commenced the LMDS rulemaking proceeding to
develop rules for the licensing of LMDS nationwide. With the release of
the Second Report and Order on March 13, 1997 providing LMDS service,
auction and eligibility rules, the LMDS rulemaking is largely completed
and FCC officials have stated that auctions for LMDS licenses
nationwide could commence by the summer of 1997.
From a regulatory standpoint, the Company's subscription
television service currently offered in the New York PMSA is not
treated as a "cable system," as that term is defined by 42 U.S.C.
section 522(7) and interpreted by the FCC's rules and relevant
decisions including the Second Report and Order. As the FCC has
formally recognized in the Second Report and Order, as a wireless
service provider, the LMDS licensee providing video programming services
is not subject to franchising or regulation as a cable system. As a
result, the Company is not required to comply with the FCC's onerous
rules applicable to franchised cable systems, including, among other
things, rate regulation and the requirement to obtain a franchise from
local government authorities in order to provide its video services.
While the Company's video operations are not subject to the FCC's
requirements applicable to franchised cable systems, the FCC has the
power to issue, revoke, modify and renew licenses within the spectrum
utilized by the Company's subscription television service, subject to
FCC and judicial case law precedent, which relies on the equitable
concept of renewal expectancy for any FCC licensee who acts in accord
with the terms of its license and seeks to serve the public interest,
convenience and necessity. The FCC also may approve changes in the
ownership of such licenses, regulate equipment used by the Company's
video operations, and impose certain equal employment opportunity and
retransmission consent requirements.
Telecommunications Reform Act. On February 8, 1996, President
Clinton signed into law the Telecommunications Reform Act, landmark
communications reform legislation that significantly relaxes various
restrictions applicable to franchised cable operators and local and
long distance telephone providers. Among other things, the
Telecommunications Reform Act (i) allows Regional Bell Operating
Companies ("RBOCs") to offer in-region video services and long distance
telephone service, subject to certain requirements; (ii) preempts state
laws, where applicable, allowing cable and long distance telephone
companies to offer local telephone service; and (iii) amends the 1992
Cable Act to substantially deregulate cable rates.
With regard to franchised cable operators, the Telecommunications
Reform Act also contains provisions that will reduce the regulatory
burdens on franchised cable systems by freeing them from rate
regulation of the cable programming services tier by March 31, 1999, or
immediately for systems with fewer than 50,000 subscribers. Under this
new legislation, franchised cable operators also will be allowed to
offer special discounts to residents of multiple dwelling units,
thereby intensifying competition between franchised cable and wireless
operators.
1984 Cable Act. Under the Cable Communications Policy Act of 1984,
as amended by the Telecommunications Reform Act (the "1984 Cable Act"),
"cable systems" may not be operated without a franchise from applicable
local government authorities. Federal law exempts from the definition
of a "cable system" those systems that (i) use wire or cable within the
premises of a single building only; (ii) interconnect one or more
buildings only through radio facilities; or (iii) interconnect
buildings, by cable or wire, provided that the system does not use
public rights-of-way. Such systems, therefore, are not required to
obtain franchises from applicable local government authorities and are
subject to fewer regulations than traditional franchised cable
operators. As the FCC has recognized in the Second Report and Order, an
LMDS video distribution system, such as that operated by the Company in
the New York PMSA, would not be considered a "cable system" since
signals are transmitted to subscribers by radio spectrum. Moreover, all
transmission and reception equipment associated with the Company's LMDS
video distribution operations can be located on private property,
eliminating the need for utility poles and dedicated easements.
1992 Cable Act. On October 5, 1992, the U.S. Congress passed the
1992 Cable Act which imposes greater regulation on franchised cable
operators and permits regulation of cable service rates by local
franchising authorities in areas in which there is no "effective
competition." The 1992 Cable Act, while primarily known for regulating
cable rates, also covers numerous other issues, including (i) equal
employment opportunity hiring policies; (ii) subscriber home wiring
ownership; (iii) compatibility of set-top converters with television
sets; (iv) carriage by private and franchise cable systems of local
television stations so-called "retransmission consent" and "must carry
rules;" (v) customer service standards; and (vi) non-discriminatory
access to programming by Multiple Video Programming Distributors
("MVPDs").
The Company's operations will not be subject to the rate
regulation and "must carry" rules of the 1992 Cable Act which restrict
the business practices of franchised cable companies.
Retransmission Consent. Under the 1992 Cable Act, MVPDs, including
the Company's wireless LMDS video distribution system, are prohibited
from carrying local television signals without first obtaining the
television station's consent, commonly known as a station's
"retransmission consent" right. The Company has obtained all necessary
retransmission consents.
Program Access. The 1992 Cable Act also contains provisions
designed to ensure access by all MVPDs to programming on fair,
reasonable and non-discriminatory terms. The program access provisions
prohibit vertically integrated cable programmers, programmers in which
a cable operator holds a five percent or greater voting or non-voting
ownership interest, a partnership interest or has a common officer or
director, from discriminating against MVPDs in the prices they charge
for programming. Moreover, the 1992 Cable Act's program access
provisions prohibit most exclusive dealing agreements that have in the
past enabled franchised cable operators to procure programming that is
unavailable to competitors. The program access provisions also prohibit
"non-price" discrimination by a programmer between competing MVPDs,
including the unreasonable refusal to sell programming to a class of
video provider, or refusing to offer particular terms to an individual
video provider. On August 24, 1995, the FCC, acting on a complaint
filed by the Company, ordered SportsChannel Associates, a unit of
Cablevision Systems Corporation ("SportsChannel"), to offer its sports
programming to the Company on non-discriminatory terms based on the
FCC's finding that SportsChannel had unreasonably refused to sell such
programming. SportsChannel challenged the FCC's decision by filing a
Petition for Reconsideration and a Petition for Stay pending FCC action
on reconsideration, which the Company opposed, and the FCC denied the
petition for Stay. Additionally, on March 12, 1996, the FCC affirmed
its decision in favor of the Company. In October 1995, the Company
executed a contract with SportsChannel, and now offers SportsChannel
programming to its subscribers.
Compulsory Copyright License. Under federal copyright laws,
permission from a television program's copyright holder generally must
be secured before the video programming may be retransmitted. Cable
systems, however, may obtain a compulsory copyright license and
retransmit local television broadcast programming without securing the
prior approval of the holders of the copyrights for such programming,
by filing reports and remitting semiannual royalty fee payments to the
Registrar of Copyrights.
On January 1, 1994, the U.S. Copyright Office held that certain
wireless video programming distributors, such as satellite carriers and
MMDS operators, were not "cable systems" eligible for a compulsory
copyright license. Subsequently, the Congress enacted the Satellite
Home Viewer Act of 1994, which broadened the U.S. Copyright Office's
"cable system" definition to include all wireless cable operators,
arguably making the Company eligible for a copyright compulsory
license. Accordingly, the Company has filed all necessary Statements of
Account with the Copyright Office.
Restrictions on Over-the-Air Reception Devices. The
Telecommunications Act of 1996 directed the FCC to promulgate
regulations to prohibit restrictions that impair a viewer's ability to
receive video programming services through devices designed for over-
the-air reception of television broadcast signals, multichannel
multipoint distribution service, or direct broadcast satellite
services. In a Report and Order released on August 6, 1996, the FCC
established a rule that prohibits restrictions impairing the
installation, maintenance or use of an antenna designed to receive
numerous video programming services, specifically including LMDS.
However, the Commission limited the interim applicability of this rule
to antennas located on property within the exclusive use or control of
the antenna user where the user has a direct or indirect ownership
interest in the property. In a Further Notice of Proposed Rulemaking
that is ongoing, the FCC is requesting further comment on situations
involving: (1) property not under the exclusive use and control of a
person who has a direct or indirect ownership interest; and, (2)
residential or commercial property subject to a lease agreement.
Equipment and Facilities
The unique feature of the Company's customer premises equipment is
its highly-directional, flat plate, window, roof or wall mounted
antenna (approximately six and five-eighths inches square) which, based
on its unique characteristics and design, reduces the risk of theft of
service. This antenna, which is connected to and powered by a set-top
converter, makes reception of the Company's high quality signal
possible. The Company's antenna permits indoor installations, in many
cases, thereby avoiding the costs involved in outdoor installations.
All of the Company's set-top converters are fully addressable, making
pay-per-view services available to all of its subscribers, and enabling
the Company to control access to all of its channels, further reducing
the risk of theft of services. Subscribers are also supplied with a
hand-held, wireless remote control unit. The Company presently obtains
its customer premises equipment through CT&T. CT&T obtains the customer
premises equipment it supplies to the Company from sole-source, third
party suppliers.
The principal physical assets of the Company's system consist of
head-end equipment (including satellite signal reception equipment,
demodulators, multiplexers and encoders), transmitters, repeaters and
subscriber equipment, as well as office space. The Company's head-end
facility collects and feeds voice, video and data information from
external sources such as satellites, local television broadcast
programming and Information Service Providers into the Company's
system, which transmits the signals from cell to cell. The cells
transmit the Company's signal directly to the subscriber's home or
office where it is received by an antenna connected to a set-top
converter. The Company deploys repeaters to fill in shadowed areas not
served directly from the cell sites.
ITEM 2. PROPERTIES
The Company subleases approximately 9,800 square feet for its
executive offices in Manhattan pursuant to a sublease which expires in
July 1999. In addition, the Company leases approximately 9,350 square
feet for its administrative, customer service and warehouse needs in
Brooklyn, New York. The Company's lease for such facility terminates in
May 1999. In November 1996, the Company entered into a lease for an
additional 20,400 square feet of space at its Brooklyn location. This
space will be utilized for the addition of a new head-end facility and
for the expansion of the Company as the employee base increases. This
lease will expire in October 2004.
In addition, as the Company expanded into the Queens area in
September 1996, an additional satellite office for installation,
service and sales was established. The lease for 10,000 square feet
expires in August 2004. The Company also leases one New York City
apartment for system demonstration and general corporate purposes.
The Company leases approximately 3,250 square feet of indoor and
outdoor space on which it has constructed its head-end facility. These
leases expire in 1998 and 1999.
The Company anticipates that the 17 transmitters it plans to have
deployed by the end of 1997, will give it access to subscribers
throughout most of the New York PMSA. The Company leases approximately
100 square feet of space on each of fifteen rooftops for its
transmitters. These leases, several of which contain seven-year renewal
options, expire from 1999 to 2003. The Company is currently in final
negotiations for rooftop space on four additional sites in New York
City. In addition, the Company has letters of intent from landlords to
lease space at a total of 24 additional sites throughout the New York
PMSA. The Company believes that leased space on rooftops in New York
City and other locations in the New York PMSA will be readily available
to serve as additional transmitter sites.
ITEM 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 at the army base. The
suit seeks $1 million in damages and is in its preliminary stages. The
Company cannot make a determination at this time as to the possible
outcome of the action or whether the case will go to trial. A summary
judgment motion has been filed by the Company and is currently pending,
requesting that the court dismiss the case. 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.
Prior to 1992, Vahak and Shant Hovnanian were officers, directors
and principal shareholders of Riverside Savings Bank, a state-chartered
savings and loan association that entered receivership in 1991. In
certain civil litigation against the Hovnanians and others that ensued,
which is pending in the U.S. District Court for the District of New
Jersey, the Resolution Trust Corporation has alleged simple and gross
negligence and breaches of fiduciary duties of care and loyalty on the
part of the defendants. Although this action is still in its
preliminary stages, the defendants have obtained dismissal of certain
allegations and intend to continue to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock is listed for quotation on the NASDAQ National
Market system (the "NNM") under the symbol "CVUS." The following table
sets forth high, low and closing sale prices for the Common Stock for
the fiscal quarters indicated, as reported by the NNM.
High Sale Low Sale Closing Sale
1996
First Quarter* $15.750 $10.125 11.000
Second Quarter 16.750 8.875 15.750
Third Quarter 16.750 9.250 10.000
Fourth Quarter 9.500 4.375 7.000
____________
* Commencing February 8, 1996, the first day of public trading of the
Common Stock, through March 31, 1996.
On December 31, 1996, the last sale price of the Common Stock as
reported on the NNM was $7.00 per share. As of December 31, 1996,
there were 41 registered shareholders of the Common Stock.
The Company has never declared or paid any cash dividends and does
not intend to declare or pay cash dividends on the Common Stock at any
time in the foreseeable future. Future earnings, if any, will be used
to finance the build-out of the Company's multichannel broadband
cellular television system in the New York PMSA.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should
be read in conjunction with Item 7_Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Consolidated
Financial Statements of the Company and related Notes thereto included
on pages 20 to 50 of this Report.
Year Ended December 31,
1992 1993 1994 1995 1996
(in thousands, except per share data)
Statement of
Operations
Data:
Revenue......... $ 2 $ 55 $ 51 $1,196 $2,190
Service
Cost............ 3 24 39 603 1,175
Selling General
and
administrative.. 499 1,799 2,884 5,637 10,574
Management
fees............ - 250 1,546 2,699 -
Depreciation and
amortization.... 51 73 188 1,376 2,258
Total operating
expenses........ 553 2,146 4,657 10,315 14,007
Operating Loss.. (551) (2,091) (4,606) (9,119) (11,817)
Net interest
income (expense) - 100 (1,393) (2,184) 186
Net loss........ $(551) $(1,991) $(5,999) $(11,303) $(11,631)
Loss per common
share (1)....... (0.91) (0.75)
Weighted average
of common shares
outstanding..... 12,395,142 15,576,478
December 31,
1992 1993 1994 1995 1996
Balance Sheet
Data:
Cash and short-
term investments. $ 14 $18,705 $12,544 $3,536 $19,600
Working capital
(deficiency).... (34) 17,766 10,470 (1,647) 16,765
Net property and
equipment....... 353 407 3,469 6,322 14,158
Total assets.... 559 20,096 16,922 12,995 35,924
Total debt...... - 15,000 16,756 18,871 6,260
Total
liabilities..... 239 16,115 18,861 26,314 8,972
Total equity
(deficit)....... 320 3,981 (1,939) (13,319) 26,952
1). Historical loss per common share for the years ended December 31,
1992, 1993, 1994 is not presented as it is not considered indicative of
the on-going entity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto and the other
financial information appearing elsewhere in this Report.
Information Relating to Forward-Looking Statements
Management's Discussion and Analysis and other sections of this
Annual Report include forward-looking statements that reflect the
Company's current expectations concerning future results. The words
"expects", "intends", "believes", "anticipates", "likely", "will", and
similar expressions identity forward looking statements. These forward-
looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated
in the forward-looking statements.
General
The Company owns a multichannel broadband cellular television
system in an area which includes New York City under a 1,000 MHz
commercial license from the FCC. The Company has been operating its 49-
channel broadband cellular television system in New York on a limited
basis since 1992. The December 1995 grant by the FCC of the Company's
34 applications for additional commercial transmitter sites has now put
the Company in a position to expand its subscription television
services to cover most of the 8.3 million people in the New York PMSA, a
region consisting of the five boroughs of New York City and three
suburban counties. Currently, there are approximately 2.9 million
people in the area covered by the Company's ten commercially
operational transmitters. The Company intends to have 17 transmitters
in operation by the end of 1997, which are expected to give it access
to subscribers throughout most of the New York PMSA. The Company's
recently granted transmitter permits are conditional upon, and subject
to conformance with the final FCC rules for LMDS.
The cost structure of the build-out of the Company's system is
significantly different from that of a hard-wire cable company, which
typically incurs substantial amounts of debt during infrastructure
build-out, without offsetting revenues. The cost associated with
infrastructure, or the ability to "pass homes," is a relatively small
portion of the Company's total capital expenditure requirements. The
predominant share of capital expenditures required to build out the
Company's system is related to customer premises equipment, consisting
of a receive antenna and set-top converter which are installed in the
subscriber's home or office. Other direct costs relating to subscriber
installation include sales commission and installation costs. The
Company capitalizes costs associated with subscriber installation,
including material and labor. These costs are then depreciated over the
shorter of the estimated average period that the subscribers are
expected to remain connected to the Company's system or five years.
Installation revenue, when charged to a subscriber, is recorded in
current period revenue to the extent of direct sales commissions and
deferred thereafter.
Operations
The focus of 1996 operations was the construction of the
CellularVision system throughout the PMSA and continued subscriber
growth. CVNY built eight transmitters, bringing the current total to
ten serving all of Brooklyn, and parts of Manhattan and Queens. Five
additional transmitters are under construction and the Company expects
to have 17 transmitters completed by the end of 1997. These
transmitters will cover over 85% of the 8.3 million population in the
PMSA.
Sales and Marketing efforts include Door-to-Door, Direct Mail and
Telemarketing campaigns. Since the launch of this three-pronged
approach in the second quarter of 1996, CVNY has grown each month. The
subscribers as of March 24, 1997, totaled approximately 12,500, more
than triple the number reported at this time in 1996.
As significant market areas (i.e., boroughs) are passed, CVNY will
incorporate mass media into the marketing plan. Television and radio
advertising will follow a newspaper strategy designed to increase
CellularVision brand awareness. Currently, CVNY is introducing its
"Business Class Service" in a series of ads running in the Wall Street
Journal and New York Times.
"Business Class Service" is a package of video, voice and data
services developed for delivery to TVs and PCs in New York's financial
institutions and corporations. Business Class includes 14 news and
business oriented video channels, data services including high speed
Internet access, and future two-way services like telephony and video
teleconferencing. In 1996, CVUS announced a strategic marketing
alliance with Bloomberg Information Television (BIT). As a result, CVNY
now delivers Bloomberg Information Television to hundreds of computer
screens in Manhattan.
CVUS was among the first to offer high speed Internet access. In
1996 the Company introduced the first high-speed wireless modem to the
New York market. Field trails of a 500 Kbps modem began in September
1996 and have been successfully completed. The $200 product operates at
data rates approximately 20 times faster than conventional 28.8 Kbps
modems, and approximately 4 times faster than ISDN. The Company
recently began marketing trials that will continue until the expected
commercial launch later in 1997.
Twelve Months Ended December 31, 1996 Compared to Twelve Months
Ended December 31, 1995. Revenue increased $994,000 from 1,196,000 for
the twelve months ended December 31, 1995 to $2,190,000 for the twelve
months ended December 31, 1996. The increase in revenue is due to an
increase in subscribers, and a full year of premium and pay-per-view
services which were introduced in April and June 1995, respectively.
Operating expenses increased $3,692,000 from $10,315,000 for the
twelve months ended December 31, 1995 to $14,007,000 for the twelve
months ended December 31, 1996. This increase is attributable to costs
associated with the continued commercial roll-out, including service
costs, selling, general and administrative expenses, and depreciation
and amortization offset in part by the elimination of management fees.
Service costs increased $572,000 from $603,000 for the twelve
months ended December 31, 1995 to $1,175,000 for the twelve months
ended December 31, 1996. Service costs are fees paid to providers of
television programming, and royalties paid to CT&T under the CT&T
License Agreement. These costs increase as the subscriber count and
associated revenues increase.
Selling, general and administrative expense increased $4,937,000
from $5,637,000 for the twelve months ended December 31, 1995 to
$10,574,000 for the twelve months ended December 31, 1996. The increase
in selling, general and administrative expenses is primarily
attributable to headcount-related costs (as the Company's employee base
rose from 55 at December 31, 1995 to 104 at December 31, 1996), and
increased payments in equipment rentals and legal fees associated
primarily with the FCC rulemaking offset in part by a decrease in
contractor sales as part of the sales force was brought in-house. The
Company expects that its legal costs associated with FCC matters will
vary dependent upon the timing and resolution of matters such as the
recently approved transmitter applications and the pending final FCC
rules for LMDS. CT&T paid 50% of all such legal costs through the date
of the consummation of the Initial Public Offering, at which time the
Company assumed all ongoing legal expenses relating to FCC matters.
Following the build-out of its network of transmitters, the Company
intends to implement a variety of mass marketing programs which should
result in an increase in total sales and marketing expenses.
Management fees decreased $2,699,000 from $2,699,000 for the
twelve months ended 31, 1995 to $0 for the twelve months ended December
31, 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 $882,000 from $1,376,000
for the twelve months ended December 31, 1995 to $2,258,000 for the
twelve months ended December 31, 1996. The increase in depreciation and
amortization costs is due primarily to the purchase of customer
premises equipment and equipment for the Company's transmitter sites.
Interest expense decreased $1,483,000 from $2,588,000 for the
twelve months ended December 31, 1995 to $1,105,000 for the twelve
months ended December 31, 1996. The decrease is due primarily to the
conversion of $10,000,000 of convertible exchangeable subordinated
notes payable in conjunction with the Company's' Initial Public
Offering. Interest income increased $888,000 from $404,000 for the
twelve months ended December 31, 1995 to $1,292,000 for the twelve
months ended December 31, 1996. The increase is due primarily to the
interest earned on the proceeds from the Company's Initial Public
Offering in 1996.
The net loss for the twelve months ended December 31, 1995 was
$11,303,000 compared to a net loss of $11,631,000 for the twelve months
ended December 31, 1996. This slight increase is due to increased
service costs, selling, general and administrative expenses, and
depreciation and amortization expense offset by increased revenue and
interest income and decreased management fees and interest expense.
Twelve Months Ended December 31, 1995 Compared to Twelve Months
Ended December 31, 1994. Revenue increased $1,145,000 from $51,000 for
the twelve months ended December 31, 1994 to $1,196,000 for the twelve
months ended December 31, 1995. The increase in revenue was
attributable to an increase in subscribers and the addition of premium
and pay-per-view services during April and June 1995, respectively.
Operating expenses increased $5,658,000 from $4,657,000 for the
twelve months ended December 31, 1994 to $10,315,000 for the twelve
months ended December 31, 1995. This increase was primarily
attributable to costs associated with commercial roll-out, including
service costs, selling, general and administrative expenses, management
fees and depreciation and amortization.
Service costs increased $564,000 from $39,000 for the twelve
months ended December 31, 1994 to $603,000 for the twelve months ended
December 31, 1995. Such costs, primarily fees paid to providers of
television programming and royalties paid to CT&T under the CT&T
License Agreement, increased with the growth in subscribers and
revenues.
Selling, general and administrative expenses increased $2,753,000
from $2,884,000 for the twelve months ended December 31, 1994 to
$5,637,000 for the twelve months ended December 31, 1995. The increase
in selling, general and administrative expenses was primarily
attributable to headcount-related costs (as the Company's employee base
rose from 13 at December 31, 1994 to 55 at December 31, 1995), sales
and marketing-related costs and increased legal costs associated with
the FCC licensing process.
Management fees increased $1,153,000 from $1,546,000 for the
twelve months ended December 31, 1994 to $2,699,000 for the twelve
months ended December 31, 1995. The increase in management fees was
attributable to contractual increases in amounts due to Bell Atlantic
under the terms of a management agreement between the Company and Bell
Atlantic (the "Management Agreement"). Other costs reimbursed under
this agreement, primarily for salary and benefits were reflected in
selling, general and administrative expenses and continued to be
incurred separately by the Company in 1996.
Depreciation and amortization increased $1,188,000 from $188,000
for the twelve months ended December 31, 1994 to $1,376,000 for the
twelve months ended December 31, 1995. The increase in depreciation and
amortization costs was due primarily to the purchase of customer
premises equipment, equipment for three transmitter sites and the build-
out of the Company's customer service/administrative facility.
Interest expense increased $669,000 from $1,919,000 for the twelve
months ended December 31, 1994 to $2,588,000 for the twelve months
ended December 31, 1995. This increase was due to increases in the
prime interest rate along with additional interest associated with the
compounding of previously accrued interest and principal on the Morgan
Notes. In connection with the consummation of the Initial Public
Offering, $10 million of the $15 million principal amount of the Morgan
Notes was converted into Common Stock of the Company. Interest accrued,
in an amount proportionate to the amount of principal converted, from
the date of issue of such notes through the conversion date was
irrevocably waived and classified to additional paid-in capital.
Interest income declined from $527,000 for the twelve months ended
December 31, 1994, to $404,000 for the twelve months ended December 31,
1995.
The net loss for the twelve months ended December 31, 1994 was
$5,999,000 compared to a net loss of $11,303,000 for the twelve months
ended December 31, 1995. The increase in net loss is due primarily to
increased operating expenses and interest expense.
Twelve Months Ended December 31, 1994 Compared to Twelve Months
Ended December 31, 1993. Revenues decreased $4,000 from $55,000 for the
twelve months ended December 31, 1993 to $51,000 for the twelve months
ended December 31, 1994. This decrease was attributable to subscriber
attrition during the testing phase of the Company's operations.
Operating expenses increased $2,511,000 from $2,146,000 for the
twelve months ended December 31, 1993 to $4,657,000 for the twelve
months ended December 31, 1994. This increase was primarily
attributable to costs associated with commercial roll-out, including
selling, general and administrative expenses, management fees and
depreciation and amortization.
Selling, general and administrative expenses increased $1,085,000
from $1,799,000 for the twelve months ended December 31, 1993 to
$2,884,000 for the twelve months ended December 31, 1994. The increase
in selling, general and administrative expenses was primarily
attributable to headcount-related costs (as the Company's employee base
rose from two at December 31, 1993 to 13 at December 31, 1994), sales
and marketing related expenses and increased legal expenses. Legal
expenses increased in connection with the LMDS rule making proceeding,
the Company's transmitter applications, litigation regarding access to
programming and an action to protect certain trade secrets.
Management fees increased $1,296,000 from $250,000 for the twelve
months ended December 31, 1993 to $1,546,000 for the twelve months
ended December 31, 1994. The increase in management fees was
attributable to contractual increases due to Bell Atlantic under the
terms of the Management Agreement.
Depreciation and amortization increased $115,000 from $73,000 for
the twelve months ended December 31, 1993 to $188,000 for the twelve
months ended December 31, 1994. The increase in depreciation and
amortization costs was primarily attributable to increased purchases of
customer premises equipment in anticipation of a commercial roll-out
and acquisition of equipment for one transmitter site.
Interest expense was $1,919,000 for the twelve months ended
December 31, 1994 with no interest expense incurred for the twelve
months ended December 31, 1993. The increase in interest expense
related to the issuance of the Morgan Notes on December 29, 1993.
Interest income increased $427,000 from $100,000 for the twelve months
ended December 31, 1993 to $527,000 for the twelve months ended
December 31, 1994. This increase related to the interest earnings on
the unexpended portion of the proceeds of the Morgan Notes.
The net loss for the twelve months ended December 31, 1994 was
$5,999,000 compared to a net loss of $1,991,000 for the twelve months
ended December 31, 1993. The increase in the net loss was due primarily
to increased operating expenses and interest expense.
Liquidity and Capital Resources
For the year ended December 31, 1996, the Company expended
$9,106,000 on operating activities. During the same period, capital
expenditures were $10,191,000, consisting primarily of transmitter
deployment and the purchase of customer premises equipment.
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
million of other expenses, were approximately $39,850,000.
Prior to the consummation of the Initial Public Offering, the
Company had financed its cash flow requirements primarily with proceeds
obtained from private placements of debt and equity. In 1993, the
Company consummated a $10 million private placement of equity with Bell
Atlantic and the $15 million private placement of the Morgan Notes. The
Company utilized the proceeds of these private placements to finance
operations, build-out its system, purchase customer premises equipment
and fund distributions totaling $4 million to the Founders in 1993 and
1994. The Morgan Notes accrued interest at Morgan's prime lending rate
plus 4%, with a minimum rate of 8% and a maximum rate of 12%. Effective
December 15, 1995, $5 million principal amount of the Morgan Notes,
together with accrued interest thereon of approximately $1.3 million,
was exchanged for the Morgan Exchange Notes. Prior to such exchange
accrued interest on the Morgan Notes was added to the outstanding
principal balance. The Morgan Exchange Notes accrue interest at
Morgan's prime lending rate plus 6%, with a minimum rate of 10% and a
maximum rate of 15%. Interest on the Morgan Exchange Notes is payable
quarterly, beginning March 28, 1996. Principal is payable as follows:
4/15 of the outstanding balance is payable on June 30, 1997, 5/11 of
the then outstanding balance is payable on June 30, 1998 and the
remaining balance is payable on April 30, 1999. The Morgan Exchange
Notes are not convertible. Upon the consummation of the Incorporation
Transactions in February 1996, the remaining $10 million principal
amount of the Morgan Notes was converted into 604,858 shares of Common
Stock. Interest accrued, in an amount proportionate to the amount of
principal converted, from the date of issue of the Morgan Notes through
the conversion date was irrevocably waived and reclassified to
additional paid-in capital upon such conversion.
On September 30, 1995, the Company exercised its option to
terminate the Management Agreement, effective December 31, 1995.
Effective December 1, 1995, the Company entered into an agreement with
Bell Atlantic which converted outstanding fees and related interest
thereon due to Bell Atlantic pursuant to the terms of the Management
Agreement, totaling approximately $3.5 million, to a senior convertible
note (the "Bell Atlantic Note"). From the proceeds of the Initial
Public Offering, the Company paid Bell Atlantic approximately $3.5
million due under the Bell Atlantic Note together with approximately
$100,000 of accrued interest thereon and $675,000 for fees accrued
during the fourth quarter of 1995 under the Management Agreement.
On December 15, 1995, the Company entered into two sale and
leaseback transactions totaling approximately $2.6 million. The minimum
lease term for each piece of equipment under the sale and leaseback
facility in the amount of $1.1 million is 36 months, with a renewal
period of an additional twelve months. The minimum lease term for each
piece of equipment under the sale and leaseback facility in the amount
of $1.5 million is 48 months, with a renewal period of an additional
twelve months. Rental payments are due monthly in advance.
The Company expects that the remaining proceeds from the Initial
Public Offering and internally generated funds will be sufficient for
the continued build out of its multichannel broadband cellular
television system. The Company believes that its sources of capital,
including internally generated funds and the remaining proceeds from
the Initial Public Offering will be adequate to satisfy anticipated
capital needs and operating expenses for the next twelve months.
Additional funding would be required for the Company to expand into the
BTA (if acquired) and to provide additional services such as high-speed
Internet access, telephony and other two-way services.
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.
Transmitter Deployment. The Company anticipates that the 17
transmitters it plans to have deployed by the end of 1997 will give it
access to subscribers throughout most of the New York PMSA. The Company
has leased space on 15 rooftops for its transmitters, and believes that
leased space on rooftops in New York City and other locations in the
New York PMSA will be readily available to serve as additional
transmitter sites. The Company is in negotiations for rooftop space on
four additional sites in New York City for transmitter deployment.
The Company is actively pursuing over 50 sites for its repeaters. The
Company has letters of intent from landlords to lease space at an
additional 24 sites throughout the New York PMSA.
The average rental cost for existing transmitter sites is
approximately $1,000 per month. The average cost of a cell site,
including a fully redundant transmitter, leasehold improvements, an
uninterruptable power supply and an inter-cell relay is currently
approximately $500,000. The final engineering of a cell may require
deployment of repeaters to provide signal to shadowed areas. The number
of repeaters required within a cell may vary significantly based upon
the topography of the cell and the location of the transmitter. The
Company anticipates the cost of cell engineering, on average, to be
$150,000 per cell.
Customer Premises Equipment. Customer premises equipment consists
of at least one set-top converter and at least one receive antenna. At
December 31, 1996, the Company had outstanding long-term orders with
CT&T for the purchase of set-top converters, receive antennas, high
speed modems, transmitters and repeaters, aggregating approximately
$11.6 million (net of deposits) to be delivered to the Company during
1997 and 1998.
CT&T License Agreement. CT&T has licensed its proprietary LMDS
technology to CVNY pursuant to the CT&T License Agreement to permit the
Company to construct and operate its multichannel broadband cellular
television system and sell communications services on an exclusive
basis for the New York PMSA and the New York BTA (to the extent the
Company holds or obtains a commercial license from the FCC). CT&T has
also agreed to license its technology to the Company in other BTAs in
which the Company obtains LMDS licenses from the FCC. The economic
terms and conditions of such licenses will be, in the aggregate, at
least as favorable as the terms of any other license granted by CT&T
within the United States. Under the CT&T License Agreement, the Company
pays CT&T a royalty currently equal to 7.5% of gross revenues on a
quarterly basis. The Company has also granted CT&T an exclusive,
royalty-free license to use any improvements the Company makes in the
licensed technology. CT&T has the right to sublicense its rights under
the agreement with Philips Electronics N.V. and its affiliates and the
unrestricted right to sublicense its rights outside the Company's
service area to other parties. CT&T has also granted CVNY a non-
exclusive, royalty-free sublicense within the Company's licensed
territory for certain patents and know-how owned or controlled by
Philips. The royalty rate payable to CT&T may be reduced by operation
of the above-mentioned "most favored nation" clause, and is also
subject to reduction in the event of expiration, revocation or
invalidation of certain CT&T patent rights. The term of the CT&T
License Agreement extends through the year 2028, subject to earlier
termination upon certain events.
Other Transactions with CT&T. As of December 31, 1996, the Company
had an amount due from CT&T of approximately $760,000, which represents
the Company's allocation of costs to CT&T, net of royalties. The
Company and CT&T have agreed, as of the consummation of the
Incorporation Transactions, to apply royalties over and above $80,000
in each calendar year otherwise due to CT&T to the outstanding amounts
due from CT&T, which will bear interest from and after such date at the
rate of 6% per annum. Effective upon the consummation of the
Incorporation Transactions in February 1996, the Company assumed all
ongoing legal expenses of FCC counsel in recognition of the potential
scope of the Company's operations outside the New York BTA. Prior to
the Initial Public Offering, because of the common interest of the
Company and CT&T in the outcome of the FCC's LMDS rule making
proceeding, the Company and CT&T had shared equally the fees and
disbursements of joint FCC counsel. Prior to the consummation of the
Incorporation Transactions, the Company paid certain general and
administrative expenses which were shared equally with, and
subsequently billed to, CT&T.
Income Taxes. The Company's predecessors were established as
partnerships and as a corporation organized under Subchapter S (a
"Subchapter S Corporation") of the Internal Revenue Code of 1986, as
amended (the "Code"). The partners or Subchapter S Corporation
stockholders, as applicable, are required to report their share of the
Company's losses in their respective income tax returns.
The Company has been organized as a Subchapter C Corporation of
the Code, and, accordingly, is subject to federal and state income
taxes. On December 31, 1996, the Company recorded a deferred tax asset
of approximately $13.9 million, primarily related to current year
operating losses and differences between the book and tax basis of the
Company's investment in CVNY. Additionally, under the provisions of
Statement of Financial Accounting Standard No. 109-Accounting for
Incomes Taxes ("SFAS 109"), the Company recorded an offsetting
valuation allowance of $13.9 million against the aforementioned tax
asset since the Company has no ability to carryback these losses and
has a limited earnings history. The Company believes this asset may be
realized upon existence of sufficient taxable income or other
persuasive evidence as defined by SFAS No. 109. See the Consolidated
Financial Statements of the Company and the related Notes thereto
included on pages 30 to 50 of this Report.
New Accounting Pronouncements. In February 1997, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No.
128 specifies new standards designed to improve the earnings per share
(EPS) information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS
and replacing it with basic EPS, with the principal difference being
that common stock equivalents (CSEs) are not considered in computing
basic EPS, (b) eliminating the modified treasury stock method and the
three percent materiality provision, and (c) revising the contingent
share provisions and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 31, 1997, including interim periods. The Company
has not yet determined the impact of the implementation of SFAS No.
128 on its financial statements and related disclosures.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial
information required to be filed herewith are included on pages 30 to
50 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
The information called for by Item 10, Directors and
Executive Officers of the Registrant (except for the information
regarding executive officers called for by Item 401 of Regulation S-K
which is included in Part I hereof in accordance with General
Instruction G(3)), Item 11, Executive Compensation, Item 12, Security
Ownership of Certain Beneficial Owners and Management, and Item 13,
Certain Relationships and Related Transactions, is hereby incorporated
by reference to the Registrant's definitive Proxy Statement for its
Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Financial Statements and Financial Schedules
(1) Consolidated Financial Statements Page(s)
Report of Independent Accountants. 30
Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1996 31
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the period January 1,
1992 (date of inception) to December 31, 1996 32
Consolidated Statements of Changes in Partners' Capital and
Stockholders' Equity (Deficit) for the years ended December 31,
1994, 1995 and 1996 and for the period January 1, 1992 (date of
inception) to December 31, 1996 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the period January 1,
1992 (date of inception) to December 31, 1996 34-35
Notes to Consolidated Financial Statements 36-50
(2) Financial Statement Schedule
Schedule II _ Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1* Certificate of Incorporation.
3.2* By-laws.
4.1* Form of Common Stock Certificate.
4.2* Stockholders Agreement, dated as of January 12, 1996, by
and among CellularVision USA, Inc., Shant S. Hovnanian,
Bernard B. Bossard and Vahak S. Hovnanian.
4.3* Registration Rights Agreement, dated as of January 12,
1996, by and among CellularVision USA, Inc., Bell
Atlantic Ventures XXIII, Inc., Philips PGNY Corp., Inc.
and Morgan Guaranty Trust Company of New York, as
Trustee of the Commingled Pension Trust Fund (Multi-
Market Special Investment) of Morgan Guaranty Trust
Company of New York, and as Investment Manager and Agent
for an Institutional Investor.
10.1* Amended and Restated License Agreement, together with
Addendum to License Agreement, each dated as of July 7,
1993, by and between CellularVision Technology &
Telecommunications, L.P. and CellularVision of New York,
L.P. and certain amendments and supplements thereto.
10.2* Reserved Channel Rights Agreement, dated as of July 7,
1993, by and between Vahak S. Hovnanian, Shant S.
Hovnanian, Bernard B. Bossard, CellularVision of New
York, L.P. and Bell Atlantic Ventures XXIII, Inc.
10.3* Restructuring Agreement, dated as of January 12, 1996,
by and among the Company, CellularVision of New York,
L.P., Hye Crest Management, Inc., Suite 12 Group, Bell
Atlantic Ventures XXIII, Inc., Philips PGNY Corp.,
Morgan Guaranty Trust Company of New York, as Trustee of
the Commingled Pension Trust Fund (Multi-Market Special
Investment) of Morgan Guaranty Trust Company of New
York, and as Investment Manager and Agent for an
Institutional Investor, Shant S. Hovnanian, Bernard B.
Bossard and Vahak S. Hovnanian.
10.4* CellularVision USA, Inc. 1995 Stock Incentive Plan.
10.5* Employment Agreement, dated as of October 18, 1995,
between CellularVision USA, Inc. and Bernard B. Bossard.
10.6* Employment Agreement, dated as of October 18, 1995,
between CellularVision USA, Inc. and Shant S. Hovnanian.
10.7* Employment Agreement, dated as of January 1, 1996,
between CellularVision USA, Inc. and John Walber.
Employment Agreement, dated as of July 31, 1996, between
10.8** CellularVision USA, Inc. and Charles N. Garber.
10.9* Intercompany Agreement, dated January 12, 1996, by and
among CellularVision USA, Inc., CellularVision
Technology & Telecommunications, L.P., CellularVision of
New York, L.P., Shant S. Hovnanian, Bernard B. Bossard
and Vahak S. Hovnanian.
10.10* Second Addendum to License Agreement, dated as of
January 12, 1996, by and between CellularVision
Technology & Telecommunications, L.P. and CellularVision
of New York, L.P.
10.11* Corporate Name License and Grant of Future Licenses
Agreement, dated as of January 12, 1996, by and between
CellularVision Technology & Telecommunications, L.P. and
CellularVision USA, Inc.
10.12* Amended and Restated Agreement of Limited Partnership of
CellularVision of New York, L.P., dated as of July 7,
1993, by and between Hye Crest Management, Inc., Bell
Atlantic Ventures, XXIII, Inc. and the limited partners
set forth on the signature page thereto.
10.13* Master Amendment Agreement, dated as of October 8, 1993,
by and among Vahak S. Hovnanian, Shant S. Hovnanian,
Bernard B. Bossard, Hye Crest Management, Inc., Suite 12
Group, CellularVision of New York, L.P., CellularVision
Technology & Telecommunications, L.P., Bell Atlantic
Ventures XXIII, Inc. and Philips PGNY Corp.
10.14* Second Master Amendment Agreement, dated as of December
29, 1993, by and among Hye Crest Management, Inc., Suite
12 Group, CellularVision of New York, L.P.,
CellularVision Technology & Telecommunications, L.P.,
Bell Atlantic Ventures XXIII, Inc., Philips PGNY Corp.,
Morgan Guaranty Trust Company of New York, as trustee of
the Commingled Pension Trust Fund (Multi-Market Special
Investment) of Morgan Guaranty Trust Company of New
York, and as Investment Manager and Agent for an
Institutional Investor.
10.15*+ Note Purchase Agreement, dated as of December 29, 1993,
between CellularVision of New York, L.P. and Morgan
Guaranty Trust Company of New York, as trustee of the
Commingled Pension Trust Fund (Multi-Market Special
Investment) of Morgan Guaranty Trust Company of New York
with respect to the issuance and sale of $12,000,000
principal amount of Convertible Exchangeable
Subordinated Notes of CellularVision of New York, L.P.
10.16* Agreement of Lease, dated May 9, 1994, by and between
Cellular Vision of New York and New York City Economic
Development Corporation and Sublease, dated March 8,
1995, between CellularVision of New York, L.P. and
Harvard Fax, Inc.
10.17* Communications Antenna Site Agreement, dated December 6,
1994, between CellularVision of New York L.P. and Tower
Owners, Inc., as amended.
10.18* Master Lease Agreement No. 6035, dated December 12,
1995, between Linc Capital Management, a division of
Scientific Leasing Inc., and CellularVision of New York,
L.P., together with the Schedules and Addendum No. 1
thereto; Warrant Certificate Nos. 1, 2 and 3, dated
December 14, 1995, issued to Linc Capital Partners, Inc.
by the Company.
10.19* Master Equipment Lease, dated December 14, 1995 between
Boston Financial & Equity Corporation and CellularVision
of New York, L.P., together with the Schedules and the
Addendum thereto; Warrant Certificate Nos. 4 and 5,
dated December 14, 1995, issued to Boston Financial &
Equity Corporation by the Company.
10.20* Senior Convertible Term Note, dated December 1, 1995, in
the principal amount of $3,521,257 issued to Bell
Atlantic Ventures XXIII, Inc. by CellularVision of New
York, L.P. and CellularVision USA, Inc. and the
Agreement, dated as of December 1, 1995, by and among
CellularVision USA, Inc., CellularVision of New York,
L.P., and Bell Atlantic Ventures XXIII, Inc.
10.21* Warrant, dated June 1, 1994, issued by CellularVision of
New York, L.P. to Alex. Brown & Sons Incorporated.
10.22* Warrant, dated June 1, 1994, issued by CellularVision of
New York, L.P. to Mark B. Fisher.
10.23* Warrant, dated December 29, 1993, issued by
CellularVision of New York, L.P. to Peter Rinfret.
10.24* Warrant, dated October 8, 1993, issued by Vahak S.
Hovnanian and Shant S. Hovnanian to Alex. Brown
Financial Corporation.
10.25* Warrant, dated October 8, 1993, issued by Vahak S.
Hovnanian and Shant S. Hovnanian to Mark B. Fisher.
10.26* Non-qualified Stock Option Agreement under the
CellularVision USA, Inc. 1995 Stock Incentive Plan,
dated as of January 15, 1996, by and between the Company
and John Walber.
10.28* Agreement, dated as of January 12, 1996, by and among
CellularVision USA, Inc., CellularVision of New York,
L.P., Hye Crest Management, Inc., Shant S. Hovnanian,
Vahak S. Hovnanian, Bernard B. Bossard and Bell Atlantic
Ventures XXIII, Inc.
10.29* Exchange Notes, dated as of December 15, 1995, of
CellularVision USA, Inc. issued to Morgan Guaranty Trust
Company of New York, as trustee of the Commingled
Pension Trust Fund (Multi-Market Special Investment) of
Morgan Guaranty Trust Company of New York, and as
Investment Manager and Agent for an Institutional
Investor, in the principal amounts of approximately $5.0
million and $1.3 million, respectively (form of Exchange
Note included as Exhibit A-2 to Exhibit 10.15 above).
21* Subsidiaries of CellularVision USA, Inc.
23.1* Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Willkie Farr & Gallagher (included in Exhibit 5).
24* Power of Attorney.
__________________
* Incorporated by reference to the Company's Registration Statement in
Form S-1 (File No. 33-98340) which was declared effective by the
Commission on February 7, 1996.
** Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 30, 1996 filed by the Registrant on August
12, 1996.
+ An identical note purchase agreement has been entered into by
CellularVision of New York, L.P. and Morgan Guaranty Trust Company of
New York, as Investment Manager and Agent for an Institutional
Investor with respect to the issuance and sale of $3,000,000 principal
amount of Convertible Exchangeable Subordinated Notes of
CellularVision of New York, L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
CellularVision USA, Inc.:
We have audited the accompanying consolidated financial statements
and the financial statement schedule of CELLULARVISION USA, INC. (the
"Company," a Development Stage Company) listed in Item 14(a) of this
Form 10-K. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of CellularVision USA, Inc. as of December 31, 1995
and 1996, and the consolidated results of its operations and its cash
flows for the years ended December 31, 1994, 1995 and 1996 and for the
period January 1, 1992 (date of inception) to December 31, 1996, in
conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand L.L.P.
New York, New York
February 14, 1997,
except for Note 4, as to which the date is
March 17, 1997
CELLULARVISION USA, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1995 1996
Current assets:
Cash and cash equivalents... $3,536,354 $19,600,070
Accounts receivable, net of
allowance for doubtful
accounts of $133,730 and
$124,370.................... 410,141 530,333
Prepaid expenses and other.. 228,803 255,800
Due from affiliates......... - 759,527
Deferred offering costs..... 1,619,972 -
Total current assets 5,795,270 21,145,73
Property and equipment, net of
accumulated depreciation of
$981,466 and $2,753,841... 6,321,768 14,157,666
Intangible assets, net of
accumulated amortization of
$39,564 and $77,383........ 97,177 187,160
Debt placement fees........ 622,678 181,069
Notes receivable from related
parties.................... - 91,275
Other noncurrent assets 158,594 160,982
Total assets............... $ 12,995,487 $ 35,923,882
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........... $355,490 $ 893,861
Accrued liabilities........ 2,246,349 1,562,982
Due to affiliates.......... 1,294,812 -
Note payable to affiliate.. 3,521,257 -
Current portion of Exchange
notes...................... - 1,669,244
Other current liabilities.. 24,799 255,008
Total current liabilities.. 7,442,707 4,381,095
Convertible exchangeable
subordinated notes payable. 12,576,324
Exchange notes............. 6,295,017 4,590,421
Total liabilities.......... 26,314,048 8,971,516
Commitments and contingencies
(Note 7)
Stockholder's (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 state........ (19,843,966) (31,475,167)
Stockholders' equity
(deficit).................... (13,318,561) 26,952,366
Total Liabilities and
Stockholders' equity
(deficit)..... .............. $12,995,487 $35,923,882
The accompanying notes are an integral part of these consolidated
financial statements.
CELLULARVISION USA, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
January 1, 1992
(date of inception)
Year Ended December 31, to December 31,
1994 1995 1996 1996
Revenue $ 50,743 $ 1,195,593 $ 2,189,766 $ 3,492,983
Expenses:
Service costs 38,710 602,995 1,174,619 1,843,313
Selling, general
and
administrative 2,884,005 5,637,066 10,574,362 21,393,173
Management fees 1,546,377 2,698,564 - 4,494,941
Depreciation and
amortization 187,925 1,376,140 2,258,415 3,946,832
Total
operating
expenses......... 4,657,017 10,314,765 14,007,396 31,678,259
Operating
loss............. (4,606,274) (9,119,172) (11,817,630) (28,185,276)
Interest income.. 526,546 403,914 1,291,516 2,322,054
Interest expense (1,918,942) (2,587,916) (1,105,087) (5,611,945)
Loss before
provision for
Income Taxes..... (5,998,670) (11,303,174) (11,631,201) (31,475,167)
Provision for
Income Taxes..... - - - -
Net Loss......... (5,998,670) (11,303,174) (11,631,201) (31,475,167)
Loss per common
share............ $(0.91) ($0.75)
Weighted average
of common shares
outstanding....... 12,395,142 15,576,478
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
CELLULARVISION USA, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
AND STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1994, 1995 and 1996
and for the period January 1, 1992
(date of inception) to December 31, 1996
<CAPTION>
Total
Partners'
Net Deficit Capital and
Unrealized Accumulated Stock-
Additional Gain on During the Holders'
Partners' Common Paid-in Marketable Development Equity
Capital Stock Capital Securities Stage (Deficit)
<S> <C> <C> <C> <C> <C> <C>
Balance,January 1, 1992.. 26,152 100 26,252
Contributions............ 1,019,688 1,019,688
Distributions............ (175,156) (175,156)
Net Loss................. (550,997) (550,997)
Balance December 31, 1992 870,684 100 (550,997) 319,787
Contributions............ 9,707,728 9,707,728
Advance to HCM
stockholders............. (3,000,000) (3,000,000)
Distribution............. (1,054,947) (1,054,947)
Net Loss................. (1,991,125) (1,991,125)
Balances
December 31, 1993........ 6,523,465 100 (2,542,122) 3,981,443
Contributions............ 94,462 94,462 (3,038
Distributions............ (3,038,889) (3,038,889)
Repayment from HCM
stockholders............. 3,000,000 3,000,000
Net unrealized gain on
marketable securities.... 22,574 22,574
Net Loss................. (5,998,670) (5,998,670)
Balances,
December 31, 1994........ 6,579,038 100 22,574 (8,540,792) (1,939,080)
Distributions............ (53,733) (53,733)
Change in net unrealized
gain on marketable
securities............... (22,574) (22,574)
Restatement of equity
to reflect issuance of
Common Stock (12,385,142
shares).................. (123,851) 123,851 0
Net Loss................. (11,303,174) (11,303,174)
Balance,
December 31,1995......... 6,401,454 123,951 0 (19,843,966) (13,318,561)
Conversion of Stock
existing prior to IPO.... (100) (100)
Common Stock issued
at IPO (3,614,858
shares).................. 36,149 36,149
Conversion of Partners
Capital to Additional
paid-in Capital at
IPO...................... (6,401,454) 6,401,454 0
Additional paid-in
capital.................. 51,866,079 51,866,079
Net Loss................. (11,631,201) (11,631,201)
Balances,
December 31, 1996........ 0 160,000 58,267,533 0 (31,475,167) 26,952,366
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
CELLULARVISION USA, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
January 1, 1992
(date of inception)
Year Ended December 31, to December 31,
1994 1995 1996 1996
Cash flows from
operating activities:
Net loss............. (5,998,670) (11,303,174) (11,631,201) (31,475,167)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 187,925 1,376,140 2,258,415 3,946,832
Amortization of
placement fees....... 163,128 189,507 98,783 451,418
Provision for
doubtful accounts.... - 202,108 351,839 553,947
Stock option
compensation expense - - 150,000 150,000
Changes in assets and
liabilities:
Accounts receivable.. (5,521) (604,413) (472,031) (1,084,283)
Prepaid expenses
and other............ 149,392 (204,232) (26,997) (67,346)
Notes Receivable from
Related Parties
Accounts payable and
accrued liabilities.. (309,242) 622,277 2,077,817 3,025,309
Other current
liabilities.......... 33,181 (8,382) 230,209 252,758
Due to affiliates 1,191,753 3,203,046 (2,054,339) 2,595,501
Accrued interest 1,755,814 2,115,527 4,955 3,876,296
Other noncurrent
assets............... (88,234) (57,340) (2,388) (160,982)
Net cash used in
operating actiities.. (2,920,474) (4,468,936) (9,106,213) (18,026,992)
Cash flows from
investing activities:
Intangibles.......... (135,838) (903) (127,802) (264,543)
Property and equipment
additiions........... (3,163,310) (6,809,719) (10,191,494) (20,629,861)
Proceeds from sale of
property and
equipment............ _ 2,608,261 135,000 2,743,261
Purchase of available-
for-sale securites... (20,008,383) (6,907,826) _ (26,916,209)
Maturities of
available-for-sale
securities........... 14,908,612 12,007,597 - 26,916,209
Net cash used in
investing activities. (8,398,919) 897,410 (10,184,296) (18,151,143)
Cash flows from
financing activities:
Advance to HCM
stockholders......... _ _ _ (3,000,000)
Contributions 94,462 _ _ 10,821,878
Distribution (38,889) (53,733) (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 to affiliate
Deferred offering
costs................ (99,862) (2,960,629) (3,060,491)
Placement costs...... (20,000) (159,696) _ (975,311)
Net cash provided
by financing
activities
Net increase
(decrease) in cash and
cash equivalents...... (11,283,820) (3,884,817) 16,063,716 19,600,070
Cash and cash
equivalents, beginning
of period............. 18,704,991 7,421,171 3,536,354 -
Cash and cash
equivalents, end of
period................ 7,421,171 3,536,354 19,600,070 19,600,070
The accompanying notes are an integral part of these consolidated
financial statements.
CELLULARVISION USA, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
January 1,1992
(date of inception)
to December 31,
1995 1996 1996
Supplemental Cash Flow
Disclosures:
Cash paid for interest
during the period - $ 1,100,133 $ 1,100,133
Cash paid for income
taxes during this
period - - -
Noncash transactions:
Common Stock issued
for convertible debt - $12,731,450 $12,731,450
The accompanying notes are an integral part of these consolidated
financial statements.
CELLULARVISION USA, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Company Background
CellularVision USA, Inc. ("CVUS") was formed on October 3,
1995, as described below, to combine the ownership of Hye Crest
Management, Inc. ("HCM") in July, 1996, HCM changed its name to
CellularVision Capital Corporation ("CVCC") and CellularVision of
New York, L.P. ("CVNY") which are companies under common control
(herein referred to on a consolidated basis as the "Company").
The Company owns and operates a multichannel broadband
cellular television system (the "System") within the 28 Gigahertz
("GHz") spectrum using Local Multipoint Distribution Service
("LMDS") technology licensed from CellularVision Technologies &
Telecommunications, L.P. ("CT&T"), an affiliate of the Company.
The Federal Communications Commission's (the "FCC") final rules
for LMDS authorize the Company and future providers of LMDS to
offer a variety of two-way broadband services, such as wireless
local loop telephony, high speed data transmission (including
Internet access), video teleconferencing (including distance
learning and telemedicine) and interactive television. The
initial service territory licensed to the Company on a commercial
basis is the New York Primary Metropolitan Statistical Area
("PMSA"), encompassing New York City and three suburban counties.
In addition, the FCC may grant to the Company a Pioneer's
Preference pursuant to which the Company would be allowed to
expand its service area to include the entire New York Basic
Trading Area ("BTA"), of which the New York PMSA is a part, by
paying a fee representing the difference between the value of a
license to serve the New York BTA and the value of the Company's
current commercial license to serve the New York PMSA, subject to
a 15% discount from the average auction price paid at the LMDS
auctions for licenses in comparable service areas.
Predecessor Companies and Basis of Presentation
The consolidated financial statements for the years ended
December 31, 1994, 1995 and 1996 include the accounts of CVCC and
CVNY. All significant intercompany accounts and transactions have
been eliminated in consolidation. HCM and Suite 12 Group are
collective by referred to herein as the "Predecessor". Certain
prior year amounts have been reclassified to conform to the
current year's presentation.
Suite 12 Group was formed as a general partnership in 1986,
and its principal operations from 1986 until 1992 consisted of
the development of the LMDS technology licensed from CT&T for use
by the Company in its System. The accounts of Suite 12 Group
included in the consolidated financial statements consist
primarily of legal and related costs associated with the FCC
licensing procedures and costs associated with the head-end and
transmitter facilities which were subsequently contributed to the
Company. The FCC commercial license for use of the 28 GHz
spectrum was obtained in 1991 by HCM. The build-out of the head-
end and transmitter facilities began in January 1992, with
service to the first subscribers beginning in July 1992. In July
1993, the Predecessor, along with Bell Atlantic Ventures XXIII,
Inc. ("Bell Atlantic"), an indirect wholly owned subsidiary of
Bell Atlantic Corporation, formed CVNY to market and sell
telecommunications services. Upon the inception of CVNY, Suite 12
Group contributed an experimental license and certain equipment
to CVNY in exchange for a limited partnership interest,
contributed its head-end and certain other equipment to HCM and
contributed its LMDS technology to CT&T, which in turn licensed
the LMDS technology to CVNY. As such, these consolidated
financial statements present the Company as if it began
operations on January 1, 1992, and exclude all costs of Suite 12
Group related to the development of the LMDS technology.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments
purchased with original maturities of three months or less to be
cash equivalents. Cash and cash equivalents consisted of the
following:
December 31,
1995 1996
Cash in bank $ 165,816 $ 312,218
Cash equivalents - -
Overnight reverse
repurchase agreements 3,370,538 19,287,852
Total $ 3,536,354 $ 19,600,070
Securities purchased under agreement to resell (reverse
repurchase agreements) result from transactions that are
collateralized by U.S. Government securities and are carried at
the amounts for which the securities will subsequently be resold.
The overnight repurchase agreements are collateralized by U.S.
Government securities at approximately 130% of the investment
amount. The collateral securities are held by the Company's
designated custodian.
At December 31, 1995 and 1996, the Company had the majority
of its cash deposits with two banking institutions. The Company
reviews the credit ratings of its banking institutions on a
regular basis.
Revenue Recognition
Revenue is primarily derived from subscriber fees, billed
one month in advance, and recorded as revenue in the period in
which the service is provided. Deferred revenue associated with
advanced billings is recorded as a current liability.
Installation revenue is recognized as revenue to the extent
of direct selling costs incurred. The remainder is deferred and
amortized to income over the estimated average period that the
subscribers are expected to remain connected to the Company's
System.
Property and Equipment
Property and equipment, consisting of head-end equipment,
customer premises equipment, transmitters, furniture and
fixtures, and leasehold improvements, are recorded at cost and
depreciated on a straight-line basis over the estimated useful
lives of the assets, ranging from three to seven years.
Transmitters are not depreciated until such assets are
constructed or placed in service. Depreciation on customer
premises equipment commences the month following receipt of the
equipment. When assets are fully depreciated, it is the Company's
policy to remove the costs and related accumulated depreciation
from its books and records. Advance payments for customer
premises equipment and transmitters approximating $645,000 and
$3,358,000 at December 31, 1995 and 1996, respectively, are
recorded as property and equipment.
The Company capitalizes subcontractor labor and materials
incurred in connection with the installation of customer premises
equipment and depreciates them over the shorter of the estimated
average period that the subscribers are expected to remain
connected to the Company's System, or five years.
Intangible Assets
The costs of field studies to determine line-of-sight
transmission capabilities are capitalized and amortized over five
years by the straight-line method. If a site is abandoned or
deemed inoperable, all costs associated with that site are
charged to expense.
Income Taxes
As a result of the consummation of the Incorporation
Transactions (as defined in Note 10), HCM's status as an S
Corporation terminated, and the Company and HCM became subject to
federal and state income taxes. The Company has adopted Statement
of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS No. 109"). As required by SFAS No. 109, the Company
is required to provide for deferred tax assets or liabilities
arising due to temporary differences between the book and tax
basis of assets and liabilities existing at the time of the
consummation of the Incorporation Transactions. As of December
31, 1996, the Company recorded a deferred tax asset of $13.9
million primarily related to operating losses and the difference
between the book and tax basis of the Company's investment in
CVNY. An offsetting valuation allowance of $13.9 million was
established as the Company has no ability to carryback its losses
and has limited earnings history.
Debt Placement Fees
Unamortized debt issuance costs are amortized over the term
of the related debt by the effective interest rate method.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of operating revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
Net Loss Per Share
Net Loss per common share for the years ended December 31,
1995 and 1996, is computed by dividing net loss by weighted
average number of common shares outstanding during the year,
including common stock equivalents (unless anti-dilutive).
Presentation of earnings per share is not presented for the
year ended December 31, 1994 as it is not considered indicitive
of the on-going entity.
Fair Value of Financial Instruments
Fair value is a subjective and imprecise measurement that is
based on assumptions and market data which require significant
judgment and may only be valid at a particular point in time.
The Company's financial instruments at December 31, 1995 and
1996 consist of overnight reverse repurchase agreements and long-
term debt. The carrying value of each of these financial
instruments approximates its market value, since the overnight
reverse repurchase agreements mature daily and the interest rate
on the long-term debt is a floating rate based on the prime rate,
which periodically adjusts.
Deferred Offering Costs
Expenses associated with the Initial Public Offering (as
defined in Note 10) (e.g., legal fees, filing fees, accounting
and printing costs) were capitalized as deferred offering costs
at December 31, 1995. Upon the successful completion of the
Initial Public Offering in 1996, such costs were deducted from
the proceeds of the Initial Public Offering and recorded as a
reduction to additional paid-in capital.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 specifies
new standards designed to improve the earnings per share (EPS)
information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of
primary EPS and replacing it with basic EPS, with the principal
difference being that common stock equivalents (CSEs) are not
considered in computing basic EPS, (b) eliminating the modified
treasury stock method and the three percent materiality
provision, and (c) revising the contingent share provisions and
the supplemental EPS data requirements. SFAS No. 128 also makes a
number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The
Company has not yet determined the impact of the implementation
of SFAS No. 128 on its financial statements and related
disclosures.
3. Property and Equipment
Property and equipment consisted of the following:
December 31,
1995 1996
Transmission and head-end
equipment $ 740,227 $ 4,240,899
Customer premises equipment 4,186,685 6,891,570
Leasehold improvements 519,483 643,586
Office equipment 461,619 768,487
Equipment deposits 645,000 3,357,864
Capitalized installation
costs 750,220 1,009,101
Subtotal 7,303,234 16,911,507
Less-Accumulated
depreciation 981,466 2,753,841
Total $ 6,321,768 $14,157,666
Depreciation expense was 176,000, 1,349,000 and 2,221,000 for
December 31, 1994, 1995 and 1996 respectively.
4. FCC Matters
CVNY holds a fixed station commercial license granted by the
FCC in January 1991 which authorizes the Company to use the 27.5-
28.5 GHz frequency band to operate a multicell LMDS video
delivery system throughout the New York PMSA. The Company's
license is the only commercial license for this service granted
by the FCC. Moreover, on December 7, 1995, the FCC granted the
Company's 34 transmitter applications, conditional upon, and
subject to conformance with the final actions taken by the FCC in
the LMDS rulemaking proceeding. The commercial license was
granted in 1991, with an initial term of five years, and expired
in February 1996. An application for renewal of this fixed
station license was filed on December 29, 1995. The FCC stated
in the Second Report and Order that it will commence processing
the Company's renewal application by placing the application on
Public Notice not later than 30 days after the March 13, 1997
release date of the Order. The new LMDS service rules will apply
to this renewal application. While the Company has an expectation
of renewal of this license, as a result of its deployment efforts
since 1992 and the FCC's adoption of a renewal expectancy
provision in the Second Report and Order, there is no guarantee
that the FCC will renew the license. Under the FCC's rules, a
license automatically stays in effect pending FCC action on a
timely filed renewal application.
In the First Report and Order the FCC grandfathered the
Company's continued operations in the 27.5-28.5 GHz spectrum
(which the Company currently is licensed to use) for a period of
two years from the release date of the First Report and Order,
July 22, 1996, or until the first GSO/FSS satellite intended to
operate in the 28.35-28.50 GHz band is launched, whichever occurs
later. Additionally, under the grandfather provision adopted by
the FCC, the Company is authorized to use the newly designated
150 MHz at 29.1-29.25 GHz for hub-to-subscriber operations during
the grandfathered period, thus allowing the Company currently to
use 1,150 MHz in the New York PMSA. At the conclusion of the
grandfathered period, the Company will be required to cease its
operations in the 28.35-28.50 GHz spectrum thus maintaining its
1,000 MHz spectrum allocation, at 27.5-28.35 GHz and 29.1-29.25
GHz, along with an additional 150 MHz in the 31 GHz band.
CVNY also holds an experimental license authorizing limited
market tests which was granted by the FCC in 1988 and has been
renewed for full two year terms on a bi-yearly basis. In August
1993, the FCC approved the modification of this license to
authorize two-way video and voice and data transmissions with
variable modulation and bandwidth characteristics. On June 30,
1995, the Company filed a timely application for renewal of its
experimental license which had an expiration date of September 1,
1995. The FCC granted the renewal application, effective
September 1, 1995, for a new two-year license term. In addition,
on November 26, 1996, the Company filed for an experimental
license in the 31.0-31.3 GHz band in the New York BTA in order to
conduct limited market studies of various packages of video,
telephony and /or data services delivered through 31 GHz LMDS
technology. This application currently is pending before the FCC.
On March 13, 1997, the FCC adopted the LMDS Second Report
and Order, which includes service, auction and eligibility rules
for LMDS. This Second Report and Order largely concludes the LMDS
rulemaking proceeding except for unresolved issues regarding
disaggregation and partitioning, which is subject to a Fifth
Notice of Proposed Rulemaking ("Fifth NPRM"). FCC officials have
stated their intent to commence the nationwide licensing of LMDS
through spectrum auctions by the summer of 1997.
The FCC in the Second Report and Order provides for two LMDS
licenses per Basic Trading Area ("BTA"): one license for 1,150
MHz, the other for 150 MHz, amounting to 1,300 MHz allocated to
LMDS. In addition to the non-contiguous 1 GHz of 28 GHz spectrum
allocated to LMDS in the First Report and Order, the FCC has
allocated an additional 300 MHz in the 31 GHz band for LMDS, 150
MHz of which will be allocated to one LMDS license, the other 150
MHz will be combined with the 1,000 MHz in the 28 GHz band.
The 1,150 MHz license will consist of: 850 MHz in the 27.5-
28.35 GHz band on a primary protected basis; 150 MHz in the 29.1-
29.25 GHz band, at the present time for LMDS hub-to-subscriber
transmissions only, on a co-primary basis with Mobile Satellite
Service (MSS) systems; and 150 MHz in the 31.075-31.225 GHz band
on a protected basis. The 150 MHz license will consist of two 75
MHz bands located at each end of the 300 MHz block in the 31.0-
31.075 GHz and 31.225-31.3 GHz bands on protected basis. LMDS
licensees operating in this bifurcated 31 GHz band will be
required to afford interference protection to incumbent
licensees. Also, this second 150 MHz block can be combined with
the 1,150 MHz license to create a 1.3 GHz LMDS system.
In order to encourage competition in the video and telephony
markets, the FCC decided to substantially restrict local exchange
carriers ("LECs") and cable companies from acquiring the 1,150
MHz LMDS license. Under the rules adopted in the Second Report
and Order, LECs and cable companies will be ineligible to acquire
a 20% or greater ownership interest in an 1,150 MHz LMDS license
in their service region for a period of three years. This
eligibility restriction may be extended or eliminated by the FCC
upon a future review of its regulations. Also, upon a showing of
good cause by a petitioning LEC or cable company, the FCC may
waive the eligibility restriction on a case-by-case basis. Cable
companies and LECs will be able to bid on the 150 MHz license in
their service area as there is no such eligibility restriction on
this LMDS license.
The FCC has adopted several opportunity enhancing measures
for qualifying small businesses. The FCC will define a "small
business" as an entity whose average annual gross revenues,
together with controlling principals and affiliates for the three
preceding years does not exceed $40 million. A small business
will be entitled to a 25% bidding credit. Small businesses are
also entitled to installment payments at an interest rate based
on the rate for U.S. Treasury obligations of maturity equal to
the license term (10yrs) fixed at the time of licensing, plus
2.5%. Payments shall include interest only for the first two
years and payments of interest and principal amortized over the
remaining eight years. The rate of interest on ten-year US
Treasury obligations will be determined by taking the coupon rate
of interest on ten-year US Treasury notes most recently auctioned
by the Treasury Department before licenses are conditionally
granted. Moreover, entities with gross revenues exceeding $40
million but not exceeding $75 million will be entitled to a 15%
bidding credit and the same ten-year repayment plan as small
businesses, except interest and principal will be amortized over
the whole ten-year period.
The FCC also initiated a Fifth NPRM to address the issues of
disaggregation and partitioning which will enable a licensee to
partition a portion of its bandwidth or geographic service area
to another entity. The FCC tentatively concluded to allow
disaggregation and partitioning without imposing substantial
regulatory requirements and issued the Fifth NPRM to solicit
public comment regarding the most effective way to implement
partitioning and disaggregation for LMDS licensees.
In the LMDS Second Report and Order, The FCC deferred action
on the Company's tentative Pioneer's Preference award and instead
ordered a "peer review" process, whereby the FCC would select a
panel of technical, non-FCC experts to review the Company's
technology and advise the FCC whether the Pioneer's Preference
should be granted. The Company believes, based on the 1994
General Agreement on Tariffs and Trade ("GATT") legislation and
the FCC's prior determinations not to subject parties to peer
review whose Pioneer's Preference applications were accepted for
filing before September 1, 1994, that this is an unnecessary
regulatory requirement. The Company is currently seeking FCC
clarification on this issue. Accordingly, there can be no
assurance that the FCC will grant the Company's Pioneer's
Preference.
Based on the Second Report and Order, wherein the FCC
confirms that it will commence processing the Company's
commercial license renewal application for the New York PMSA
within 30 days of the March 13, 1997 release of the Order, the
outcome of the Pioneer's Preference award has no impact on the
Company's License to operate in the New York PMSA. As previously
stated by the FCC in the Third Notice of Proposed Rulemaking, the
Pioneer's Preference would apply only to the outer portion of the
New York BTA not covered by the Company's existing license for
the PMSA. If the Company ultimately is awarded the Pioneer's
Preference award, the Company would be licensed to use the
portion of the New York BTA outside the New York PMSA pursuant
to the FCC's band segmentation plan (i.e., 27.5-28.35 GHz and
29.1-29.25 GHz and 30.0-30.3 GHz). While the remainder of the
New York BTA would be awarded to the Company without being
subject to a spectrum auction, under the FCC's most recent
proposal, the Company would have the exclusive right to extend
its license to add the portion of the New York BTA not included
in the 1,000-plus square mile area covered by the Company's
existing license for the New York PMSA by paying a fee
representing the difference between the value of a license to
service the New York BTA and the value of the Company's current
commercial license to serve the New York PMSA, subject to a 15%
discount from the average price paid at the LMDS auctions for
licenses in comparable service areas. In addition, the FCC is
considering the adoption of conditions on the Company's Pioneer's
Preference similar to those placed on the Pioneer's Preferences
granted to Personal Communications Service licensees. If adopted,
these conditions may require the Company to construct the system
subject to the Pioneer's Preference using substantially the same
technology upon which its Pioneer's Preference award is based.
5. Related Party Transactions
CT&T License Agreement
In July 1993, CVNY entered into a license agreement with
CT&T for use of certain patented technologies owned by CT&T and
for CT&T know-how related to the LMDS technology. The license
agreement grants to CVNY the right to utilize the licensed LMDS
technology to construct and operate its system and sell
communications services on an exclusive basis for the New York
PMSA and the New York BTA (to the extent the Company holds or
obtains a commercial license from the FCC). CT&T has also agreed
to license the LMDS technology to the Company in other BTAs in
which the Company obtains LMDS licenses from the FCC. The
economic terms and conditions of such licenses will be, in the
aggregate, at least as favorable as the terms of any other
license granted by CT&T within the United States. Under the
license agreement, the Company pays CT&T a royalty currently
equal to 7.5% of gross revenues on a quarterly basis. The license
will remain in effect until either the expiration, revocation or
invalidation of CT&T patent rights directly related to the
operation of the Company's system, or the year 2028. The license
fees were $4,000 $79,000 and $149,000 for the years ended
December 31, 1994, 1995 and 1996.
Under the license agreement, the Company's ability to
procure capital equipment relating to its system from sources
other than CT&T had been limited. Pursuant to an amendment dated
January 12, 1996, subject to certain conditions and except for
outstanding purchase orders, CVNY is under no obligation to
continue to purchase equipment or supplies from CT&T, although it
may continue to do so. The total amount of such equipment
purchased from CT&T for the years ended December 31, 1995 and
1996 was $5,595,000 and $6,198,000, respectively. CT&T entered
into certain purchase commitments during 1996 on behalf of CVNY
for the manufacture of antennas, receivers, modems and
transmitters, and CVNY intends to fulfill the remaining
obligations under these commitments which totaled approximately
$11.6 million, net of deposits of $3.4 million, at December 31,
1996. Over 83% of the deposits are covered by a pledge agreement
which collateralizes CT&T's security interest in equipment
ordered from its vendors.
Management Agreement
In July 1993, CVNY entered into a management agreement with
Bell Atlantic (the "Management Agreement") pursuant to which Bell
Atlantic, under the control and direction of the Board of
Directors of the Company, performed certain operational and
technical functions including, without limitation, installation,
engineering and network operations, accounting, procurement,
business planning, marketing, government relations and related
services in order to develop the commercial infrastructure
necessary to deploy the LMDS technology licensed from CT&T. The
Company exercised its option to terminate the Management
Agreement with Bell Atlantic on September 30, 1995, effective
December 31, 1995. The terms of the agreement were for five
years and provided for management fees at agreed upon scheduled
amounts, a percentage of gross revenue, 0.5% of aggregate average
Bell Atlantic equity from the preceding quarters, and
reimbursement of salary-related and benefit-related costs
incurred by Bell Atlantic. Since January 1, 1996, the Company has
been responsible for hiring all of its own employees, including
senior management, and administering its own services.
For the years ended December 31, 1994 and 1995, CVNY
incurred $1,546,000 and $2,699,000 respectively, of management
fees from Bell Atlantic. The reimbursed costs are included in
selling, general and administrative expenses and totaled $640,000
and $1,949,000 for the years ended December 31, 1994 and 1995,
respectively. For the year ended December 31, 1996, there are no
costs as the management agreement was terminated by CVNY at the
end of 1995.
Bell Atlantic Senior Convertible Note
Effective December 1, 1995, the Company entered into a
senior convertible note agreement with Bell Atlantic which
converted outstanding fees and related interest thereon due to
Bell Atlantic under the Management Agreement, totaling
approximately $3.5 million to a senior convertible note (the
"Bell Atlantic Note"). Interest accrued on the Bell Atlantic
Note at a per annum rate equal to the lesser of (a) Morgan's
prime lending rate plus 3% or (b) 12%. Interest was compounded
monthly. Principal plus accrued interest would have been payable
as follows: one-third of the outstanding balance would have been
payable on June 30, 1997, one-third of the then outstanding
balance would have been payable on June 30, 1998 and the
remaining balance would have been payable on June 30, 1999.
In February 1996, from the proceeds of the Initial Public
Offering, the Company paid Bell Atlantic approximately $3.5
million due under the Bell Atlantic Note, together with
approximately $100,000 of accrued interest thereon, and $675,000
in fees accrued during the fourth quarter of 1995 under the
Management Agreement.
Other Transactions with CT&T
In the past, CVNY paid certain legal, general and
administrative expenses on behalf of CT&T. The total of such
expenditures for the years ended December 31, 1994 and 1995 was
$754,000 and $612,000, respectively. Similarly, CVNY reimbursed
certain legal, general and administrative expenses paid by CT&T.
The total of such expenditures for the years ended December 31,
1994 and 1995 were $503,000 and $268,000, respectively.
Commencing on January 1, 1996 there were no such payments or
reimbursements as the Company and CT&T now pay their own
expenditures. In addition, all "joint use" costs which resulted
in benefits to both parties (e.g., salaries and benefits for the
limited personnel performing functions for both entities, office
rent and related expenses, office equipment and supplies) were
allocated to the respective parties on a cost-causative basis.
The Company also paid to CT&T an annual royalty amount which
totaled $80,000 for each of the years ended December 31, 1994,
1995 and 1996.
The Founders are parties to an agreement with CVNY, pursuant
to which they have the nontransferable right to require CVNY to
make available 60 MHz of continuous spectrum per polarization in
the spectrum awarded to CVNY by the FCC for the purpose of
providing certain programming (other than telephony, two-way
voice or data communication services) developed by them.
Other Transactions
In 1996, CVNY entered into agreements with certain
executives of CVNY and the Company to loan them money for the
purpose of purchasing Common Stock of the Company. The amount due
to CVNY is $91,275 at December 31, 1996.
An affiliate of certain directors of HCM provided
administrative, legal and operational functions to CVNY. These
costs aggregated $131,000 and $94,000 for the years ended
December 31, 1994 and 1995. There were no related costs for the
year ended December 31, 1996.
In July 1993, CVNY entered into compensation and consulting
agreements, aggregating $480,000 annually plus 0.291% of gross
revenues, with certain executive officers and directors of CVNY
which were terminated upon the consummation of the Incorporation
Transactions (as defined in Note 10). These officers and
directors are also partners in CT&T.
On December 29, 1993, concurrently with the closing of the
issuance of the convertible exchangeable notes discussed in Note
6, CVNY advanced $3,000,000 to the managing general partner. This
advance was interest-free. In June 1994, this advance was settled
through a non-cash capital distribution to the HCM stockholders.
This amount was presented as a reduction in partners' capital at
December 31, 1993.
Amounts due to certain partners of CVNY consisted of the
following:
December 31,
1995 1996
Due (to) from Bell Atlantic $(1,116,480) $ 0
Due (to) from CT&T (178,332) 759,527
Total $(1,294,812) $ 759,527
CVNY has entered into an agreement with the International
CellularVision Association ("ICVA"), whose members include
licensees of CT&T's proprietary LMDS technology and other
interested members, to fund, along with all other members of
ICVA, operating expenses of ICVA. CVNY funded $72,500, $179,434
and $286,934 of such expenses for the years ended December 31,
1994, 1995 and 1996 respectively. The Company also subleases
certain office space for ICVA on a month-to-month basis. As of
December 31, 1996, the monthly charge was $2,884.
6. Long-term Notes
On December 29, 1993, CVNY issued convertible exchangeable
subordinated notes aggregating $15,000,000 ("Convertible Notes").
Interest on the Convertible Notes was at a floating rate equal on
any given date to the prime rate plus 4% per annum, subject to a
minimum of 8% per annum and a maximum of 12% per annum.
A portion of the notes was subject to mandatory and
automatic conversion into shares of Common Stock upon the
consummation of a public offering pursuant to a registration
statement on Form S-1 with minimum aggregate proceeds of $35
million (a "qualified public offering").
Prior to the exchange of the notes, interest was accrued
quarterly and added to the principal balance and treated as
principal. For the year ended December 31, 1995, $2,116,000 of
accrued interest was added to principal.
In conjunction with the Initial Public Offering that
occurred in 1996, $10 million of Convertible Notes and the
associated accrued interest of approximately $2.7 million was
converted into shares of Common Stock and recorded primarily as
Additional Paid in Capital. Also, in conjunction with the IPO and
effective December 15, 1995 the remaining $5 million of
Convertible Notes and approximately $1.3 million of accrued
interest was converted into Exchange Notes. The Exchange Notes
bear interest at the prime rate plus 6% per annum, subject to a
minimum of 10% and a maximum of 15% per annum. Interest on the
Exchange Notes is payable quarterly and began on March 28, 1996.
The scheduled repayment dates in respect of the Exchange
Notes are as follows:
Date Amount Payable
June 30, 1997 4/15 of the aggregate outstanding principal balance
June 30, 1998 5/11 of the aggregate outstanding principal balance
June 30, 1999 Remaining amounts outstanding
7. Commitments and Contingencies
The Company has entered into various operating lease
arrangements for automobiles, office equipment and rent expiring
at various dates.
On December 15, 1995, the Company entered into two sale and
leaseback transactions totaling approximately $2.6 million which
reflected the net book value of assets sold on that date.
Accordingly, there was no gain or loss recorded on these
transactions. The minimum lease term for each piece of equipment
under the sale and leaseback facility in the amount of $1.1
million is 36 months, with a renewal period of an additional
twelve months. The minimum lease term for each piece of
equipment under the sale and leaseback facility in the amount of
$1.5 million is 48 months, with a renewal period of an additional
twelve months. Rental payments are due monthly in advance. The
Company has a firm commitment under the first of these sale and
leaseback facilities for additional lease financing in the amount
of $400,000. In connection with these sale and leaseback
facilities, the Company issued to the lessors warrants to
purchase an aggregate of 20,000 shares of common stock, par value
$.01 per share (the "Common Stock"), of the Company at the
initial public offering price of $15.00 per share.
At December 31, 1996, future minimum rental and lease
payments due under these arrangements are as follows:
1997 $1,815,975
1998 1,664,430
1999 868,956
2000 293,990
2001 265,290
Thereafter 562,439
Total $5,471,080
Rent expense was approximately $120,000, $180,000 and
$432,000 for the years ended December 31, 1994, 1995 and 1996
respectively.
CT&T entered into certain purchase commitments during 1996
on behalf of CVNY for the manufacture of antennas, receivers,
modems and transmitters, and CVNY intends to fulfill the
remaining obligations under these commitments which totaled
approximately $11.6 million (net of deposits) at December 31,
1996. See Note 5.
The Company has entered into a series of noncancelable
agreements to purchase entertainment programming for rebroadcast
which expire through the year 2001. The agreements generally
require monthly payments based upon the number of subscribers to
the Company's system, subject to certain minimums. Total
programming costs, including but not limited to, the
aforementioned minimums were approximately $35,000, $510,000 and
$1,026,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
The Company obtained an irrevocable standby letter of credit
in April 1995, in the amount of $90,000, for which no amounts
have been drawn upon. The standby letter of credit expires
December 1, 1999, and collateralizes the Company's programming
rebroadcast agreement with one of its programming providers. The
fair value of this standby letter of credit is estimated to be
the same as the contract value based on the nature of the fee
arrangement with the issuing bank.
8. Stock Options and Warrants
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123
establishes financial accounting and reporting standards for
employee stock-based compensation plans and to transactions in
which an entity issues its equity instruments to acquire goods or
services from non-employees. Under this statement, the Company
has the option of either charging against income the estimated
fair value of stock-based compensation, or in lieu of a direct
charge, disclosing the effect on earnings and earnings per share
as if the charge had been applied. The Company has elected to
follow the disclosure-only alternative and to continue to account
for its stock-based compensation in accordance with Accounting
Principles Board Opionion No. 25 and its related interpretations.
In October 1995, the Board of Directors of the Company
adopted the CellularVision 1995 Stock Incentive Plan (the "Plan")
which provides for the grant of non-qualified and incentive stock
options. The Plan has reserved authorized, but unissued, shares
of common stock for issuance of both Qualified Incentive Stock
Options and Non-Qualified Stock Options to employees, officers
and directors of the Company. The minimum purchase price in the
case of non-qualified stock options granted under the Plan is the
par value of the Common Stock and, in the case of incentive stock
options granted under the Plan is the fair market value, as
defined in the Plan, of the Common Stock on the date the option
is granted. The vesting period and expiration dates of any option
granted may vary. As of December 31, 1996, a total of 103,700 non-
qualified stock options have been granted under the plan. All
such options have a ten-year term and are exercisable at 9.875,
the market price per share on the date of grant.
The purpose of the Plan is to attract and incent able
persons to remain with the Company and its Subsidiaries by
providing a means whereby employees, directors and consultants of
the Company and its Subsidiaries can acquire and maintain Common
Stock ownership, or be paid incentive compensation measured by
reference to the value of Common Stock, thereby strengthening
their commitment to the welfare of the Company and its
Subsidiaries and promoting a common identity of interest between
stockholders and these employees, directors and consultants.
In connection with the employment agreements discussed in
Note 9, non-qualified options to purchase an aggregate of 40,000
shares of Common Stock were issued pursuant to the Plan to two
officers of the Company. The options, which have a ten-year
term, were immediately exercisable at the date of grant at
exercise prices ranging from $10.50 to $15.00 per share.
In February 1996, the Company granted options to each
director who is not employed by the Company or any of its
affiliates to purchase 5,000 shares of Common Stock at the
initial public offering price of $15.00 per share. A total of
35,000 options were granted to directors in February 1996. The
options have a ten-year term and were immediately exercisable at
the date of grant.
As of January 1, 1996 there were no outstanding options.
During the year 188,700 options were granted and 10,000 options
were terminated leaving a balance of 178,700 as of December 31,
1996.
Exercise price per share ranges from $9.875 to $15.00. The
weighted average exercise price at December 31, 1996 was $11.31
per share. All options issued have a ten-year term. A total of
75,000 options issued to Board members and two officers of the
Company were exercisable at the date of grant. The balance of
103,700 outstanding options were issued to employees and are
exercisable as follows: 34,566 at August 1, 1996, 34,568 at
April 1, 1997 and 34,566 at April 1, 1998.
At December 31, 1996 and 1995, there were 1,071,300 and
1,250,000 shares available for future grants, respectively.
Since the exercise price of all stock options granted under
the 1995 Plan in 1996 were equal to the closing price of the
Common Stock on the NASDAQ on the date of grant, no compensation
expense has been recognized by the Company for its stock-based
compensation plans during the year. Compensation expense would
have been $1,365,000 in 1996, had compensation cost for stock
options awarded in 1996 under the Company's stock option
agreements been determined based upon the fair value at the grant
date consistent with the methodology prescribed under SFAS No.
123, "Accounting for Stock-Based Compensation," and the Company's
pro forma net loss and earnings per share would have been a net
loss of $12,996,000 and $0.83 loss per share for 1996.
The stock options were valued using the Black-Scholes option
pricing model. Key assumptions used in valuing the options
included: risk free interest rates of 5.3%-6.8%, an expected life
of five years and a volatility factor of 80%.
At December 31, 1995, the Company had issued warrants to
purchase up to 190,862 shares of Common Stock. No additional
warrants were issued in 1996. At December 31, 1995, an aggregate
(i) up to 113,256 shares were issuable by the Company, and (ii)
77,606 shares were issuable by Suite 12 Group from its Common
Stock holdings. The warrants issued by the Company have a ten-
year term and are exercisable at a price per share ranging from
$12.50 to $15.03. The holders of all outstanding warrants have
registration rights in respect of the shares of Common Stock
issuable upon exercise.
9. Employment Agreements
The Company has entered into an employment agreement with
Mr. Shant S. Hovnanian, dated October 18, 1995. The agreement
provides that Mr. Hovnanian will act as President and Chief
Executive Officer of the Company and will devote substantially
all of his working time and efforts to the Company's affairs.
Pursuant to the agreement, Mr. Hovnanian may devote such working
time and efforts to CT&T and its affiliates as the due and
faithful performance of his obligations under the agreement
permits. The agreement has a one year term and provides for an
annual salary of $250,000, effective February 7, 1996. Mr.
Hovnanian is currently negotiating an extension of his contract
with the Company, and is continuing to serve as Chairman,
President and CEO pending the successful conclusion of these
discussions.
The Company has also entered into an employment agreement
with the inventor of the LMDS technology licensed from CT&T, Mr.
Bernard B. Bossard, dated October 18, 1995. The agreement
provides that Mr. Bossard will act as Executive Vice President
and Chief Technical Officer of the Company and will devote such
substantial portion of his time and effort to the affairs of the
Company as the Company's Board of Directors reasonably requires.
The agreement has a three year term and provides for an annual
salary of $170,000, the use of an automobile and one of the
Company's New York City apartments, effective February 7, 1996.
The Company has entered into an employment agreement with
Mr. Charles N. Garber, dated July 31, 1996. The agreement
provides that Mr. Garber will serve as Chief Financial Officer of
the Company and Vice President - Finance of CVNY, effective as of
July 15, 1996. The agreement has a three year initial term and
provides for an annual salary of $175,000, a signing bonus of
$50,000, a relocation allowance of $50,000, an annual bonus of no
less than $50,000 subject to review based on executive's
attainment of performance goals established by the Compensation
Committee, 25,000 options exercisable at the market value as of
the agreement date, a monthly commuting allowance of $350, and a
bonus of $50,000 upon completion of a financing by the Company or
CVNY in excess of $50 million. The agreement also provides that
Mr. Garber's compensation shall be reviewed for a potential
increase no less frequently than annually.
The Company has entered into an employment agreement with
Mr. John Walber, dated January 1, 1997. The agreement provides
that Mr. Walber will continue to serve as Vice President of CVUS
and as President and Chief Operating Officer of CVNY. The
agreement has an initial term of two years and provides for an
annual salary of $195,000, a monthly commuting expense allowance
of $1,500, an annual bonus in the amount of up to $195,000 based
on the executive's attainment of certain performance goals.
Pursuant to the terms of this agreement, Mr. Walber was granted
50,000 options to purchase CVUS shares at the market value as of
the effective date of the agreement. 25,000 options are
exercisable on December 31, 1997 and 25,000 are exercisable on
December 31, 1998.
10. Initial Public Offering
Initial Public Offering
The Company filed with the Securities and Exchange
Commission a Registration Statement on Form S-1 (the
"Registration Statement") in connection with the initial public
offering (the "Initial Public Offering") of 3,333,000 shares of
Common Stock, including 333,000 shares sold by certain existing
shareholders of the Company. The initial public offering price
per share of Common Stock was $15.00. The Registration Statement
was declared effective on February 7, 1996 and the Initial Public
Offering 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 million in other expenses, were $39,850,000.
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. In December 1995, the FCC
approved the pro forma transfer of control of HCM from the
Founders to the Company. The capital stock of the Company
consists of Common Stock, $.01 par value, 40,000,000 shares
authorized, and 16,000,000 shares issued and outstanding
immediately prior to the Initial Public Offering. The Company has
also authorized 20,000,000 shares of Preferred Stock, $.01 par
value. No shares of Preferred Stock have been issued.
Stockholders' equity has been restated at December 31, 1995
to give retroactive recognition to the stock split of the 93,180
shares of Common Stock issued to the stockholders of HCM.
11. 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 and is in
its preliminary stages. The Company cannot make a determination
at this time as to the possible outcome of the action or whether
the case will go to trial. A summary judgment motion has been
filed by the Company and is currently pending, requesting that
the court dismiss the case. 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.
Prior to 1992, Vahak and Shant Hovnanian were officers,
directors and principal shareholders of Riverside Savings Bank, a
state-chartered savings and loan association that entered
receivership in 1991. In certain civil litigation against the
Hovnanians and others that ensued, which is pending in the U.S.
District Court for the District of New Jersey, the Resolution
Trust Corporation has alleged simple and gross negligence and
breaches of fiduciary duties of care and loyalty on the part of
the defendants. Although this action is still in its preliminary
stages, the defendants have obtained dismissal of certain
allegations and intend to continue to vigorously defend the
action.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York on March 28,
1997.
CELLULARVISION USA, INC.
/s/ Shant S. Hovnanian
Shant S. Hovnanian
President, Chief Executive
Officer and
Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the dates
indicated.
Signature Title Date
President and Chief March 28, 1997
/s/ Shant Hovnanian Executive Officer and
Shant Hovnanian Chairman of the Board of
Directors
/s/ Charles N. Garber Chief Financial Officer March 28, 1997
Charles N. Garber
/s/ Bernard B. Bossard Executive Vice President, March 28, 1997
Bernard B. Bossard Chief Technical Officer
and Director
/s/ Vahak S. Hovnanian Director March 28, 1997
Vahak S. Hovnanian
/s/ William E. James Director March 28, 1997
William E. James
/s/ Bruce G. McNeill Director March 28, 1997
Bruce G. McNeill
/s/ Roy H. March Director March 28, 1997
Roy H. March
/s/ Matthew J. Rinaldo Director March 28, 1997
Matthew J. Rinaldo
/s/ Dennis G. Spickler Director March 28, 1997
Dennis G. Spickler
CELLULARVISION USA, INC.
(A Development Stage Company)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1995 and 1996
Balance at Charged to Balance at
Beginning of Costs and end of
Description Period Expenses Deductions Period
1996
Allowance for
doubtful
accounts........ $133,730 $351,839 $361,199 $124,370
1995
Allowance for doubtful
accounts........ $2,402 $202,108 $70,780 $133,730
1994
Allowance for doubtful
accounts........ $ 1,000 $ 1,402 $ 0 $2,402
1996
Deferred Tax Asset
Valuation Reserve.... $ 0 $13,900,000 $ 0 $13,900,000
1995
Deferred Tax Asset
Valuation Reserve.... $ 0 $ 0 $ 0 $ 0
1994
Deferred Tax Asset
Valuation Reserve.... $ 0 $ 0 $ 0 $ 0
[ARTICLE] 5
<TABLE>
<S> <C> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[CASH] 19,600,070
[SECURITIES] 0
[RECEIVABLES] 654,703
[ALLOWANCES] 124,370
[INVENTORY] 0
[CURRENT-ASSETS] 21,145,730
[PP&E] 16,911,507
<ACCUMULATED-DEPRECIATION> 2,753,841
[TOTAL-ASSETS] 35,923,882
[CURRENT-LIABILITIES] 4,381,095
[BONDS] 4,590,421
[PREFERRED] 0
[COMMON] 160,000
[OTHER-SE] 26,792,366
[TOTAL-LIABILITY-AND-EQUITY] 35,923,882
[SALES] 0
[TOTAL-REVENUES] 2,189,766
[CGS] 0
[TOTAL-COSTS] 1,174,619
[OTHER-EXPENSES] 12,832,777
[LOSS-PROVISION] 351,839
<AMORTIZATION-DEBT > 98,783
<INCOME-PRETAX-OTHER> (11,817,630)
[INCOME-TAX] 0
[INCOME-CONTINUING] (11,631,201)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (11,631,201)
[EPS-PRIMARY] (0.75)
[EPS-DILUTED] 0.00
</TABLE>
