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, 1998
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)
140 58th Street, Loft 7E
Brooklyn, New York 11220
(Address of principal executive offices) (Zip Code)
(718) 489-1200
(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, 1998 was 16,000,000.
<PAGE>
CELLULARVISION USA, INC.
INDEX TO FORM 10-Q
Page(s)
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations................................1-4
ITEM 2 -- Financial Statements
Consolidated Balance Sheets as of March 31,
1998 (unaudited) and the Year Ended December 31,
1997...........................................................................5
Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and the
Three Months Ended March 31, 1997 (unaudited) .................................6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and the
Three Months Ended March 31, 1997 (unaudited) ...............................7-8
Notes to Consolidated Financial Statements (unaudited)......................9-12
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings...................................................13
ITEM 2 -- Changes in Securities...............................................13
ITEM 3 -- Defaults Upon Senior Securities.....................................13
ITEM 4 -- Submission of Matters to a Vote of Security Holders.................13
ITEM 5 -- Other Information...................................................13
ITEM 6 -- Exhibits and Reports on Form 8-K....................................13
Signature Page................................................................14
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the corresponding
discussion and analysis included in the Company's Report on Form 10-K for the
year ended December 31, 1997.
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
On December 31, 1997 a decision was made to de-emphasize subscription
television service, with an associated force reduction of 43 persons, almost all
of whom were associated with subscription television sales, marketing and
operations. On March 31, 1998, CVNY reduced its staff by an additional 13
full-time equivalent employees. These reductions were in subscription television
operations staff, and included part-time and full-time Customer Service
Representatives and Dispatchers. This downsizing resulted in a current CVNY
employee count of 55 full-time-equivalent employees, which brings the customer
support staff in line with current subscriber counts and lack of subscriber
growth. In addition, this reduction was needed as part of the overall plan to
reduce expenses and conserve capital resources. The Company believes that,
subject to the availability of requisite funding, these positions can be quickly
restored upon the resumption of a high growth strategy in the subscription
television portion of its business.
As of May 15th 1998, the Company had 15 operational transmitters with
four additional cell sites under construction. Due to the decision to
de-emphasize subscription television service on December 31, 1997, the related
and subsequent reductions in force and the continuation of the aforementioned
capital conservation measures, the subscriber base declined during the first
quarter and the first six weeks of the second quarter of 1998. As of May 15,
1998, subscribers totaled approximately 14,000, the same quantity reported for
the comparable period in 1997, and about 6.7% less than reported on April 15,
1998. The Company expects that the overall subscriber base will continue to
decline in the immediate future, until the growth in the super-high-speed
Internet subscriber base is sufficient to offset the expected losses in
subscription television customers, or until the full-scale marketing of
subscription television service is resumed upon the receipt of requisite
funding. (See Liquidity and Capital Resources.)
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31, 1997.
Revenue increased $572,000 from $852,000 for the three months ended
March 31, 1997 to $1,424,000 for the three months ended March 31, 1998. The
increase in revenue is primarily attributable to an increase in the average
subscriber base during the first quarter of 1998, as compared to the comparable
1997 period.
Operating expenses increased $370,000 from $4,459,000 for the three
months ended March 31, 1997 to $4,829,000 for the three months ended March 31,
1998. This increase is attributable to increased depreciation and amortization
costs associated with the Company's infrastructure build-out and increased
service costs associated with the increased subscriber base, offset in part by
reductions in selling, general and administrative expenses.
Service costs increased $213,000 from $446,000 for the three months
ended March 31, 1997 to $659,000 for the three months ended March 31, 1998. Such
costs, primarily fees paid to providers of television programming, increase with
the growth in subscribers.
Selling, general and administrative expenses decreased $360,000 from
$3,153,000 for the three months ended March 31, 1997 to $2,793,000 for the three
months ended March 31, 1998. The decrease in selling, general and administrative
expenses is primarily attributable to reduced head-count-related costs (as the
Company's total employee base decreased from 120 at March 31, 1997 to 77 at
March 31, 1998).
1
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Depreciation and amortization increased $517,000 from $860,000 for the
three months ended March 31, 1997 to $1,377,000 for the three months ended March
31, 1998. 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 increased $66,000 from $223,000 for the three months
ended March 31, 1997 to $289,000 for the three months ended March 31, 1998. This
increase is due primarily to the additional notes payable to Newstart Factors,
Metromedia Fiber Network and an affiliate of J.P. Morgan.
Interest income decreased $281,000 from $288,000 for the three months
ended March 31, 1997 to $7,000 for the three months ended March 31, 1998. This
decrease is primarily due to a decrease in the Company's cash position as the
Company continued to expend funds to build out its network.
The net loss for the three months ended March 31, 1998 was $3,688,000
compared to a net loss of $3,542,000 for the three months ended March 31, 1997.
The increased net loss is due to increases in depreciation and amortization
expense, service costs and interest expense and decreased interest income, which
were largely, but not completely, offset by increased revenues and decreased
selling, general and administrative expenses.
Liquidity and Capital Resources
For the three months ended March 31, 1998, the Company expended
$233,000 on operating activities. During the same period, capital expenditures
were $986,000, consisting primarily of transmitter and head-end equipment.
In the fourth quarter of 1997 and the first quarter of 1998, the
Company experienced a severe liquidity shortfall due to the postponement or
cancellation of several planned financing transactions, including a potential
syndication of a $40 million senior secured debt facility by Fleet National Bank
("Fleet"), which remains on hold and will be revisited during 1998. In April of
1998, the Company entered into several financing arrangements which, while
providing the Company with commitments to obtain sufficient funds which the
Company believed at that time would be sufficient to continue its operations
throughout the 1998 calendar year, provide for, or potentially provide for, the
issuance of equity securities at a discount from market prices current at the
time of funding. Utilization of these sources of financing could, therefore,
result in substantial dilution to existing stockholders and, while the Company
intends to seek alternative sources of financing on more attractive terms, there
can be no assurance that such alternatives will be available prior to the date
that the Company's operations will require additional utilization of its
existing, potentially-dilutive financing commitments.
The Company's operations continue to result in negative cash flows, and
repayment of existing indebtedness will require additional sources of liquidity
in the future. Therefore, the Company anticipates that its future financing
requirements will continue to be substantial. The Company intends to address
those requirements through a combination of strategic and financial investments,
but there can be no assurance that the Company will be successful in
implementing the necessary financing arrangements on favorable terms. The lack
of availability of additional capital could have a material adverse effect on
the Company's financial condition, operating results and prospects for growth.
On December 1, 1997, CVNY, a wholly-owned subsidiary of the Company,
entered into an agreement (the "Logimetrics Agreement") with Logimetrics, Inc.
("Logimetrics") pursuant to which CVNY assumed financial responsibility for
certain equipment purchased through its affiliate, CT&T. In exchange,
Logimetrics agreed to continue servicing CVNY's equipment so long as CVNY
continues to meet its obligations under the Logimetrics Agreement. Pursuant to
the Logimetrics Agreement, CVNY issued and delivered a $2,621,695 Secured
Promissory Note to Logimetrics having a final maturity date of July 27, 1998.
Principal under such note was amortized and also subject to partial mandatory
prepayment upon the occurrence of certain events. On December 31, 1997,
Logimetrics sold their interest in the Secured Promissory Note to Newstart
Factors, Inc. ("Newstart"). On April 1, 1998, the Company and Newstart
restructured the terms of such note as discussed below.
On January 21, 1998, the Company issued new Subordinated Exchange
Notes, in the aggregate principal amount of $1,191,147 (the "New Notes"), to the
holders (the "Holders") of the Company's Subordinated Exchange Notes (the
"Original Notes") held by an affiliate of J.P. Morgan, in exchange for $1
million in cash and as payment of $191,147 in respect of an interest payment due
on December 28, 1997. Also, in connection with the issuance of the New Notes,
the Holders waived certain defaults under the Original Notes. As consideration
for the purchase of the New Notes and the waiver of certain defaults under the
Original Notes, the Holders received a warrant to purchase 27,000 shares of the
Company's Common Stock at an exercise price of $0.01 per share.
2
<PAGE>
On March 31, 1998, CVNY reduced its staff by 13 full-time equivalent
employees. In part, this reduction was needed as one element of an overall plan
to contain 1998 expenditures within committed sources of financing for the 1998
calendar year. The Company believes that, subject to the availability of
requisite funding, these positions can be quickly restored upon the resumption
of a high growth strategy in the subscription television portion of its
business.
On April 1, 1998, the Company entered into financing agreements with
Proprietary Convertible Investment Group, Inc. ("Proprietary"), which is an
affiliate of CS First Boston, and Marion Interglobal Ltd. ("Marion"). Also on
such date, the Company entered into an agreement with Newstart to restructure
the Secured Promissory Note of CVNY held by Newstart.
Pursuant to a Securities Purchase Agreement, dated April 1, 1998,
between the Company and Proprietary (the "Proprietary Purchase Agreement"), on
April 6, 1998 the Company issued 3,500 shares of its Series A Convertible
Preferred Stock ("Convertible Preferred Stock") to Proprietary for $3.5 million.
Subject to certain conditions, including the registration under the Securities
Act of the underlying shares of Common Stock, the Proprietary Purchase Agreement
provides for the issuance, at the Company's option, of an additional 3,500
shares of Convertible Preferred Stock at a purchase price of $1,000 per share at
any time on or after June 15, 1998 and prior to December 31, 1998. The
Proprietary Purchase Agreement also provides for the issuance, at Proprietary's
option, of an additional 3,000 shares of Convertible Preferred Stock at a
purchase price of $1,000 per share during the three year period following April
6, 1998. The Convertible Preferred Stock has a dividend rate of 4%, which may be
paid in cash or, at the option of the Company and subject to certain conditions,
in stock. The Convertible Preferred Stock may be converted into Common Stock of
the Company at any time at the option of the holder thereof at an initial
conversion price of $5.25 for the ninety day period following April 6, 1998.
Following such ninety-day period, or in the event that certain conditions are
not satisfied during such ninety-day period, the conversion price shall be the
lesser of (i) $5.25 and (ii) 88% of the lesser of (A) the average of the lowest
sale prices for the Common Stock on each of any three trading days during the
twenty two trading days occurring immediately prior to (but not including) the
applicable conversion date and (B) the average of the three lowest closing bid
prices for the Common Stock during the twenty two trading days occurring
immediately prior to (but not including) the applicable conversion date. In
addition, the Company has the right to redeem all the Convertible Preferred
Stock outstanding in the event that the closing bid price for the Common Stock
is above $10 for twenty two consecutive trading days at a price equal to 130% of
(i) the stated value of the Convertible Preferred Stock ($1,000 per share) plus
(ii) accrued and unpaid dividends thereon. The Convertible Preferred Stock is
subject to mandatory redemption upon the occurrence of certain events of
default. In addition, the Proprietary Purchase Agreement contains certain
capital raising limitations which could preclude certain equity-linked financing
transactions in excess of $6 million for a period of one year following the
final issuance of Convertible Preferred Stock under the agreement.
Pursuant to a Securities Purchase Agreement, dated April 1, 1998,
between the Company and Marion (the "Marion Purchase Agreement"), on April 6,
1998, the Company issued to Marion (i) a Warrant to purchase up to $2 million
worth of shares of Common Stock (the "Warrant Shares") and (ii) 110,000 shares
of its Common Stock. The shares of Common Stock were issued for nominal
consideration and the Warrant is exercisable (the "Exercisability Date") from
and after the earlier to occur of (i) the date on which there is an effective
registration statement under the Securities Act of 1933, as amended, relating to
the resale of the Warrant Shares and (ii) June 28, 1998. The Company has the
right to cause Marion to exercise the Warrant following the Exercisability Date.
The exercise price per share of Common Stock is the lesser of (i) 80% of the
average closing price of the Common Stock on the five trading days preceding the
issuance of such Common Stock and (ii) $3.20 per share, provided that such price
will in no event be less than $1.60 per share. The Company has the right to
cancel the Warrant at any time prior to the Exercisability Date. In the event
that the Company elects to cancel the aforementioned warrant, the Company does
not currently have capital available to make the scheduled June 30, 1998
payments to the Holders of the Original Notes and the New Notes without raising
additional capital for this purpose.
Pursuant to a Letter Agreement, dated April 1, 1998, among the Company,
CVNY and Newstart (the "Newstart Agreement"), the parties agreed to restructure
the terms of CVNY's Secured Promissory Note (the "Original Note") on the
following terms: (i) the Company paid Newstart $500,000 from the proceeds of the
initial sale of Preferred Stock pursuant to the Proprietary Purchase Agreement,
(ii) the Original Note was amended and restated as a Secured Convertible
Promissory Note in the principal amount of $2,315,917 (the "New Note") and (iii)
the Company issued to Newstart a warrant to purchase 125,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share of Common Stock.
The New Note provides that CVNY will pay an additional $500,000 on or before the
earlier to occur of (i) the consummation by the Company of a financing
transaction yielding gross proceeds to the Company in excess of $2.5 million and
(ii) ninety days following April 1, 1998. In addition, CVNY has the right to
prepay the New Note in full at any time prior to October 1, 1998 at a price
equal to 125% of the outstanding principal amount. At the option of the holder,
the New Note may be converted in whole or in part at any time and from time to
time at a conversion price per share equal to
3
<PAGE>
91% of the average of the lowest trading price on each of the four trading days
immediately prior to the conversion notice, provided, however, that the holder
may not convert more than $500,000 in principal amount of the New Note in any
calendar month. The New Note is subject to acceleration upon the occurrence of
certain events of default.
To effectuate the restructuring contemplated by the Newstart Agreement,
the Company and CVNY entered into an Agreement, dated April 1, 1998, with the
holders of the Company's Subordinated Exchange Notes (the "Subordinated Exchange
Notes Agreement") pursuant to which such holders consented to such
restructuring. In consideration for such consent, the Company granted such
holders warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $.01 per share of Common Stock.
The Company has agreed to register the resale of the shares of Common
Stock issued, or to be issued, pursuant to the Proprietary Purchase Agreement,
the Marion Purchase Agreement, the Newstart Agreement and the Subordinated
Exchange Notes Agreement. The total registration rights relating to shares of
CVUS Common Stock under all the foregoing agreements and under all warrants
previously outstanding prior to the consummation of these agreements is
estimated to be approximately four million shares. Under certain circumstances
the Company has agreed to pay liquidated damages in the event that certain of
such shares are not registered within certain prescribed time periods.
As a result of the foregoing financing agreements, as of April 15, 1998,
the Company had committed sources of capital, coupled with internally generated
funds, that would be adequate to satisfy its then-estimated minimum anticipated
capital needs and operating expenses for the remainder of 1998 without requiring
the restructuring of existing debt obligations. However, payments from the
proceeds of the initial $3.5 million sale of Series A Convertible Preferred
Stock pursuant to the Proprietary Purchase Agreement needed to address accounts
payable to equipment vendors, programmers and providers of professional
services, all of whom are critical to the Company's continued operations,
substantially exceeded expectations. Therefore, the Company believes that it
will be necessary to restructure one or more of the 1998 principal repayments
due on outstanding indebtedness to assure that it has adequate committed sources
of capital, coupled with internally generated funds, to satisfy minimum
anticipated capital needs and operating expenses for the remainder of 1998.
Currently, the Company has three principal payment obligations totaling
approximately $3.5 million to three creditors due in calendar year 1998. To date
the Company has had encouraging discussions with each of the three creditors,
and believes that potential restructuring of all of them may be possible, and
that restructuring of one or more of them is likely. However, there can be no
assurance that the Company will be able to obtain the requisite restructuring,
or if obtained, that it will be obtained upon terms favorable to the Company. In
addition to the foregoing, additional funding would be necessary for an
accelerated expansion of the super-high-speed Internet access service,
restoration of the subscription television sales and marketing efforts to
achieve the Company's targeted 1998 subscriber levels, or to provide telephony
and other two-way services. Therefore, the Company expects to seek additional
financing during 1998. However, there can be no assurance that this capital
either will be available to the Company, or, if available, will be provided on
terms acceptable to the Company.
On May 6, 1998, the Company entered into an agreement with Wasserstein
Perella & Co. Inc. ("WP&Co.") as its exclusive financial advisor for the purpose
of exploring and evaluating the Company's strategic and financial alternatives.
The Company's primary objective is to capitalize on its exclusive commercial
license to utilize its existing LMDS system in offering broadband wireless
telecommunications services in the New York Primary Metropolitan Statistical
Area ("PMSA"). WP&Co. and the Company will jointly analyze potential
transactions including, but not necessarily limited to, merger or sale of the
Company, a recapitalization, a joint venture, or a capital infusion. There can
be no assurance that the results of this effort will be successful.
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 desires to pursue a
business strategy based on the resumption of rapid subscriber growth. However,
until additional capital is obtained to resume such a strategy, the Company
intends to continue to operate in a cash conservation mode, as was done during
the first quarter of 1998, thereby enabling the Company to operate for an
extended period of time.
4
<PAGE>
ITEM 2- Financial Statements
CELLULARVISION USA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents ..................... $ 50,012 $ 407,741
Accounts receivable, net of allowance
for doubtful accounts of $441,021
and $290,984 ................................ 1,254,074 1,233,501
Due from affiliates ........................... 134,936 181,012
Prepaid expenses and other .................... 50,488 112,058
------------ ------------
Total current assets .................. 1,489,510 1,934,312
Property and equipment, net of
accumulated depreciation of
$6,624,862 and $5,277,052 ................... 20,233,943 20,607,744
Intangible assets, net of accumulated
amortization of $164,794 and $147,261 ....... 185,855 203,388
Debt placement fees ........................... 46,207 65,590
Notes receivable from related parties ......... 171,245 171,245
Other noncurrent assets ....................... 171,811 171,811
------------ ------------
Total assets .......................... $ 22,298,571 $ 23,154,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 4,800,696 $ 1,873,317
Accrued liabilities ........................... 1,118,117 2,093,148
Current portion of notes payable .............. 5,205,427 4,993,997
Other current liabilities ..................... 21,496 2,761
------------ ------------
Total current liabilities ............. 11,145,736 8,963,223
Notes payable ................................. 3,150,880 2,501,163
------------ ------------
Total liabilities ..................... 14,296,616 11,464,386
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 ........................... (50,425,578) (46,737,829)
------------ ------------
Stockholders' equity .............................. 8,001,955 11,689,704
------------ ------------
Total liabilities and
Stockholders' equity .................. $ 22,298,571 $ 23,154,090
============ ============
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Revenue ........................................ $ 1,423,682 $ 851,630
Expenses:
Service costs .............................. 658,659 446,002
Selling, general and
administrative ........................ 2,793,318 3,152,511
Depreciation and amortization .............. 1,377,366 860,403
------------ ------------
Total Operating Expenses ............... 4,829,343 4,458,916
------------ ------------
Operating loss ................................. (3,405,661) (3,607,286)
Interest income ................................ 6,914 288,216
Interest expense ............................... (289,002) (222,825)
Net loss ....................................... $ (3,687,749) $ (3,541,895)
Per Share:
Basic loss per common share .................... $ (.23) $ (.22)
Weighted average common shares outstanding ..... 16,000,000 16,000,000
============ ============
Diluted loss per common share .................. $ (.23) $ (.22)
Weighted average common shares outstanding ..... 16,000,000 16,000,000
============ ============
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss ...................................... $(3,687,749) $ (3,541,895)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 1,377,366 860,403
Amortization of placement fees ........... 19,383 19,383
Provision for doubtful accounts .......... 150,037 116,908
Changes in assets and liabilities:
Accounts receivable ...................... (170,610) (183,150)
Notes receivable ......................... -- (81,000)
Prepaid expenses and other ............... 61,570 (43,462)
Accounts payable ......................... 2,927,379 (232,499)
Accrued liabilities ...................... (877,176) (660,695)
Other current liabilities ................ 18,735 (159,568)
Due to affiliates ........................ 46,076 (15,361)
Accrued interest ......................... (97,855) 4,995
Other noncurrent assets .................. -- (3,140)
----------- ------------
Net cash used in
operating activities ............... (232,844) (3,919,081)
----------- ------------
Cash flows from investing activities:
Intangibles ............................ -- (82,566)
Property and equipment additions ....... (986,032) (1,672,885)
----------- ------------
Net cash provided by (used in)
investing activities ............... (986,032) (1,755,451)
----------- ------------
Cash flows from financing activities:
Proceeds from notes payable ............ 1,191,147 --
Repayment of note payable affiliate .... (330,000) --
-----------
Net cash provided by (used in)
financing activities ............... 861,147 --
Net (decrease) increase in
cash and cash equivalents .......... (357,729) (5,674,532)
Cash and cash equivalents, beginning of
period ..................................... 407,741 19,600,070
----------- ------------
Cash and cash equivalents, end of period ........ $ 50,012 $ 13,925,538
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Supplemental Cash Flow Disclosures:
Cash paid for interest during the
period................................ $191,147 $222,824
The accompanying notes are an integral part of these financial statements.
8
<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 1997 audited consolidated financial statements and notes
thereto on Form 10-K. Operating results for the three-month period ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
2. Legal Proceedings
Since the date of the Company's report on Form 10-K for the year ended
December 31, 1997, there have been no material developments with respect to any
legal proceedings reported in Item 3 of such report.
3. Regulatory Matters
The Company's Experimental License. In addition to its 10-year
commercial license to operate an LMDS system in the New York Primary
Metropolitan Statistical Area (PMSA), the Company holds an experimental LMDS
license 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 throughout the United States. 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. The FCC
granted the Company's most recent renewal application, effective September 1,
1997, for a new two-year license term. In addition, on December 11, 1997, the
Company filed a modification application with the FCC seeking an additional 150
MHz in the 31.075-31.225 GHz band in order to conform the license to the
Company's New York PMSA commercial license. This application was granted by the
FCC and a modified experimental license was issued effective January 1, 1998,
which now expires on January 1, 2000.
LMDS Auction. On July 30, 1997, the FCC announced its intent to
commence the nationwide licensing of LMDS through a spectrum auction starting
December 10, 1997. On November 10, 1997, the FCC released a Public Notice
announcing its decision to postpone the LMDS auction from December 10, 1997
until February 18, 1998. The Commission granted this postponement to ensure the
maximum participation by small businesses, many of which had requested
additional time to secure financing in light of the elimination of installment
payments. On February 18, 1998, the LMDS auction commenced. On March 25, 1998,
the LMDS auction was concluded after 128 rounds of bidding. The FCC auctioned
864 of the 986 licenses up for bid, for a total net revenue of $578,663,029.
Because the Company holds the spectrum for the A Block license in the
New York PMSA, this license was excluded from the nationwide LMDS auction.
Accordingly, the A Block license for the New York BTA in the FCC LMDS Auction
consisted only of that portion of the New York BTA not included in the New York
PMSA (i.e., suburban counties in New Jersey, Eastern Pennsylvania, Southwestern
Connecticut and on Long Island).
4. Subsequent Events
On April 1, 1998, the Company entered into financing agreements with
Proprietary Convertible Investment Group, Inc. ("Proprietary"), which is an
affiliate of CS First Boston, and Marion Interglobal Ltd. ("Marion"). Also on
such date, the Company entered into an agreement with Newstart to restructure
the Secured Promissory Note of CVNY held by Newstart.
Pursuant to a Securities Purchase Agreement, dated April 1, 1998,
between the Company and Proprietary (the "Proprietary Purchase Agreement"), on
April 6, 1998 the Company issued 3,500 shares of its Series A Convertible
Preferred Stock ("Convertible Preferred Stock") to Proprietary for $3.5 million.
Subject to certain conditions, including the registration under the Securities
Act of the underlying shares of Common Stock, the Proprietary Purchase Agreement
9
<PAGE>
provides for the issuance, at the Company's option, of an additional 3,500
shares of Convertible Preferred Stock at a purchase price of $1,000 per share at
any time on or after June 15, 1998 and prior to December 31, 1998. The
Proprietary Purchase Agreement also provides for the issuance, at Proprietary's
option, of an additional 3,000 shares of Convertible Preferred Stock at a
purchase price of $1,000 per share during the three year period following April
6, 1998. The Convertible Preferred Stock has a dividend rate of 4%, which may be
paid in cash or, at the option of the Company and subject to certain conditions,
in stock. The Convertible Preferred Stock may be converted into Common Stock of
the Company at any time at the option of the holder thereof at an initial
conversion price of $5.25 for the ninety day period following April 6, 1998.
Following such ninety-day period, or in the event that certain conditions are
not satisfied during such ninety-day period, the conversion price shall be the
lesser of (i) $5.25 and (ii) 88% of the lesser of (A) the average of the lowest
sale prices for the Common Stock on each of any three trading days during the
twenty two trading days occurring immediately prior to (but not including) the
applicable conversion date and (B) the average of the three lowest closing bid
prices for the Common Stock during the twenty two trading days occurring
immediately prior to (but not including) the applicable conversion date. In
addition, the Company has the right to redeem all the Convertible Preferred
Stock outstanding in the event that the closing bid price for the Common Stock
is above $10 for twenty two consecutive trading days at a price equal to 130% of
(i) the stated value of the Convertible Preferred Stock ($1,000 per share) plus
(ii) accrued and unpaid dividends thereon. The Convertible Preferred Stock is
subject to mandatory redemption upon the occurrence of certain events of
default. In addition, the Proprietary Purchase Agreement contains certain
capital raising limitations which could preclude certain equity-linked financing
transactions in excess of $6 million for a period of one year following the
final issuance of Convertible Preferred Stock under the agreement.
Pursuant to a Securities Purchase Agreement, dated April 1, 1998,
between the Company and Marion (the "Marion Purchase Agreement"), on April 6,
1998, the Company issued to Marion (i) a Warrant to purchase up to $2 million
worth of shares of Common Stock (the "Warrant Shares") and (ii) 110,000 shares
of its Common Stock. The shares of Common Stock were issued for nominal
consideration and the Warrant is exercisable (the "Exercisability Date") from
and after the earlier to occur of (i) the date on which there is an effective
registration statement under the Securities Act of 1933, as amended, relating to
the resale of the Warrant Shares and (ii) June 28, 1998. The Company has the
right to cause Marion to exercise the Warrant following the Exercisability Date.
The exercise price per share of Common Stock is the lesser of (i) 80% of the
average closing price of the Common Stock on the five trading days preceding the
issuance of such Common Stock and (ii) $3.20 per share, provided that such price
will in no event be less than $1.60 per share. The Company has the right to
cancel the Warrant at any time prior to the Exercisability Date. In the event
that the Company elects to cancel the aforementioned warrant, the Company does
not currently have capital available to make the scheduled June 30, 1998
payments to the Holders of the Original Notes and the New Notes without raising
additional capital for this purpose.
Pursuant to a Letter Agreement, dated April 1, 1998, among the Company,
CVNY and Newstart (the "Newstart Agreement"), the parties agreed to restructure
the terms of CVNY's Secured Promissory Note (the "Original Note") on the
following terms: (i) the Company paid Newstart $500,000 from the proceeds of the
initial sale of Preferred Stock pursuant to the Proprietary Purchase Agreement,
(ii) the Original Note was amended and restated as a Secured Convertible
Promissory Note in the principal amount of $2,315,917 (the "New Note") and (iii)
the Company issued to Newstart a warrant to purchase 125,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share of Common Stock.
The New Note provides that CVNY will pay an additional $500,000 on or before the
earlier to occur of (i) the consummation by the Company of a financing
transaction yielding gross proceeds to the Company in excess of $2.5 million and
(ii) ninety days following April 1, 1998. In addition, CVNY has the right to
prepay the New Note in full at any time prior to October 1, 1998 at a price
equal to 125% of the outstanding principal amount. At the option of the holder,
the New Note may be converted in whole or in part at any time and from time to
time at a conversion price per share equal to 91% of the average of the lowest
trading price on each of the four trading days immediately prior to the
conversion notice, provided, however, that the holder may not convert more than
$500,000 in principal amount of the New Note in any calendar month. The New Note
is subject to acceleration upon the occurrence of certain events of default.
To effectuate the restructuring contemplated by the Newstart Agreement,
the Company and CVNY entered into an Agreement, dated April 1, 1998, with the
holders of the Company's Subordinated Exchange Notes (the "Subordinated Exchange
Notes Agreement") pursuant to which such holders consented to such
restructuring. In consideration for such consent, the Company granted such
holders warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $.01 per share of Common Stock.
The Company has agreed to register the resale of the shares of Common
Stock issued, or to be issued, pursuant to the Proprietary Purchase Agreement,
the Marion Purchase Agreement, the Newstart Agreement and the Subordinated
Exchange Notes Agreement. The total registration rights relating to shares of
CVUS Common Stock under all the foregoing agreements and under all warrants
previously outstanding prior to the consummation of these agreements is
10
<PAGE>
estimated to be approximately four million shares. Under certain circumstances
the Company has agreed to pay liquidated damages in the event that certain of
such shares are not registered within certain prescribed time periods.
As a result of the foregoing financing agreements, as of April 15,
1998, the Company had committed sources of capital, coupled with internally
generated funds, that would be adequate to satisfy its then-estimated minimum
anticipated capital needs and operating expenses for the remainder of 1998
without requiring the restructuring of existing debt obligations. However,
payments from the proceeds of the initial $3.5 million sale of Series A
Convertible Preferred Stock pursuant to the Proprietary Purchase Agreement
needed to address accounts payable to equipment vendors, programmers and
providers of professional services, all of whom are critical to the Company's
continued operations, substantially exceeded expectations. Therefore, the
Company believes that it will be necessary to restructure one or more of the
1998 principal repayments due on outstanding indebtedness to assure that it has
adequate committed sources of capital, coupled with internally generated funds,
to satisfy minimum anticipated capital needs and operating expenses for the
remainder of 1998. Currently, the Company has three principal payment
obligations totaling approximately $3.5 million to three creditors due in
calendar year 1998. To date the Company has had encouraging discussions with
each of the three creditors, and believes that potential restructuring of all of
them may be possible, and that restructuring of one or more of them is likely.
However, there can be no assurance that the Company will be able to obtain the
requisite restructuring, or if obtained, that it will be obtained upon terms
favorable to the Company. In addition to the foregoing, additional funding would
be necessary for an accelerated expansion of the super-high-speed Internet
access service, restoration of the subscription television sales and marketing
efforts to achieve the Company's targeted 1998 subscriber levels, or to provide
telephony and other two-way services. Therefore, the Company expects to seek
additional financing during 1998. However, there can be no assurance that this
capital either will be available to the Company, or, if available, will be
provided on terms acceptable to the Company.
On May 6, 1998, the Company entered into an agreement with Wasserstein
Perella & Co., Inc. ("WP&Co.") as its exclusive financial advisor for the
purpose of exploring and evaluating the Company's strategic and financial
alternatives. The Company's primary objective is to capitalize on its exclusive
commercial license to utilize its existing LMDS system in offering broadband
wireless telecommunications services in the New York Primary Metropolitan
Statistical Area ("PMSA"). WP&Co. and the Company will jointly analyze potential
transactions including, but not necessarily limited to, merger or sale of the
Company, a recapitalization, a joint venture, or a capital infusion. There can
be no assurance that the results of this effort will be successful.
On May 18, 1998, the Company received an offer from Shant Hovnanian,
the Company's Chairman and Chief Executive Officer, to convey to the Company all
of the outstanding shares of VisionStar, Inc. ("VisionStar"), a company
wholly-owned by him, together with related patent application rights. VisionStar
holds a license from the FCC, granted in May 1997, to construct, launch and
operate a geostationary Ka-band telecommunications satellite at 113 degrees West
Longitude, a position overlooking the continental United States. According to
the FCC order granting the license, VisionStar proposes to offer interactive
broadband services covering the nation and in urban areas in conjunction with
broadband wireless operators such as LMDS operators. These broadband services
may include high-speed Internet access, high-speed data services, video
teleconferencing, distance learning and video programming. VisionStar proposes
to offer services on a non-common carrier basis.
The FCC requires Ka-band licensees to adhere to a strict timetable for
system implementation, including a requirement that construction must be
commenced within one year of license grant, and that the satellite be launched
and operational within five years of grant. VisionStar has not yet entered into
an agreement with a satellite manufacturer for construction of its satellite,
but has informed the Company that it has received several proposals for such
contracts. Mr. Hovnanian's offer assumes that all FCC milestones will be
attained by May 31, 1998, and contemplates reimbursement by the Company of his
verifiable VisionStar-related, out-of-pocket expenses, in an amount not to
exceed $300,000, which would be payable in the form of a note due March 31,
1999, or upon the earlier consummation by the Company of a financing of $10
million or more.
11
<PAGE>
The Company intends to consider Mr. Hovnanian's offer thoroughly, to
evlauate VisionStar's business plan and prospects and review its proposed
contracts with satellite manufacturers, with a view toward accepting, rejecting
or negotiating his proposal prior to May 31, 1998. If the Company accepts Mr.
Hovnanian's offer, transfer of VisionStar's license is subject to prior FCC
approval.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
Since the date of the Company's report on Form 10-K for the year ended
December 31, 1997, there have been no material developments with respect to any
legal proceedings reported in Item 3 to such report.
ITEM 2 -- CHANGES IN SECURITIES
For the quarter ended March 31, 1998, 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.
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 Company filed a Form 8-K dated January 30, 1998 providing specific
information regarding the following:
(i) The issuance of a Secured Promissory Note in the amount of $2,621,695
on December 1, 1997 to Logimetrics Inc., an equipment supplier, in
connection with an equipment purchase through an affiliate, CT&T;
(ii) The status of a syndication effort by Fleet National Bank with respect
to a potential $40 million senior secured debt facility;
(iii) The issuance on January 21, 1998 of new Subordinated Exchange Notes
in the aggregate principal amount of $1,191,147, to the holders of the
Company's original Subordinated Exchange Notes, and selected financial
data summarizing the Company's financial position at that time;
(iv) The Company's intensified focus on its super-high-speed Internet
access service as of December 31, 1997, and the related force
reductions on that date associated with the de-emphasis of sales and
marketing efforts related to subscription television service; and
(v) The selection of Gary MacGregor, CVNY Vice President of Sales and
Marketing, to lead the Company's high-speed Internet access marketing
efforts, following the resignation of Bruce Judson, former Chief
Marketing Officer, who has left the Company.
* Filed herewith
13
<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 20, 1998 By: /s/ Charles N. Garber
Charles N. Garber
Chief Financial Officer
14
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