UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 June 30, 1998 was 16,110,000.
<PAGE>
The Company hereby amends and restates its entire Quarterly Report on Form
10-Q for the period ended June 30, 1998, filed with the Securities and Exchange
Commission on August 14, 1998. As a result of an inadvertent oversight, the
"Diluted loss per common share" and the corresponding "Weighted average common
shares outstanding" on the Consolidated Statements of Operations (unaudited) for
the Three and Six Months Ended June 30, 1998 contained in Part I were omitted.
CELLULARVISION USA, INC.
INDEX TO FORM 10-Q
Page(s)
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PART I -- FINANCIAL INFORMATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 3-7
Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 .................................... 8
Consolidated Statements of Operations (unaudited) for the
Three Months Ended June 30, 1998 and 1997and the
Six Months Ended June 30, 1998 and 1997 ................... 9
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 1998 and 1997 ................... 10
Notes to Consolidated Financial Statements (unaudited) .... 11-15
PART II -- OTHER INFORMATION
ITEM 1 -- Legal Proceedings ........................................ 16
ITEM 2 -- Changes in Securities .................................... 16
ITEM 3 -- Defaults Upon Senior Securities .......................... 16
ITEM 4 -- Submission of Matters to a Vote of Security Holders ...... 16
ITEM 5 -- Other Information ........................................ 16
ITEM 6 -- Exhibits and Reports on Form 8-K ......................... 16
Signature Page ..................................................... 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
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. On August 5, 1998, CVNY further reduced its
staff by an additional 25 persons. This downsizing resulted in a current CVNY
employee count of 25 full-time equivalent employees. In addition to the
de-emphasis on subscription television service, these reductions were made as
part of the Company's overall plan to reduce expenses and conserve capital
resources.
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 six months of 1998. At the end of July, 1998,
subscribers totaled approximately 12,000. 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 in the event that
full-scale marketing of subscription television service is resumed upon the
receipt of requisite funding. However, at the present time, the Company expects
to discontinue its subscription television service by the end of 1998, as a
result of the proposed assignment of spectrum, as discussed below. (See
Liquidity and Capital Resources.)
Six and Three Months Ended June 30, 1998 Compared to Six and Three
Months Ended June 30, 1997.
Revenue increased $830,000 from $1,957,000 for the six months ended
June 30, 1997 to $2,787,000 for the six months ended June 30,1998 and increased
$257,000 from $1,106,000 for the three months ended June 30, 1997 to $1,363,000
for the three months ended June 30,1998. These increases are a result of the
1998 periods reflecting the benefit of increases in the average subscriber base
during 1997, net of service cancellations, and increases in the fees charged to
subscribers.
Service costs increased $166,000 from $955,000 for the six months ended
June 30,1997 to $1,121,000 for the six months ended June 30,1998 and decreased
$46,000 from $509,000 for the three months ended June 30, 1997 to $463,000 for
the three months ended June 30, 1998. The increase for the six months ended June
30, 1998 is a result of the increase in revenue as discussed above since service
costs, primarily fees paid to providers of television programming, increase with
the growth of subscribers. This increase, however, is net of a decrease as a
result of more favorable rates for programming that were negotiated by the
Company during 1998. The decrease for the three months ended June 30, 1998 is a
result of that period having the full benefit of the more favorable rates.
Selling, general and administrative expenses decreased $885,000 from
$6,662,000 for the six months ended June 30,1997 to $5,777,000 for the six
months ended June 30, 1998 and decreased $526,000 from $3,510,000 for the three
months ended June 30, 1997 to $2,984,000 for the three months ended June
30,1998. These decreases are primarily attributable to reduced
head-count-related costs as a result of personnel reductions at the end of 1997
and the first quarter of 1998.
3
<PAGE>
Depreciation and amortization increased $933,000 from $1,796,000 for
the six months ended June 30, 1997 to $2,729,000 for the six months ended June
30, 1998 and increased $417,000 from $935,000 for the three months ended June
30, 1997 to $1,352,000 for the three months ended June 30, 1998. These increases
were due primarily to the 1998 periods having the full effect of 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 in 1997.
Interest expense increased $113,000 from $446,000 for the six months
ended June 30, 1997 to $559,000 for the six months ended June 30, 1998 and
increased $47,000 from $223,000 for the three months ended June 30, 1997 to
$270,000 for the three months ended June 30, 1998. These increases are due
primarily to the additional notes payable to Newstart Factors, Metromedia Fiber
Network and an affiliate of J.P. Morgan.
Interest income decreased $475,000 from $496,000 for the six months
ended June 30, 1997 to $21,000 for the six months ended June 30, 1998 and
decreased $194,000 from $208,000 for the three months ended June 30, 1997 to
$14,000 for the three months ended June 30, 1998. These decreases are primarily
due to decreases in the Company's cash position as the Company expended cash to
fund operations and build out its network.
Liquidity and Capital Resources
The Company has recorded net losses and negative operating cash flow in
each period of its operations since inception, primarily due to the start-up
costs incurred in connection with the commercial roll-out of the Company's
system, slower than anticipated consumer acceptance of its service offerings to
date and expenses incurred in connection with the LMDS rulemaking proceeding.
During the six months ended June 30, 1998, the Company expended $3,166,000 on
operating activities. During the same period, capital expenditures were
$1,101,000, consisting primarily of transmitter and head-end equipment.
Since the fourth quarter of 1997 and continuing to date, the Company is
experiencing a severe liquidity shortfall due to the postponement or
cancellation of several planned financing transactions. During 1998, the Company
entered into several financing arrangements, as discussed below, which provide
for , or potentially provide for, the issuance of equity securities at a
discount from market prices at the time of funding, which could result in
substantial dilution to existing stockholders
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. 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
its interest in the Secured Promissory Note to Newstart Factors, Inc.
("Newstart"). Pursuant to an agreement dated 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"), an affiliate of J.P. Morgan, in exchange for $1,000,000 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 $.01 per share. Pursuant to
agreements dated April 1, 1998 and July 16, 1998, the Company and the Holders
restructured the terms of such notes as discussed below.
On April 6, 1998, pursuant to a Securities Purchase Agreement, dated
April 1, 1998, between the Company and Marshall Capital Management, Inc.
("Marshall"), formerly Proprietary Convertible Investment Group, Inc., an
affiliate of CS First Boston (the "Marshall Purchase Agreement"), the Company
issued 3,500 shares of its Series A Convertible Preferred Stock ("Convertible
Preferred Stock") to Marshall for $3.500,000. Subject to certain conditions,
including the registration under the Securities Act of the underlying shares of
Common Stock, the Marshall 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 Marshall Purchase Agreement also provides
for the issuance, at Marshall'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 Common Stock. The Convertible Preferred
Stock may be converted into Common Stock
4
<PAGE>
of the Company at the option of the holder at a conversion price equal to 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 Marshall Purchase Agreement contained 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
an agreement dated July 11, 1998, the Company and Marshall restructured the
terms of the Marshall Purchase Agreement as discussed below.
On April 6, 1998, pursuant to a Securities Purchase Agreement, dated
April 1, 1998, between the Company and Marion Interglobal Ltd. ("Marion"), (the
"Marion Purchase Agreement"), the Company issued to Marion (i) a warrant to
purchase (the "Warrant") up to $2,000,000 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 was
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 at 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. On June 30,
1998, following the Company's exercise of its right to cause Marion to exercise
the Warrant, Marion defaulted under the Marion Purchase Agreement. The Company
is considering litigation against Marion for non-performance and resulting
damages.
On April 6, 1998, 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 of the
proceeds from the sale of Convertible Preferred Stock to Marshall as a principal
payment under the New Note, as defined below, (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"), including unpaid interest at the time, and (iii)
the Company issued to Newstart a warrant to purchase 125,000 shares of Common
Stock at an exercise price of $5 per share. The New Note provides that CVNY will
pay an additional $500,000 as a principal payment 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 $2,500,000 and (ii) ninety days
following April 1, 1998. As a result of such a transaction in July of 1998, as
discussed below, Newstart received $500,000. 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 Newstart,
the New Note may be converted in whole or in part into Common Stock at any 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. However, Newstart 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. Through July
31, 1998, Newstart has converted $500,000 in principal amount of the New Note
into 883,706 shares of Common Stock, after which the unpaid principal balance
under the New Note was $815,917. Any remaining unpaid principal balance under
the New Note will be due on April 1, 1999.
In order to effectuate the restructuring under 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 the Holders consented to such restructuring.
In consideration for such consent, the Company granted the Holders warrants to
purchase 100,000 shares of the Company's Common Stock at an exercise price of
$.01 per share of Common Stock.
In May of 1998, the Company registered 3,600,000 shares of Common Stock
issued, or to be issued, pursuant to the Marshall Purchase Agreement, the Marion
Purchase Agreement, the Newstart Agreement and the Subordinated Exchange Notes
Agreement. 1,250,000 shares registered in connection with the Marion Purchase
Agreement were reallocated as a result of Marion's default, as discussed above.
The Company expects that it will register additional shares in the future. Under
certain circumstances, the Company has agreed to pay liquidated damages in the
event that certain of such shares to be registered under these agreements are
not registered within certain prescribed time periods.
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.
5
<PAGE>
The Company's primary objective was 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 intended to 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.
As a result of the foregoing financing agreements, the Company had
committed sources of capital, coupled with internally generated funds, that it
believed at April 15, 1998 would be adequate to satisfy its minimum anticipated
capital needs and operating expenses for the remainder of 1998. However, certain
of these transactions as originally contemplated were not completed and payments
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. In addition, there
were payment obligations totaling approximately $3,500,000 to three creditors
due throughout the balance of 1998. The Company had encouraging discussions with
each of the three creditors, and believed that potential restructuring of all of
them might have been possible, and that restructuring of one or more of them was
likely. However, there was no assurance that the Company would be able to obtain
the requisite restructuring, or if obtained, that it would 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 or other future business strategies. As a result, the Company
decided that it was in its best interest to enter into the following
transaction.
In July of 1998, pursuant to an agreement, dated July 10, 1998, between
the Company and WinStar Communications, Inc. ("WinStar"), (the "WinStar
Agreement"), the Company agreed to assign to WinStar 850 MHz of contiguous Local
Multipoint Distribution Service ("LMDS") spectrum currently licensed to the
Company throughout its licensed territory for $32,500,000 in cash. The
transaction is subject to regulatory and shareholder approval and is expected to
close in the fourth quarter of 1998. In connection with the WinStar Agreement,
the Company has borrowed $3,500,000 from WinStar and, upon shareholder approval
and the submission of required FCC filings, WinStar is obligated to lend an
additional $2,000,000 to the Company. These borrowings will be repaid as an
offset against the purchase price. The Company will use the loan proceeds to
meet outstanding obligations and finance its operations pending the closing,
following which it intends to repay all of its outstanding debt obligations. In
the event that the WinStar transaction is terminated, under certain conditions,
the Company may be required to pay WinStar a termination fee of $1,625,000 and
reimburse WinStar for expenses in an amount not to exceed $325,000. As a result
of the WinStar Agreement, the Company has paid an investment banking fee of
$250,000 to WP&Co. and will be obligated to make an additional $800,000 payment
upon closing.
In order to effectuate the transaction under the WinStar Agreement, the
Company and CVNY entered into a Supplemental Agreement, dated July 16, 1998,
with the Holders of the Company's Subordinated Exchange Notes (the "Supplemental
Agreement") pursuant to which the Holders consented to such restructuring and
waived certain defaults. In consideration for such consent, the Company and CVNY
paid a fee of $750,000, payable $500,000 in cash and $250,000 by the issuance of
new Subordinated Exchange Notes. The interest rate under the Subordinated
Exchange Notes was increased to prime plus 10%, subject to a minimum rate of
18%. The Subordinated Exchange Notes with an unpaid principal balance now of
$6,026,675 will be due April 30, 1999.
Pursuant to a letter agreement dated July 11, 1998 (the "Letter
Agreement"), the Company and Marshall have agreed to waive the Company Option
and the Marshall Option, respectively, provided that the other party does not
willfully breach any material covenant contained in (i) the Marshall Purchase
Agreement, (ii) the certificate of designation of the Convertible Preferred
Stock or (iii) the registration rights agreement (the "Registration Rights
Agreement") relating to the registration of the underlying shares of Common
Stock into which Marshall's shares of Convertible Preferred Stock are
convertible. In addition, Marshall's waiver of the Marshall Option is subject to
the condition that certain shareholders of the Company not willfully breach
their respective voting agreements entered into pursuant to the Marshall
Purchase Agreement. In addition, pursuant to the Letter Agreement, Marshall has
waived the capital raising limitations contained in the Marshall Purchase
Agreement that precluded certain equity-linked financing transactions in excess
of $6,000,000 for a period of one year following the final issuance of
Convertible Preferred Stock. In addition, as a result of certain ongoing
negotiations during July, 1998 that ultimately resulted in the WinStar Agreement
discussed above, Marshall has advised the Company of its view that certain
securities law matters have resulted in an adjustment to the conversion price of
the Convertible Preferred Stock (a "Repricing Event"). If Marshall's view is
correct, a permanent conversion price in the amount of $.375 per share of Common
Stock would be set. Through August 11, 1998, Marshall has converted 25 shares of
the Convertible Preferred Stock into 67,538 shares of Common Stock and the
remaining 3,475 shares of Convertible Preferred Stock would be convertible,
subject to certain conditions and restrictions, into a minimum of approximately
9,300,000 shares of Common Stock, representing approximately 35.4% of the
Company's outstanding shares of Common Stock, after giving effect to such
conversion. However, the terms of the Convertible Preferred Stock provide that,
except under certain conditions, no holder of Convertible Preferred Stock can
convert such shares in excess of the number of such shares which, upon
conversion, would exceed 19.99% of the number of outstanding shares of Common
Stock on April 6, 1998 or 4.99% of the number of outstanding shares then issued
and outstanding at any time.
6
<PAGE>
The assignment of spectrum to WinStar will require the Company to
discontinue its subscription television service which has accounted for
substantially all of the Company's revenues to date. While the Company believes
that consummation of the WinStar transaction will give it sufficient liquidity
to repay the WinStar loans and all of its other outstanding debt and other
obligations, it does not expect to have a positive operating cash flow or any
other source of financing prior to the second loan from WinStar. The Company is
therefore taking measures to conserve its current cash reserves. After the
WinStar transaction, the Company will retain a portion of its LMDS spectrum and
consider the future course of its business, which might include pursuit of an
internet and/or satellite-based telecommunications business, a multi-channel
specialized video business, other transactions with third parties that may
emerge in the future or an orderly liquidation.
Pro forma Information
Effects on financial position
At June 30, 1998, the Company had outstanding debt in the amount of
approximately $13,100,000, including the current portion of notes payable in the
amount of approximately $7,900,000 and accounts payable, accrued expenses and
other liabilities in the amount of approximately $5,200,000, which the Company
would satisfy out of the net proceeds from consummation of the WinStar
transaction, after repayment to WinStar. The remaining funds would be available
to the Company in the future course of its business which might include an
internet and/or satellite-based telecommunications business, a multi-channel
specialized video business, other transactions with third parties that may
emerge in the future or an orderly liquidation.
At June 30, 1998, the Company had property and equipment with a net
carrying value aggregating approximately $3,099,000, represented by
approximately $2,116,000 in set-top converters and approximately $983,000 in
head-end equipment which may have little or no value and would be written off,
although the Company will consider whether these assets have salvage or other
nominal value. The Company believes that its remaining property and equipment
may have value in the future course of its business.
Effects on results of operations
For the six months ended June 30, 1998, the Company generated
approximately $2,787,000 in revenue and incurred approximately $1,121,000 in
service costs. These amounts were generated almost entirely as a result of its
subscription television service which the Company will discontinue upon
consummation of the WinStar transaction. Revenue to be generated upon
consummation of the WinStar transaction will depend upon the Company's future
course of its business and cannot be predicted at this time.
Selling, general and administrative expenses have decreased in the six
months ended June 30, 1998 primarily attributable to reduced head-count-related
costs as a result of personnel reductions at the end of 1997 and the first
quarter of 1998 and will continue to decrease as a result of further reductions
in early August, 1998.
For the six months ended June 30, 1998, the Company incurred interest
expense in the amount of approximately $559,000 which would not have been
incurred if the WinStar transaction had been consummated on January 1, 1998.
Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities" was issued
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. SFAS 133 establishes accounting and disclosure requirements for
derivative instruments and hedging activities. It requires the Company to record
all derivatives as either assets or liabilities and measure those instruments at
fair value. The Company currently does not hold any derivative instruments and
does not expect the adoption of SFAS 133 to have a material effect on the
company's financial statements taken as a whole.
7
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 76,716 $ 407,741
Accounts receivable, net of allowance
for doubtful accounts of $590,546
and $290,984 ...................................... 1,293,732 1,233,501
Due from affiliates ................................... 95,372 181,012
Prepaid expenses and other ............................ 43,377 112,058
------------ ------------
Total current assets ..................... 1,509,197 1,934,312
Property and equipment, net of
accumulated depreciation of
$7,971,059 and $5,277,052 ......................... 19,014,303 20,607,744
Intangible assets, net of accumulated
amortization of $182,326 and $147,261 ............. 168,323 203,388
Debt placement fees ................................... 26,824 65,590
Notes receivable from related parties ................. -- 171,245
Other noncurrent assets ............................... 174,454 171,811
------------ ------------
Total assets ............................. $ 20,893,101 $ 23,154,090
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................... $ 4,070,177 $ 1,873,317
Accrued liabilities ................................... 1,031,964 2,093,148
Current portion of notes payable ...................... 7,930,092 4,993,997
Other current liabilities ............................. 49,169 2,761
------------ ------------
Total current liabilities ................ 13,081,402 8,963,223
Notes payable ......................................... -- 2,501,163
------------ ------------
Total liabilities ........................ 13,081,402 11,464,386
Stockholders' equity:
Common Stock, ($.01 par value; 40,000,000
shares authorized; 16,110,000 and 16,000,000
shares issued and outstanding) ..................... 161,100 160,000
Preferred Stock,($.01 par value; 20,000,000
shares authorized):
Series A Convertible ($1,000 stated value; 10,000
shares authorized; 3,500 and no shares
issued and outstanding) ............................ 3,500,000 --
Additional paid-in capital ............................ 58,267,533 58,267,533
Accumulated deficit ................................... (54,116,934) (46,737,829)
------------ ------------
Stockholders' equity ..................................... 7,811,699 11,689,704
------------ ------------
Total liabilities and
Stockholders' equity ..................... $ 20,893,101 $ 23,154,090
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue .................................. $ 1,363,340 $ 1,105,833 $ 2,787,022 $ 1,957,463
Expenses:
Service costs ....................... 462,530 509,320 1,121,189 955,322
Selling, general and
administrative ...................... 2,984,106 3,509,681 5,777,424 6,662,192
Depreciation and amortization ............ 1,351,706 935,267 2,729,072 1,795,670
------------ ------------ ------------ ------------
Total Operating Expenses ..... 4,798,342 4,954,268 9,627,685 9,413,184
------------ ------------ ------------ ------------
Operating loss ........................... (3,435,002) (3,848,435) (6,840,663) (7,455,721)
Interest income .......................... 14,114 207,640 21,028 495,856
Interest expense ......................... (270,468) (222,825) (559,470) (445,650)
------------ ------------ ------------ ------------
Net loss ................................. $ (3,691,356) $ (3,863,620) $ (7,379,105) $ (7,405,515)
============ ============ ============ ============
Per Share:
Basic loss per common share .............. $ (.23) $ (.24) $ (.46) $ (.46)
Weighted average common shares outstanding 16,110,000 16,000,000 16,055,304 16,000,000
============ ============ ============ ============
Diluted loss per common share ............ $ (.23) $ (.24) $ (.46) $ (.46)
Weighted average common shares outstanding 16,110,000 16,000,000 16,055,304 16,000,000
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
CELLULARVISION USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss .................................... $(7,379,105) $(7,405,515)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 2,729,072 1,795,670
Amortization of placement fees ........... 38,766 76,713
Provision for doubtful accounts .......... 299,562 201,382
Changes in assets and liabilities:
Accounts receivable ...................... (359,793) (520,008)
Notes receivable ......................... 171,245 (81,000)
Prepaid expenses and other ............... 68,681 31,935
Accounts payable ......................... 2,196,860 307,397
Accrued liabilities ...................... (1,061,184) (640,663)
Other current liabilities ................ 46,408 (210,577)
Due from affiliates ...................... 85,640 155,710
Other noncurrent assets .................. (2,643) (4,834)
----------- ------------
Net cash used in
operating activities .................. (3,166,491) (6,293,790)
----------- ------------
Cash flows from investing activities:
Intangibles ........................... -- (93,670)
Property and equipment additions ...... (1,100,566) (3,423,584)
----------- ------------
Net cash provided by (used in)
investing activities ........... (1,100,566) (3,517,254)
----------- ------------
Cash flows from financing activities:
Proceeds from sale of stock ............... 3,501,100 --
Proceeds from notes payable ............ 1,191,147 --
Repayment of note payable .............. (756,215) (1,669,244)
----------- ------------
Net cash provided by (used in)
financing activities ................ 3,936,032 (1,669,244)
----------- ------------
Net (decrease) increase in
cash and cash equivalents ...... (331,025) (11,480,288)
Cash and cash equivalents, beginning of
period ..................................... 407,741 19,600,070
----------- ------------
Cash and cash equivalents, end of period ........ $ 76,716 $ 8,119,782
=========== ============
Supplemental Cash Flow Disclosures:
Cash paid for interest during the
period....................................... $272,676 $445,648
======== ========
The accompanying notes are an integral part of these financial statements.
10
<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 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-and six month period ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
2. 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 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).
3. Related Party Transactions
On May 18, 1998, the Company received an offer from Shant S. 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 informed the Company
that it has entered into an agreement with a satellite manufacturer for
construction of its satellite. Mr. Hovnanian's offer 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
11
<PAGE>
of $10,000,000 or more. The Company, through a special committee of the Board of
Directors, has been considering Mr. Hovnanian's offer. The Company expects to
receive the special committee's recommendation and take final action with
respect to the offer in the near future.If the Company accepts Mr. Hovnanian's
offer, transfer of VisionStar's license is subject to prior FCC approval.
4. Long-Term Notes
(a) 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.
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 its interest in the Secured Promissory Note to Newstart
Factors, Inc. ("Newstart").
On April 6, 1998, 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 of the
proceeds from the sale of Convertible Preferred Stock to Marshall as a principal
payment under the New Note, as defined below, (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"), including unpaid interest at the time, and (iii)
the Company issued to Newstart a warrant to purchase 125,000 shares of Common
Stock at an exercise price of $5 per share. The New Note provides that CVNY will
pay an additional $500,000 as a principal payment 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 $2,500,000 and (ii) ninety days
following April 1, 1998. As a result of such a transaction in July of 1998, as
discussed below, Newstart received $500,000. 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 Newstart,
the New Note may be converted in whole or in part into Common Stock at any 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. However, Newstart 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. Through July
31, 1998, Newstart has converted $500,000 in principal amount of the New Note
into 883,706 shares of Common Stock, after which the unpaid principal balance
under the New Note was $815,917. Any remaining unpaid principal balance under
the New Note will be due on April 1, 1999.
(b) 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"), an affiliate of J.P. Morgan, in exchange for $1,000,000 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 $.01 per share. Pursuant to
agreements dated April 1, 1998 and July 16, 1998, the Company and the Holders
restructured the terms of such notes as discussed in Notes 5 and 8,
respectively.
5. Stockholders' Equity
(a) On April 6, 1998, pursuant to a Securities Purchase Agreement,
dated April 1, 1998, between the Company and Marshall Capital Management, Inc.
("Marshall"), formerly Proprietary Convertible Investment Group, Inc., an
affiliate of CS First Boston (the "Marshall Purchase Agreement"), the Company
issued 3,500 shares of its Series A Convertible Preferred Stock ("Convertible
Preferred Stock") to Marshall for $3,500,000. Subject to certain conditions,
including the registration under the Securities Act of the underlying shares of
Common Stock, the Marshall 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 Marshall Purchase Agreement also provided
for the issuance, at Marshall'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 Common Stock. The Convertible Preferred
Stock may be converted into Common Stock of the Company at the option of the
holder at a conversion price equal to 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
12
<PAGE>
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 Marshall Purchase
Agreement contained 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 an agreement dated July 11, 1998, the Company
and Marshall restructured the terms of the Marshall Purchase Agreement as
discussed in Note 8.
(b) On April 6, 1998, pursuant to a Securities Purchase Agreement,
dated April 1, 1998, between the Company and Marion Interglobal Ltd. ("Marion"),
(the "Marion Purchase Agreement"), the Company issued to Marion (i) a warrant to
purchase (the "Warrant") up to $2,000,000 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 was
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 at 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. On June 30,
1998, following the Company's exercise of its right to cause Marion to exercise
the Warrant, Marion defaulted under the Marion Purchase Agreement. The Company
is considering litigation against Marion for non-performance and resulting
damages.
(c) In order to effectuate the restructuring under 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 the Holders consented to such
restructuring. In consideration for such consent, the Company granted the
Holders warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $.01 per share of Common Stock.
(d) In May of 1998, the Company registered 3,600,000 shares of Common
Stock issued, or to be issued, pursuant to the Marshall Purchase Agreement, the
Marion Purchase Agreement, the Newstart Agreement and the Subordinated Exchange
Notes Agreement. 1,250,000 shares registered in connection with the Marion
Purchase Agreement were reallocated as a result of Marion's default, as
discussed above. The Company expects that it will register additional shares in
the future. Under certain circumstances, the Company has agreed to pay
liquidated damages in the event that certain of such shares to be registered
under these agreements are not registered within certain prescribed time
periods.
(e) 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 was 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 intended to 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. In
connection with this agreement, WP&Co. received a warrant to purchase 50,000
shares of Common Stock at an exercise price of $.01 per share.
(f) See Notes 4 and 8 for information on additional transactions which
have resulted, and likely will continue to result in, the issuance of additional
shares of the Company's Common Stock.
6. Legal Proceedings
(a) On June 16, 1998, Susan K. Greaney, as Administrator for the Estate
of Patrick J. Greaney, the Company's former President, filed a complaint with
the Supreme Court of the State of New York, County of Kings. The complaint seeks
payment of certain performance bonuses and expenses in connection with the late
Mr. Greaney's employment agreement. The Company believes that this suit is
likely to be resolved without a material adverse effect on the financial
position of the Company.
(b) On June 30, 1998, Charles N. Garber, the Company's former Chief
Financial Officer, filed a demand for arbitration with the American Arbitration
Association. Mr. Garber has asserted that his employment agreement was breached
by the Company's failure to pay him guaranteed minimum annual performance
bonuses. In his claim, Mr. Garber seeks damages in an amount estimated to total
$488,000, plus his costs and reasonable attorney's fees. Based upon a
preliminary review of the claim, the Company believes it to be materially
overstated. The Company cannot make a determination at this time as to the
possible outcome of the action.
13
<PAGE>
However, the effect of such claim, if an adverse judgement were to be rendered,
could have a material adverse effect on the financial position and liquidity in
the period in which it is resolved.
(c) See Note 8 to these financial statements for information on an
additional legal proceeding concerning the Company.
(d) 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 the legal proceedings reported in Item 3 or in Note 11 to the financial
statements included in Item 14 of such report.
7. Commitments and Contingencies
At December 31, 1997, the Company had outstanding long-term orders with
CT&T for the purchase of equipment in the aggregate amount of approximately
$3,200,000, net of deposits in the aggregate amount of approximately $600,000.
Subsequent to that date, the Company has not entered into any similar
commitments.
Approximately $1,400,000 of this amount, net of deposits, is
represented by set-top converters and head-end equipment which has been
delivered to the Company but have experienced performance problems, as a result
of which CT&T is presently involved in litigation with the vendor of this
equipment. The Company has not accepted billings for this equipment and no
amounts are reflected in the accompanying financial statements. In the event
that the WinStar transaction, as discussed in Note 8, is consummated and the
Company is ultimately forced to accept and pay for this equipment, the equipment
may have little or no value and would be written off, although the Company would
consider whether the equipment has salvage or other nominal value.
Approximately $1,800,000 of this amount, net of deposits, represents
long-term orders which are still outstanding for modems that would be usable by
the Company in a high-speed internet access business.
8. Subsequent Events
(a) In July of 1998, pursuant to an agreement, dated July 10, 1998,
between the Company and WinStar Communications, Inc. ("WinStar"), (the "WinStar
Agreement"), the Company agreed to assign to WinStar 850 MHz of contiguous Local
Multipoint Distribution Service ("LMDS") spectrum currently licensed to the
Company throughout its licensed territory for $32,500,000 in cash. The
transaction is subject to regulatory and shareholder approval and is expected to
close in the fourth quarter of 1998. In connection with the WinStar Agreement,
the Company has borrowed $3,500,000 from WinStar and, upon shareholder approval
and the submission of required FCC filings, WinStar is obligated to lend an
additional $2,000,000 to the Company. These borrowings will be repaid as an
offset against the purchase price. The Company will use the loan proceeds to
meet outstanding obligations and finance its operations pending the closing,
following which it intends to repay all of its outstanding debt obligations. In
the event that the WinStar transaction is terminated, under certain conditions,
the Company may be required to pay WinStar a termination fee of $1,625,000 and
reimburse WinStar for expenses in an amount not to exceed $325,000. As a result
of the WinStar Agreement, the Company has paid an investment banking fee of
$250,000 to WP&Co. and will be obligated to make an additional $800,000 payment
upon closing.
(b) In order to effectuate the sale under the WinStar Agreement, the
Company and CVNY entered into a Supplemental Agreement, dated July 16, 1998,
with the Holders of the Company's Subordinated Exchange Notes (the "Supplemental
Agreement") pursuant to which the Holders consented to such restructuring and
waived certain defaults. In consideration for such consent, the Company and CVNY
paid a fee of $750,000, payable $500,000 in cash and $250,000 by the issuance of
new Subordinated Exchange Notes. The interest rate under the Subordinated
Exchange Notes was increased to prime plus 10%, subject to a minimum rate of
18%. The Subordinated Exchange Notes with an unpaid principal balance now of
$6,026,675 will be due April 30, 1999.
(c) Pursuant to a letter agreement dated July 11, 1998 (the "Letter
Agreement"), the Company and Marshall have agreed to waive the Company Option
and the Marshall Option, respectively, provided that the other party does not
willfully breach any material covenant contained in (i) the Marshall Purchase
Agreement, (ii)the certificate of designation of the Convertible Preferred Stock
or (iii) the registration rights agreement (the "Registration Rights Agreement")
relating to the registration of the underlying shares of Common Stock into which
Marshall's shares of Convertible Preferred Stock are convertible. In addition,
Marshall's waiver of the Marshall Option is subject to the condition that
certain shareholders of the Company not willfully breach their respective voting
agreements entered into pursuant to the Marshall Purchase Agreement. In
addition, pursuant to the Letter Agreement, Marshall has waived the capital
raising limitations contained in the Marshall Purchase Agreement that precluded
certain equity-linked financing transactions in excess of $6,000,000 for a
period of one year following the final issuance of Convertible Preferred Stock.
In addition, as a result of certain ongoing negotiations during July, 1998 that
ultimately resulted in the WinStar Agreement discussed above, Marshall has
advised the Company of its view that certain securities law matters have
resulted in an adjustment to the conversion price of the Convertible Preferred
Stock (a "Repricing Event"). If Marshall's view is correct, a permanent
conversion price in the amount of $.375 per share of Common Stock would be set.
Through August 11, 1998, Marshall has converted 25 shares of the Convertible
Preferred Stock into 67,538 shares of Common Stock and the remaining 3,475
shares of Convertible
14
<PAGE>
Preferred Stock would be convertible, subject to certain conditions and
restrictions, into a minimum of approximately 9,300,000 shares of Common Stock,
representing approximately 35.4% of the Company's outstanding shares of Common
Stock, after giving effect to such conversion. However, the terms of the
Convertible Preferred Stock provide that, except under certain conditions, no
holder of Convertible Preferred Stock can convert such shares in excess of the
number of such shares which, upon conversion, would exceed 19.99% of the number
of outstanding shares of Common Stock on April 6, 1998 or 4.99% of the number of
outstanding shares then issued and outstanding at any time.
(d) On July 22, 1998, a summary judgment in the amount of
approximately $190,000 was entered in the Civil Court of the City of New York
against the Company in connection with the lease on the Company's former
executive offices in New York City. The Company is presently considering an
appeal of this decision and, at the same time, is in settlement discussions in
this matter. The claim, if an adverse judgement were to be executed, could have
a material adverse effect on the liquidity of the Company.
15
<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 the
legal proceedings reported in Item 3 or in Note 11 to the financial statements
included in Item 14 of such report.
Notes 6 and 8 to the accompanying financial statements are incorporated
herein by reference.
ITEM 2 -- CHANGES IN SECURITIES
Notes 4, 5 and 8 to the accompanying financial statements are
incorporated herein by reference.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
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
20, 1998:
1. The election of six members to the Board of Directors of the Company
to serve until the next Annual Meeting of Stockholders to be held in 1999 (the
"1999 Meeting") or until their successors are duly elected.
2. The appointment of independent auditors of the Company for the 1998
fiscal year to serve until the 1999 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 six Nominees for election
as directors of the Board to serve until the 1999 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 six 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,
the Board, at the recommendation of the Audit Committee, proposed that the
stockholders appoint the firm of Coopers & Lybrand LLP, now
PricewaterhouseCoopers LLP ("PWC"), to serve as the independent auditors of the
Company for the 1998 fiscal year until the 1999 Meeting. PWC served as the
Company's independent auditors for the 1997 fiscal year. The Board unanimously
recommended a vote "FOR" the approval of this 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, and entitled to vote at the Annual
Meeting.
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:
None.
* Filed herewith
16
<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 24, 1998 By: /s/ Shant S. Hovnanian
Shant S. Hovnanian
Chairman and President
Date: August 24, 1998 By: /s/ Angela M. Vaccaro
Angela M. Vaccaro
Controller and Chief Accounting
Officer
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 76,716
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