UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0-22888
CAI WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1324691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Corporate Woods Boulevard, Albany, New York 12211
(Address and zip code of principal executive offices)
(518) 462-2632
(Registrant's telephone number, including area code)
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 _____
Number of shares outstanding of each of registrant's class of common stock at
October 31, 1997:
CLASS OUTSTANDING SHARES
Common Stock, no par value 40,540,539
<PAGE>
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
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CAI WIRELESS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 MARCH 31, 1997
------------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 861,071 $10,471,918
Subscriber accounts receivable, net 764,762 695,707
Prepaid expenses 791,017 1,034,106
Property and equipment, net 66,544,638 69,767,017
Wireless channel rights, net 205,518,500 207,680,551
Investment in CS Wireless Systems, Inc. 74,649,527 88,389,527
Investment in TelQuest Satellite Services LLC 3,126,252 -
Goodwill, net of accumulated amortization 100,097,416 104,204,716
Debt service escrow 32,387,339 47,865,389
Debt financing costs, net 13,406,310 9,249,934
Other assets 3,133,797 2,980,650
----------- -----------
Total Assets $501,280,629 $542,339,515
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 6,997,613 $ 6,600,584
Accrued expenses 19,462,787 16,138,811
Wireless channel rights obligations 4,203,350 5,302,600
Interim debt financing 12,709,226 -
Notes payable 36,666,068 36,786,596
Notes payable to TelQuest Satellite Services LLC 1,341,192 -
Senior notes 275,000,000 275,000,000
----------- -----------
356,380,236 339,828,591
----------- -----------
Commitments and Contingencies
Mandatorily Redeemable Preferred Stock
14% Senior convertible preferred stock
(liquidation value $70,000,000) 69,230,000 69,160,000
Accrued preferred stock dividends 25,865,593 18,660,734
----------- -----------
95,095,593 87,820,734
----------- -----------
SHAREHOLDERS' EQUITY
Common stock, 100,000,000 Shares Authorized, No Par
Value; 40,540,539 shares issued and outstanding 275,769,414 275,769,414
Accumulated deficit (225,964,614) (161,079,224)
----------- -----------
49,804,800 114,690,190
----------- -----------
Total Liabilities and Shareholders' Equity $501,280,629 $542,339,515
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
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CAI WIRELESS SYSTEMS, INC.
Consolidated Statements of Operations
(unaudited)
Six-Months Ended Three-Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 15,386,043 $ 18,487,778 $ 7,294,791 $ 9,182,955
------------ ------------ ------------ -----------
Costs and expenses
Programming and licensing 7,271,163 7,859,550 3,568,253 3,966,954
Marketing 829,936 1,226,017 461,088 651,412
General and administrative 13,941,679 14,340,890 6,838,194 7,427,376
Depreciation and amortization 15,907,088 16,550,788 7,968,256 8,455,561
------------ ------------ ------------ -----------
37,949,866 39,977,245 18,835,791 20,501,303
------------ ------------ ------------ -----------
Operating loss (22,563,823) (21,489,467) (11,541,000) (11,318,348)
------------ ------------ ------------ -----------
Other income (expense)
Interest expense (22,929,735) (20,304,553) (11,956,062) (10,143,719)
Equity in net loss of CS Wireless
Systems, Inc. (13,740,000) (7,800,000) (7,124,000) (4,800,000)
Interest and other income 1,623,027 4,116,571 762,390 1,905,053
------------ ------------ ------------ -----------
(35,046,708) (23,987,982) (18,317,672) (13,038,666)
------------ ------------ ------------ -----------
Loss before income tax benefit (57,610,531) (45,477,449) (29,858,672) (24,357,014)
Income tax benefit - 9,000,000 - 4,500,000
------------ ------------ ------------ -----------
Net loss (57,610,531) (36,477,449) (29,858,672) (19,857,014)
Preferred stock dividends (7,274,859) (6,270,364) (3,706,901) (3,194,747)
------------ ------------ ------------ -----------
Loss applicable to common
stockholders $(64,885,390) $(42,747,813) $ (33,565,573) $(23,051,761)
============ ============ ============
===========
Loss per common share $ (1.60) $ (1.08) $ (0.83) $ (0.57)
============ ============ ============ ===========
Average common and equivalent shares
outstanding 40,540,539 39,638,851 40,540,539 40,384,787
============ ============ ============ ===========
</TABLE>
<PAGE>
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CAI WIRELESS SYSTEMS, INC.
Consolidated Statements of Shareholders'Equity
For the Six Months Ended September 30, 1997 (unaudited)
AND THE YEAR ENDED MARCH 31, 1997
Common Stock Accumulated
Shares Amount Deficit Total
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at April 1, 1996 37,829,482 $257,701,130 $(65,090,206) $192,610,924
Senior preferred stock issuance costs
reclassified from project costs - - (661,212) (661,212)
Series A 8% redeemable convertible
preferred stock converted into 2,637,742 18,049,955 - 18,049,955
common
Value assigned to warrants exercised 73,315 18,329 (18,329) -
Preferred stock dividends accrued - - (13,011,270) (13,011,270)
Net loss - - (82,298,207) (82,298,207)
---------- ----------- ----------- -----------
BALANCE AT MARCH 31, 1997 40,540,539 275,769,414 (161,079,224) 114,690,190
Preferred stock dividends accrued - - (7,274,859) (7,274,859)
Net loss - - (57,610,531) (57,610,531)
---------- ----------- ----------- -----------
Balance at September 30, 1997 40,540,539 $275,769,414 $(225,964,614) $ 49,804,800
========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
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CAI WIRELESS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended September 30,
----------------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (57,610,531) $ (36,477,449)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 15,907,088 16,550,788
Equity in net loss of CS Wireless Systems, Inc. 13,740,000 7,800,000
Deferred income tax benefit - (9,000,000)
Debt financing costs and discount amortization 2,040,626 990,042
Debt service escrow interest income 394,106 835,968
Changes in assets and liabilities:
Subscriber accounts receivable (69,055) 107,366
Other assets 164,236 (670,899)
Accounts payable and accrued expenses 2,507,288 694,115
------------ ------------
Net cash used in operating activities (22,926,242) (19,170,069)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of wireless channel rights (1,761,760) (2,941,307)
Purchase of equipment (5,224,875) (22,152,837)
Proceeds from the sale of equipment 39,145 463,900
Investment in TelQuest Satellite Services LLC (1,512,488) -
Proceeds from sale of escrow investments 15,150,387 13,844,342
Payments received from CS Wireless Systems, Inc. 2,514,542 -
Loan to related parties (197,758) (800,000)
Cash paid for investment (356,025) (436,202)
Other (153,823) (37,857)
------------ ------------
Net cash provided by (used in) investing activities 8,497,345 (12,059,961)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from interim debt financing 9,500,000 -
Repayment of debt (2,167,578) (26,549,127)
Debt financing costs paid (2,514,372) -
------------ ------------
Net cash provided by (used in) financing activities 4,818,050 (26,549,127)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,610,847) (57,779,157)
Cash and cash equivalents, beginning of year 10,471,918 103,263,094
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 861,071 $45,483,937
============ ============
CASH PAYMENTS FROM THE DEBT SERVICE ESCROW ACCOUNT DURING
THE PERIOD FOR INTEREST $ 17,429,098 $ 17,338,065
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all the information and notes required by generally accepted accounting
principles for complete financial statements.
The consolidated financial statements include the accounts of CAI
Wireless Systems, Inc. and its wholly-owned subsidiaries (the "Company" or
"CAI"). All intercompany transactions have been eliminated in consolidation.
The Company's 50.7% investment in CS Wireless Systems, Inc. ("CS") is accounted
for on the equity method. Current summarized financial information regarding
CS is presented in Note 3. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of results for interim periods have been included. Certain items
in the prior period financial statements have been reclassified to conform with
the current period's presentation. Operating results for the quarter and six
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 1998. The unaudited
financial statements presented herein should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended March 31, 1997 which is
on file with the Securities and Exchange Commission.
GOING CONCERN
CAI's recurring losses, restrictions on its ability to obtain
additional financing, and substantial commitments raise substantial doubt about
the continuation of CAI as a going concern. For the last half of the fiscal
year ending March 31, 1998, the Company is obligated to pay approximately
$4,300,000 for minimum license fees and lease payments, approximately
$1,100,000 in remaining MMDS license auction fees and to fund current operating
costs.
On a long-term basis, CAI has substantial indebtedness which,
beginning in fiscal year 1999, will include significant debt service
requirements and senior preferred stock dividend payments. As of September 30,
1997, CAI has outstanding consolidated long-term debt of $325,717,000 and
senior preferred stock including accrued dividends totaling $95,096,000.
The Company's business strategy has been to explore digital
wireless cable systems for its MMDS subscription television services and
alternative uses of its MMDS spectrum for a variety of applications, including
data and voice transmission such as Internet access and telephony delivery
services. In management's opinion, this strategy will help meet the current and
perceived future competition and, in relation to obtaining a new strategic
partner, show the flexibility and increased value of the Company's MMDS
spectrum, if such exploration is successful. In connection with achieving these
objectives, CAI is committed through additional open purchase orders as of
October 24, 1997 to spend approximately $5,000,000, primarily for capital
expenditures associated with additional development of the Boston digital
transmission facilities. These commitments are to be funded in part by the
Interim Debt Financing (see Note 4).
The Company's operating plans, including digital video, two-way
voice and data, Internet and Intranet access services and testing, will require
additional funding. Such additional funds may take the form of debt or equity
securities issuances, borrowings under loan arrangements or sales of assets
including channel rights or wireless cable systems. CAI's ability to engage in
financings, asset sales or acquisition transactions is limited by the
contractual arrangements entered into with the BANX Partnership (defined
below), the Interim Debt Lenders (defined below) or the Investor (defined
below). Significant transactions likely will require the prior consent of one
or all of such parties. In addition, the Company's 12.25% Senior Notes due 2002
impose certain restrictions on the incurrence of additional debt and on the
ability of CAI to effect asset sales.
NOTE 2. LITIGATION
SHAREHOLDERS' CLASS ACTION
During the year ended March 31, 1997, the Company was named in six
class action lawsuits, each alleging various violations of the federal
securities laws. These actions were consolidated into one lawsuit entitled
IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES LITIGATION (96-CV-1857) (the
"Securities Lawsuit"), which is currently pending in the United States
District Court for the Northern District of New York. The Securities
Lawsuit is in its preliminary stages. The amended, consolidated complaint,
which names the Company and certain officers and directors of CAI as
defendants, alleges a variety of violations of the antifraud provisions of
the federal securities laws by the aforementioned defendants.
The defendants filed a motion to dismiss, which motion was heard
by the Northern District of New York on October 17, 1997. While the motion is
pending, all other deadlines affecting motions and discovery have been
postponed. The Company and the individual defendants continue to contest the
Securities Lawsuit vigorously and believe it is entirely without merit.
Accordingly, management believes that this lawsuit will not have a material
adverse effect on the Company's earnings, financial condition, or liquidity.
OTHER LITIGATION
The Company is involved in various claims and legal actions arising in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's earnings, financial condition or liquidity.
NOTE 3. INVESTMENT IN CS
The Company's investment in CS reflects an equity loss of $12,540,000
(based on CAI's pro-rata share of CS's net loss of $24,754,000 for the six-
month period ended June 30, 1997) along with $1,200,000 of amortization of the
goodwill associated with this investment.
<PAGE>
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENT IN CS (CONTINUED)
The following is an unaudited condensed consolidated balance sheet of CS
derived from its Form 10-Q as of June 30, 1997:
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $102,844,000
Other current assets 1,826,000
Systems and equipment, net 40,624,000
Wireless channel rights, net 170,969,000
Goodwill, net of accumulated amortization 50,108,000
Net assets held for sale 4,609,000
Debt issuance costs, net 12,651,000
-----------
Total Assets $383,631,000
===========
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 4,448,000
FCC Auction payable 5,256,000
Other liabilities 624,000
Debt 270,548,000
Deferred income taxes 2,715,000
Common stock and paid-in-capital 154,528,000
Accumulated deficit (54,488,000)
-----------
Total Liabilities and Equity $383,631,000
===========
</TABLE>
The following are unaudited condensed consolidated statements of
operations of CS derived from its June 30, 1997 Form 10-Q for the periods
presented:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, 1997 June 30, 1997
--------------- ---------------
<S> <C> <C>
Revenues $ 6,822,000 $ 13,500,000
----------- ------------
Operating expenses:
Systems operations 3,657,000 7,352,000
General and administrative 3,959,000 7,774,000
Depreciation and amortization 6,705,000 13,290,000
----------- ------------
Total operating expenses 14,321,000 28,416,000
----------- ------------
Operating loss ( 7,499,000) ( 14,916,000)
Interest income 1,432,000 2,882,000
Interest expense (8,093,000) (16,089,000)
Other 655,000 655,000
----------- ------------
Loss before income tax benefit (13,505,000) (27,468,000)
Income tax benefit 1,357,000 2,714,000
----------- ------------
Net loss $(12,148,000) $(24,754,000)
=========== ============
</TABLE>
<PAGE>
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INTERIM DEBT FINANCING
On June 6, 1997, the Company consummated a $30 million interim credit
facility (the "F/C Credit Facility") provided by Foothill Capital Corporation
and affiliates of Canyon Capital Management, L.P. (the "Interim Debt Lenders").
The F/C Credit Facility is governed by the terms of Loan and Security Agreement
dated as of May 16, 1997 (the "LSA"), and is comprised of $25 million of term
debt, of which approximately $11.1 million was outstanding at September 30,
1997, and a $5 million revolving loan, none of which was outstanding at
September 30, 1997.
The LSA provides that the term debt bears interest at 13% per annum. So
long as the Company is not in default of its obligations under the LSA, the
Company can elect to have one-half of the interest on the term debt accrue and
be added to the principal amount outstanding on the term debt. The remaining
portion of the term debt interest is payable monthly in arrears. Since the
June 6th closing, the Company has elected to have one-half of the term debt
interest accrue and be added to the principal amount outstanding. The term
debt matures on March 1, 1999, at which time all accrued and unpaid interest on
and principal of the outstanding amount of the term debt shall be due and
payable in full.
The $5 million revolving loan bears interest at four and three-quarters
percent above the Reference Rate, as announced from time to time by Norwest
Bank. Principal and interest on the revolving loan is payable monthly, and the
revolving loan expires on March 1, 1999.
The F/C Credit Facility is collateralized by a pledge of the assets of
CAI, including the stock of its wholly-owned subsidiaries, certain investments
held by CAI and a pledge of the stock of CS Wireless held by CAI. In
connection with the closing of the F/C Credit Facility, the Company was
required to effect certain corporate restructurings in an effort to increase
the flexibility and options available to the Interim Debt Lenders with respect
to their collateral position.
In addition to $1.5 million in cash fees payable to the Interim Debt
Lenders at the closing of the F/C Credit Facility and the fees and expenses
(including fees and expenses of counsel and special FCC counsel to the Interim
Debt Lenders) incurred in connection therewith, CAI was also required to (i)
pay an additional $1.5 million fee, evidenced by a two-year promissory note
bearing interest at 14% per annum (the "Fee Note"), which interest shall accrue
and be payable in full at maturity, and (ii) issue warrants to purchase CAI
common stock at any time between the loan closing and the fifth anniversary of
the closing. The warrants entitle the holders thereof to purchase, in the
aggregate, that number of shares of CAI common stock equal to the quotient of
(i) the maximum amount outstanding (including principal and interest) on the
Fee Note, DIVIDED BY (ii) the lowest of (A) $1.90 per share, or (B) the lowest
price per share of CAI common stock (or its equivalent) that CAI receives in
connection with any new capital investment, merger, strategic partnership,
joint venture or other significant corporate transaction, which makes available
to CAI in excess of $50 million or following certain specified transactions.
The warrants contain certain anti-dilution provisions and registration rights,
and have been allocated among the Interim Debt Lenders.
The availability of loans under the F/C Credit Facility is based upon the
achievement by CAI of certain operational benchmarks. In addition, the Company
is required to satisfy certain post-closing conditions primarily relating to
the Company's corporate structure. The post-closing restructuring was required
to be completed on or before September 4, 1997. On September 4, 1997, the
Company delivered evidence of all actions taken in furtherance of the
restructuring. Concurrently, the Company presented materials demonstrating
achievement by CAI of the initial operational benchmark and the Company
requested $5 million of funds. Following an initial review of the CAI
materials, the Interim Debt Lenders informed CAI that it was not in complete
compliance with the requirements of the LSA with respect to the post-closing
restructuring matters. On September 24, 1997, the Interim Debt Lenders waived
such compliance to complete their review of such materials.
Pursuant to a waiver agreement (the "First Waiver Agreement"), the
Interim Debt Lenders advanced $1 million to the Company under the revolving
loan on September 25, 1997. The First Waiver Agreement also suspended the
requirement that any outstanding balance on the revolving loan be repaid out of
the daily cash receipts of the Company, and permitted CAI to sell identified
non-core assets. In exchange for the waiver, CAI was required to pay a $75,000
fee, which amount was added to the principal of the Fee Note, and agree to a 2%
per annum increase in the revolving loan rate of interest for the $1 million
advanced thereunder. Additionally, CAI was required to deliver to the Interim
Debt Lenders a general release, which release was contained in the First Waiver
Agreement.
The Interim Debt Lenders informed the Company that they would continue
their review of the F/C Credit Facility and that a term sheet outlining new or
modified terms for the continuing relationship would be distributed to CAI
during the waiver period. No term sheet or other indication of modifications
to F/C Credit Facility was delivered and a continuing waiver was entered into
as of October 10, 1997 (the "Second Waiver Agreement").
In addition to the aforementioned, the Second Waiver Agreement provided
CAI with a term loan advance of $1.347 million on October 14, 1997, and an
additional term loan advance of $1.65 million on October 24, 1997. In exchange
for the extended waiver, in the Second Waiver Agreement CAI agreed to a three
percent (3%) per annum interest rate increase on all outstanding obligations
owing by CAI to the Interim Debt Lenders during the waiver period, which also
replaced the 2% rate increase on the revolving loan advance under the First
Waiver Agreement. The Second Waiver Agreement imposed additional, and/or
modified existing, negative covenants relating to the sale of assets, certain
fundamental changes to the Company and the Company's ability to incur
additional indebtedness. The Interim Debt Lenders informed CAI that they were
continuing their review of the F/C Credit Facility. In the absence of a
proposed term sheet for new or modified terms, a further continuing waiver was
executed (the "Third Waiver Agreement"), effective as of October 31, 1997,
extending the waiver of compliance with the specified provisions of the LSA
until November 14, 1997.
Pursuant to the Third Waiver Agreement, $1 million was advanced to the
Company in exchange for a continuation of the terms of the Second Waiver
Agreement, including the increased interest rate, imposition of additional
and/or modified existing negative covenants, and a general release. The Third
Waiver indicated that the waiver period was intended to permit the Interim Debt
Lenders to continue to analyze various aspects of the F/C Credit Facility, and
attempt to negotiate a mutually agreeable resolution of the identified non-
compliance with CAI. The Third Waiver Agreement expired on November 14, 1997
and the parties are currently in good faith negotiations with respect to a
fourth waiver agreement.
In this connection, the Interim Debt Lenders have informed the Company of
additional conditions upon which they would continue to lend money to the
Company under the LSA. The Interim Debt Lenders set forth a number of
outstanding issues relating to the Company's business, to which the Company has
responded in full. Following discussions regarding the outstanding issues, the
Interim Debt Lenders have proposed a fourth waiver agreement (the "Fourth
Waiver Agreement"), which, if signed, will be effective as of November 14,
1997, through December 5, 1997. In addition to providing the Company with a
waiver of compliance of various provisions of the LSA, the Fourth Waiver
Agreement requires CAI to achieve certain operational benchmarks on or before
December 5, 1997, in certain instances, and December 31, 1997, in other
instances.
The Company had originally intended that the full $30 million F/C Credit
Facility would allow CAI to meet its cash requirements through the end of
calendar 1997. As a result of the issues giving rise to the various waiver
agreements, the Company has not had available to it the entire amount
contemplated by the LSA. In an effort to satisfy its cash requirements since
late September 1997, the Company has increased its cost-cutting efforts,
curtailed operations and sold approximately $1.1 million of assets not used or
useful in the Company's operations.
The Company also has been actively seeking to replace the F/C Credit
Facility with another secured credit facility and to explore additional sources
of capital. To assist the Company with this project, CAI retained Donaldson,
Lufkin & Jenrette Securities Corporation on June 20, 1997 to act as a financial
advisor to the Company.
On November 14, 1997, the Company signed a commitment letter with an
existing investor (the "Investor") to purchase from the Company up to $25
million of senior secured notes pursuant to the terms of a new secured credit
facility (the "Refinancing Facility"). The Company is currently discussing
with the Investor the possibility of increasing the Refinancing Facility by $5
million and having the Investor purchase the F/C Credit Facility. Under the
terms of the commitment letter for the Refinancing Facility, the Investor has
agreed to advance $25 million to the Company at closing, which the Company
believes shall occur not later than November 26, 1997.
The Refinancing Facility will bear interest at 13% per annum, and will be
secured by a lien on all of the assets of the Company, including its stock in
CS Wireless Systems, Inc. and its interest in TelQuest Satellite Services LLC,
in substantially identical fashion as the F/C Credit Facility. The Company
plans to use the proceeds of the loan to repay all outstanding amounts
currently owing to the Interim Debt Lenders (approximately $17.5 million) and
the balance for general corporate purposes and to pay fees and expenses of the
Refinancing Facility transaction. The commitment letter provides that the
Refinancing Facility will be subject to covenants that are usual and customary
for a transaction of this type. The closing of the loans is subject to a number
of usual and customary conditions, including the successful completion of a due
diligence investigation of the Company by the Investor.
There can be no assurance that the Company will be able to negotiate the
Fourth Waiver Agreement on terms and conditions satisfactory to the Company.
If the Fourth Waiver Agreement is entered into by the parties, there can be no
assurance that the Company will be able to achieve the operational benchmarks
currently being discussed among the parties, or, if such benchmarks are
achieved, that the Interim Debt Lenders will advance additional funds under the
F/C Credit Facility. Furthermore, there can be no assurance that the
transactions contemplated by the commitment letter between the Company and the
Investor will be consummated, and if consummated, there can be no assurance
that all of the funds contemplated by the commitment letter will be made
available to the Company, or that additional funds will be available to the
Company from the Investor.
NOTE 5. SIGNIFICANT EVENTS
TELQUEST SATELLITE SERVICES
On August 4, 1997, the Company entered into an agreement with TelQuest
Communications, Inc. ("TelQuest"), a company controlled by Mr. Jared E.
Abbruzzese, Chairman and Chief Executive Officer of CAI, and CS to create a
joint venture, TelQuest Satellite Services LLC ("TSS"). TSS was created to
develop and operate satellite systems utilizing C-band and Ku-band satellite
capacity to provide digital video programming to MMDS and hard-wire cable
operators and other users through head-end and direct-to-home services.
Pursuant to the terms of an affiliation agreement between TSS and the Company,
the Company will receive digital video programming for its various markets,
when and as it launches digital video services, in exchange for payment of a
monthly fee based on the number of subscribers receiving the service. The
affiliation agreement alleviates the need for CAI to construct a digital
compression center in any of its markets in which it may launch a digital video
service. The Company expects to use the TSS programming in Boston in
connection with the launch of its first digital video service.
In connection with the formation of TSS, CAI agreed to contribute
$2,500,000 in cash and lease to TSS $2,500,000 of equipment at a nominal rental
amount under a five-year renewable lease in exchange for a minority interest
in TSS. Upon the achievement of certain benchmarks, TSS is required to
purchase the equipment from the Company at not less than its then-current fair
market value. The cash portion of the contribution is payable in installments,
the first of which was paid on August 4, 1997 in the amount of $711,744, and
included principal and accrued interest from an investment by the Company in
TelQuest in March 1997. The balance of the cash portion is payable in four
equal quarterly installments of $447,064, the first of which was paid on
September 1, 1997.
CAI DATA SYSTEMS
CAI Data Systems, Inc. ("Data Systems"), a subsidiary of CAI, announced on
July 23, 1997 that it had filed an application with the Federal Communications
Commission ("FCC") to construct, launch and operate a Ka-band satellite. The
application, which is currently pending before the FCC, contemplates a July
1999 launch date for the satellite. The estimated cost of constructing and
launching the satellite is approximately $292,500,000, which Data Systems plans
to finance through the issuance of its own debt and/or equity securities.
There can be no assurance that Data Systems' application will be granted by the
FCC or, if granted, that Data Systems will be able to secure financing
necessary to construct and launch a satellite.
REFINANCING FACILITY
On November 14, 1997, the Company signed a commitment letter with the
Investor to purchase from the Company up to $25 million of senior secured notes
pursuant to the terms of the Refinancing Facility. The Company is currently
discussing with the Investor the possibility of increasing the Refinancing
Facility by $5 million and having the Investor purchase the F/C Credit
Facility. Under the terms of the commitment letter for the Refinancing
Facility, the Investor has agreed to advance $25 million to the Company at
closing, which the Company believes shall occur not later than November 26,
1997.
The Refinancing Facility will bear interest at 13% per annum, and will be
secured by a lien on all of the assets of the Company, including its stock in
CS Wireless Systems, Inc. and its interest in TelQuest Satellite Services LLC,
in substantially identical fashion as the F/C Credit Facility. The Company
plans to use the proceeds of the loan to repay all outstanding amounts
currently owing to the Interim Debt Lenders (approximately $17.5 million) and
the balance for general corporate purposes and to pay fees and expenses of the
Refinancing Facility transaction. The commitment letter provides that the
Refinancing Facility will be subject to covenants that are usual and customary
for a transaction of this type. The closing of the loans is subject to a number
of usual and customary conditions, including the successful completion of a due
diligence investigation of the Company by the Investor.
There can be no assurance that the transactions contemplated by the
commitment letter between the Company and the Investor will be consummated, and
if consummated, there can be no assurance that all of the funds contemplated by
the commitment letter will be made available to the Company, or that additional
funds will be available to the Company from the Investor.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 ("SFAS 128") -
"Earnings Per Share." This statement which is effective for financial
statements issued for periods ending after December 15, 1997, simplifies the
computation of earnings per share (EPS) by replacing the "primary" EPS
requirements with a "basic" EPS computation based upon weighted-average shares
outstanding. This new standard requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Due to the Company's net losses, the loss per
share amounts included in the accompanying Statements of Operations would not
differ from the basic or the dilutive loss per share amounts calculated under
SFAS 128.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", which was issued in June 1997 is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
believes that it does not have a significant amount of comprehensive income
(loss) as defined, if any. Accordingly, the Company believes that this
statement will not have a material effect on CAI's future financial statement
presentations.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was also issued. This pronouncement is effective for fiscal years
beginning after December 15, 1997 and requires disclosures about operating
segments and enterprise-wide disclosures about products and services,
geographic areas and major customers. Effective April 1, 1998, the Company
will comply with the requirements of SFAS 131 and make the necessary
disclosures.
NOTE 7. SUBSEQUENT EVENTS
Reference is made to the discussion regarding the Interim
Debt Financing contained in Note 4 above.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The statements contained in this Quarterly Report on Form 10-Q, including
the exhibits hereto, relating to the Company's future operations may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results of the Company may differ
materially from those in the forward-looking statements and may be affected by
a number of factors including the availability of new strategic partners and
their willingness to enter into arrangements with CAI, the terms of such
arrangements, the ability of CAI to achieve the operating benchmarks necessary
to receive the balance of the funds contemplated by the F/C Credit Facility
(defined below), the successful consummation of the Refinancing Facility
(defined below), the successful launch of a digital MMDS system, the receipt of
regulatory approvals for alternative uses of its MMDS spectrum, the success of
CAI's trials in various of its markets, the commercial viability of any
alternative use of MMDS spectrum, consumer acceptance of any new products
offered or to be offered by CAI, subscriber equipment availability, tower space
availability, absence of interference and the ability of the Company to
redeploy or sell excess equipment, the assumptions, risks and uncertainties set
forth below in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere herein, as well as other
factors contained herein and in the Company's other securities filings.
BUSINESS DEVELOPMENTS
BOSTON DIGITAL PROJECT
In Boston, Massachusetts, the Company intends to commercially launch its
digital subscription television service and to provide high speed Internet
access during late 1997/early 1998. The digital programming signals will
enable the Company to deliver laser disc picture quality as well as CD quality
sound. Furthermore, the Company anticipates offering its subscribers more than
70 channels of video programming, which the Company believes will be
competitive with other subscription television providers in this market. The
Internet service to be offered will have the capacity to transmit data at
speeds of up to 27 Mbps, many times faster than traditional telephone lines.
The initial high speed Internet service offering will be one-way, utilizing a
telephony return path. There can be no assurance, however, that the Company
will be able to successfully launch and operate a digital subscription video
business in this market, nor can there be any assurance that the Company will
be able to successfully deploy, in a commercial manner, an Internet access
service over its MMDS spectrum in Boston or any other market in which it may
seek to initiate such a service.
TELQUEST SATELLITE SERVICES
On August 4, 1997, the Company entered into an agreement with TelQuest
Communications, Inc. ("TelQuest"), a company controlled by Mr. Jared E.
Abbruzzese, Chairman and Chief Executive Officer of CAI, and CS to create a
joint venture, TelQuest Satellite Services LLC ("TSS"). TSS was created to
develop and operate satellite systems utilizing C-band and Ku-band satellite
capacity to provide digital video programming to MMDS and hard-wire cable
operators and other users through head-end and direct-to-home services.
Pursuant to the terms of an affiliation agreement between TSS and the Company,
the Company will receive digital video programming for its various markets,
when and as it launches digital video services, in exchange for payment of a
monthly fee based on the number of subscribers receiving the service. The
affiliation agreement alleviates the need for CAI to construct a digital
compression center in any of its markets in which it may launch a digital video
service. The Company expects to use the TSS programming in Boston in connection
with the launch of its first digital video service.
In connection with the formation of TSS, CAI agreed to contribute
$2,500,000 in cash and lease to TSS $2,500,000 of equipment at a nominal rental
amount under a five-year renewable lease in exchange for a minority interest
in TSS. Upon the achievement of certain benchmarks, TSS is required to
purchase the equipment from the Company at not less than its then-current fair
market value. The cash portion of the contribution is payable in installments,
the first of which was paid on August 4, 1997 in the amount of $711,744, and
included principal and accrued interest from an investment by the Company in
TelQuest in March 1997. The balance of the cash portion will be payable in
four equal quarterly installments of $447,064, the first of which was paid by
the Company on September 1, 1997.
CAI DATA SYSTEMS
CAI Data Systems, Inc. ("Data Systems"), a subsidiary of CAI, announced on
July
23, 1997 that it had filed an application with the Federal Communications
Commission ("FCC") to construct, launch and operate a Ka-band satellite. The
application, which is currently pending before the FCC, contemplates a July
1999 launch date for the satellite. The estimated cost of constructing and
launching the satellite is approximately $292,500,000, which Data Systems plans
to finance through the issuance of its own debt and/or equity securities.
There can be no assurance that Data Systems' application will be granted by the
FCC or if granted that data systems will be able to secure financing necessary
to construct and launch a satellite.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED SEPTEMBER 30, 1997
For the six months ended September 30, 1997, cash and cash equivalents
decreased by $9,611,000. Cash provided from financing activities of $4,818,000
included the proceeds from the S/C Credit Facility (defined below), net of fees.
Cash utilized by operations of $22,926,000 included the loss for the quarter of
$57,611,000 reduced for non-cash expenditures including depreciation and
amortization totaling $15,907,000 and the $13,740,000 equity loss related to
the CS investment, and further offset by a $2,507,000 increase in accruals
(primarily interest).
The Company's capital expenditures during the six months ended September
30, 1997 included the purchase of $5,225,000 in equipment and $1,762,000 in
wireless channel rights.
INTERIM DEBT FINANCING
On June 6, 1997, the Company consummated a $30 million interim credit
facility (the "F/C Credit Facility") provided by Foothill Capital Corporation
and affiliates of Canyon Capital Management, L.P. (the "Interim Debt Lenders").
The F/C Credit Facility is governed by the terms of Loan and Security Agreement
dated as of May 16, 1997 (the "LSA"), and is comprised of $25 million of term
debt, of which approximately $11.1 million was outstanding at September 30,
1997, and a $5 million revolving loan, none of which was outstanding at
September 30, 1997.
The LSA provides that the term debt bears interest at 13% per annum. So
long as the Company is not in default of its obligations under the LSA, the
Company can elect to have one-half of the interest on the term debt accrue and
be added to the principal amount outstanding on the term debt. The remaining
portion of the term debt interest is payable monthly in arrears. Since the
June 6th closing, the Company has elected to have one-half of the term debt
interest accrue and be added to the principal amount outstanding. The term
debt matures on March 1, 1999, at which time all accrued and unpaid interest on
and principal of the outstanding amount of the term debt shall be due and
payable in full.
The $5 million revolving loan bears interest at four and three-quarters
percent above the Reference Rate, as announced from time to time by Norwest
bank. Principal and interest on the revolving loan is payable monthly, and the
revolving loan expires on March 1, 1999.
The F/C Credit Facility is collateralized by a pledge of the assets of
CAI, including the stock of its wholly-owned subsidiaries, certain investments
held by CAI and a pledge of the stock of CS Wireless held by CAI. In
connection with the closing of the F/C Credit Facility, the Company was
required to effect certain corporate restructurings in an effort to increase
the flexibility and options available to the Interim Debt Lenders with respect
to their collateral position.
In addition to $1.5 million in cash fees payable to the Interim Debt
Lenders at the closing of the F/C Credit Facility and the fees and expenses
(including fees and expenses of counsel and special FCC counsel to the Interim
Debt Lenders) incurred in connection therewith, CAI was also required to (i)
pay an additional $1.5 million fee, evidenced by a two-year promissory note
bearing interest at 14% per annum (the "Fee Note"), which interest shall accrue
and be payable in full at maturity, and (ii) issue warrants to purchase CAI
common stock at any time between the loan closing and the fifth anniversary of
the closing. The warrants entitle the holders thereof to purchase, in the
aggregate, that number of shares of CAI common stock equal to the quotient of
(i) the maximum amount outstanding (including principal and interest) on the
Fee Note, DIVIDED BY (ii) the lowest of (A) $1.90 per share, or (B) the lowest
price per share of CAI common stock (or its equivalent) that CAI receives in
connection with any new capital investment, merger, strategic partnership,
joint venture or other significant corporate transaction, which makes available
to CAI in excess of $50 million or following certain specified transactions.
The warrants contain certain anti-dilution provisions and registration rights,
and have been allocated among the Interim Debt Lenders.
The availability of loans under the F/C Credit Facility is based upon the
achievement by CAI of certain operational benchmarks. In addition, the Company
is required to satisfy certain post-closing conditions primarily relating to
the Company's corporate structure. The post-closing restructuring was required
to be completed on or before September 4, 1997. On September 4, 1997, the
Company delivered evidence of all actions taken in furtherance of the
restructuring. Concurrently, the Company presented materials demonstrating
achievement by CAI of the initial operational benchmark and the Company
requested $5 million of funds. Following an initial review of the CAI
materials, the Interim Debt Lenders informed CAI that it was not in complete
compliance with the requirements of the LSA with respect to the post-closing
restructuring matters. On September 24, 1997, the Interim Debt Lenders waived
such compliance to complete their review of such materials.
Pursuant to a waiver agreement (the "First Waiver Agreement"), the
Interim Debt Lenders advanced $1 million to the Company under the revolving
loan on September 25, 1997. The First Waiver Agreement also suspended the
requirement that any outstanding balance on the revolving loan be repaid out of
the daily cash receipts of the Company, and permitted CAI to sell identified
non-core assets. In exchange for the waiver, CAI was required to pay a $75,000
fee, which amount was added to the principal of the Fee Note, and agree to a 2%
per annum increase in the revolving loan rate of interest for the $1 million
advanced thereunder. Additionally, CAI was required to deliver to the Interim
Debt Lenders a general release, which release was contained in the First Waiver
Agreement.
The Interim Debt Lenders informed the Company that they would continue
their review of the F/C Credit Facility and that a term sheet outlining new or
modified terms for the continuing relationship would be distributed to CAI
during the waiver period. No term sheet or other indication of modifications
to F/C Credit Facility was delivered and a continuing waiver was entered into
as of October 10, 1997 (the "Second Waiver Agreement").
In addition to the aforementioned, the Second Waiver Agreement provided
CAI with a term loan advance of $1.347 million on October 14, 1997, and an
additional term loan advance of $1.65 million on October 24, 1997. In exchange
for the extended waiver, in the Second Waiver Agreement CAI agreed to a three
percent (3%) per annum interest rate increase on all outstanding obligations
owing by CAI to the Interim Debt Lenders during the waiver period, which also
replaced the 2% rate increase on the revolving loan advance under the First
Waiver Agreement. The Second Waiver Agreement imposed additional, and/or
modified existing, negative covenants relating to the sale of assets, certain
fundamental changes to the Company and the Company's ability to incur
additional indebtedness. The Interim Debt Lenders informed CAI that they were
continuing their review of the F/C Credit Facility. In the absence of a
proposed term sheet for new or modified terms, a further continuing waiver was
executed (the "Third Waiver Agreement"), effective as of October 31, 1997,
extending the waiver of compliance with the specified provisions of the LSA
until November 14, 1997.
Pursuant to the Third Waiver Agreement, $1 million was advanced to the
Company in exchange for a continuation of the terms of the Second Waiver
Agreement, including the increased interest rate, imposition of additional
and/or modified existing negative covenants, and a general release. The Third
Waiver indicated that the waiver period was intended to permit the Interim Debt
Lenders to continue to analyze various aspects of the F/C Credit Facility, and
attempt to negotiate a mutually agreeable resolution of the identified non-
compliance with CAI. The Third Waiver Agreement expired on November 14, 1997
and the parties are currently in good faith negotiations with respect to a
fourth waiver agreement.
In this connection, the Interim Debt Lenders have informed the Company of
additional conditions upon which they would continue to lend money to the
Company under the LSA. The Interim Debt Lenders set forth a number of
outstanding issues relating to the Company's business, to which the Company has
responded in full. Following discussions regarding the outstanding issues, the
Interim Debt Lenders have proposed a fourth waiver agreement (the "Fourth
Waiver Agreement"), which, if signed, will be effective as of November 14,
1997, through December 5, 1997. In addition to providing the Company with a
waiver of compliance of various provisions of the LSA, the Fourth Waiver
Agreement requires CAI to achieve certain operational benchmarks on or before
December 5, 1997, in certain instances, and December 31, 1997, in other
instances.
The Company had originally intended that the full $30 million F/C Credit
Facility would allow CAI to meet its cash requirements through the end of
calendar 1997. As a result of the issues giving rise to the various waiver
agreements, the Company has not had available to it the entire amount
contemplated by the LSA. In an effort to satisfy its cash requirements since
late September 1997, the Company has increased its cost-cutting efforts,
curtailed operations and sold approximately $1.1 million of assets not used or
useful in the Company's operations.
The Company also has been actively seeking to replace the F/C Credit
Facility with another secured credit facility and to explore additional sources
of capital. To assist the Company with this project, CAI retained Donaldson,
Lufkin & Jenrette Securities Corporation on June 20, 1997 to act as a financial
advisor to the Company.
On November 14, 1997, the Company signed a commitment letter with an
existing investor (the "Investor") to purchase from the Company up to $25
million of senior secured notes pursuant to the terms of a new secured credit
facility (the "Refinancing Facility"). The Company is currently discussing
with the Investor the possibility of increasing the Refinancing Facility by $5
million and having the Investor purchase the F/C Credit Facility. Under the
terms of the commitment letter for the Refinancing Facility, the Investor has
agreed to advance $25 million to the Company at closing, which the Company
believes shall occur not later than November 26, 1997.
The Refinancing Facility will bear interest at 13% per annum, and will be
secured by a lien on all of the assets of the Company, including its stock in
CS Wireless Systems, Inc. and its interest in TelQuest Satellite Services LLC,
in substantially identical fashion as the F/C Credit Facility. The Company
plans to use the proceeds of the loan to repay all outstanding amounts
currently owing to the Interim Debt Lenders (approximately $17.5 million) and
the balance for general corporate purposes and to pay fees and expenses of the
Refinancing Facility transaction. The commitment letter provides that the
Refinancing Facility will be subject to covenants that are usual and customary
for a transaction of this type. The closing of the loans is subject to a number
of usual and customary conditions, including the successful completion of a due
diligence investigation of the Company by the Investor.
There can be no assurance that the Company will be able to negotiate the Fourth
Waiver Agreement on terms and conditions satisfactory to the Company. If the
Fourth Waiver Agreement is entered into by the parties, there can be no
assurance that the Company will be able to achieve the operational benchmarks
currently being discussed among the parties, or, if such benchmarks are
achieved, that the Interim Debt Lenders will advance additional funds under the
F/C Credit Facility. Furthermore, there can be no assurance that the
transactions contemplated by the commitment letter between the Company and the
Investor will be consummated, and if consummated, there can be no assurance
that all of the funds contemplated by the commitment letter will be made
available to the Company, or that additional funds will be available to the
Company from the Investor.
AMENDED RELATIONSHIP WITH BELL ATLANTIC AND NYNEX
Through a series of amendments to the investment and business
relationship agreements among the Company and affiliates of Bell Atlantic
Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"), the Company has
been granted the right to purchase the $30,000,000 of BANX Term Notes,
$70,000,000 of Senior Preferred Stock and BANX Warrants (collectively the "CAI
Securities"), for an aggregate purchase price of $40,000,000 and the issuance
of 100,000 shares of a series of CAI junior preferred stock having a
liquidation value of $30,000,000. The right to purchase the CAI Securities has
been granted to CAI through February 28, 1998 (the "Option Period"), and CAI
must give notice to Bell Atlantic and NYNEX of its election to exercise this
right no later than November 21, 1997. Upon the consummation of such purchase,
the BR Agreement would terminate, eliminating CAI's strategic relationship with
the BANX Affiliates including all restrictions relating thereto. The Company
is actively seeking a new strategic partner to replace the BANX Partnership and
to provide the necessary interim and long-term funding to carry out CAI's short
and long term objectives. CAI's ability to locate such strategic partner(s) to
replace BANX may be limited by the BANX Partnership's willingness to negotiate
the terms and conditions of the purchase of the CAI Securities. In the event
that CAI does not deliver, on or before November 21, 1997, a notice of election
to exercise its right to purchase the CAI Securities, Bell Atlantic and NYNEX
have the right to sell the CAI Securities. If CAI does not purchase the CAI
Securities on or before February 28, 1998, the BR Agreement will be reinstated
with respect to each market contemplated thereby with the exception of Boston,
MA, Pittsburgh, PA and Albany, Syracuse and Buffalo, NY.
The amendments also relieve CAI from any of its obligations under the BR
Agreement with respect to its Boston, MA, Pittsburgh, PA and Albany, Syracuse
and Buffalo, NY markets with the same effect as such markets had never been
subject to the BR Agreement, and suspend, through February 28, 1998, CAI's
obligations under the BR Agreement with respect to the remaining markets
contemplated by the BR Agreement. Upon consummation of the purchase of the CAI
Securities, the BR Agreement will terminate as to such remaining markets. In
addition, Bell Atlantic and NYNEX have granted to CAI an irrevocable proxy
during the Option Period with respect to the approximately 10% interest held by
Bell Atlantic and NYNEX in CS, and have agreed to transfer such interest to CAI
upon consummation of a purchase of the CAI Securities held by Bell Atlantic and
NYNEX.
GOING CONCERN
CAI's recurring losses, restrictions on its ability to obtain additional
financing, and substantial commitments raise substantial doubt about the
continuation of CAI as a going concern. For the last half of the fiscal year
ending March 31, 1998, the Company is obligated to pay approximately $4,300,000
for minimum license fees and lease payments, approximately $1,100,000 in
remaining MMDS license auction fees and to fund current operating costs.
On a long-term basis, CAI has substantial indebtedness which,
beginning in fiscal year 1999, will include significant debt service
requirements and senior preferred stock dividend payments. As of September 30,
1997, CAI has outstanding consolidated long-term debt of $325,717,000 and
senior preferred stock including accrued dividends totaling $95,096,000.
The Company's business strategy has been to explore digital
wireless cable systems for its MMDS subscription television services and
alternative uses of its MMDS spectrum for a variety of applications, including
data and voice transmission such as Internet access and telephony delivery
services. In management's opinion, this strategy will help meet the current and
perceived future competition and, in relation to obtaining a new strategic
partner, show the flexibility and increased value of the Company's MMDS
spectrum, if such exploration is successful. In connection with achieving these
objectives, CAI is committed through additional open purchase orders as of
October 24, 1997 to spend approximately $5,000,000, primarily for capital
expenditures associated with additional development of the Boston digital
transmission facilities. These commitments are to be funded in part by the
Interim Debt Financing (see Note 4 to the Notes to Consolidated Financial
Statements).
The Company's operating plans, including digital video, two-way
voice and data, Internet and Intranet access services and testing, will require
additional funding. Such additional funds may take the form of debt or equity
securities issuances, borrowings under loan arrangements or sales of assets
including channel rights or wireless cable systems. CAI's ability to engage in
financings, asset sales or acquisition transactions is limited by the
contractual arrangements entered into with the BANX Partnership, the Interim
Debt Lenders or the Investor. Significant transactions likely will require the
prior consent of one or all of such parties. In addition, the Company's 12.25%
Senior Notes due 2002 impose certain restrictions on the incurrence of
additional debt and on the ability of CAI to effect asset sales.
<PAGE>
RESULTS OF OPERATIONS
SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
The Company's strategy is not to pursue analog-based television
subscriber growth while it evaluates its business opportunities in addition to
subscription television including high speed Internet and Intranet access, as
well as digital video and telephony services. The policy has had a negative
impact on the Company's subscription revenues. As of September 30, 1997, the
Company's subscriber base had decreased by approximately 19,000 to 62,500
subscribers from approximately 81,500 at September 30, 1996. Consequently,
subscriber revenues have decreased $1,811,000 and $3,025,000 for the quarter
and six months ended September 30, 1997, compared to the corresponding periods
last year.
Operating expenses were approximately $37,950,000 and $39,977,000 for the
six months ended September 30, 1997 and 1996, respectively. The decrease of
approximately $2,027,000, of which approximately $1,666,000 occurred in the
September 1997, versus 1996 quarter is primarily attributable to programming,
licensing and marketing costs which were lower as a result of the decline in
subscribers.
Interest expense was $22,930,000 and $20,305,000 for the six months ended
September 30, 1997 and 1996, respectively, and was $11,956,000 and $10,144,000
for the quarter ended September 30, 1997 and 1996, respectively, and relates
primarily to the interest recorded on the $275,000,000 of 12.25% Senior Notes
due 2002 and the $30,000,000 of 16% Term Notes issued to Bell Atlantic and
NYNEX. On June 6, 1997, the Company closed the $30,000,000 F/C Credit Facility.
Interest incurred on the amount outstanding on the F/C Credit Facility through
September 30, 1997 plus the amortization of the loan fees accounted for the
increase in interest expense.
The decrease in CAI's investment in CS Wireless, Inc. ("CS") reflects
primarily the Company's 50.7% pro rata share of the $24,754,000 net loss
reported by CS for the six months ended June 30, 1997, along with $1,200,000 of
amortization of the goodwill associated with the Company's investment compared
to an aggregate loss of $7,800,000 for the same period last year.
.
Other income, comprised primarily of interest income, for the six months
ended September 30, 1997 was $1,623,000 compared to $4,117,000 for the
comparable period last year and for the quarter ended September 30, 1997 and
1996 was $762,000 and $1,905,000, respectively. Current period interest income
on investments declined due to the use of cash in the escrow account for semi-
annual interest payments totaling approximately $33,700,000 for the prior
twelve-month period in addition to usage of the Company's unrestricted accounts
for operational requirements and capital expenditures.
The Company recorded an income tax benefit of $4,500,000 for the first
and second quarter of 1996 to offset existing deferred tax liabilities. There
is no tax benefit for the current period since there were no available deferred
tax liabilities and it is more likely than not that any benefit recorded on the
Company's current losses would not be realized in the foreseeable future.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128 ("SFAS 128") -
"Earnings Per Share." This statement which is effective for financial
statements issued for periods ending after December 15, 1997, simplifies the
computation of earnings per share (EPS) by replacing the "primary" EPS
requirements with a "basic" EPS computation based upon weighted-average shares
outstanding. This new standard requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Due to the Company's net losses, the loss per
share amounts included in the accompanying Statements of Operations would not
differ from the basic or the dilutive loss per share amounts calculated under
SFAS 128.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", which was issued in June 1997 is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
believes that it does not have a significant amount of comprehensive income
(loss) as defined, if any. Accordingly, the Company believes that this
statement will not have a material effect on CAI's future financial statement
presentations.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was also issued. This pronouncement is effective for fiscal years
beginning after December 15, 1997 and requires disclosures about operating
segments and enterprise-wide disclosures about products and services,
geographic areas and major customers. Effective April 1, 1998, the Company
will comply with the requirements of SFAS 131 and make the necessary
disclosures, as applicable.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS.
The following Exhibits are filed herewith or
incorporated by reference as indicated:
<TABLE>
<CAPTION>
Incorporation
by Reference Page
EXHIBIT NO. Description (SEE LEGEND) Refereence
------------ ----------- ------------ ----------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation [1] Exhibit 3.1
of CAI
3.2 Amended and Restated Bylaws of CAI [1] Exhibit 3.2
10.1 Affiliation Agreement as of August 4, 1997 between [2] Exhibit 10.1
CAI and TelQuest Satellite Services LLC
<dagger>11.1 Schedule Regarding Computation of Loss Per Common
Share for the Quarter Ended September 30, 1997 and
1996
<dagger>11.2 Schedule Regarding Computation of Loss Per Common
Share for the Six Months Ended September 30, 1997
and 1996
<dagger>27. Financial Data Schedule
99.1 MMDS Affiliation Agreement [3] Exhibit 99.1
</TABLE>
LEGEND
------
[1] Incorporated by reference to the exhibits to the Quarterly Report
on Form 10-Q for September 30, 1995.
[2] Incorporated by reference to the exhibits to the Quarterly Report
on Form 10-Q for June 30, 1997
[3] Incorporated by reference to the exhibit to the Current Report on
Form 8-K dated August 4, 1997
<dagger> Filed herewith.
b) REPORTS ON FORM 8-K.
Form 8-K dated August 4, 1997 was filed August 27, 1997, regarding
the following items under Item 5, Other Events:
CAI Wireless Systems, Inc. entered
into an MMDS Affiliation Agreement
with TelQuest Satellite Services
LLC, a Delaware limited liability
company owned by the Chairman of
CAI, on August 4, 1997. TelQuest
intends to develop and operate a
satellite system with CAI as
partial owner and user of this
satellite system.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ JARED E. ABBRUZZESE Chairman, Chief Executive Officer November 17, 1997
JARED E. ABBRUZZESE and Director (Principal Executive
Officer)
/S/ JAMES P. ASHMAN Executive Vice President, Chief November 17, 1997
JAMES P. ASHMAN Financial Officer and Director
(Principal Financial Officer)
/S/ ARTHUR J. MILLER Vice President and Controller November 17, 1997
ARTHUR J. MILLER (Principal Accounting Officer)
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11.1
CAI WIRELESS SYSTEMS, INC.
COMPUTATION OF LOSS PER COMMON SHARE
Quarter Ended September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
PRIMARY LOSS PER COMMON SHARE:
1 Net loss $(29,858,672) $(19,857,014)
2 Less preferred dividends (3,706,901) (3,194,747)
----------- -----------
3 Loss applicable to common shareholders $(33,565,573) $(23,051,761)
=========== ===========
4 Weighted average shares outstanding 40,540,539 40,384,787
5 Add additional shares issuable upon exercise of
outstanding stock options and warrants * - -
----------- -----------
6 Adjusted weighted average shares outstanding 40,540,539 40,384,787
=========== ===========
7 Net loss per common share (line 3 <divide> line 6) $(0.83) $(0.57)
===== =====
FULLY DILUTED LOSS PER COMMON SHARE:
8 Line 3 above $(33,565,573) $(23,051,761)
9 Add back preferred dividends 3,706,901 3,194,747
10 Add back interest, net of tax, assuming conversion of Term Notes 999,000 729,000
11 Add back interest, net of tax, assuming proceeds from
exercise of warrants and options in excess of the
20% treasury stock buyback applied against
short-term debt 1,366,000 3,673,000
----------- -----------
12 Adjusted net loss $(27,493,672) $(15,455,014)
=========== ===========
13 Weighted average shares outstanding (line 4) 40,540,539 40,384,787
14 Add additional shares issuable upon the assumed exercise
of outstanding stock options 2,195,937 1,274,134
15 Add additional shares issuable upon the assumed exercise
of BANX warrants (Term Notes and Senior Preferred Stock) 36,751,085 36,751,083
16 Add additional shares issuable upon the assumed exercise
of other warrants 2,852,453 2,235,541
17 Add Series A preferred stock (not converted until November 1996) - 115,500
18 Deduct treasury stock repurchased with proceeds from theassumed
exercise of all options and warrants (8,108,108) (8,076,957)
----------- -----------
19 Adjusted weighted average shares outstanding 74,231,906 72,684,088
=========== ===========
20 Net loss per common share (line 12 <divide> line 19) ** $(0.37) $(0.21)
===== =====
</TABLE>
* For the calculation of loss per share, the inclusion of the
assumed exercise of options and warrants is not dilutive for the periods
presented and, therefore, such assumed exercise is excluded from the per share
calculations.
** The fully diluted loss per share is anti-dilutive and is,
therefore, not presented in the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
EXHIBIT 11.2
CAI WIRELESS SYSTEMS, INC.
COMPUTATION OF LOSS PER COMMON SHARE
Six Months Ended September 30,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
PRIMARY LOSS PER COMMON SHARE:
1 Net loss $(57,610,531) $(36,477,449)
2 Less preferred dividends (7,274,859) (6,270,364)
----------- -----------
3 Loss applicable to common shareholders $(64,885,390) $(42,747,813)
=========== ===========
4 Weighted average shares outstanding 40,540,539 39,638,851
5 Add additional shares issuable upon exercise of
outstanding stock options and warrants * - -
----------- -----------
6 Adjusted weighted average shares outstanding 40,540,539 39,638,851
=========== ===========
7 Net loss per common share (line 3 <divide> line 6) $(1.60) $(1.08)
-==== =====
FULLY DILUTED LOSS PER COMMON SHARE:
8 Line 3 above $(64,885,390) $(42,747,813)
9 Add back preferred dividends 7,274,859 6,270,364
10 Add back interest, net of tax, assuming conversion of Term Notes 1,998,000 1,458,000
11 Add back interest, net of tax, assuming proceeds from
exercise of warrants and options in excess of the
20% treasury stock buyback applied against
short-term debt 2,871,000 6,300,000
----------- -----------
12 Adjusted net loss $(52,741,531) $(28,719,449)
=========== ===========
13 Weighted average shares outstanding (line 4) 40,540,539 39,638,851
14 Add additional shares issuable upon the assumed exercise
of outstanding stock options 2,195,937 1,274,134
15 Add additional shares issuable upon the assumed exercise
of BANX warrants (Term Notes and Senior Preferred Stock) 36,751,085 36,751,083
16 Add additional shares issuable upon the assumed exercise
of other warrants 2,852,453 2,235,541
17 Add Series A preferred stock (not converted until November1996) - 115,500
18 Deduct treasury stock repurchased with proceeds from the assumed
exercise of all options and warrants (8,108,108) (8,076,957)
----------- -----------
19 Adjusted weighted average shares outstanding 74,231,906 71,938,152
=========== ===========
20 Net loss per common share (line 12 <divide> line 19) ** $(0.71) $(0.40)
-==== =====
</TABLE>
* For the calculation of loss per share, the inclusion of the
assumed exercise of options and warrants is not dilutive for the periods
presented and, therefore, such assumed exercise is excluded from the per share
calculations.
** The fully diluted loss per share is anti-dilutive and is,
therefore, not presented in the Consolidated Statements of Operations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
<CAPTION>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
FINANCIAL DATA SCHEDULE
AS OF AND FOR THE SIX MONTHS ENDED SEPTEMBER
30, 1997
<S> <C>
<PERIOD-START> APR-01-1997
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 861,071
<SECURITIES> 0
<RECEIVABLES> 1,137,519
<ALLOWANCES> 372,757
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 102,347,624
<DEPRECIATION> 35,802,986
<TOTAL-ASSETS> 501,280,629
<CURRENT-LIABILITIES> 0
<BONDS> 325,716,486
95,095,593
0
<COMMON> 275,769,414
<OTHER-SE> (225,964,614)
<TOTAL-LIABILITY-AND-EQUITY> 501,280,629
<SALES> 0
<TOTAL-REVENUES> 15,386,043
<CGS> 0
<TOTAL-COSTS> 37,949,866
<OTHER-EXPENSES> 13,740,000
<LOSS-PROVISION> 426,200
<INTEREST-EXPENSE> 22,929,735
<INCOME-PRETAX> (57,610,531)
<INCOME-TAX> 0
<INCOME-CONTINUING> (57,610,531)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,610,531)
<EPS-PRIMARY> (1.60)
<EPS-DILUTED> 0
</TABLE>
