UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20649
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number: 000-27582
CellularVision USA, Inc.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3853788
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
505 Park Avenue
New York, New York 10022
------------------ -----
(Address of principal executive offices) (Zip Code)
(212) 751-0900
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |x| No |_|
The number of outstanding shares of the registrant's common stock, par value
U.S. $.01 per share, as of, June 30, 1997 was 16,000,000.
Total number of pages in this Report including Exhibits, if any: 15
<PAGE>
CELLULARVISION USA, INC.
INDEX TO FORM 10-Q
Page(s)
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996.................................................... 1
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and the
Three and Six Months Ended June 30, 1996 (unaudited)..................... 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and the
Six Months Ended June 30, 1996 (unaudited)............................... 3-4
Notes to Consolidated Financial Statements (unaudited)................... 5-6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 7-10
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings............................................... 10
ITEM 4 - Submission of Matters to a Vote
of Security Holders............................................. 10
ITEM 6 - Exhibits and Reports on Form 8-K................................ 11
Signature Page........................................................... 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- Financial Statements
CELLULARVISION USA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,119,782 $ 19,600,070
Accounts receivable, net of allowance for doubtful
accounts of $142,603 and $124,370 848,959 530,333
Due from affiliates 603,817 759,527
Prepaid expenses and other 223,865 255,800
------------ ------------
Total current assets 9,796,423 21,145,730
Property and equipment, net of accumulated
depreciation of $3,814,220 and $2,753,841 15,826,141 14,157,666
Intangible assets, net of accumulated amortization
of $110,974 and $77,383 240,269 187,160
Debt placement fees 104,356 181,069
Notes receivable from related parties 172,275 91,275
Other noncurrent assets 165,816 160,982
------------ ------------
Total assets $ 26,305,280 $ 35,923,882
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,201,258 $ 893,861
Accrued liabilities 927,275 1,562,982
Current portion of exchange note 2,084,302 1,669,244
Other current liabilities 44,431 255,008
------------ ------------
Total current liabilities 4,257,266 4,381,095
Exchange notes 2,501,163 4,590,421
------------ ------------
Total liabilities 6,758,429 8,971,516
Commitments and contingencies -- --
Stockholders' equity:
Common Stock ($.01 par value; 40,000,000
shares authorized; 16,000,000 shares issued
and outstanding) 160,000 160,000
Preferred Stock ($.01 par value; 20,000,000
shares authorized; none issued and outstanding) -- --
Additional paid-in capital 58,267,533 58,267,533
Accumulated deficit (38,880,682) (31,475,167)
------------ ------------
Stockholders' equity 19,546,851 26,952,366
------------ ------------
Total liabilities and
Stockholders' equity $ 26,305,280 $ 35,923,882
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three months Six months
Ended June 30, Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 1,105,833 $ 384,423 $ 1,957,463 $ 878,105
------------ ------------ ------------ ------------
Expenses:
Service costs 509,320 252,876 955,322 539,024
Selling, general
and administrative 3,509,681 2,606,437 6,662,192 4,794,617
Depreciation and
amortization 935,267 576,887 1,795,670 1,051,390
============ ============ ============ ============
4,954,268 3,436,200 9,413,184 6,385,031
------------ ------------ ------------ ------------
Operating loss (3,848,435) (3,051,777) (7,455,721) (5,506,926)
Interest income 207,640 443,786 495,856 587,135
Interest expense (222,825) (249,499) (445,650) (713,208)
------------ ------------ ------------ ------------
Net loss $ (3,863,620) $ (2,857,490) $ (7,405,515) $ (5,632,999)
============ ============ ============ ============
Net loss per common
share $ (.24) $ (.18) $ (.46) $ (.37)
============ ============ ============ ============
Weighted average number
of shares of common
stock 16,000,000 16,000,000 16,000,000 15,138,839
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss $ (7,405,515) $ (5,632,999)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,795,670 1,051,390
Amortization of placement fees 76,713 44,136
Provision for doubtful accounts 201,382 209,370
Stock compensation expense -- 150,000
Changes in assets and liabilities:
Accounts receivable (520,008) (43,513)
Prepaid expenses and other 31,935 18,308
Notes receivable from related parties (81,000) --
Accounts payable and accrued liabilities (333,266) 1,041,713
Other current liabilities (210,577) 18,011
Due to affiliates 155,710 (1,901,019)
Accrued interest -- 4,954
Other noncurrent assets (4,834) 41,975
------------ ------------
Net cash used in operating activities (6,293,790) (4,997,674)
------------ ------------
Cash flows from investing activities:
Intangibles (93,670) (60,552)
Property and equipment additions (3,423,584) (2,041,475)
------------ ------------
Net cash used in investing activities (3,517,254) (2,102,027)
------------ ------------
Cash flows from financing activities:
Distribution -- (13,889)
Repayment of notes payable (1,669,244) --
Proceeds from sale of stock -- 41,850,000
Repayment of note payable affiliate -- (3,521,257)
Payment of deferred offering costs -- (2,960,629)
------------ ------------
Net cash (used in) provided by
financing activities (1,669,244) 35,354,225
------------ ------------
Net (decrease) increase in cash and
equivalents (11,480,288) 28,254,524
Cash and cash equivalents, beginning of period 19,600,070 3,536,354
------------ ------------
Cash and cash equivalents, end of period $ 8,119,782 $ 31,790,878
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
1997 1996
---- ----
Supplemental Cash Flow Disclosures:
Cash paid for interest during the period $445,648 $ 877,309
Noncash transactions:
Common stock issued for convertible debt -- 12,731,450
Write-off of debt placement fees in connection with
conversion of debt for common stock -- 342,826
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CELLULARVISION USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
CellularVision USA, Inc. ("the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not
include all information and notes required by generally accepted accounting
principles for complete financial statements. Certain prior year amounts have
been reclassified for comparative purposes.
In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The consolidated financial statements should be read in conjunction
with the Company's 1996 audited financial statements and notes thereto. Prior to
January 1, 1997, the Company was a development stage company. Operating results
for the three and six month periods ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
2. Legal Proceedings
Since the dates of the Company's report on Form 10-K/A for the year ended
December 31, 1996, and the Company's report on Form 10-Q for the quarter ended
March 31, 1997, there have been no material developments with respect to any
legal proceedings reported in such reports.
In February 1996, a suit was filed against the Company alleging that the
Company caused the U.S. Army to breach a contract with the plaintiff wherein the
plaintiff was to have an exclusive right to provide cable television services at
an army base located in Brooklyn, New York. The suit alleges that by entering
into a franchise agreement with the Army which grants the Company the right to
enter the army base to build, construct, install, operate and maintain its
multi-channel broadband cellular television system, the Company induced the Army
to breach its franchise agreement with the plaintiff. The Army has advised the
Company that it has the right to award the franchise to the Company and the
Company is continuing to provide service to the army base. The suit seeks $1
million in damages. 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. 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.
3. Regulatory Matters
NY PMSA Commercial License Renewal:
On July 1, 1997, the FCC commenced processing the Company's renewal application
by placing the renewal application on Public Notice, thereby allowing any
interested party to file a petition to deny the application.
5
<PAGE>
This Public Notice period expired July 31, 1997. As of August 8, 1997, both
the Company and relevant Commission staff are unaware of any filings submitted
to the FCC in regard to this matter.
LMDS Auction Date:
On July 30, 1997, the FCC announced its intent to commence the nationwide
licensing of LMDS through spectrum auctions starting December 10, 1997.
Notwithstanding the fact that the Commission has announced this date, numerous
parties, including the Company, have filed Petitions for Reconsideration with
the FCC challenging various portions of the FCC's LMDS rules. In addition,
numerous Local Exchange Carriers (LECs) have challenged the FCC's eligibility
restrictions in the D.C. Circuit Court of Appeals. Accordingly, the December 10,
1997 auction date could be delayed if a judicial stay is granted.
LMDS "Small Business" Installment Payments:
Given the fact that the FCC has initiated a proceeding to review the existing
problems involving a similar installment payment plan previously extended to
PCS-C Block licensees, the FCC may decide to eliminate installment payments as a
small business incentive in all prospective auctions, including the December 10,
1997 LMDS auctions.
Pioneer's Preference:
On August 5, 1997, the President signed into law the Balanced Budget Act of 1997
("Budget Act"). Section 3002 of the Budget Act eliminates the FCC's authority to
award licenses through the Pioneer's Preference Program. Accordingly, the
Company's pending Pioneer's Preference application, along with the Pioneer's
Preference applications of numerous other companies, will not be acted upon by
the Commission.
However, under the terms of the Second Report and Order, small business LMDS
licensees, which includes the Company, would be entitled to a 25% bidding credit
in the auction of LMDS spectrum in nationwide BTAs. By contrast, had the Company
been awarded a Pioneer's Preference for the outer portion of the New York BTA
not already covered by its existing commercial license for the New York PMSA,
the Company would have only received a 15% credit on the auction equivalent
price of that outer portion of the New York BTA. It is important to note that
elimination of the FCC's Pioneer's Preference Program, and the Company's
Pioneer's Preference application thereunder, is totally unrelated to, and does
not affect, the Company's existing commercial license for the New York PMSA.
6
<PAGE>
CELLULARVISION USA, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the corresponding discussion
and analysis included in the Company's Report on Form 10-K/A for the year ended
December 31, 1996.
Information Relating to Forward-Looking Statements
Management's Discussion and Analysis and other sections of this Quarterly
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 identify
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.
Results of Operations
In June, the Company announced the commercial launch of its innovative
high-speed Internet access service. This service, which is referred to as CVDN
500, can provide residents and offices located in Manhattan, Brooklyn and Queens
with downstream Internet access at speeds up to 550Kbps (kilobits per second).
At present, the Company is actively marketing subscriptions to the service.
In June, the Company also announced that by January 1, 1998 it will deploy
a service that provides downstream Internet access at speeds significantly
greater than those provided by CVDN 500. This service was designed principally
for the business community. Technical trials began in mid-June.
The Company continued to deploy transmission sites throughout New York
City. There are thirteen sites currently constructed, covering Brooklyn and
parts of Manhattan and Queens. Four additional sites are under construction,
primarily to serve Manhattan. The company expects to have 17 transmitters
operating by the end of 1997. The Company had approximately 16,000 subscribers
as of August 12, 1997.
The Company announced on June 11th, that it has signed an inter-
connection and re-sale agreement with New York-based RBOC NYNEX Corp. This
agreement enables the Company to bundle telephone services with its existing
high-speed Internet access and subscription television businesses. The Company
also received approval from the New York State Public Service Commission to
provide telecommunications service in the state of New York.
7
<PAGE>
Six and Three Months Ended June 30, 1997 Compared to Six and Three Months
Ended June 30, 1996.
Revenue increased $1,079,000 from $878,000 for the six months ended June
30, 1996 to $1,957,000 for the six months ended June 30, 1997 and increased
$722,000 from $384,000 for the three months ended June 30, 1996 to $1,106,000
for the three months ended June 30, 1997. These increases in revenue are due
primarily to an increase in subscribers and increased installation revenue.
Operating expenses increased $3,028,000 from $6,385,000 for the six months
ended June 30, 1996 to $9,413,000 for the six months ended June 30, 1997 and
increased $1,518,000 from $3,436,000 for the three months ended June 30, 1996 to
$4,954,000 for the three months ended June 30, 1997. These increases are
primarily attributable to costs associated with the Company's commercial
roll-out, including service costs, selling, general and administrative expenses,
and depreciation and amortization.
Service costs increased $416,000 from $539,000 for the six months ended
June 30, 1996 to $955,000 for the six months ended June 30, 1997 and increased
$256,000 from $253,000 for the three months ended June 30, 1996 to $509,000 for
the three months ended June 30, 1997. These increases are due primarily to fees
paid to providers of television programming which increase with the growth of
revenues and subscribers, offset in part by volume discounts due to the
increased subscriber base.
Selling, general and administrative expenses increased $1,867,000 from
$4,795,000 for the six months ended June 30, 1996 to $6,662,000 for the six
months ended June 30, 1997 and increased $904,000 from $2,606,000 for the three
months ended June 30, 1996 to $3,510,000 for the three months ended June 30,
1997. These increases are primarily attributable to headcount-related costs (as
the Company's employee base rose from 79 at June 30, 1996 to 120 at June 30,
1997), legal costs primarily associated with the FCC licensing process, and
increased bad debt expense attributed to the Company's increased subscriber
base.
Depreciation and amortization increased $745,000 from $1,051,000 for the
six months ended June 30, 1996 to $1,796,000 for the six months ended June 30,
1997 and increased $358,000 from $577,000 for the three months ended June 30,
1996 to $935,000 for the three months ended June 30, 1997. These increases are
due primarily to the purchase and installation of customer premises equipment,
equipment for the Company's transmitter sites, and the continued build-out of
the Company's customer service/administrative facilities.
Interest expense decreased $267,000 from $713,000 for the six months ended
June 30, 1996 to $446,000 for the six months ended June 30, 1997 and decreased
$26,000 from $249,000 for the three months ended June 30, 1996 to $223,000 for
the three months ended June 30, 1997. The decreases for the six and three months
ended June 30, 1997 are due primarily to the conversion of approximately $12.6
million of convertible exchangeable subordinated notes payable to common stock
in conjunction with the IPO, and the repayment of approximately $3.5 million
notes payable from the proceeds of the IPO which occurred in February 1996.
8
<PAGE>
Interest income decreased $91,000 from $587,000 for the six months ended
June 30, 1996 to $496,000 for the six months ended June 30, 1997 and decreased
$236,000 from $444,000 for the three months ended June 30, 1996 to $208,000 for
the three months ended June 30, 1997. These decreases are primarily due to a
decrease in cash position as the Company continues to build out its network
infrastructure and increase its subscriber base.
Net loss for the six months ended June 30, 1997 was $7,406,000 compared to
a net loss of $5,633,000 for the six months ended June 30, 1996. The net loss
for the three months ended June 30, 1997 was $3,864,000 compared to $2,857,000
for the three months ended June 30, 1996. The increase in net loss is due
primarily to increased operating expenses due to costs associated with the
Company's continued build-out of its infrastructure, increased workforce, and
increased subscriber base, partially offset by the additional revenues from a
larger subscriber base.
Liquidity and Capital Resources
For the six months ended June 30, 1997, the Company expended $6,294,000 on
operating activities. During the same period, capital expenditures were
$3,424,000, consisting primarily of transmitter equipment and the continued
build-out of the Company's new Head-End, Customer Service and Administrative
facility. On June 30, 1997, the Company expended $1,669,000 on the repayment of
notes payable.
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 stockholders of the Company) at the initial offering price of $15.00
per share. The net proceeds to the Company from the Initial Public Offering,
after deducting underwriting discounts and commissions of $1.05 per share and
approximately $2.5 million of other expenses, were approximately $39,850,000.
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.
The Company expects that the remaining proceeds from the Initial Public
Offering and internally generated funds will be sufficient to build out its
multi-channel broadband cellular television system to cover most of the New York
PMSA, and that its sources of capital will be adequate to satisfy anticipated
capital needs and operating expenses for the year. However, additional funding
would be required for the Company to accelerate its subscriber growth, expand
into the New York Basic Trading Area ("BTA") (if acquired) or other BTAs (if
acquired), or to provide additional services such as telephony or other two-way
services.
9
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
Note 2 of the accompanying financial statements is incorporated herein by
reference.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following two matters were submitted to, and voted upon by, the
stockholders in conjunction with the Annual Meeting of Stockholders held on May
7, 1997 in New York, New York:
1. The election of seven members to the Board of Directors of the Company
(the "Board") to serve until the next Annual Meeting of Stockholders to be
held in 1998 (the "1998 Annual Meeting") or until their successors are
duly elected.
2. The appointment of independent auditors of the Company for the 1997
fiscal year to serve until the 1998 Annual Meeting or until their
successors are duly elected.
With respect to the election of directors, the Board, at the
recommendation of the Nominating Committee, designated seven Nominees for
election as directors to the Board to serve until the 1998 Annual Meeting or
until their successors are duly elected and qualified. The Board unanimously
recommended a vote "FOR" the election of the Nominees to the Board. The
stockholders approved the election of the seven Nominees to the Board by the
affirmative vote of a majority of the shares of Common Stock present, in person
or by proxy, and entitled to vote at the Annual Meeting.
With respect to the appointment of independent auditors of the Company for
the 1997 fiscal year, the Board, upon the recommendation of the Audit Committee
of the Board, proposed that the stockholders appoint the firm of Coopers &
Lybrand L.L.P. (C&L) to serve as the independent auditors of the Company for the
1997 fiscal year until the 1998 Annual Meeting. C&L served as the Company's
independent auditors for the 1996 fiscal year. The Board unanimously recommended
a vote "FOR" the approval of the proposal. The stockholders approved the
appointment by the affirmative vote of a majority of the shares of Common Stock
present, in person or by proxy, at the Annual Meeting.
10
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27* Financial Data Schedule
b. Current Reports on Form 8-K:
The Company filed a Form 8-K dated July 7, 1997, announcing the appointment of
Patrick J. Greaney as president, chief operating officer and a director of the
Company.
- ----------
* Filed herewith
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLULARVISION USA, INC.
Date: August 14, 1997 By: /s/Charles N. Garber
-----------------------
Charles N. Garber
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,119,782
<SECURITIES> 0
<RECEIVABLES> 991,562
<ALLOWANCES> 142,603
<INVENTORY> 0
<CURRENT-ASSETS> 9,796,422
<PP&E> 19,640,361
<DEPRECIATION> 3,814,220
<TOTAL-ASSETS> 26,305,280
<CURRENT-LIABILITIES> 4,257,266
<BONDS> 4,585,465
0
0
<COMMON> 160,000
<OTHER-SE> 19,386,851
<TOTAL-LIABILITY-AND-EQUITY> 26,305,280
<SALES> 0
<TOTAL-REVENUES> 1,957,463
<CGS> 955,322
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,457,862
<LOSS-PROVISION> 201,382
<INTEREST-EXPENSE> 76,713
<INCOME-PRETAX> (7,455,721)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,405,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,405,515)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> 0.00
</TABLE>
