UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
505 Park Avenue
New York, New York 10022 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
$.01 per share (the "Common Stock"), as of March 31, 1997 was 16,000,000.
Total number of pages in this Report including Exhibits, if any: 13
<PAGE>
CELLULARVISION USA, INC.
INDEX TO FORM 10-Q
Page(s)
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- Financial Statements
Consolidated Balance Sheets as of March 31,
1997 (unaudited) and the Year Ended December 31,
1996.........................................................................1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and the
Three Months Ended March 31, 1996 (unaudited) ...............................2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and the
Three Months Ended March 31, 1996 (unaudited) .............................3-4
Notes to Consolidated Financial Statements (unaudited).......................5
ITEM 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................6-8
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings..................................................8
ITEM 2 -- Changes in Securities..............................................8
ITEM 3 -- Defaults Upon Senior Securities....................................8
ITEM 4 -- Submission of Matters to a Vote of Security Holders................8
ITEM 5 -- Other Information..................................................9
ITEM 6 -- Exhibits and Reports on Form 8-K...................................9
Signature Page..............................................................10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1- Financial Statements
CELLULARVISION USA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 13,925,538 $ 19,600,070
Accounts receivable, net of allowance
for doubtful accounts of $127,808
and $124,370 ............................................... 596,575 530,333
Due from affiliates ............................................ 774,888 759,527
Prepaid expenses and other ..................................... 299,262 255,800
------------ ------------
Total current assets .............................. 15,596,263 21,145,730
Property and equipment, net of
accumulated depreciation of
$3,291,614 and $2,753,841 .................................. 14,987,221 14,157,666
Intangible assets, net of accumulated
amortization of $97,184 and $77,383 ........................ 252,653 187,160
Debt placement fees ............................................ 161,686 181,069
Notes receivable from related parties .......................... 172,275 91,275
Other noncurrent assets ........................................ 164,122 160,982
------------ ------------
Total assets ...................................... $ 31,334,220 $ 35,923,882
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 666,357 $ 893,861
Accrued liabilities ............................................ 902,287 1,562,982
Current portion of exchange notes .............................. 1,669,244 1,669,244
Other current liabilities ...................................... 95,440 255,008
------------ ------------
Total current liabilities ......................... 3,333,328 4,381,095
Exchange notes ................................................. 4,590,421 4,590,421
------------ ------------
Total liabilities ................................. 7,923,749 8,971,516
Commitments and contingencies (Note 8)
Stockholders' equity:
Common Stock, ($.01 par value; 40,000,000
shares authorized; and 16,000,000
shares issued and outstanding) .............................. 160,000 160,000
Preferred Stock,($.01 par value; 20,000,000
shares authorized; none issued and
outstanding)
Additional paid-in capital .................................... 58,267,533 58,267,533
Accumulated deficit ............................................ (35,017,062) (31,475,167)
------------ ------------
Stockholders' equity ................................................ 23,410,471 26,952,366
------------ ------------
Total liabilities and
Stockholders' equity .............................. $ 31,334,220 $ 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)
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
Revenue .......................... $ 851,630 $ 493,682
------------ ------------
Expenses:
Service costs ............... 446,002 286,148
Selling, general and
administrative ......... 3,152,511 2,188,180
Depreciation and amortization 860,403 474,503
------------ ------------
4,458,916 2,948,831
------------ ------------
Operating loss ..... (3,607,286) (2,455,149)
Interest income .................. 288,216 143,349
Interest expense ................. (222,825) (463,709)
Net loss ........... $ (3,541,895) $ (2,775,509)
============ ============
Net loss per common share ........ $ (.22) $ (.20)
============ ============
Weighted average number of
shares of common stock .. 16,000,000 13,816,776
============ ============
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
Cash flows from operating activities:
Net loss .................................. $ (3,541,895) $ (2,775,509)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ......... 860,403 474,503
Amortization of placement fees ........ 19,383 27,094
Provision for doubtful accounts ....... 116,908 111,208
Stock option compensation expense ..... -- 150,000
Changes in assets and liabilities:
Accounts receivable ................. (183,150) (78,534)
Notes receivable .................... (81,000) --
Prepaid expenses and other .......... (43,462) (25,124)
Accounts payable and accrued
liabilities ...................... (893,194) (264,614)
Other current liabilities ........... (159,568) (12,815)
Due to affiliates ................... (15,361) (1,927,304)
Accrued interest .................... 4,995 4,955
Other noncurrent assets ............. (3,140) 50,775
------------ ------------
Net cash used in
operating activities ........... (3,919,081) (4,265,365)
------------ ------------
Cash flows from investing activities:
Intangibles ............................. (82,566) --
Property and equipment additions ........ (1,672,885) (893,602)
------------ ------------
Net cash provided by (used in)
investing activities ................ (1,755,451) (893,602)
------------ ------------
Cash flows from financing activities:
Distribution ............................ -- (13,889)
Proceeds from sale of stock ............. -- 41,850,000
Repayment of note payable affiliate ..... -- (3,521,257)
Payment of deferred offering costs ...... -- (1,471,221)
Placement costs
------------ ------------
Net cash (used in) provided by
financing activities ................ -- 36,843,633
------------ ------------
Net (decrease) increase in
cash and cash equivalents ........... (5,674,532) 31,684,666
Cash and cash equivalents, beginning of
period ....................................... 19,600,070 3,536,354
------------ ------------
Cash and cash equivalents, end of period ..... $ 13,925,538 $ 35,221,020
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1997 1996
-------- -----------
Supplemental Cash Flow Disclosures:
Cash paid for interest during the $222,824 $ 315,978
period
Noncash transactions:
Common stock issued for -- 12,731,450
convertible debt
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.
In the opinion of the 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 consolidated financial statements and notes
thereto. Prior to January 1, 1997, the Company was a development stage company.
Operating results for the three-month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. Legal Proceedings
In February 1996, a suit was filed against the Company alleging that
the Company caused the U.S. Army to breach a contract with the plaintiff wherein
the plaintiff was to have an exclusive right to provide cable television
services at an army base located in Brooklyn, New York. The suit alleges that by
entering into a franchise agreement with the Army which grants the Company the
right to enter the army base to build, construct, install, operate and maintain
its multi-channel broadband cellular television system, the Company induced the
Army to breach its franchise agreement with the plaintiff. The Army has advised
the Company that it has the right to award the franchise to the Company and the
Company is continuing to provide service to the army base. The suit seeks $1
million in damages 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. 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. On March 31, 1997, the Court issued an opinion holding that the
Company has a right under New York law to install the customer premises
equipment and, based on same, held that all allegations related to a purported
class be dismissed. As a result, the only part of the case that remains is a
claim for an alleged trespass and damage to one building because customer
premises equipment was installed without prior notice to the landlord. The
Company believes, upon advice of counsel, that this suit is likely to be
resolved without a material adverse effect on the financial position of the
Company.
3. Regulatory Matters
On May 6, 1997, the public comment cycle closed on the Federal
Communications Commission's ("FCC") Local Multipoint Distribution Service
("LMDS") Fifth Notice of Proposed Rulemaking to implement LMDS license
partitioning and disaggregation policies. With the conclusion of this public
comment cycle, the FCC is expected to issue a Third Report & Order adopting
specific partitioning and disaggregation rules for LMDS licenses. In addition,
FCC officials indicate that nationwide LMDS auctions are expected to occur in
the fall of 1997.
With regard to the Company's pending New York Primary Metropolitan
Statistical Area ("PMSA") commercial license renewal application, the FCC is
expected to commence processing this application by placing it
5
<PAGE>
on Public Notice after June 30, 1997, the date established by the Federal
Register upon which new LMDS rules adopted in the Second Report and Order become
legally effective.
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
The Company continued to build out the New York PMSA by adding two
transmitter locations, bringing the total constructed to 12, covering Brooklyn
and parts of Manhattan and Queens. Five additional sites are under construction,
and the Company expects to have 17 transmitters constructed and operating by the
end of 1997. The Company has also begun deploying solid state repeaters which
allow the Company to expand its coverage to shadowed areas. Construction work
has begun on the Company's new head-end and administrative facilities, which is
expected to be completed by the end of August 1997. The new head-end facility
will give the Company enhanced signal quality, capability to offer additional
geographically or ethnically targeted channels, the ability to provide
advertising insertions, and other useful service provision flexibilities.
In the first quarter of 1997, the Company began using newspaper
advertising, including a series of advertisements in The Wall Street Journal and
The New York Times introducing its "Business Class Service", to augment its
targeted direct mail, telemarketing and door-to-door sales campaigns.
Subscribers as of May 12, 1997 totaled approximately 14,000, more than triple
the 4,500 subscribers reported in May 1996.
CellularVision Digital Network, ("CVDN"), the Company's high-speed
Internet access service continued to perform well in market trials in Manhattan
and Brooklyn. The Company plans a commercial launch during the second quarter of
this year.
The Company continued negotiations with NYNEX during the first quarter
of 1997 to secure an interconnection and resale agreement, the first step toward
the provision of telephony service in the New York Metropolitan Area.
Three Months Ended March 31, 1997 Compared to Three Months Ended March
31, 1996.
Revenue increased $358,000 from $494,000 for the three months ended
March 31, 1996 to $852,000 for the three months ended March 31, 1997. The
increase in revenue is attributable to an increase in subscribers.
Operating expenses increased $1,510,000 from $2,949,000 for the three
months ended March 31, 1996 to $4,459,000 for the three months ended March 31,
1997. This increase is primarily attributable to costs associated with the
Company's commercial roll-out, including service costs, selling, general and
administrative expenses, and depreciation and amortization.
6
<PAGE>
Service costs increased $160,000 from $286,000 for the three months
ended March 31, 1996 to $446,000 for the three months ended March 31, 1997. Such
costs, primarily fees paid to providers of television programming, increase with
the growth in subscribers.
Selling, general and administrative expenses increased $965,000 from
$2,188,000 for the three months ended March 31, 1996 to $3,153,000 for the three
months ended March 31, 1997. The increase in selling, general and administrative
expenses is primarily attributable to head-count-related costs (as the Company's
employee base rose from 63 at March 31, 1996 to 120 at March 31, 1997), and
sales and marketing-related costs associated with the Company's increased
subscriber base. As the build-out of its network of transmitters continues, the
Company intends to implement a variety of mass marketing programs which the
Company expects will result in an increase in total sales and marketing
expenses.
Depreciation and amortization increased $385,000 from $475,000 for the
three months ended March 31, 1996 to $860,000 for the three months ended March
31, 1997. The increase in depreciation and amortization costs was due primarily
to the purchase of customer premises equipment, the purchase of equipment for
additional transmitter sites and the continued build-out of the Company's
customer service/administrative facilities.
Interest expense decreased $241,000 from $464,000 for the three months
ended March 31, 1996 to $223,000 for the three months ended March 31, 1997. This
decrease is due primarily to the conversion of approximately $12.6 million of
convertible exchangeable subordinated notes payable to Common Stock in
conjunction with the Initial Public Offering ("IPO"), and the repayment of
approximately $3.5 million of notes payable from the proceeds of the IPO, during
the first quarter of 1996.
Interest income increased $145,000 from $143,000 for the three months
ended March 31, 1996 to $288,000 for the three months ended March 31, 1997. This
increase is due primarily to interest received on the remaining proceeds of the
IPO for a full three months in the first quarter of 1997 compared to
approximately one and a half months in the first quarter of 1996.
The net loss for the three months ended March 31, 1997 was $3,542,000
compared to a net loss of $2,776,000 for the three months ended March 31, 1996.
The increase in net loss is due primarily to increased operating expenses due to
costs associated with the Company's commercial roll-out and increased subscriber
base.
Liquidity and Capital Resources
For the three months ended March 31, 1997, the Company expended
$3,919,000 on operating activities. During the same period, capital expenditures
were $1,673,000, consisting primarily of transmitter and head-end equipment.
In February 1996, the Company consummated the IPO 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 net proceeds of the Initial Public
Offering and internally generated funds will be sufficient to build out its
multi-channel broadband cellular television system to pass most of the
households in the New York PMSA, and believes that its sources of capital,
including internally generated funds and the net proceeds of the Initial Public
Offering, 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,
7
<PAGE>
or if the Company decides to expand into the New York Basic Trading Area ("BTA")
(if acquired) or other BTAs (if acquired), or to provide additional services
such as high-speed Internet access, telephony or 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.
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
In February 1996, a suit was filed against the Company alleging that
the Company caused the U.S. Army to breach a contract with the plaintiff wherein
the plaintiff was to have an exclusive right to provide cable television
services at an army base located in Brooklyn, New York. The suit alleges that by
entering into a franchise agreement with the Army which grants the Company the
right to enter the army base to build, construct, install, operate and maintain
its multi-channel broadband cellular television system, the Company induced the
Army to breach its franchise agreement with the plaintiff. The Army has advised
the Company that it has the right to award the franchise to the Company and the
Company is continuing to provide service at the army base. The suit seeks $1
million in damages 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. 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. On March 31, 1997, the Court issued an opinion holding that the
Company has a right under New York law to install the customer premises
equipment and, based on same, held that all allegations related to a purported
class be dismissed. As a result, the only part of the case that remains is a
claim for an alleged trespass and damage to one building because customer
premises equipment was installed without prior notice to the landlord. The
company believes, upon advice of counsel, that this suit is likely to be
resolved without a material adverse effect on the financial position of the
Company.
Since the date of the Company's Report on Form 10-K/A for the year
ended December 31, 1996, there have been no material developments with respect
to any other legal proceedings reported in Item 1 to such report.
ITEM 2 -- CHANGES IN SECURITIES
For the quarter ended March 31, 1997, the Company did not make any
sales of securities which were not registered under the Securities Act of 1933,
as amended.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
ITEM 5 -- OTHER INFORMATION
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27* Financial Data Schedule
b. Current Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during
the period beginning January 1, 1997 and ending March 31,
1997.
- ----------
* Filed herewith
9
<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: May 15, 1997 By: /s/ Charles N. Garber
--------------------------
Charles N. Garber
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 13,925,538
<SECURITIES> 0
<RECEIVABLES> 724,383
<ALLOWANCES> 127,808
<INVENTORY> 0
<CURRENT-ASSETS> 15,596,263
<PP&E> 18,278,835
<DEPRECIATION> 3,291,614
<TOTAL-ASSETS> 31,334,220
<CURRENT-LIABILITIES> 3,333,328
<BONDS> 4,590,421
0
0
<COMMON> 160,000
<OTHER-SE> 23,250,471
<TOTAL-LIABILITY-AND-EQUITY> 31,334,220
<SALES> 0
<TOTAL-REVENUES> 851,630
<CGS> 0
<TOTAL-COSTS> 446,002
<OTHER-EXPENSES> 4,012,914
<LOSS-PROVISION> 116,908
<INTEREST-EXPENSE> 32,049
<INCOME-PRETAX> (3,607,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,541,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,541,895)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> 0.00
</TABLE>
