UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22888
CAI WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Connecticut 06-1324691
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
<S><C><S>
</TABLE>
18 Corporate Woods Blvd., Third Floor, Albany, NY 12211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 462-2632
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
None
<S><C><C>
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
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 ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at June 25, 1997 was approximately $47,250,000.
The number of shares of Registrant's Common Stock outstanding on June 25,
1997 was 40,540,539.
<PAGE>
PART I
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING
THE EXHIBITS HERETO, RELATING TO CAI'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 CAI'S INTERIM CREDIT
FACILITY, THE SUCCESSFUL LAUNCH OF A DIGITAL SUBSCRIPTION VIDEO BUSINESS, 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 CAI TO REDEPLOY OR
SELL EXCESS EQUIPMENT, THE ASSUMPTIONS, RISKS AND UNCERTAINTIES SET FORTH
HEREIN, INCLUDING IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS OTHER FACTORS
CONTAINED HEREIN AND IN CAI'S SECURITIES FILINGS.
ITEM 1. BUSINESS
OVERVIEW
CAI Wireless Systems, Inc. ("CAI" or the "Company") is a leading
developer, owner and operator of wireless telecommunications transport systems
utilizing Multichannel Multipoint Distribution Services ("MMDS") spectrum, in
terms of number of subscription television subscribers and number of Estimated
Total Service Area households. In CAI's 14 primary markets, there are a total
of 16,135,174 Estimated Total Service Area households, of which the Company
estimates they have the ability to serve between 70% and 90% of such homes.
Initially, the Company focused on the development of MMDS subscription
television systems in major metropolitan markets, primarily in the Northeast
and Mid-Atlantic regions of the United States. More recently, the Company has
begun to explore alternative uses of its MMDS spectrum and has pursued
development of other lines of business, including high speed Internet and
intranet access, as well as digital video and fixed wireless telephony
services. CAI had approximately 66,500 subscribers as of June 21, 1997.
MMDS subscription television programming, and other MMDS-based
telecommunications transport services, are transmitted through the air via
microwave frequencies from a central transmission facility to a small receiving
antenna at each subscriber's location, and requires a line-of-sight ("LOS")
path between the transmit point to the receive antenna. Therefore, in
communities with tall trees, hilly terrain, tall buildings or other
obstructions in the transmission path, MMDS transmission can be difficult or
impossible to receive at certain locations without the use of low power signal
repeaters (known as "beambenders") or signal boosters, which retransmit an
otherwise blocked signal over a limited area. The use of beambenders and/or
signal boosters increases the costs per subscriber.
MMDS spectrum is regulated by the Federal Communications Commission
("FCC"), which governs, among other things, the issuance, renewal, assignment,
transfer and modification of licenses necessary for MMDS systems to operate.
"MMDS" is the vernacular term used to describe CAI's business and includes both
MMDS and Multichannel Distribution Service ("MDS") channels, as well as
Instructional Television Fixed Service ("ITFS") channels. To date, the MMDS
spectrum has been licensed by the FCC for one-way video and data transmission
on an industry-wide basis. In addition, CAI has applied for and received a
variety of authorizations from the FCC for fixed, flexible use of its MMDS
spectrum in certain of CAI's markets. The Company has received from the FCC
(i) authorization for a market trial of up to 500 customers for CAI's high
speed one-way Internet access product (which uses a telephone line for the
return path) in Rochester, New York, (ii) authorization for a market trial of
up to 1,000 customers for CAI's high speed one-way Internet access product in
New York City, (iii) permanent authorization for fixed, two-way flexible use of
five channels for 16 customer sites located in and around the Boston market,
and (iv) authorization from the FCC to utilize its MMDS spectrum in Pittsburgh,
PA for a variety of tests, including the simulation of a commercial roll-out of
fixed, two-way services to customers located within a 20-mile radius of CAI's
main transmission facility in Pittsburgh. The Company has also received
developmental authorization to test fixed, flexible two-way uses on two
channels located in its Hartford, Connecticut market; however, the Company does
not have any plans to conduct any testing in this market at this time.
<PAGE>
Item 1. Business (continued)
CAI is a Connecticut corporation. Its principal executive offices are
located at 18 Corporate Woods Boulevard, 3rd Floor, Albany, New York 12211.
CAI's telephone number is (518) 462-2632. CAI also maintains offices at 101
Ponds Edge Drive, Suite 300, Chadds Ford, PA 19317, at which its
operational headquarters, including the President and Chief Operating
Officer and (beginning in July 1997) the Company's accounting department are
located, and at 2101 Wilson Boulevard, Suite 100, Arlington, VA 22201, at
which the Company's engineering and regulatory affairs departments are
located. Unless the context indicates otherwise, all references to the
"Company" or "CAI" refer collectively to CAI Wireless Systems, Inc. and its
subsidiaries.
RECENT FINANCIAL DEVELOPMENTS
CAI's recurring losses, restrictions on its ability to obtain additional
financing, and substantial commitments, raise substantial doubt about CAI
continuing as a going concern. For the year ending March 31, 1998, the Company
is obligated to pay approximately $8,500,000 in minimum license fees and
operating lease payments, approximately $1,100,000 in MMDS license auction
fees, in addition to funding operating losses. Management estimates that the
present revenue stream and cash resources available to the Company, including
amounts available to CAI under its recently-obtained credit facility (described
below), are adequate to sustain the Company's needs through December 1997.
A significant portion of CAI's current subscription television operations
and MMDS spectrum rights were acquired from various third parties in a series
of transactions consummated throughout 1995 and the first half of 1996, and,
prior to being acquired by CAI, were not operated in conjunction with one
another. Consequently, there is limited historical financial information
regarding CAI's current operations. In addition, and subject to regulatory
approval and successful completion of testing, the Company intends to expand
its business to include not only subscription video delivery, but also one-way
Internet access services and fixed, flexible two-way uses of its MMDS spectrum.
Because these alternative uses of the MMDS spectrum are in the early stages of
development, the Company has no operating history for any such alternative uses
of the MMDS spectrum, and given CAI's limited operating history, there is no
assurance that CAI can commercially deploy such alternative uses on a wide-
spread basis, that it will be able to achieve positive cash flow from any
operating activities and that it can compete successfully in the subscription
television industry or in the data transmission or telephony delivery
industries.
CAI has incurred net losses since inception (1991) of approximately $147
million through March 31, 1997 and expects to realize additional net losses on
a consolidated basis while it develops and expands its MMDS systems.
Additionally, CAI has substantial indebtedness, and beginning in 1999, will
have significant debt service requirements. As of March 31, 1997, CAI had
outstanding consolidated long-term debt of approximately $312 million, and
shareholders' equity of approximately $115 million. On June 6, 1997, the
Company closed a $30 million interim credit facility provided by Foothill
Capital Corporation and affiliates of Canyon Capital Management, L.P. (the
"Interim Debt Lenders"). The credit facility is governed by the terms of a
Loan and Security Agreement dated as of May 16, 1997 (the "LSA") and is
comprised of $25 million of two-year term debt, of which $10 million was made
available to CAI at the closing and is currently outstanding. The balance of
the term debt will be made available to CAI upon the achievement of certain
agreed-upon operational benchmarks. In addition to the term debt, there is a
two-year $5 million revolving loan, of which $3 million was made available by
the Interim Debt Lenders to CAI at the closing, with the balance of such
revolving loan to be made available upon the achievement of certain other
agreed-upon operational benchmarks. There can be no assurance that the Company
will be able to achieve the operational benchmarks or, if achieved, such
achievement will be timely, thus providing the Company with access to such loan
proceeds. As of June 24, 1997, the Company had not yet borrowed any amount
against the revolving loan. In addition to the foregoing indebtedness, CAI has
$70 million of mandatorily redeemable preferred stock outstanding having a
priority as to dividends and a liquidation preference over the Shares of Common
Stock.
Pursuant to CAI's debt instruments, CAI is restricted from incurring
additional indebtedness (except in connection with purchases of goods and
services in the ordinary course of business and other ordinary course
indebtedness permitted thereunder, granting liens to secure repayment of
indebtedness, making investments (other than investments specifically permitted
thereunder), pay dividends, dispose of assets, enter into any merger,
consolidation, reorganization, or recapitalization plan, retire long-term debt,
or make any acquisitions without the prior consent of the lenders. Further, in
accordance with the LSA, the Company is required to maintain minimal levels of
net worth and number of subscribers, and is limited with respect to the amount
of annual capital expenditures. Such debt instruments and preferred stock and
the restrictions contained therein will have several important consequences on
CAI's future operations, including, but not limited to the following: (i) CAI
will incur significant interest expense and principal repayment obligations;
(ii) CAI's ability to obtain additional financing, including the balance of
proceeds
<PAGE>
Item 1. Business (continued)
contemplated by the interim financing, in the future, as needed, may
be limited; (iii) CAI's leveraged position and the covenants contained in such
debt instruments and preferred stock could limit CAI's ability to compete as
well as its ability to expand and make capital improvements; (iv) CAI's
substantial leverage will make it more vulnerable to economic downturns, limit
its ability to withstand competitive pressures and reduce its flexibility in
responding to changing business and economic conditions; and (v) CAI's
substantial leverage will affect the extent to which the Company can implement
its plans to exploit its MMDS spectrum, including, without limitation,
development of fixed, flexible two-way alternative uses of MMDS spectrum in any
of CAI's markets. In addition, such debt instruments and the terms of such
preferred stock contain provisions that obligate CAI to redeem or offer to
purchase such securities for specified premiums in the event of a change of
control of CAI and certain similar events.
The Company is seeking longer term financing through arrangements with
strategic partner(s) interested and willing to participate with the Company in
the development of its operating systems and various alternative uses of its
MMDS spectrum. Much of the Company's business plan relating to fixed, flexible
use of the MMDS spectrum is dependent upon CAI securing a new strategic partner
to provide to CAI the necessary capital resources, as well as engineering and
other expertise, and subscribers for such flexible-use services. There can be
no assurance that the Company will be able to secure any additional financings
or strategic relationships on terms and conditions satisfactory to the Company,
if at all. Failure to obtain such financings and relationships will have a
material adverse effect on the Company. Further, there can be no assurance
that, even with additional financing, new strategic partner(s) and receipt of
all necessary regulatory authorizations, the Company will be able to launch
fixed, flexible two-way uses of its MMDS spectrum in a commercially successful
manner.
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 million of BANX Term Notes (as
defined below), $70 million of Senior Preferred Stock (as defined below) and
BANX Warrants (as defined below, and together with the BANX Term Notes and the
Senior Preferred Stock, the "CAI Securities") for an aggregate purchase price
of $40 million and the issuance of 100,000 shares of a series of CAI junior
preferred stock having a liquidation value of $30 million. 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. The
amendments also relieve CAI from any of its obligations under the BR Agreement
(as defined below) 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 Wireless, and have agreed to transfer such
interest to CAI upon consummation of a purchase of the CAI Securities held by
Bell Atlantic and NYNEX.
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.
BUSINESS AND OPERATING STRATEGIES
GENERAL. The Company, since its formation, has focused on the
development and operation of MMDS subscription television systems concentrated
in major metropolitan areas located in the northeast and mid-Atlantic regions
of the United States. With the suspension of the BR Agreement with Bell
Atlantic and NYNEX and the receipt of regulatory approvals not previously
sought by MMDS operators or granted by the FCC, the Company has begun to
explore the full capabilities of its MMDS spectrum in addition to, or in
certain CAI markets, instead of, subscription television. The Company believes
that its MMDS spectrum can be utilized as the transport system for fixed,
flexible two-way uses that eventually could be combined into a wireless full
service network-the Wireless Information Network ("BWN"). Although the Company
recognizes that there are significant regulatory, technological and financial
issues surrounding the development of such a system in any of CAI's markets,
the Company believes that BWN systems can be deployed in a reasonable manner to
develop a commercially-viable means of delivering video, voice and data
transmission services.
<PAGE>
Item 1. Business (continued)
The Company has assembled significant spectrum rights in the northeast
and mid-Atlantic regions of the United States, and is continuing to acquire
channel rights in anticipation of developing digital systems that will allow
CAI to utilize higher output power and compression technologies to increase
channel capacity. CAI originally began to acquire its spectrum capacity in
preparation for its obligations under the BR Agreement, which required CAI to
deliver a minimum number of channels in each of the markets subject to the BR
Agreement. During the Option Period, the Company intends to utilize its
significant spectrum capacity to develop systems that are capable of delivering
video, voice and data, or various combinations thereof, subject to regulatory
approval. Although the Company believes that it will be possible to offer all
three services in any given market once regulatory approval for fixed, flexible
two-way use is obtained for such market, the allocation of channels among the
various services is expected to be driven by consumer demand for such services
in the Company's markets and not all services may be offered in all markets.
The Company's initial efforts with respect to the development of fixed,
flexible two-way use of the MMDS spectrum have been limited primarily to its
Boston market and have been limited to the conduct of tests, only.
For most of its channel rights, CAI is dependent upon leases of
transmission capacity with various third-party license holders. ITFS licenses
generally are granted for a term of ten years and are subject to renewal by the
FCC. MDS licenses generally will expire on May 1, 2001 unless renewed. FCC
licenses also specify construction deadlines which, if not met, could result in
the loss of the license. Requests for additional time to construct a channel
may be filed and are subject to review pursuant to FCC rules. Certain of CAI's
ITFS channel rights are subject to pending extension requests and it is
anticipated that additional extensions will be required. There can be no
assurance that the FCC will grant any particular extension request or license
renewal request. CAI's channel leases typically cover four ITFS channels
and/or one to four MDS channels each. Under the rules of the FCC, the term of
leases for ITFS channels, which constitute up to 20 of the 33 available
wireless channels within any major MMDS market, may not exceed ten years.
There is no such restriction on MMDS leases. Following the expiration of the
initial term of a lease for ITFS channels, the leases under which CAI operates
generally provide that the ITFS license holders may negotiate for the lease of
channel capacity for one or more additional renewal terms with only CAI or its
sublessor. In addition, if a renewal agreement is not reached within a
specified time frame during which only CAI or its sublessor has the use of the
channel capacity, CAI will thereafter typically have a right of first refusal
to match any competing offers from one or more third parties. Because the ITFS
license holders have generally received their FCC licenses within the last ten
years, CAI and other similarly situated entities in the industry have had
little or no experience negotiating renewals of ITFS channel lease agreements.
CAI anticipates, however, that it will be able to negotiate additional renewals
with either the incumbent license holder, or with successor license holders,
although there is no assurance that it will be successful in doing so. The
MMDS channel leases held by CAI generally grant CAI the right to renew the
channel lease. All ITFS and MMDS channel leases are dependent upon the
continued validity of the corresponding FCC license. CAI anticipates that upon
the expiration of the current license terms, all such FCC licenses will be
renewed following completion of the FCC review process, although there is no
assurance that such renewal applications will be granted. The termination of
or failure to renew a channel license or lease (due to a breach by CAI, or its
lessor, cancellation of the license held by a third party lessor for failure to
timely construct and/or perfect the wireless cable facility or otherwise) or
the failure to grant an application for an extension of time to construct an
authorized station, would result in CAI being unable to deliver programming on
such channel(s) unless it were able to lease excess capacity from a successor
license holder. Such a termination or failure in a market which CAI actively
serves could have a material adverse effect on CAI.
The excess channel capacity leases with Boston Catholic Television Center
and Northeastern University, involving a total of 14 ITFS channels in Boston,
contain provisions that required the Company to have commenced offering a
commercial subscription television service by a certain date that passed
without a service being put into operation. Neither institution has invoked
the termination provision, and negotiations are ongoing. The Company believes
such negotiations will result in each of the lessors entering into amended
agreements that will cover a variety of issues, including an extension of the
date by which the Company must initiate subscriber services. There can be no
assurance, however, that such negotiations will result in such amended
agreements or that such amended agreements will be on terms favorable to the
Company.
ANALOG-BASED SUBSCRIPTION VIDEO. CAI operates six analog-based wireless
cable systems in New York City, Rochester and Albany, NY, Philadelphia, PA,
Washington, DC, and Norfolk/Virginia Beach, VA. In addition, CAI has a
portfolio of wireless cable channel rights in eight additional markets,
including Long Island, Buffalo and Syracuse, NY, Providence, RI, Hartford, CT,
Boston, MA, Baltimore, MD, and Pittsburgh, PA. As of June 21, 1997, CAI
provided subscription video services to approximately 66,500 subscribers.
<PAGE>
Item 1. Business (continued)
The Company's principal subscription video competitors in each of its
markets are the hard-wire cable companies, and include Comcast Corp., Tele-
Communications, Inc., Cox Cable Communications, Time Warner Cable and
Cablevision Systems Corp.
The table below outlines as of March 31, 1997 (except as indicated in the
footnotes) the characteristics of the markets in which the Company has an
operational subscription television system or in which the Company holds
significant spectrum rights:
TABLE I
<TABLE>
<CAPTION>
Estimated Number of New
Total Service Analog/Digital Analog/Digital
DMA Area Channels Channels
MARKET RANK{(1)} HOUSEHOLDS{(2)} AVAILABLE{(3)} APPLIED FOR
<S> <C> <C> <C> <C>
New York City 1 4,996,976 36 0
Long Island{(4)} N/A 1,083,780 20 13
Philadelphia 4 2,154,389 41 2
Boston 6 1,007,198 30 3
Washington, DC 7 1,479,278 24 4
Pittsburgh 19 1,011,310 23 9
Baltimore 23 1,053,959 32 1
Hartford 26 471,532 20 3
Buffalo 39 501,314 31 2
Norfolk 40 531,833 32 1
Providence 46 842,658 23 10
Albany 52 320,742 32 0
Syracuse 69 278,630 18 7
Rochester 73 401,575 27 6
SUB TOTAL 16,135,174
BTA MARKETS (SEE TABLE II BELOW) 3,354,615
GRAND TOTAL 19,489,789
</TABLE>
{(1)} DMA is the Designated Market Area as determined by A.C. Nielsen Company
as of December 1995.
{(2)} The Estimated Total Service Area Households in the service area
represents the approximate number of households within a 35 mile radius of
the Company's Tower sites. These households may have been adjusted downward
if any of the Company's markets overlapped with a newly acquired BTA (see
table II). This information is based on estimates obtained using two EDX
Engineering software programs, MSITE{TM} and POP90{TM}. Both of these
programs use 1990 Census data to compile their information. Some of these
households will be "shadowed" and therefore unable to receive the Company's
service due to line-of-sight ("LOS") constraints. The percentage of
Estimated Households in the Service Area that the Company estimates may be
shadowed due to LOS constraints generally ranges from 10% to 60% depending
upon the market. A certain amount of these LOS constraints may be overcome
by the placement of beambenders and/or signal boosters.
{(3)} The Number of Channels Available comprises wireless cable channels and
local broadcast channels that can be received by subscribers. Wireless
cable channels are either licensed to CAI or leased to CAI from other
license holders. The Number of Channels Available includes 10 off-air
channels in Philadelphia and 11 in New York City. The Number of Channels
Available includes certain channels that are subject to FCC approvals or
third party interference agreements. CAI has pending FCC applications
concerning co-location of transmission sites and/or an increase in broadcast
power with respect to 4 channels in Philadelphia, 5 channels in Hartford, 8
channels in New York City, 7 channels in Washington, D.C., 20 channels in
Rochester, 17 channels in Providence, 3 channels in Buffalo, 16 channels in
Syracuse, 20 channels in Norfolk, 22 channels in Boston and 16 channels in
Long Island. The Number of Channels Available includes ITFS channels that
may not be available for commercial programming by CAI.
{(4)} The Long Island market includes Nassau and Suffolk counties in New York
State.
<PAGE>
Item 1. Business (continued)
The table below outlines as of March 31, 1997 the characteristics of the
potential markets for which CAI was the successful bidder at the completion of
the FCC Auction (defined below. See "-Regulation-Licensing Procedures" below.
The Estimated Service Area households in the table above may have been adjusted
if the 35-mile Protected Service Area (PSA) overlapped with any of the markets
identified below. To the extent there was overlap between two PSAs, the number
of Estimated Total Service Area households in such overlapping area was divided
equally between the two affected markets.
TABLE II
<TABLE>
<CAPTION>
Estimated Number of New
Total Service Analog/Digital Analog/Digital
DMA Area Channels Channels
MARKET RANK HOUSEHOLDS AVAILABLE{(1)} APPLIED FOR
<S> <C> <C> <C> <C>
Dover, DE N/A 155,360 3 12
Hyannis, MA N/A 213,629 1 0
Manchester, NH N/A 316,004 1 0
Portsmouth, NH N/A 232,477 4 0
Worcester, MA N/A 352,646 9 20
New Haven, CT N/A 541,263 3 6
New London, CT N/A 96,380 1 0
Springfield, MA 102 366,198 9 20
Poughkeepsie, NY N/A 258,221 2 4
Pittsfield, MA N/A 116,365 1 0
Glens Falls, NY N/A 141,702 4 9
Ithaca, NY N/A 183,496 1 8
Utica, NY 166 153,219 2 4
Summit, NJ N/A 227,655 9 6
TOTAL 3,354,615
</TABLE>
{(1)} The number of channels currently owned or leased by CAI.
The table below outlines as of June 21, 1997 the characteristics of the
markets in which CAI operates subscription television systems.
TABLE III
<TABLE>
<CAPTION>
Number of Monthly Revenue
MARKET SUBSCRIBERS PER SUBSCRIBER ($) PREMIUM PENETRATION{(1)}
<S> <C> <C> <C>
New York City 10,100 44.09 190%
Philadelphia 40,000 35.61 136%
Washington, DC 2,500 36.68 130%
Norfolk 2,500 31.09 116%
Albany 8,700 29.46 131%
Rochester 2,100 27.22 58%
Providence (SMATV) 600 24.96 72%
</TABLE>
_________________________
{(1)} Premium penetration is the ratio of the total number of premium channels
received by subscribers in a market divided by the number of subscribers in
that market. In certain markets, the basic subscription service includes
one premium channel.
The Company has not actively sought to increase its television subscriber
base in its existing analog operating systems. Originally, this decision was
made in connection with the BR Agreement, which contemplated that CAI would be
required to transfer all of its analog television subscribers to the
appropriate BANX Affiliate (as defined below) at the time such BANX Affiliate
became the provider of video programming in a particular market. CAI was not
entitled to any compensation for subscribers so transferred, and there was no
incentive for CAI to increase its subscriber base. With the suspension of the
BR Agreement, the Company plans to explore the full capabilities of its MMDS
spectrum, including uses for such spectrum other than subscription television
delivery. Consequently, the Company has maintained its strategy of not
pursuing television subscriber growth while it evaluates its business
opportunities other than subscription television services. The policy of not
pursuing subscriber growth has a negative impact on the
<PAGE>
Item 1. Business (continued)
Company's revenues,
which is only partially mitigated by the cost-savings associated with reduced
marketing and other efforts ordinarily pursued in connection with increasing a
subscriber base.
The Company intends to commence digital subscription television service
in the Boston market during the fall of 1997, pending the availability to the
Company of the necessary subscriber equipment and access to pre-digitized
compressed programming. Utilizing portions of the digital MMDS system built by
the Company in Boston last year, CAI intends to launch the digital subscription
television service in certain locations served by the Company's main
transmitter located in downtown Boston and by selected booster sites throughout
the greater Boston area. To replace programming that would have been provided
by the BANX Affiliates under the BR Agreement, the Company is currently in the
process of negotiating a joint venture with TelQuest Communications, Inc., an
entity of which Jared E. Abbruzzese, Chairman of the Company, is the principal
stockholder, and CS Wireless, to form an entity (hereinafter, "TelQuest Joint
Venture") capable of providing pre-digitized compressed programming to CAI, CS
Wireless and other MMDS and hard-wire cable operators. CAI intends to use such
programming for Boston and any other markets in which it determines to roll-out
a digital video product. See "Item 13. Certain Relationships and Related
Transactions." In the event that the TelQuest Joint Venture is not formed, CAI
would have to construct a compression facility capable of serving the Boston
market to provide digital programming or make other arrangements to receive
pre-digitized compressed programming via satellite. The Company estimates the
cost of constructing a digital compression facility is approximately $5 million
as of June 1997. There can be no assurance that the necessary subscriber
equipment or access to pre-digitized compressed programming will be available
to the Company in the Boston market, and if available, that the Company will be
able to successfully launch and operate a digital subscription television
business in this market.
CAI has substantially completed construction of a second digital system
in Hampton Roads, VA. The Company does not yet have a definitive timetable for
the commercial deployment of digital subscription television service in this
market; however, if and when CAI decides to launch a digital subscription
television service in Hampton Roads or any other of CAI's markets, availability
of necessary subscriber equipment and access to pre-digitized compressed
programming must be secured in connection with any such service launch.
In each of the principal analog-based subscription television markets
served by CAI there is and, the Company believes there will continue to be
significant competition for households that are presently subscribers of a
hard-wire cable service. Additionally, the Company has experienced loss of
subscribers to hard-wire cable providers in markets where the Company's channel
offering is significantly less, as a result of channel capacity limitations
inherent in an analog-based MMDS operation, than the hard-wire cable providers,
such as in the Company's New York City market.
In addition to the markets set forth above, CAI holds 48% of CS Wireless
Systems, Inc., a Delaware corporation ("CS Wireless"), formed on February 23,
1996 by the Company and Heartland Wireless Communications, Inc., an MMDS
subscription television operator of small- and medium-sized markets
("Heartland"). Pursuant to the terms of a Participation Agreement dated
December 12, 1995 (as amended, the "Participation Agreement") among the
Company, Heartland and CS Wireless, each of CAI and Heartland contributed MMDS
assets and channel rights or the stock of subsidiaries owning such assets and
channel rights to CS Wireless. As a result of the contributions and
transactions effected by CS Wireless following its formation, CS Wireless
currently has 18 markets, encompassing approximately 7.5 million television
households. As of December 31, 1996, CS Wireless provided service to
approximately 65,600 subscribers.
ONE-WAY, HIGH-SPEED INTERNET ACCESS. The Company believes that MMDS
technology presents a viable option to traditional telephony providers as a
"pipeline" through which Internet and commercial on-line services can be
carried, especially for small- to medium -sized businesses seeking a cost-
effective means of accessing such on-line services. To date, the FCC has
licensed the MMDS spectrum for one-way video and data transmission. CAI
further believes that the MMDS industry's systems, which can currently reach
more than 50% of the nation's households, are superior to traditional telephone
lines in terms of speed. An MMDS system can transmit data at speeds of up to
27 Mbps, nearly 1,000 times faster than traditional telephony rates of 28.8
Kbps. Several MMDS operators, including CAI, have successfully tested one-way
Internet access capabilities over their existing systems, using a traditional
telephone line for the typically less data-intensive return path. CAI intends
to enter the Internet access market as a retail Internet Access Provider
("IAP"), but is also expected to offer wholesale transmission services. The
Company's wholesale service is expected to be offered to other IAPs.
<PAGE>
Item 1. Business (continued)
CAI recently initiated a commercial one-way Internet access service in
its Rochester and New York City, New York markets, where the FCC has granted
CAI developmental authorization to conduct a market trial of up to 500 and
1,000 Internet subscribers, respectively. The Company's service consists of
one-way wireless high-speed downstream data transmission at those market
transmission rates of up to 10 Mbps in Rochester and 27 Mbps in New York City.
The service utilizes the Company's existing MMDS network for the downstream
transmission, while the return path is handled using a traditional telephone
line. The Company is marketing its Internet access service principally to
small- to medium-sized businesses and residential consumers, for which, the
Company believes, there is a significant need for high speed Internet access,
but not necessarily the financial resources to install costly advanced
telephone circuits capable of providing comparable transmission speed. The
Company is also conducting Internet trials in Washington, D.C. There has been
no definitive agreement to pursue commercial authorization for an Internet
access service in Washington, D.C. as of the date hereof.
In both of the above markets, the Company has established an Internet
Point of Presence ("PoP") at its existing transmission facilities. Equipment
at each PoP includes modem banks for upstream traffic, routers, servers,
Internet wireless transmission hubs and high speed connectivity to the Internet
backbone.
Internet access service is a new application for the MMDS platform.
Although the Company has previously demonstrated the technology and equipment
necessary to transmit data over its MMDS spectrum on several occasions and in
various markets, there can be no assurance that the Company will be able to
successfully deploy, in a commercial manner, an Internet access service over
its MMDS spectrum in Rochester, New York City or any other market in which it
may seek to initiate such a service.
FIXED, FLEXIBLE TWO-WAY USE OF MMDS SPECTRUM. CAI has recently applied
for, and has received from the FCC, additional authorizations permitting CAI to
develop fixed, flexible two-way uses of its MMDS spectrum in specified CAI
markets for specific customer locations. The Company believes that fixed,
flexible two-way use of the MMDS spectrum offers a significantly enhanced
service capability and would present new opportunities for CAI and other MMDS
operators. Based upon policy statements in which the FCC has consistently
recognized that MMDS spectrum may be employed for a variety of video, voice and
data transmission services, including two-way transmission, the Company
believes that FCC policy regarding the use of MMDS spectrum is moving toward
flexible two-way use so long as favorable technical and interference studies
can be demonstrated. The Company believes that fixed, flexible two-way uses
include data transmission such as two-way Internet and intranet access
(eliminating the use of a traditional telephone line return path currently
utilized by CAI's Internet access service) and local loop bypass telephony.
The Company, in anticipation of such FCC policy regarding flexible two-
way use, has recently applied for, and received from the FCC, a permanent
authorization for fixed, flexible two-way use of five of its MMDS channels for
16 sites located in and around CAI's Boston market. This authority represents
the first of its kind awarded to an MMDS operator. CAI is actively seeking
strategic partners interested in developing fixed, flexible two-way uses for
its MMDS spectrum in Boston, and potentially, other CAI markets. The Company
is engaged in discussions with potential strategic investors; however, such
discussions are in the preliminary stages. There can be no assurance that CAI
will be successful in attracting a strategic partner, or if successful, that a
business arrangement between CAI and such strategic investor can be reached on
satisfactory terms and conditions, if at all. Further, there can be no
assurance that CAI, alone or in conjunction with a strategic partner, will be
able to successfully develop fixed, flexible uses of its MMDS spectrum, or if
successfully developed, that such uses can be deployed profitably in a
commercial manner.
Additionally, the permanent authorization granted to Boston is limited to
five MMDS channels for 16 customer locations. There can be no assurance that
such customer locations will enable CAI to successfully develop fixed, flexible
uses of its MMDS spectrum in Boston in a commercial manner and, therefore, CAI
will need to apply for authorization in Boston for additional channels and/or
additional customer locations. Such applications have not been made as of the
date hereof. There can be no assurance, however, if such applications are
made, that CAI would receive authorization from the FCC for additional channels
and/or additional customer locations in the Boston market.
In connection with the Company's intention to develop fixed, flexible
two-way uses of its MMDS spectrum, the Company entered into a memorandum of
understanding in January 1997 with ADC Telecommunications, Inc., a
telecommunications equipment manufacturer ("ADC"), to pursue the design and
implementation of fixed two-way broadband wireless communications systems for
the transmission of video, voice and data over the MMDS spectrum. Subject to
receipt of the requisite regulatory authority, the Company and ADC expect to
use certain of the channels in CAI's Pittsburgh market for the initial phase of
the joint development project. If such phase is successful, the Company and
ADC have agreed to deploy a demonstration system in Boston, which the Company
believes will be conducted
<PAGE>
Item 1. Business (continued)
pursuant to the permanent authority it has already
received for fixed, flexible two-way use in that market. Further joint
development would be the subject of a definitive agreement among CAI and ADC,
however, there can be no assurance that the initial phase or demonstration
system will be successful, or if successful, that a definitive agreement
relating to additional joint development of fixed two-way broadband wireless
communications systems with ADC will be reached on terms and conditions that
are satisfactory to the Company, if at all.
The Company also believes that fixed, flexible two-way use of its MMDS
spectrum includes telephony delivery services. The Company believes that the
combination of digital compression, fiber loop and cellular technologies can be
integrated into the MMDS spectrum, resulting in a single wireless platform
capable of delivering a wide range of services, including telephony delivery
services. Adaptation of newly available, but as of yet commercially untested,
technologies has been explored by the Company, with the intention of assessing
Broadband MMDS spectrum's ability to simultaneously provide a combination of
video, voice and data delivery services. See "--Wireless Network" below. CAI
believes that an MMDS system having one main transmitter and multiple booster
sites can be designed using standard cellular network design principles to
produce a relatively low-cost telephony delivery platform. The Company has
commenced preliminary testing and has taken initial steps in furtherance of
developing a telephony application for its MMDS spectrum. Although the Company
believes that an MMDS system can be designed to provide telephony delivery
services, there can be no assurance that such a system could be designed, or
that the Company would be capable of designing and constructing such a system.
Furthermore, in the event that such a system could be designed, there can be no
assurance that the Company would receive the requisite regulatory approval to
offer a telephony delivery service, that the Company would have the financial
resources, alone or in conjunction with a strategic partner, necessary to
design and construct a telephony delivery service in one or more of its
markets, or that such service, if it was designed and constructed by the
Company in one or more markets, could be successfully deployed in a
commercially successful manner.
BROADBAND WIRELESS NETWORK. Subject to receipt of regulatory approval
for fixed, flexible use of its MMDS spectrum and successful testing, the
successful deployment of digital video, one- and two-way data transmission and
telephony delivery services utilizing the MMDS platform and sufficient capital
resources, the Company intends to launch a wireless version of the full service
network, the Broadband Wireless Network ("BWN"). The Company believes that its
BWN systems would be able to provide quick and relatively inexpensive household
coverage on a broad scale. CAI believes that the BWN system concept will
enhance the Company's ability to attract one or more strategic investors by
giving such partners the ability to provide competitive access products over
CAI's MMDS spectrum. The Company believes that its BWN systems will be capable
of providing a combination of analog and/or digital video services for
residential, as well as for corporate and institutional/instructional
subscribers, bundled with high speed Internet and intranet access services, and
ultimately, telephony delivery services. The Company expects to be able to
alter the channel allocation among the various services depending on the needs
of the strategic partner and consumer demand, thereby deriving multiple revenue
streams from each BWN system.
The Company has not yet implemented a BWN system in any of its markets. CAI
believes that the various regulatory approvals it has received and the joint
development projects with which it is involved will enable CAI to assess the
viability of the BWN system and present it to potential strategic partners.
The Company has not, however, tested a BWN system in any of its markets. There
are a number of risk factors, including, without limitation, receipt of all
requisite regulatory approvals, technology development and the availability of
additional financing, that will affect the implementation of a BWN system in
any of the Company's markets, some of which are outside the control of the
Company. There can be no assurance that the Company will be able to develop a
BWN system in any of its markets, or that if a BWN system is developed, that
the Company will be able to deploy a variety of services in a commercially
reasonable manner, if at all.
MMDS subscription television is not a new technology; however, it is a new
industry with a relatively short operating history. Fixed, flexible two-way
uses of the MMDS spectrum have relatively no operating history. There are
difficulties and uncertainties normally associated with new industries, such as
lack of consumer acceptance, difficulty in obtaining financing, increasing
competition, advances in technology and changes in laws and regulations. There
can be no assurance that the MMDS industry will develop or continue as a viable
or profitable industry.
REGULATION
General. The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment
<PAGE>
Item 1. Business (continued)
and/or transfer of control of such licenses;
to approve the location of wireless cable system headends; to regulate the
kind, configuration and operation of equipment used by wireless cable systems;
and to impose certain equal employment opportunity and other obligations and
reporting requirements on wireless cable channel license holders and operators.
The FCC has determined that wireless cable systems are not "cable
systems" for purposes of the Communications Act. Accordingly, a wireless cable
system does not require a local franchise and is subject to fewer local
regulations than a hard-wire cable system. Moreover, all transmission and
reception equipment for a wireless cable system can be located on private
property; hence, there is no need to make use of utility poles or dedicated
easements or other public rights of way. Although wireless cable operators
typically have to lease from third parties the right to use a certain portion
of the channels utilized in any given system, unlike hard-wire cable operators
they do not have to pay local franchise fees. Recently, legislation has been
introduced in some states, including Illinois, Maryland, Pennsylvania and
Virginia, to authorize state and local authorities to impose on all video
program distributors (including wireless cable operators) a tax on the
distributors' gross receipts comparable to the franchise fees cable operators
pay. Similar legislation might be introduced in several other states. While
the proposals vary among states, the bills all would require, if passed, as
much as 5.0% of gross receipts to be paid by wireless distributors to local
authorities. Efforts are underway by the industry trade association to preempt
such state taxes through federal legislation. In addition, the industry is
opposing the state bills as they are introduced, and, in Virginia and Maryland,
it has succeeded in either blocking the legislation or being exempted from the
video tax that was eventually enacted into law. However, it is not possible to
predict whether new state laws will be enacted which impose new taxes on
wireless cable operators.
The FCC licenses and regulates the use of channels by license holders and
system operators. In the 50 largest markets, 33 6-MHz channels are available
for wireless cable delivery services (in addition to any local broadcast
television channels that can be offered to subscribers via an off-air antenna).
In each geographic service area of all other markets, 32 6-MHz channels are
available for wireless cable (in addition to any local broadcast television
channels that can be offered to subcribers via an off-air antenna). Except in
limited circumstances, 20 wireless cable channels in each of these geographic
service areas are generally licensed only to qualified non-profit educational
organizations (commonly referred to as ITFS channels). In general, each of
these channels must be used a minimum of 20 hours per week per channel for
instructional programming. The remaining "excess air time" on an ITFS channel
may be leased to wireless cable operators for commercial use, without further
restrictions (other than the right of the ITFS license holder, at its option,
to recapture up to an additional 20 hours of air time per week for educational
programming). Lessees of ITFS' "excess air time," including the Company,
generally have the right to transmit to their customers the educational
programming provided by the lessor at no incremental cost. The FCC recently
amended its rules to permit ITFS license holders to consolidate their
educational programming on one or more of their ITFS channels, thereby
providing wireless cable operators leasing such channels, including the
Company, greater flexibility in their use of ITFS channels. The remaining 13
analog channels available in most of the Company's operating and targeted
markets are made available by the FCC for full-time usage without programming
restrictions.
LICENSING PROCEDURES. The actual number of wireless cable channels
available for licensing in any market is determined by the FCC's interference
protection and channel allocation rules. The FCC awards ITFS and MMDS licenses
based upon applications demonstrating that the applicant is legally,
financially and technically qualified to hold the license and that the
operation of the proposed station will not cause harmful interference to other
stations or proposed stations entitled to interference protection.
During the year ended March 31, 1996, CAI participated in the FCC's MMDS
Spectrum auction (the "FCC Auction") for awarding available commercial wireless
spectrum in 493 markets (the "Auction Markets") throughout the United States,
identified as Basic Trading Areas( in accordance with material copyrighted by
Rand McNally & Company. The winner of an Auction Market has the right to apply
for the available MDS frequencies throughout the Auction Market, consistent
with certain specified interference criteria that protect existing ITFS and
MMDS channels. Existing ITFS and MMDS channel right holders also must protect
the Auction Market winner's spectrum from power increases or tower relocations.
CAI was the successful bidder for 32 Auction Markets costing CAI a total of
$48.8 million. Pursuant to an agreement with CS Wireless, CAI has transferred
five Auction Markets located in CS Wireless' operating regions and for which
CAI was the successful bidder, costing an aggregate of $12.6 million, to CS
Wireless at cost, and will transfer two additional Auction Markets located in
CS Wireless' operating regions and for which CAI was the successful bidder upon
the granting of such Auction Market awards by the FCC. For each of the Auction
Markets in which CAI was the successful bidder, CAI was required to submit the
requisite FCC applications and make a down-payment (20% of such successful bid)
within five days of the announcement by Public Notice of the successful bid.
When the authorization for an Auction Market is ready to be issued by the FCC,
<PAGE>
Item 1. Business (continued)
the FCC will release a Public Notice to that effect. Within 5 days of such
Public Notice, the successful bidder is required to remit the balance of its
bid to the FCC, whereupon the Auction Market authorization will be issued by
the FCC. As of March 31, 1997, authorizations for all but two Auction Markets
for which CAI was the successful bidder (excluding those markets that are
required to be conveyed at cost to CS Wireless) have been issued by the FCC and
paid for by CAI. Authorizations for the remaining two Auction Markets are
expected to be issued during the fiscal year ending March 31, 1998, and
payment, in the aggregate amount of $1.1 million for such remaining Auction
Markets will be due upon such issuance.
In order to be eligible for the FCC Auction, CAI, prior to the start of
the auctions, was required to file applications and make up-front payments in
accordance with the rules of the FCC Auction. CAI, as the winning bidder, is in
the process of fulfilling certain post-auction filing obligations, including,
but not limited to, filing applications that propose new transmission
facilities, exhibits concerning its involvement in bidding consortia, and
descriptions of its plans to build-out two-thirds of each market over a five-
year period. Due to the unique nature of the FCC Auction, there is no prior
regulatory history regarding the scope and nature of the information the FCC
will require, or how the FCC will treat the information.
Under rules and policies for applications for new MDS facilities filed
before the FCC Auction, the FCC would generally issue a conditional license
that permits the conditional licensee to commence construction of its
facilities upon the satisfaction of specified conditions. Construction of MDS
stations generally must be completed within one year of grant of the
conditional license.
In February 1995, the FCC amended its rules and established "windows" for
the filing of new ITFS applications or major modifications to authorized ITFS
facilities. The first filing "window" was October 16-20, 1995. Where two or
more ITFS applicants file applications for the same channels and the proposed
facilities could not be operated without impermissible interference, the FCC
employs a set of comparative criteria to select from among the competing
applicants. Construction of ITFS stations generally must be completed within 18
months of the date of grant of the authorization.
If construction of MDS or ITFS stations is not completed within the
authorized construction period, the licensee must file an application with the
FCC seeking additional time to construct the station and demonstrate therein
compliance with certain FCC standards. If the extension application is not
filed or is not granted, the license will be deemed forfeited. ITFS and MDS
licenses generally have terms of 10 years. Licenses must be renewed thereafter,
and may be revoked for cause in a manner similar to other FCC licenses. FCC
rules prohibit the sale for profit of a conditional MDS license or a
controlling interest in the conditional licensee prior to construction of the
station or, in certain circumstances, prior to the completion of one year of
operation. However, the FCC does permit the leasing of 100% of an MDS
licensee's spectrum to a wireless cable operator and the granting of options to
purchase a controlling interest in a license even before such holding period
has lapsed.
Wireless cable transmissions are subject to FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). Until recently, FCC regulations required wireless cable systems to
transmit only analog signals and those regulations needed to be modified,
either by rulemaking or by individual application, to permit the use of digital
transmissions. CAI was a party to a petition for declaratory ruling filed in
July 1995 seeking adoption of interim regulations authorizing digital
transmission. This petition was granted on July 9, 1996, and allows wireless
licenseholders to operate digitally under current FCC interference rules. The
license holder is, however, required to file for digital authorization. It is
likely that, in the longer term, the FCC will consider adopting both new
technical and service rules tailored to digital operations. The service rules
could modify the respective rights and obligations of the ITFS lessors and
their commercial lessees of "excess air time" in light of the increased
capacity that would result from digital compression. Even if the FCC does
adopt new service rules governing the allocation of "excess air time" in a
digital environment, it is anticipated that there would be a dramatic increase
in the number of channels that will be available to the Company following the
conversion to digital transmission. The Company demonstrated transmission of
digital satellite television programming and digital local broadcast television
signals in its Rochester, NY market in June 1996. The Company believes that
the necessary FCC approvals will be obtained to permit use of digital
compression by the time it becomes commercially available on a wide-spread
basis; however, there can be no assurance that these approvals will be
forthcoming or timely. In addition, such modifications filed with the FCC after
the FCC Auction will be subject to the interference protection rights of
adjacent FCC Auction winners.
<PAGE>
Item 1. Business (continued)
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of MMDS channels and operations with transmission
characteristics (such as power and polarity). In order to commence the
operations of certain of the Company's markets, applications have been or will
be filed with the FCC to relocate and modify existing transmission facilities.
Under current FCC regulations, a wireless cable operator generally may
serve subscribers anywhere within the LOS of its transmission facility,
provided that the signal complies with FCC interference standards. Under rules
adopted by the FCC on June 15, 1995, an MMDS channel license holder generally
has a protected service area of 35 miles around its transmitter site. The
current rules became effective on September 15, 1995. An ITFS channel license
holder has protection as to all of its receive sites, but the same protected
service area during excess capacity use by a wireless cable operator as an MMDS
license holder. In launching or upgrading a system, the Company may wish to
relocate its transmission facility or increase its height or power. If such
changes cause the Company's signal to violate interference standards with
respect to the protected service area of other wireless license holders, the
Company would be required to obtain the consent of such other license holders;
however, there can be no assurance that such consents would be received.
INTERFERENCE ISSUES. Interference from other wireless cable systems can
limit the ability of a wireless cable system to serve any particular point. In
licensing ITFS and MDS systems, a primary concern of the FCC is avoiding
situations where proposed stations are predicted to cause interference with the
reception of previously proposed stations. Pursuant to FCC rules, a wireless
cable system is generally protected from interference within a radius of 35
miles of the transmission site. In addition, modification applications
submitted after the FCC Auction will be required to protect FCC Auction winners
from interference. The FCC's interference protection standards may make one
or more of these proposed modifications or new grants unavailable. In such
event, it may be necessary to negotiate interference agreements with the
licensees of the systems which would otherwise block such modifications or
grants. There can be no assurance that the Company will be able to negotiate
all necessary interference agreements that are on terms acceptable to the
Company. In the event the Company cannot obtain interference agreements
required to implement the Company's plans for a market, the Company may have to
curtail or modify operations in that market, utilize a less optimal tower
location, or reduce the height or power of the transmission facility, any of
which could have a material adverse effect on the growth of the Company in that
market. In addition, while the Company's leases with ITFS and MDS licensees
require their cooperation, it is possible that one or more of the Company's
channel lessors may hinder or delay the Company's efforts to use the channels
in accordance with the Company's plans for the particular market.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable
Act, which compels the FCC to, among other things, (i) adopt comprehensive
federal standards for the local regulation of certain rates charged by hard-
wire cable operators, (ii) impose customer service standards on hard-wire cable
operators, (iii) govern carriage of certain broadcast signals by all multi-
channel video providers, and (iv) compel non-discriminatory access to
programming owned or controlled by vertically-integrated cable operators.
The rate regulations adopted by the FCC do not regulate cable rates once
other multi-channel video providers serve, in the aggregate, at least 15% of
the households within the cable franchise area. The customer service rules
adopted by the FCC establish certain minimum standards to be maintained by
traditional hard-wire cable operators. These standards include prompt responses
to customer telephone inquiries, reliable and timely installations and repairs,
and readily understandable billing practices. These rules do not apply to
wireless cable operators, although the Company believes that it provides and
will continue to provide customer service superior to its hard-wire cable
competitors.
Under the retransmission consent provisions of the 1992 Cable Act and the
FCC's implementing regulations, all multi-channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
1992 Cable Act and the FCC's "must carry" rules to retransmit a specified
number of local commercial television or qualified low power television
signals. See "Retransmission Consent."
The 1992 Cable Act and the FCC's implementing regulations impose limits
on exclusive programming contracts and prohibit programmers in which a cable
operator has an attributable interest from discriminating against cable
competitors with respect to the price, terms and conditions of programming.
Certain provisions of the 1992
<PAGE>
Item 1. Business (continued)
Cable Act and the FCC's implementing regulations
have been challenged in the courts and before the FCC. Under the
Telecommunications Act of 1996 (the "1996 Act"), Congress has directed the FCC
to eliminate cable rate regulations for "small systems," as defined in the 1996
Act, and for large systems under certain prescribed circumstances, and for all
cable systems effective three years after enactment of the 1996 Act.
While current FCC regulations are intended to promote the development of
a competitive subscription television industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse
effect on the Company. In addition, a number of legal challenges to the 1992
Cable Act and the regulations promulgated thereunder have been filed, both in
the courts and before the FCC. These challenges, if successful, could result in
increases in the Company's operating costs and otherwise have a material
adverse effect on the Company. The Company's costs to acquire satellite-
delivered programming may be affected by the outcome of those challenges. Other
aspects of the 1992 Cable Act that have been challenged, the outcome of which
could adversely affect the Company, including the 1992 Cable Act's provisions
governing rate regulation to be met by traditional hard-wire cable companies.
The 1992 Cable Act empowered the FCC to regulate the basic subscription rates
charged by traditional hard-wire cable operators. The FCC recently issued rules
requiring such cable operators, under certain circumstances, to reduce the
rates charged for non-premium services by as much as 17%. Should these
regulations withstand court and regulatory challenges, the extent to which
wireless cable operators may continue to maintain a price advantage over
traditional hard-wire cable operators could be diminished. On the other
hand, continued strict rate regulation of cable rates would tend to
impede the ability of hard-wire cable operators to upgrade their cable
plant and gain a competitive advantage over wireless cable.
THE 1996 ACT. The Telecommunications Act of 1996 (the "1996 Act"),
enacted in February 1996, could have a material impact on the MMDS industry and
the competitive environment in which the Company operates. The 1996 Act will
result in comprehensive changes to the regulatory environment for the
telecommunications industry as a whole. The legislation will, among other
things, substantially reduce regulatory authority over cable rates. Another
provision of the 1996 Act will afford hard-wire cable operators greater
flexibility to offer lower rates to certain of its subscribers, and would
thereby permit cable operators to offer discounts on hard-wire cable service to
the Company's subscribers or prospective subscribers. The legislation will
permit telephone companies to enter the video distribution business, subject to
certain conditions. The entry of telephone companies into the video
distribution business, with greater access to capital and other resources,
could provide significant competition to the companies in the MMDS industry,
including the Company. In addition, the legislation will afford relief to DBS
providers by exempting such providers from local restrictions on reception
antennas and preempting the authority of local governments to impose certain
taxes. The Company cannot predict the substance of rules and policies to be
adopted by the FCC in implementing the provisions of the legislation.
COPYRIGHT. Under the federal copyright laws, permission from the
copyright holder generally must be secured before a video program may be
retransmitted. Under Section 111 of the Copyright Act, certain "cable systems"
are entitled to engage in the secondary transmission of programming without the
prior permission of the holders of copyrights in the programming. In order to
do so, a cable system must secure a compulsory copyright license. Such a
license may be obtained upon the filing of certain reports with and the payment
of certain fees to the U.S. Copyright Office. In 1994, Congress enacted the
Satellite Home Viewers Act of 1994 which enables operators of wireless cable
television systems to rely on the cable compulsory license under Section 111 of
the Copyright Act.
RETRANSMISSION CONSENT. Under the retransmission consent provisions of
the 1992 Cable Act, wireless and hard-wire cable operators seeking to
retransmit certain commercial television broadcast signals must first obtain
the permission of the broadcast station in order to cover their signal.
However, wireless cable systems, unlike hard-wire cable systems, are not
required under the FCC's "must carry" rules to retransmit a specified number of
local commercial television or qualified low power television signals. Although
there can be no assurances that the Company will be able to obtain requisite
broadcaster consents, the Company believes in most cases it will be able to do
so for little or no additional cost.
In addition to regulation by the FCC, MMDS operators are subject to
regulations by the Federal Aviation Administration ("FAA") with respect to
construction of transmission towers and to certain local zoning regulations
affecting construction of towers and other facilities. There also may be
restrictions imposed by local authorities, neighborhood associations and other
similar organizations limiting the use of certain types of reception equipment
used by CAI. Future changes in the foregoing regulations or any other
regulations applicable to CAI could have a material adverse effect on CAI's
results of operations and financial condition.
<PAGE>
Item 1. Business (continued)
Certain states have legislated that each resident of a Multiple Dwelling
Unit ("MDU") should not be denied access to programming provided by franchised
cable systems, notwithstanding the fact that the MDU entered into an exclusive
agreement with a non-franchised video program distributor. States with such
"mandatory access" laws where CAI provides MMDS service include Connecticut,
Delaware, District of Columbia, New Jersey, New York, Pennsylvania and Rhode
Island. In several district courts, mandatory access laws have been held
unconstitutional. Such laws could increase the competition for subscribers in
MDUs. There may also be restrictions imposed by local authorities. There can be
no assurance that the Company will not be required to incur additional costs in
complying with such regulations or restrictions.
Due to the regulated nature of the subscription television industry, the
Company's growth and operations may be adversely impacted by the adoption of
new, or changes to existing, laws or regulations or the interpretations
thereof.
COMPETITION
The subscription television industry is highly competitive. CAI's
principal subscription television competitors in each market are traditional
hard-wire cable, direct broadcast satellite ("DBS") and private cable
operators. Hard-wire cable companies generally are well established and known
to potential customers and have significantly greater financial and other
resources than CAI. Premium movie services offered by the cable television
systems have encountered significant competition from the home video cassette
recorder industry. In areas where several local off-air VHF/UHF broadcast
channels can be received without the benefit of subscription television, cable
television systems also have faced competition from the availability of
broadcast signals generally and have found market penetration to be more
difficult. Legislative, regulatory and technological developments may result
in additional and significant competition, including competition from local
telephone companies and from a proposed new wireless service known as Local
Multipoint Distribution Service ("LMDS"). A more detailed discussion follows:
HARD-WIRE CABLE. CAI's principal subscription television competitors in
each market are traditional hard-wire cable operators. Hard-wire cable
companies are generally well established and known to potential customers and
have significantly greater financial and other resources than CAI. The hard-
wire cable companies competing in CAI's markets generally offer between 34 to
82 channels to their subscribers, compared to between 22 to 42 channels
(consisting of between 17 and 33 wireless cable channels and between 5 and 10
local off-air VHF/UHF broadcast channels) generally offered by CAI in its
markets.
DIRECT-TO-HOME ("DTH"). DTH satellite television services originally were
available via satellite receivers which generally were 7-to-12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has reduced their popularity, although CAI
will to some degree compete with these systems in marketing its services.
Another form of DTH service is Direct Broadcast Satellite ("DBS"). DBS involves
the transmission of an encoded signal direct from a satellite to the customer's
home. Because the signal is at a higher power level and frequency than most
satellite-transmitted signals, its reception can be accomplished with a
relatively small (18-inch) dish mounted on a rooftop or in the yard. DBS
cannot, for technical and legal reasons, provide local VHF/UHF broadcast
channels as part of its service, although many DBS subscribers receive such
channels via standard over-the air receive antennas. Moreover, DBS may provide
subscribers with access to broadcast network distant signals only when such
subscribers reside in areas unserved by any broadcast station. The cost to a
DBS subscriber for equipment and service is generally substantially higher than
the cost to wireless cable subscribers.
PRIVATE CABLE. Private cable is a multi-channel subscription television
service where the programming is received by satellite receiver and then
transmitted via coaxial cable throughout private property, often MDUs, without
crossing public rights of way. Private cable operates under an agreement with
a private landowner to service a specific MDU, commercial establishment or
hotel. The FCC amended its rules to provide point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 GHz band. Private cable operators compete with CAI for exclusive rights of
entry into larger MDUs.
TELEPHONE COMPANIES. In July 1995, Pacific Telesis Group ("PacTel"), a
local exchange carrier based in California, acquired Cross Country Wireless,
Inc., a wireless cable system operator in southern California, for
approximately $175 million. PacTel recently launched a 150-channel digital
video system in Los Angeles, CA. Bell South Corp. has acquired wireless cable
channel rights Miami, FL; Atlanta, GA, and New Orleans, LA, and has
<PAGE>
Item 1. Business (continued)
announced
plans to launch digital video systems in each of these markets over the course
of the next 12 to 24 months. The competitive effect of the entry of telephone
companies into the subscription television business, including wireless cable,
is still uncertain.
LOCAL OFF-AIR VHF/UHF BROADCASTS. Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox) provide free programming to
the public. Previously, subscription television operators could retransmit
these broadcast signals without permission. However, effective October 6,
1993, pursuant to the 1992 Cable Act, local broadcasters may require that
subscription television operators obtain their consent before retransmitting
local television broadcasts. The Company has obtained such consents for its
operating systems. See "Risk Factors--Restrictions Imposed by Government and
Community Regulation." The Company will be required to obtain such consents in
certain of its markets to re-broadcast any such channels. The Company believes
that it will be able to obtain such consents, but no assurance can be given
that it will be able to obtain all such consents. The FCC also has recently
permitted broadcast networks to acquire, subject to certain restriction,
ownership interests in hard-wire cable systems. In some areas, several low
power television ("LPTV") stations authorized by the FCC are used to provide
multi-channel subscription television service to the public. LPTV transmits on
conventional VHF/UHF broadcast channels, but is restricted to very low power
levels, which limits the area where a high-quality signal can be received.
LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS"). On March 11, 1997, the
FCC established service and competitive bidding rules for LMDS, a new service
that will use spectrum in the 27.5-28.35 GHz, 29.1-29.25 GHz, and 31.0-31.3 GHz
bands. LMDS licensees will be able to use their spectrum for a wide variety of
services, including voice, video and data. Two licenses will be awarded in
each of 493 Auction Markets, one for 1150 MHz and one for 150 MHz. Incumbent
local exchange carriers ("LECs") and cable companies will not be eligible to
obtain in-region 1150 MHz licenses for three years. However, several LECs and
cable companies have appealed this FCC restriction, and those appeals remain
pending in several U.S. Courts of Appeals around the country. The FCC had
intended to conduct the LMDS auction in the summer or fall of 1997, however,
the pendency of the appeals will prevent the FCC from conducting the LMDS
auction until one or more of the appeals are resolved. Depending on the
outcome, the LMDS auction could be delayed beyond 1997.
In addition, within each market, the Company initially must compete with
others to acquire, from the limited number of MMDS channels issued or issuable,
rights to a minimum number of MMDS channels needed to establish a commercially
viable system. Digital capability is essential for MMDS to compete with hard-
wire cable, which in its current analog state offers between 36 to 90 channel
offerings depending on a given market. With the deployment of digital, hard-
wire cable is expected to offer over 150 channels. The Company has lost
television subscribers to hard-wire cable competitors in each of its markets
due to the channel capacity limitations inherent in an analog-based MMDS
operation. In addition, within each market, the Company initially must
compete with others to acquire, from the limited number of MMDS channels issued
or issuable, rights to a minimum number of MMDS channels needed to establish a
commercially viable system. Aggressive price competition or the passing of a
substantial number of presently unpassed households by any existing or new
subscription television service could have a material adverse effect on the
Company's results of operations and financial condition.
New and advanced technologies for the subscription television industry,
such as digital compression, fiber optic networks, DBS transmission, video
dialtone and LMDS, are in various stages of development of commercial
deployment. These technologies are being developed and supported by entities,
such as hard-wire cable companies and regional telephone companies, that have
significantly greater financial and other resources than CAI. These new
technologies could have a material adverse effect on the demand for MMDS
subscription television services. There can be no assurance that CAI will be
able to compete successfully with existing competitors or new entrants in the
market for subscription television services.
The Company will also face intense competition from other providers of
data and telephony transmission services if the Company implements, on a
commercial basis, such services. Such competition is increased due to the fact
that MMDS spectrum has not traditionally been utilized to deliver such
alternative services, and consumer acceptance of such services delivered via
MMDS technology is unknown at this time. Many of the existing providers of
data transmission and telephony services, such as long distance and regional
telephone companies have significantly greater financial and other resources
than the Company. In addition, in recent months ASkyB, a satellite venture
between News Corp. and MCI, and PRIMESTAR, Inc., a DBS provider, announced that
the two companies would be combining their assets and resources into a single
DBS unit. Also recently, Microsoft Corporation and Comcast Corporation
announced that Microsoft will be investing $1 billion in Comcast, the nation's
fourth largest
<PAGE>
Item 1. Business (continued)
cable television operator. Both transactions will impact the
competitive nature of the video, voice and data markets. In addition, both
transactions may make it more difficult for wireless cable providers to obtain
access to attractive video programming. News Corp. may be reluctant to permit
its local Fox television affiliates to be retransmitted on the wireless cable
system, and Microsoft may be more reluctant to make its MSNBC programming
available to wireless cable systems.
There can be no assurance that there will be consumer demand for
alternative uses of the MMDS spectrum such as data transmission, including
Internet access services, and telephony delivery services, that the Company
will be able to compete successfully against other providers of such services
or that the Company will be able to achieve profitability from such services in
future years.
BACKGROUND
GENERAL. The Company was formed in 1991 to invest in and operate MMDS
subscription television systems. Through a series of acquisitions culminating
in the September 29, 1995 acquisition of ACS Enterprises, Inc., an MMDS
operator based in Philadelphia, Pennsylvania with operating systems in
Philadelphia, Cleveland, Ohio and Bakersfield, California, and Eastern Cable
Networks of Washington, Inc. ("ECNW") that operated the Washington, D.C. MMDS
system, the Company has grown to become the largest MMDS operator in the United
States in terms of both television and LOS households. The Company enhanced
its spectrum capacity during 1996 by being the top bidder in the FCC Auction
with a bid of $36.2 million for the BTA rights for its existing markets as well
as for its new markets.
The rapid growth CAI has experienced in the number of employees, the
scope of its operating and financial systems, the geographic area of its
operations, and the exploration of alternative uses of its MMDS spectrum, has
increased the operating complexity of CAI, as well as increased the level of
responsibility for both existing and new management personnel. In managing
this growth, CAI has been and will be required to continue to improve its
operating and financial systems to expand, train and manage its employees.
There can be no assurance that CAI will be able to attract and retain qualified
employees. Any inability to attract and retain qualified employees may impede
CAI's growth and its ability to compete with other subscription television
providers. In addition, beginning in the fiscal year ended March 31, 1997, the
Company has implemented a series of cost-cutting measures, including a
reduction of its workforce, in an effort to manage the increased costs
associated with this growth.
The Company made its initial public offering in February 1994, and issued
$275 million aggregate principal amount of its 12 1/4% Senior Notes due 2002
(the "Senior Notes") in September 1995. As of March 31, 1997, the Company had
40,540,539 shares of its common stock, without par value (the "CAI Common
Stock"), issued and outstanding.
BANX TRANSACTIONS. In addition to the consummation of several
acquisitions and the offering of CAI's Senior Notes, the Company also completed
a series of transactions with affiliates of Bell Atlantic and NYNEX in
September 1995. In March 1995, CAI entered into a strategic business
relationship with BANX Partnership, an affiliate of Bell Atlantic and NYNEX
(the "BANX Partnership") and with other affiliates of Bell Atlantic and NYNEX
(the "BANX Affiliates"). This relationship consisted of (i) the signing of the
Business Relationship Agreement, as amended (the "BR Agreement") with the BANX
Affiliates, (ii) the purchase by the BANX Partnership of $30 million of
convertible Term Notes due May 9, 2005 ("BANX Term Notes") and Warrants (the
"BANX Warrants") to purchase convertible preferred stock, no par value (the
"Voting Preferred Stock") (the "Stage I Closing"), and (iii) the purchase by
the BANX Partnership of $70 million of 14% Senior Convertible Preferred Stock,
par value $10,000 per share ("Senior Preferred Stock" and additional Warrants;
and together with the BANX Term Notes and BANX Warrants, the "CAI Securities")
(the "Stage II Closing"). Upon issuance of the CAI Securities in September
1995, the full conversion or exercise of the CAI Securities would have resulted
in the BANX Partnership having to make an additional investment, at that time,
in CAI of approximately $202 million (subject to adjustment in accordance with
the terms of the Modification Agreement (as defined below), and its pro forma
ownership interest in CAI increasing to approximately 45%.
Pursuant to the BR Agreement, which was intended to allow CAI to realize
revenue in certain of its markets without incurring substantial capital
expenditures required for subscriber equipment and installation as well as
eliminate most operating costs, other than channel license fees and
distribution system expenses, CAI granted to each BANX Affiliate the ability,
on a market by market basis, to elect to become the marketer and provider of
subscription television services using CAI's MMDS transmission systems in each
market in their respective service
<PAGE>
Item 1. Business (continued)
areas in exchange for monthly service
revenues based on the number of serviceable households and subscribers in each
market so optioned by a BANX Affiliate. In connection with the Company's
obligations under the BR Agreement, CAI substantially completed the
construction of digital video delivery systems in Boston, MA and Hampton Roads,
VA. Through December 12, 1996, however, neither BANX Affiliate had exercised
their respective options under the BR Agreement in these or any other markets
contemplated by the BR Agreement.
On December 12, 1996, the Company and the various BANX entities reached
an agreement (the "Modification Agreement") modifying certain terms of the BR
Agreement and providing CAI or its designee with the right to acquire the CAI
Securities. In connection with the Modification Agreement, the average per
share exercise/conversion price of the CAI Securities was reduced from $8.19 to
$5.31, on full conversion and exercise. This reduction would result in the
BANX Partnership having to make an additional investment in CAI of
approximately $95.0 million to acquire an approximately 45% ownership interest
in CAI. The Modification Agreement was subsequently amended on April 29, 1997,
pursuant to Amendment No.1 to the Modification Agreement ( the "Amendment").
The Amendment represents the renegotiation of an option granted to CAI to
repurchase the $100 million face amount of CAI securities held by the BANX
Partnership. The repurchase consideration is $40 million in cash and 100,000
shares of convertible junior preferred stock. The junior preferred stock,
which is non-voting, carries no coupon and has no maturity, is convertible into
2.5 million shares of CAI Common Stock. The repurchase option is exercisable
through February 28, 1998.
As part of the Amendment, the BANX Affiliates also immediately released
CAI from its obligation under the BR Agreement to make CAI's wireless MMDS
spectrum available to the BANX Affiliates at a future date in Boston, MA,
Pittsburgh, PA and Albany, Syracuse and Buffalo, NY. Upon a repurchase of the
CAI securities, as contemplated by the Amendment, the BR Agreement will lapse
in its entirety, releasing a similar obligation in CAI's other markets.
In connection with the execution of the Amendment, the BANX Partnership
also suspended or released CAI from a number of covenant restrictions and
governance rights and provided CAI with a blanket proxy on the approximately
10% interest in CS Wireless held by BANX entities. If the repurchase is
consummated, the CS Wireless shares would be returned to CAI without additional
consideration. The parties also exchanged mutual releases and reached an
agreement to share certain patent and intellectual property rights related to
their digital wireless venture.
In addition to the $40 million in cash, Bell Atlantic and NYNEX will
receive as consideration for the surrender of their CAI Securities, 100,000
shares of a series of non-voting junior preferred stock of CAI. The junior
preferred stock carries a liquidation preference of $30 million in the
aggregate, but carries no special dividends, covenants or governance rights,
except as provided by the Connecticut Business Corporation Act, under which CAI
is incorporated. Each of the 100,000 shares of junior preferred stock is
convertible into 25 shares of CAI Common Stock in the hands of a subsequent
purchaser unrelated to Bell Atlantic or NYNEX. If the junior preferred stock
continues to be held by Bell Atlantic and NYNEX at the end of three years, and
the value of the CAI common stock is not at least $14.00 per share, then Bell
Atlantic and NYNEX would be entitled to a value floor representing the
difference between the then-market value of the CAI common stock and $14.00 per
share (the "Value Floor"). At CAI's election, the Value Floor would be payable
either in the form of up to, but not more than, 1 million additional shares of
CAI Common Stock or in the form of a ten-year subordinated note in a principal
amount of up to $15 million, bearing interest at 8%, which is payable-in-kind
for the first five years.
INVESTMENT IN CS WIRELESS. Pursuant to the terms of a Participation
Agreement dated December 12, 1995 between CAI, CS Wireless and Heartland, CAI
and Heartland agreed to contribute to CS Wireless certain wireless cable
assets, including related operating liabilities, or the stock of subsidiaries
owning wireless cable assets for systems located principally in the Midwestern
and Southwestern regions of the country. The combination of these assets into
CS Wireless resulted in a company with approximately 7.5 million Estimated
Total Service Area households and 56,500 subscribers, as of March 31, 1996,
making it one of the largest wireless cable companies in the United States in
terms of subscribers and Estimated Total Service Area households.
The transaction closed on February 23, 1996 (the "CS Closing").
Immediately following the CS Closing, and after giving effect to the issuance
of equity by CS Wireless in connection with the Unit Offering (defined below)
and true-up adjustments contemplated by the Participation Agreement, CAI owned
approximately 52% of the equity in CS Wireless, Heartland owned approximately
37% of the equity in CS Wireless, and affiliates of Bell Atlantic and NYNEX own
approximately 10% of the equity in CS Wireless. The remaining 1% equity
interest was sold to purchasers of an aggregate of 100,000 units ("the "Unit
Offering"), each unit consisting of four $1,000 principal amount at maturity of
11
<PAGE>
Item 1. Business (continued)
3/8% Senior Discount Notes due 2006 and 1.1 shares of common stock of CS
Wireless in a private placement closing contemporaneously with the CS Closing.
The notes will accrete in value for five years and cash interest will be paid
beginning 2001. The gross proceeds to CS Wireless were approximately $230.0
million. The net proceeds of the Unit Offering were used in part to make the
cash payment to Heartland at the CS Closing, as required under the
Participation Agreement, and the remaining net proceeds will be used by CS
Wireless for capital expenditures to build-out its systems and to add
subscribers, for certain formation costs, working capital, and general
corporate purposes.
Prior to the contributions contemplated by the Participation Agreement,
CS Wireless, a wholly-owned subsidiary of the Company, operated a wireless
cable system in Cleveland, Ohio. Under the Participation Agreement, CS
Wireless acquired, or had contributed to it, stock of subsidiaries of CAI
owning wireless cable systems or channel rights, and operating wireless cable
systems or wireless channel rights held by CAI in Bakersfield, CA, Charlotte,
NC, and Stockton/Modesto, CA and held by Heartland in Dallas, Fort Worth, and
San Antonio, TX, Dayton, OH, Maysville and Sweet Springs, MO, Minneapolis, MN,
Grand Rapids, MI, and Salt Lake City, UT. The CAI assets contributed in the
transactions consisted of the above-mentioned four properties located outside
the operating territories of Bell Atlantic and NYNEX. The Heartland
contribution was originally valued at approximately $138.7 million, the
estimated fair value. Heartland received 3,578,834 shares of CS Wireless
common stock, approximately $28.3 million of cash, and $40.0 million of notes
from CS Wireless, before "true-up" adjustments.
Pursuant to the terms of the Participation Agreement regarding a true-up
of the amounts contributed by each of CAI and Heartland to CS Wireless (based
on the value of MMDS assets or channel rights or stock of entities owning such
assets or rights), and the consummation of the exchange of certain MMDS assets
and channel rights relating to Portsmouth, New Hampshire owned by Heartland and
certain of its affiliates for shares of CS Wireless owned by the Company, the
Company's 52% interest in CS Wireless was reduced to approximately 48% and
Heartland's interest in CS Wireless was increased to approximately 39%
Although CAI's stock ownership in CS Wireless fell below 50%, CAI will continue
to be the largest single stockholder of CS Wireless following the consummation
of the Portsmouth transaction and the true-up adjustment.
RECENT DEVELOPMENTS
On June 6, 1997, the Company closed a $30 million interim credit
facility provided by Foothill Capital Corporation and affiliates of Canyon
Capital Management, L.P. (the "Interim Debt Lenders"). The credit facility is
governed by the terms of the LSA, and is comprised of $25 million of term debt,
of which $10 million was made available at the closing and is currently
outstanding. The balance of the term debt will be made available to CAI upon
the achievement of certain agreed-upon operational benchmarks. The term debt
bears interest at the rate of 13% per annum. So long as the Company is not in
default of its obligations under the credit facility, 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. 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 Interim Debt Lenders have also made available to CAI a $5 million
revolving loan, of which $3 million was made available to CAI at the June 6th
closing. The remaining $2 million of the revolving loan will be made available
to CAI upon the achievement by the Company of certain operational benchmarks.
The 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. As of June 24, 1997, the Company had not yet
borrowed any amount against the revolving loan.
The credit facility is collateralized by a pledge of the assets of CAI,
including the stock of its wholly-owned subsidiaries, certain investments held
by the Company and a pledge of the stock of CS Wireless held by CAI. In
connection with the closing of the credit facility, the Company is required to
effect certain corporate restructurings in an effort to enhance the Interim
Debt Lender's collateral position. The proceeds from the credit facility will
be used by the Company to continue to build-out its wireless cable business and
for general working capital purposes.
In addition to $1.5 million in cash fees payable to the Interim Debt
Lenders at the closing of the 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 with the credit facility, 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, which interest shall accrue
and be payable in full at the maturity date of such note, and (ii) issue
warrants to purchase CAI common stock at any time
<PAGE>
Item 1. Business (continued)
between the closing and the
fifth anniversary of such 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
accrued interest) on the above-mentioned promissory note, DIVIDED BY (ii) the
lowest of (A) $1.90 per share, (B) the lowest effective net price for the
Common Stock (or its equivalent) which 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, (C) the lowest 20-day fair market value of the Common Stock
following the consummation of a transaction identified in clause (B) above, and
(D) the 20-day fair market value of the Common Stock immediately following
confirmation of a plan of reorganization under Chapter 11 of the United States
Bankruptcy Code. The warrants contain certain anti-dilution provisions and
registration rights, and have been allocated among the Interim Debt Lenders.
The Company and its subsidiaries are subject to several restrictions that
are contained in the LSA, including, without limitation, restrictions on the
Company's ability to (i) incur additional indebtedness, contingent or otherwise
(ii) grant liens, (iii) dispose of assets or make certain investments other
than in accordance with the terms of the LSA, and (iv) the use of the proceeds
from the credit facility. The indebtedness under the credit facility is
permitted under the Company's Indenture governing its 12 1/4 % Senior Notes,
and under the terms of the various investment and business relationship
agreements among the Company and affiliates of Bell Atlantic and NYNEX, as
amended.
OTHER. It is likely that CAI will consider acquisitions of wireless
cable companies or licenses from time to time, subject to the covenants and
restrictions imposed by the various CAI Securities, Senior Notes and LSA.
These acquisitions, if any, would be financed by the sale or exchange of
securities of CAI, borrowings from existing lenders or others, or a combination
thereof. It is CAI's policy not to discuss or comment upon negotiations
regarding such acquisitions until a definitive agreement is signed, unless the
law otherwise requires. There can be no assurance that CAI will be successful
in identifying, negotiating and completing such transactions.
INDUSTRY OVERVIEW
SUBSCRIPTION TELEVISION INDUSTRY. The subscription television industry
began in the late 1940s to serve the needs of residents in predominantly rural
areas with limited access to local broadcast television stations. The industry
expanded to metropolitan areas due to, among other things, the fact that it
offered better reception and more programming. Currently, such systems offer
various types of programming, which generally include basic service, enhanced
basic, premium service and, in some instances, pay-per-view service.
A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part,
of the number of channels and services included in the basic service package
and the cost of such services to the television system operator. In most
instances, a separate monthly fee for each premium service and certain other
specific programming is charged to customers, with discounts generally
available to customers receiving multiple premium services. Monthly service
fees for basic, enhanced basic and premium services constitute the major source
of revenue for subscription television systems. Converter rentals, remote
control rentals, installation charges and reconnect charges for customers who
were previously disconnected are also included in a subscription television
system's revenues, but generally are not a major component of such revenues.
Traditional cable systems, as defined in Section 602 of the Communications Act
of 1934 (the "Communications Act"), are subject to both federal and local
regulation. In addition, the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") imposed strict federal and local
rules governing aspects of cable prices for programming and equipment. See
"Business 3/4 Regulation."
WIRELESS CABLE INDUSTRY BACKGROUND. In 1983, the FCC reallocated a
portion of the electromagnetic radio spectrum located between 2.5 and 2.7 GHz,
permitted this spectrum to be used for commercial purposes, and modified its
rules on the usage of the remaining portion of such spectrum. Regulatory and
other obstacles nevertheless impeded the growth of the wireless cable industry
through the remainder of the 1980s. In addition, before the 1992 Cable Act
became effective, wireless cable operators' ability to obtain programming from
cable-controlled, hard-wire cable owned programmers was not assured. The
factors contributing to the increasing growth of wireless cable systems since
that time include (i) regulatory reforms by the FCC to facilitate competition
with hard-wire cable, (ii) federal legislation that increased the availability
of programming for wireless cable systems, (iii) consumer demand for
alternatives to traditional hard-wire cable service, (iv) enhanced ability of
wireless cable operators to aggregate a sufficient number of channels in each
market to create a competitive product, and (v) increased availability of
capital to wireless cable operators in the public and private markets.
According to Paul
>PAGE>
Item 1. Business (continued)
Kagan Associates, Inc. ("Kagan"), there were approximately
200 wireless cable systems currently operating in the United States, serving
approximately 850,000 subscribers at the end of 1995.
Wireless cable systems can provide subscribers with the same or superior
video television signal as that of traditional hard-wire systems. Both hard-
wire cable systems and wireless cable systems receive programming at a headend.
Wireless cable programming, however, is then retransmitted by microwave
transmitters from an antenna located on a tower associated with the headend to
a small receiving antenna located on a subscriber's rooftop. At the customer's
location, the signals are converted to frequencies that can pass through
conventional coaxial cable into a descrambling converter located on top of a
television set. Wireless cable requires a clear LOS, because the microwave
frequencies used will not pass through dense foliage, hills, buildings or other
obstructions. To ensure the clearest line-of-sight possible in CAI's markets,
CAI has placed, and plans to place, such towers on top of tall buildings or
accessible mountain tops located in such markets. There exists, in each of
CAI's operating and targeted markets, a number of acceptable locations for the
placement of its towers, and CAI does not believe that the failure to secure
any one location for such placement in any single market will materially affect
CAI's operations in such market. Additionally, some LOS obstructions can be
overcome with the use of signal boosters and beam benders which retransmit an
otherwise blocked signal over a limited area. CAI believes that its coverage
will be further enhanced upon the implementation of digital technology and/or
cellularization. Since wireless cable systems do not require an extensive
cable plant, wireless cable operators can provide customers with a high quality
picture resulting in a reliable signal with few transmission disruptions at a
significantly lower system capital cost per installed customer than traditional
hard-wire cable systems.
Wireless cable programming is transmitted through the air via microwave
frequencies from a transmission facility to a small receiving antenna at each
subscriber's location, which generally requires an unobstructed LOS from the
transmission facility to the subscriber's receiving antenna. Traditional hard-
wire cable television systems also transmit signals from a central transmission
facility, but deliver the signal to a subscriber's location through an
extensive network of fiber optic and/or coaxial cable and amplifiers. Since
wireless cable systems do not require a network of fiber optic and coaxial
cable, wireless cable operators such as CAI can provide subscribers with a high
quality picture with fewer transmission disruptions at a significantly lower
capital cost per installed subscriber than traditional hard-wire cable systems.
In addition, not having to maintain a hard-wire transmission system results in
lower ongoing maintenance costs for wireless cable systems. As a result of the
generally low capital expenditure requirements and low maintenance costs, CAI
believes it should be able to achieve positive cash flow at lower levels of
subscriber penetration than hard-wire cable companies.
CAI provides its subscribers with a variety of programming choices,
including local television broadcast stations; cable television networks such
as CNN, ESPN, A&E, MTV, Nickelodeon, Discovery, HBO, Showtime and Disney; pay-
per-view programming services; and various feature films and sporting events.
CAI currently offers variations of such programming packages in its six
operating markets. The majority of CAI's subscribers are equipped with fully
addressable converter boxes which enables CAI to offer pay-per-view and other
pay video services to such subscribers. The channels that CAI offers vary in
each market depending upon subscribers' viewing preferences.
EMPLOYEES
As of June 24, 1997, CAI had a total of 204 employees, of which none were
subject to collective bargaining agreements. CAI has never experienced a work
stoppage and believes that employee relations are good.
ITEM 2. PROPERTIES
CAI leases various office sites in Albany, New York; Arlington, Virginia;
Chadds Ford, Pennsylvania (as of April 1, 1997); and in each region in which
an operating system exists or is being constructed. CAI also leases
transmission tower sites in the regions of its operating systems. CAI
believes adequate office space and tower sites are readily available in all
markets.
CAI owns substantially all of the equipment which is necessary to conduct
its operations, except certain vehicles, test equipment, and office equipment.
A significant portion of CAI's investment in plant and equipment consists of
subscriber equipment, which includes antennas, block downs, converters and
remotes, and related installation costs, principally located at the
subscribers' premises, and the reception and transmitter equipment located at
the transmitter sites.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
CAI has been named in six class action lawsuits alleging various
violations of the federal securities laws filed in the United States District
Court for the Northern District of New York. The 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 Northern District of New York. The amended, consolidated complaint,
which names the Company, Jared E. Abbruzzese, Chairman and Chief Executive
Officer of the Company, John J. Prisco, President, Chief Operating Officer and
a Director of the Company, and Alan Sonnenberg, the former President of the
Company and currently a member of its Board of Directors, as defendants,
alleges a variety of violations of the anti-fraud provisions of the Federal
securities laws by CAI arising out of its alleged disclosure (or alleged
omission from disclosure) regarding its Internet and other flexible use of MMDS
spectrum, as well as its business relationship with Bell Atlantic and NYNEX.
Specifically, the complaint alleges that defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and Rule 10b-5 promulgated under the Exchange Act during the specified Class
Period (May 23, 1996 through December 6, 1996).
The Company has notified the carrier of its Directors' and Officers'
Liability insurance policy, which is intended to cover not only the Company's
officers and directors, but also the Company, itself, against claims such as
those made in the Securities Lawsuit. The policy covers up to $5 million of
any covered liability, subject to a retention amount of $500,000.
The Securities Lawsuit is in its preliminary stages. A scheduling
conference was held on June 3, 1997, at which the briefing schedule for
defendants' motion to dismiss was agreed upon among the parties. Based on such
schedule, the Company believes that such motion will not be ruled upon until
the fall of 1997. While the motion is pending, all other deadlines affecting
motions and discovery have been postponed.
The Company and individual defendants are contesting the Securities
Lawsuit vigorously and believe it is entirely without merit at this time.
Accordingly, management believes the Securities Lawsuit will not have a
material adverse effect on the Company's earnings, financial condition or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the last three months of
the fiscal year ended March 31, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The principal market in which CAI Common Stock is traded is the NASDAQ
National Market System under the ticker symbol "CAWS." The approximate number
of stockholders of record on June 17, 1997 was 775. The high and low sales
prices for the Common Stock on the NASDAQ are as follows:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996
First Quarter $13.75 $ 9.75
Second Quarter 13.00 8.38
Third Quarter 10.50 7.25
Fourth Quarter 10.38 7.25
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter 17.50 6.25
Second Quarter 9.38 6.63
Third Quarter 7.38 0.84
Fourth Quarter 4.00 0.97
FISCAL YEAR ENDING MARCH 31, 1998
First Quarter (through June 25, 1997) 2.00 1.03
</TABLE>
DIVIDENDS
The Company has never paid cash dividends on the CAI Common Stock and
does not currently intend to pay cash dividends on the CAI Common Stock in the
foreseeable future.
Since the Company generally conducts, and in the future intends to
conduct, operations through subsidiaries, the Company's ability to declare or
pay cash dividends will depend in part on the ability of the Company's present
and future subsidiaries to declare or pay cash dividends to the Company.
Any future determination by the Company to pay cash dividends on the CAI
Common Stock will be within the discretion of the Company's Board of Directors
and will depend upon the earnings of the Company, the Company's financial
condition and capital requirements and other financial factors which are
considered relevant by the Company's Board of Directors.
The Company has accrued dividends of $18,660,734 on its outstanding
Senior Preferred Stock as of March 31, 1997. The Company is not required to
pay dividends on the Senior Preferred Stock until December 1, 1998. The
Company began paying quarterly dividends on the 8% Redeemable Convertible
Series A Preferred Stock, no par value (the "Series A Preferred Stock"), of CAI
in March 1996. All of the Series A Preferred Stock was converted into common
stock by March 31, 1997.
Pursuant to certain restrictive covenants contained in the BANX Term
Notes and the Senior Notes and the Loan and Security Agreement, the Company
cannot declare or pay any dividends or make any distributions on shares of the
Company except for dividends required to be paid on the Senior Preferred
Stock. Also, the Company may not purchase or redeem any of its shares,
including warrants and options.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated
financial statements and related notes contained elsewhere herein (in
thousands, except per share data):
<TABLE>
<CAPTION>
Seven- Eight-
month month
Period Period Year
Year Ended Year Ended Year Ended Ended Ended Ended
March 31, March 31, March 31, March 31, August 31, Dec. 31,
1997 1996{(2)} 1995{(3)} 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Summary of Operations:
Revenue $ 36,327 $ 30,682 $ 5,148 $ 918 $ - $ -
Net loss (82,298) (40,986) (14,107) (7,521) (1,378) (189)
Preferred dividend
requirement 13,011 5,879 328 - - -
Ratio of earnings to
fixed charges{(1)} - - - - - -
Per Share Data:
Loss per common share (2.38) (1.73) (.93) (.61) (.12) (.02)
Weighted average number
of shares outstanding 40,069 27,076 15,457 12,278 11,777 11,777
</TABLE>
<TABLE>
<CAPTION>
March 31, March 31, March 31, March 31, August 31, Dec. 31,
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Financial Condition:
Wireless channel rights $ 207,681 $ 205,974 $ 46,192 $ 10,791 $ 1,350 $ -
Investment in CS Wireless 88,535 113,054 - - - -
Property and equipment 69,767 52,569 21,840 2,434 763 -
Total assets 542,340 698,795 78,461 41,047 2,499 395
Debt 311,787 318,435 29,532 3,130 3,511 312
Redeemable preferred
stock 87,821 92,883 18,378 - - -
Shareholders' equity 114,690 192,611 22,115 34,346 (1,597) 75
</TABLE>
{(1)} In calculating the ratio of earnings to fixed charges, earnings
consists of losses prior to income tax benefit, minority interest in
loss, and fixed charges. Fixed charges consists of interest expense,
amortization of debt issuance costs and one-third of rental payments on
operating leases (such amount having been deemed by CAI to represent
the interest portion of such payments). Earnings were inadequate to
cover fixed charges by the amount of $97,298, $53,307, $15,004, $7,552,
$1,378, and $189 for the periods ended in 1997, 1996, 1995, 1994, 1993,
and 1992, respectively.
{(2)} The Company acquired ACS and ECNW on September 29, 1995. Also, the
Company closed a series of transactions with Heartland wherein CS
Wireless received certain assets from Heartland in exchange for CS
Wireless common stock and cash (see Notes 2 and 5 to the Financial
Statements).
{(3)} The Company acquired the New York System on January 9, 1995 (see Note
2 to the Financial Statements).
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Annual Report on Form 10-K, including
the exhibits hereto, relating to CAI'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 CAI's interim
credit facility, the successful launch of a digital subscription video
business, 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 CAI to redeploy or sell excess equipment, the assumptions,
risks and uncertainties set forth herein, including in the following section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as other factors contained herein and in
CAI's securities filings.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable industry requires significant capital. CAI's plan
for continued expansion requires substantial capital investment on a
continuing basis and availability of sufficient financing is essential to
that plan. Funds are required for the lease or acquisition of channel
rights, the acquisition of wireless cable systems, the construction of system
head-end and transmission equipment, start-up costs related to the
commencement of operations and subscriber installation costs. CAI has
financed its capital requirements since inception through a combination of
the issuance of debt and equity securities, the incurrence of loans and the
assumption of debt and other liabilities in connection with acquisitions.
CAI has incurred operating losses since inception and its cash flow from
operating activities has to date been insufficient to cover its operating
expenses.
CAI has incurred net losses since inception in 1991 of approximately
$147 million through March 31, 1997 and expects to realize additional net
losses on a consolidated basis while it develops and expands its MMDS
systems. Additionally, CAI has substantial indebtedness and, beginning in
fiscal year 1999, will have significant debt service requirements. As of
March 31, 1997, CAI had outstanding consolidated long-term debt of
approximately $312 million, mandatorily redeemable preferred stock and
accrued dividends of approximately $88 million, and shareholders' equity of
approximately $115 million.
Pursuant to CAI's debt instruments, CAI is restricted from incurring
additional indebtedness (except in connection with purchases of goods and
services in the ordinary course of business, and other ordinary course
indebtedness permitted thereunder), granting liens to secure repayment of
indebtedness, making investments (other than investments specifically
permitted thereunder), pay dividends, dispose of assets, enter into any
merger, consolidation, reorganization, or recapitalization plan, retire long-
term debt, or make any acquisitions without the prior consent of the lenders.
Further, in accordance with the LSA, the Company is required to maintain
minimal levels of net worth and number of subscribers, and is limited with
respect to the amount of annual capital expenditures.
CAI's recurring losses, substantial commitments, and ongoing cash
requirements in the development of alternate uses of its MMDS Spectrum raise
substantial doubt about CAI continuing as a going concern. The Company has
outstanding purchase orders of approximately $3.2 million as of March 31,
1997, with approximately $5.0 million in additional purchase orders as of
June 17, 1997 (relating primarily to the Boston project), is obligated to pay
approximately $8.5 million in minimum license fees and operating lease
payments, approximately $1.1 million in MMDS license auction fees, and to
fund operating costs.
Management of CAI plans to mitigate the uncertainties related to the
Company's continued existence as a going concern by securing interim
financing, exploring alternative uses of its MMDS spectrum in addition to
subscription television and pursuing longer term financing through obtaining
strategic partner(s) interested and willing to participate with the Company
in the development of its operating systems and various alternative uses of
its MMDS spectrum. Although certain qualified parties have expressed
interest in entering into a strategic alliance with the Company, CAI has not
yet reached a definitive agreement with any such qualified party. Much of the
Company's business plan relating to fixed, flexible use of the MMDS spectrum
is dependent upon CAI securing a new strategic partner to provide the
necessary capital resources, as well as engineering and other expertise, and
subscribers for such flexible-use services, to CAI as it develops these
business segments. There can be no assurance that the
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Company will be able
to secure any additional financings or strategic relationships on terms and
conditions satisfactory to the Company, if at all. Failure to obtain such
financings and relationships will have a material adverse effect on the
Company. Further, there can be no assurance that, even with additional
financing, new strategic partner(s) and receipt of all necessary regulatory
authorizations, the Company will be able to launch fixed, flexible two-way
uses of its MMDS spectrum in a commercially successful manner.
On June 6, 1997, CAI completed a $30 million interim financing
arrangement with Foothill Capital Corporation and Canyon Capital
Management, L.P. to fund the Company's current working capital
requirements. This credit facility consists of $25 million in term
loans and a $5 million revolving loan, both of which mature on March
1, 1999. Management estimates that the present revenue stream and
cash resources available to the Company, including this interim
financing in June 1997, are adequate to sustain the Company's needs
through December 1997, subject to meeting the terms of the financing
agreement. The LSA permits four drawdowns on the term loan, of which
the first for $10 million took place in June 1997. The other
drawdowns are predicated on meeting certain operational benchmarks.
There is no assurance that these benchmarks can be met.
Additional funding 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 BANX, and restrictions imposed by
the Senior Notes and the interim financing arrangement and significant
transactions likely will require their prior consents. The Senior Notes
impose similar restrictions on the incurrence of additional debt and on the
ability to effect asset sales. There is no assurance that any additional
financings will be available to the Company on satisfactory terms and
conditions, if at all, especially in light of the BANX and Senior Note
restrictions.
The Company's business strategy has shifted away from analog to digital
wireless cable systems for its MMDS subscription television services and to
alternative uses of its MMDS spectrum for a variety of applications including
video, voice and data transmission. In management's opinion, the new
strategy will help meet the current and perceived future competition and in
relation to obtaining a new strategic partner, demonstrate the flexibility
and increased value of the Company's MMDS spectrum.
The Company's operating plans include digital video, two-way voice and
data, Internet and Intranet access services and testing. Additionally, CAI
has received FCC approval in selected markets to test and/or provide wireless
services in addition to subscription video, using the MMDS spectrum. These
services include Internet and intranet access and two-way voice and data
transmission. The design and full implementation of these systems capable of
delivering these services will require additional financing from a strategic
partner.
Additionally, pursuant to the terms of the Modification
Agreement, CAI has been granted the right to purchase the CAI
Securities. 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
amended Modification Agreement allows CAI or its designee to buy out
the BANX investment for $40 million plus 100,000 shares of CAI junior
preferred stock.
The Company intends to commence digital subscription television service
in the Boston market during the fall of 1997, pending the availability to the
Company of the necessary subscriber equipment and access to pre-digitized
compressed programming. Utilizing portions of the digital MMDS system built
by the Company in Boston last year, CAI intends to launch the digital
subscription television service in certain locations served by the Company's
main transmitter located in downtown Boston and by selected booster sites
throughout the greater Boston area. The Company plans on using an internal
marketing staff to obtain subscribers costing an estimated $45 to $50 per
potential subscriber. Subscriber equipment cost, assuming one converter per
subscriber, is estimated at $610 per subscriber including installation. To
replace programming that would have been provided by the BANX Affiliate under
the BR Agreement, the Company is currently in the process of negotiating a
joint venture with TelQuest Communications, Inc., an entity of which Jared E.
Abbruzzese, Chairman of the Company, is the principal stockholder, and CS
Wireless, to form an entity (hereinafter, "TelQuest Joint Venture") capable of
providing pre-digitized compressed programming to CAI, CS Wireless and other
MMDS and hard-wire cable operators. CAI intends to use such programming for
Boston and any other markets in which it determines to roll-out a digital
video product. See "Item 13. Certain Relationships and Related Transactions."
In the event that the TelQuest Joint Venture is not formed, CAI would have to
construct a compression facility in the Boston area to provide digital
programming, or make other arrangements to receive pre-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
digitized compressed
programming via satellite. The Company estimates the cost of such
construction of a digital compression facility to be approximately $5 million
as of June 1997. There can be no assurance that the necessary subscriber
equipment or access to pre-digitized compressed programming will be available
to the Company in the Boston market, and if available, that the Company will
be able to successfully launch and operate a digital subscription television
business in this market.
EQUIPMENT REPLACEMENT. Due to interference caused by the new PCS telephone
frequencies, the Company intends to replace approximately 24,000 subscriber
downconverters in the Philadelphia market at a rate of approximately 500
replacements per month plus all of the new installations receiving the new
equipment. Replacements will cost approximately $84 per unit, while new
installations will incur a $62 per unit additional cash outflow by not
reusing currently owned equipment. The total cost of this replacement in
Philadelphia is approximately $1.7 million. Replacement costs in other CAI
markets, if deemed necessary, are not expected to be material.
CASH FLOW INFORMATION
During the year ended March 31, 1997, CAI expended approximately $37.1
million to purchase equipment, $34.8 million to fund operating activities,
$3.7 million to acquire wireless channel rights and $45.3 million to pay
senior and other debt, including $34.0 million due to the FCC for the
purchase of MMDS licenses at the 1996 auction. During this period, CAI
funded its cash requirements out of existing cash balances. At March 31,
1997, CAI had cash and cash equivalents of approximately $10.5 million.
During the year ended March 31, 1996, CAI expended approximately $14.5
million to purchase equipment, $34.6 million to fund operating activities and
$24.5 million to acquire wireless channel rights. During fiscal 1996, CAI
funded its cash requirements out of existing cash balances and the financings
more fully described above. At March 31, 1996, CAI had cash and cash
equivalents of approximately $103.3 million.
On September 29, 1995, the Company received $265.9 million from the
Senior Notes Offering, net of $9.1 million in underwriting costs and
interest, of which $90.6 million was placed in escrow to cover three years of
interest, plus $70 million from the sale of 7,000 shares of Senior Preferred
Stock and the Stage II Warrants to BANX. These funds were used in part to
pay the cash portions of the following acquisitions: ACS ($41.1 million),
ECNW ($8.9 million), the Baltimore Assets ($11.3 million) and the Pittsburgh
Assets ($6.4 million). The non-cash portion of the purchase prices was
satisfied with CAI Common Stock or debt, primarily notes.
Additionally, the Company loaned ACS $22.3 million to repay certain ACS
bank debt and another $11.3 million to pay other costs incurred by ACS
relating to the ACS acquisition and for other corporate purposes. CAI also
used $12.4 million to repay the interim financing it received from Smith
Barney Holdings, Inc. in June 1995, including interest, and another $2.1
million to pay legal and other fees relating to the acquisition, Stage II
Closing and the offering of the Senior Notes.
In April 1995, CAI raised an additional $1.5 million of equity capital
through the issuance of 179,765 shares of common stock. On May 9, 1995, at
the Stage I Closing CAI received $30.0 million from Bell Atlantic and NYNEX,
the proceeds of which were used to retire $21.3 million of short-term notes
issued in connection with the purchase of the New York System, provide a
required $4.0 million cash deposit under the ACS Merger Agreement, and to pay
$3.0 million of cost associated with the short-term debt issued for the
acquisition of the New York System and for transaction expenses and working
capital. In June 1995, CAI received $12.0 million from Smith Barney
Holdings, Inc. for working capital purposes.
During the year ended March 31, 1995, CAI expended
approximately $15.0
million to purchase equipment, $8.1 million to fund operating activities,
$9.9 million to acquire the New York System, and $1.3 million to acquire
wireless channel rights. During this period CAI funded its cash requirements
out of existing cash balances, an issuance of equity securities generating
net proceeds of approximately $7.1 million, debt proceeds of $9.8 million,
and the disposition of equipment generating net proceeds of approximately
$0.6 million. At March 31, 1995, CAI had unrestricted cash and cash
equivalents of approximately $1.2 million.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
OPERATIONS
As of March 31, 1997, the Company had approximately 70,800
wireless systems subscribers compared to 82,900 subscribers as of
March 31, 1996. The 12,100 net decline in subscribers is due primarily
to the New York System decline of approximately 5,100 subscribers, the
Philadelphia System decrease of approximately 6,400 subscribers and
other system net decreases of approximately 600 subscribers for the
comparable periods. The New York System is losing subscribers to
hardwire cable operators primarily due to the system's limited channel
capacity. This trend in New York is likely to continue. The Company
has implemented a program to increase retention of subscribers in
Philadelphia and other systems through an increase in installation
fees, which the Company believes will increase subscriber commitment,
and thus, retention. This retention policy has slowed subscriber
additions. The decrease in subscribers experienced in the other
systems was primarily due to a curtailment of marketing efforts in the
first half of the year ended March 31, 1997, in anticipation of the
then expected implementation of the BR Agreement. The decline in
subscribers in Philadelphia and New York has continued through June
21, 1997 at which time the total subscribers were approximately
66,500.
The net result of disconnects minus reconnects divided by the
number of subscribers at the beginning of the period is considered the
churn rate in the subscription television industry. The churn rate is
calculated monthly and year to date for an average monthly rate over a
year. CAI's average monthly churn rate for the year ended March 31,
1997 was 4.6% overall with individual operating systems ranging from
2.5% to 5.5%. CAI's average monthly churn rate for the year ended
March 31, 1996 was 4.0% overall with individual operating systems
ranging from 2.8% to 5.4%. Churn rates within the 2% to 5% range are
common in this industry, with 2% being excellent, 3% the standard
norm, and 5% or above being unfavorable.
The cost of disconnecting and/or reconnecting customers is generally
expensed. Subscriber equipment includes the capitalized labor to install, but
depreciation rates are different based on recoverability or lack thereof.
Subscriber equipment that is recoverable (i.e. antennas and converters) is
generally depreciated over five years based on the life of the equipment. The
non-recoverable portion, consisting of installation labor, wire, small parts
and supplies, is generally depreciated over two or three years based on the
applicable churn rate of each operating system, which approximates subscriber
lives.
Long-lived assets and certain identifiable intangibles are
periodically reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. The Company periodically reviews wireless channel rights
and other long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may
not be recoverable. When such circumstances occur, the Company
evaluates the possible effects on the carrying amount of such assets.
The Modification Agreement with BANX did not result in an impairment
of the Company's long-lived assets.
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both could be
reduced in the future due to changes in, among other things, technology, the
Company's ability to obtain permission for flexible use of the wireless
channel rights, government regulation, available financing or competition.
As a result, the carrying amounts of long-lived assets, including goodwill,
could be reduced by amounts which would be material to the financial
statements.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
COMPARISON OF OPERATING RESULTS
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
The following tables illustrate the changes discussed below in
management's discussion of the results of operations.
<TABLE>
<CAPTION>
OPERATING REVENUES
(in millions of dollars)
YEAR ENDED MARCH 31,
1997 1996 CHANGE
<S> <C> <C> <C>
Same Systems $13.4 $15.4 $ (2.0)
Acquired Systems (FY 96) 22.9 12.0 10.9
Total 36.3 27.4 8.9
Disposals:
Disposed Systems (FY 96) - 3.3 (3.3)
Total operating revenues $36.3 $30.7 $ 5.6
</TABLE>
<TABLE>
<CAPTION>
OPERATING EXPENSES
(in millions of dollars)
YEAR ENDED MARCH 31,
1997 1996 CHANGE
<S> <C> <C> <C>
Same Systems $27.9 $30.9 $ (3.0)
Acquired Systems (FY 96) 33.3 16.4 16.9
Corporate operations 20.4 13.1 7.3
Total 81.6 60.4 21.2
Disposals:
Disposed Systems (FY 96) - 5.1 (5.1)
Total operating expenses $81.6 $65.5 $ 16.1
</TABLE>
CAI's revenue increased $5.6 million ($36.3 million FY 1997;
$30.7 million FY 1996) in the year ended March 31, 1997 over the
same period in the prior year. The increase resulted primarily from
the acquisition of ACS, with operating systems in Philadelphia,
Cleveland, and Bakersfield, and the acquisition of ECNW, with an
operating system in Washington D.C. ("Acquired Systems" except for
the "Disposed Systems" (Cleveland and Bakersfield) which were
contributed to CS Wireless). Both acquisitions were made on
September 29, 1995. Acquired Systems revenue increased $10.9
million ($22.9 million FY 1997; $12.0 million FY 1996) over the six-
month period included in the prior year. Revenue from operations
that were owned throughout both years ("Same Systems") decreased
$2.0 million ($13.4 million FY 1997; $15.4 million FY 1996) in the
year ended March 31, 1997, primarily due to the decrease in the
number of subscribers mentioned above. During December 1996, CAI
instituted a $2 per subscriber rate increase that, while increasing
the average revenue per subscriber; may have caused additional net
reduction of subscribers in the last quarter FY 97 and into the
future.
CAI's television subscription revenue was $33.1 million for
the year ended March 31, 1997 as compared to $28.1 million for the
year ended March 31, 1996 generated by the following systems:
Albany ($3.2 vs. $3.1 million), Rochester ($0.7 vs. $0.7 million),
New York City ($7.3 vs. $9.2 million), Hampton Roads ($1.1 vs. $0.8
million), Philadelphia ($19.4 vs. $10.8 million) , Cleveland ($0 vs.
$2.1 million), Bakersfield ($0 vs. $0.9 million), Washington ($1.2
vs. $0.2 million), Hartford VDT ($0 vs. $0.1 million), and
Providence SMATV ($0.2 vs. $0.2 million). The systems with zero for
the current year were either Disposed Systems or systems in which
service was discontinued (Hartford VDT) in the prior year.
Operating expenses were $81.6 million and $65.5 million for
the years ended March 31, 1997 and 1996, respectively. The $21.2
million increase, excluding the Disposed Systems, is attributable
primarily to increases in (a) operations of acquired systems (ACS
and ECNW) of $10.3 million ($20.3 million FY 1997; $10.0 million FY
1996), excluding depreciation and amortization, due to a year of
operations of the Philadelphia and Washington systems in FY 1997
versus only six months in FY 1996; (b) general and administrative
corporate operations of $3.2 million ($9.4 million FY 1997; $6.2
million FY 1996), excluding depreciation and amortization, primarily
due to increased staffing
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
and effort to maintain a larger operation,
developing digital markets, and developing other potential uses of
the wireless channel rights; (c) depreciation and amortization of
$9.4 million ($32.3 million FY 1997; $22.9 million FY 1996)
primarily due to the acquisition of ACS and ECNW fixed assets,
wireless channel rights, and goodwill; and (d) abandoned project
costs of $2.1 million in FY 97; offset by a decrease in marketing
costs of the Same Systems of $1.1 million ($2.0 million FY 1997;
$3.1 million FY 1996) due to a concentrated effort to reduce
marketing costs and limit subscriber growth in light of the then
anticipated implementation of the BR Agreement with BANX.
CAI has a $17.6 million equity in net loss of affiliate for
the year ended March 31, 1997, relating to its 48% investment in CS
Wireless. In the prior year, CAI's operating systems contributed to
CS Wireless on February 23, 1996 were consolidated in the operating
results of CAI from October 1, 1995 to December 31, 1995.
Interest income increased $0.4 million ($6.4 million FY 1997;
$6.0 million FY 1996) for the year ended March 31, 1997. The
increase is primarily due to interest earned on the Debt Service
Escrow established in connection with the Company's offering of
12.25% Senior Notes Due 2002 and the investment of the cash
remaining from the net proceeds of the Senior Notes offering. In
future periods, interest income is anticipated to steadily decrease
as the Debt Service Escrow and investments are used to fund debt
service, project costs, capital purchases, and operations of the
Company.
Interest expense increased $16.2 million ($40.8 million FY
1997; $24.6 million FY 1996) for the year ended March 31, 1997. The
increase is primarily due to interest expense incurred on the Senior
Notes issued on September 29, 1995. Interest expense is expected to
increase in FY 1998 with the addition of the $30 million of interim
financing (see Note 19 to the Financial Statements).
YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31,
1995
CAI's total revenue was $30.7 million for the year ended March
31, 1996 as compared to $5.1 million for the year ended March 31,
1995 primarily due to the ACS acquisition on September 29, 1995 and
a full year of operations for the New York System. ACS contributed
$15.0 million to the overall increase of $25.6 million for its six
months of operations included since the date of acquisition. The
New York System contributed $7.5 million of the increased revenue.
The remaining increase of $3.1 million is attributable to the growth
of subscribers in the other systems.
CAI's television subscription revenue was $28.1 million for
the year ended March 31, 1996 as compared to $4.9 million for the
year ended March 31, 1995 resulted from the following systems:
Albany ($3.1 vs. $1.9 million), Rochester ($0.7 vs. $0.1 million),
New York City ($9.2 vs. $2.6 million), Hampton Roads ($0.8 vs. $0.1
million), Philadelphia ($10.8 vs. $0 million), Cleveland ($2.1 vs.
$0 million), Bakersfield ($0.9 vs. $0 million), Washington ($0.2 vs.
$0 million), Hartford VDT ($.01 vs. $0.1 million), and Providence
SMATV ($0.2 vs. $0.1 million). The systems with zero for the prior
year were acquired in the current year. The increase in the New
York City television subscription revenue is due to a full year of
operations for the year ended March 31, 1996 as compared to only
three months of operations included in the year ended March 31,
1995. The television subscription revenue for Cleveland and
Bakersfield totaling $3.0 million is for the period that these two
systems were part of CAI. Cleveland and Bakersfield were acquired as
part of the ACS acquisition and subsequently contributed to CS
Wireless. CS Wireless was consolidated with CAI until the CS
Closing (February 23, 1996). CS Wireless' revenue and expenses are
not included in CAI's consolidated financial statements after that
date. CAI accounts for CS Wireless on a three-month lag that
corresponds with CS Wireless' December 31 fiscal year end.
CAI's net loss of $41.0 million for the year ended March 31,
1996 is higher than the net loss of $14.1 million for the year ended
March 31, 1995 by $26.9 million due primarily to substantial
increases in depreciation and amortization ($21.1 million) and
interest expense ($22.9 million) offset by a deferred income tax
benefit of $12.0 million and increased interest income of $5.4
million.
The operating loss increased to $34.8 million for the year
ended March 31, 1996 from $14.2 million for the year ended March 31,
1995, a change of $20.6 million, which approximated the depreciation
and amortization increase of $21.1 million. The increase is
primarily due to the depreciation and amortization associated with
property and equipment, wireless channel rights, and goodwill
acquired in connection with the ACS and ECNW acquisitions and to a
lesser extent on additional investment in property and equipment.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Programming and license fees were up six times from $2.0
million for the year ended March 31, 1995 to $12.6 million for the
year ended March 31, 1996 in line with television subscription
revenue also up almost six times. Marketing expenses were up
slightly from $2.5 million for the year ended March 31, 1995 to $3.5
million for the year ended March 31, 1996 reflecting less emphasis
on marketing and more on acquisitions during the year. General and
administrative expenses increased from $11.1 million for the year
ended March 31, 1995 to $24.7 million for the year ended March 31,
1996, primarily due to the general and administrative expenses of
then-newly acquired ACS and ECNW ($6.3 million) and a full year of
the New York System (net increase of $5.2 million).
General and administrative expenses, other than those
associated with new acquisitions and the New York System, increased
$2.1 million over the prior year primarily due to increased
salaries, personnel and professional fees incurred to develop,
acquire, integrate and manage new systems.
Interest expense increased to $24.6 million for the year ended
March 31, 1996 from $1.7 million for the year ended March 31, 1995,
a change of $22.9 million, primarily due to interest expense
incurred on the Senior Notes issued on September 29, 1995 and the
Term Notes issued on May 9, 1995.
Interest income was $6.0 million for the year ended March 31,
1996 as compared to $0.6 million for the year ended March 31, 1995.
The increase is primarily due to income earned on the debt service
escrow for the Senior Notes and on funds remaining from the issuance
of the Senior Notes which are invested until used.
The operating loss of $34.8 million for the year ended March
31, 1996 includes $1.8 million for the Disposed Systems which are
now part of CS Wireless. While CAI will no longer include Disposed
Systems' revenue and expenses in its Statements of Operations, CAI
will include its share of CS Wireless's net loss to the extent of
its ownership. CAI has not guaranteed any debt or commitments of CS
Wireless.
INFLATION
Management does not believe that inflation has had or will
have a material impact on the Company's results of operations.
SEASONALITY OF INSTALLATION ACTIVITIES
The rate at which new subscriber installations occur can be
affected by severe winter or other weather conditions and limited
daylight hours in the winter months in certain markets. Therefore,
CAI may experience lower than average subscriber growth and capital
expenditures primarily during the winter season.
NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board No. 125 - "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement which would be effective for all
transfers after December 31, 1997, addresses several matters that
have a significant impact on certain industries. It addresses how
and when to record transferred assets, transfers of partial
interests, servicing of financial assets, securitizations, transfers
of sales-type and direct financing lease receivables, securities
lending transactions, repurchase agreements including "dollar
rolls," "wash sales," loan syndications and participations, risk
participations in banker's acceptances, factoring arrangements,
transfers of receivables with recourse, and extinguishments of
liabilities, collateral, repurchase agreements and how to amortize
servicing assets and liabilities. CAI believes this statement will
not have a material effect on CAI's financial position or results of
operations.
Financial Accounting Standards No. 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. CAI this statement will not have a material effect on
loss per share.
Financial Accounting Standards Board No. 129 - "Disclosure of
Information About Capital Structure." Effective for financial
statement periods ending after December 15, 1997, this statement
requires disclosure about (a)
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
the liquidation preference of
preferred stock, (b) redeemable stock, and (c) descriptive
information of other securities previously omitted since they were
not part of the computation of earnings per share. CAI generally
provides the aforementioned disclosures, but will augment such
disclosures when and if necessary.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page No.
IN FORM 10-K
FINANCIAL STATEMENTS
Reports of Independent Accountants 34
Consolidated Balance Sheets - March 31, 1997 and 1996 36
Consolidated Statements of Operations - Years Ended
March 31,1997, 1996, and 1995 37
Consolidated Statements of Shareholders' Equity - Years Ended
March 31, 1997, 1996, and 1995 38
Consolidated Statements of Cash Flows - Years Ended
March 31,1997, 1996, and 1995 39
Notes to Consolidated Financial Statements 42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors
CAI Wireless Systems, Inc. and Subsidiaries
Albany, New York
We have audited the accompanying consolidated balance sheets of CAI
Wireless Systems, Inc. and Subsidiaries as of March 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
March 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits. We did not audit
the financial statements of CS Wireless Systems, Inc., the Company's
investment in which is accounted for by use of the equity method. The
Company's investment of $88,534,526 in CS Wireless Systems, Inc. as of
March 31, 1997 and its share of losses of $17,600,000 in CS Wireless
Systems, Inc.'s operation for the year ended March 31, 1997 are
included in the accompanying financial statements. The financial
statements of CS Wireless Systems, Inc. were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for CS Wireless Systems, Inc., is
based on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CAI
Wireless Systems, Inc. and Subsidiaries as of March 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows
for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has
suffered recurring losses from operations and has incurred substantial
debt to finance the acquisition of assets and sustain operations. The
Company's operating plans require additional funds which may take the
form of debt or equity security issuances, borrowings or asset sales.
Recoverability of the Company's intangible and other long-lived assets
is dependent on the Company's ability to implement its operating
plans. There can be no assurance that additional financings will be
available. The uncertainty over the Company's ability to obtain such
additional financings raises substantial doubt about the ability of
the Company to continue as a going concern. Management's plans in
regard to these matters are described in Note 18. The financial
statements do not include any adjustments that might result from the
outcome of the uncertainty.
COOPERS & LYBRAND LLP
Albany, New York
June 26, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
We have audited the accompanying consolidated balance sheet of CS
Wireless Systems, Inc. and subsidiaries as of December 31, 1996, and
the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company<O~>s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit{ }in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1996,
and the results of their operations and their cash flows for the year{
}then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 21, 1997
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,471,918 $103,263,094
Accounts receivable, less allowance for bad debts
1997 $751,000; 1996 $1,296,000 695,707 1,432,674
Prepaid expenses 1,034,106 698,482
Property and equipment, net 69,767,017 52,568,619
Wireless channel rights, net 207,680,551 205,973,840
Investment in CS Wireless Systems, Inc. 88,534,526 113,054,069
Debt service escrow 47,865,389 77,621,088
Goodwill, net 104,204,716 131,282,996
Loan acquisition costs, net 9,249,934 10,631,263
Other assets 2,835,651 2,268,847
Total Assets $542,339,515 $698,794,972
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable $ 6,600,584 $ 8,244,577
Accrued expenses 16,138,811 10,186,374
Wireless channel rights obligations 5,302,600 41,025,866
Senior debt 275,000,000 275,000,000
Notes payable 36,786,596 43,434,667
Deferred income taxes - 35,410,000
339,828,591 413,301,484
Commitments and contingencies
Mandatorily redeemable preferred stock
14% Senior convertible preferred stock
(liquidation value $70,000,000) 69,160,000 69,020,002
Series A 8% redeemable convertible preferred stock
(liquidation value $18,050,000) - 18,050,000
Accrued preferred stock dividends 18,660,734 5,812,562
87,820,734 92,882,564
Shareholders' Equity
Preferred stock - -
Common stock, shares issued and outstanding
March 31, 1997 - 40,540,539
March 31, 1996 - 37,829,482 275,769,414 257,701,130
Accumulated deficit (161,079,224) (65,090,206)
114,690,190 192,610,924
Total Liabilities and Shareholders' Equity $542,339,515 $698,794,972
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues $36,326,816 $ 30,682,486 $ 5,147,510
Costs and expenses
Programming and license fees 16,051,094 12,582,750 2,024,943
Marketing 2,033,107 3,525,396 2,529,623
General and administrative 31,196,446 24,689,572 11,139,693
Depreciation and amortization 32,345,327 24,718,341 3,639,643
81,625,974 65,516,059 19,333,902
Operating loss (45,299,158) (34,833,573) (14,186,392)
Other income (expense)
Equity in net loss of affiliate (17,600,000) - -
Interest income 6,435,188 6,047,081 641,021
Other income (expense) (28,446) 87,268 275,579
Interest expense (40,805,791) (24,608,258) (1,733,745)
(51,999,049) (18,473,909) (817,145)
Loss before provision for
income tax benefit and
minority interest (97,298,207) (53,307,482) (15,003,537)
Provision for income tax benefit 15,000,000 12,000,000 -
Loss before minority interest (82,298,207) (41,307,482) (15,003,537)
Minority interest in loss - 321,910 896,700
Net loss (82,298,207) (40,985,572) (14,106,837)
Preferred stock dividends (13,011,270) (5,878,960) (328,011)
Loss applicable to common stock
shareholders $(95,309,477) $ (46,864,532) $(14,434,848)
Loss per common share $ (2.38) $ (1.73) $ (0.93)
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1994 15,410,000 $ 38,422,543 $ 5,084,716 $ (9,161,496) $ 34,345,763
Value assigned to warrants
exercised 72,279 18,500 (18,500) - -
Preferred stock converted
to common stock 271,739 1,900,000 - - 1,900,000
Value assigned to
detachable warrants - - 304,438 - 304,438
Preferred stock dividends - - (328,011) - (328,011)
Net loss for the year - - - (14,106,837) (14,106,837)
Balance at March 31, 1995 15,754,018 40,341,043 5,042,643 (23,268,333) 22,115,353
Net proceeds from sale
of common stock 179,765 1,470,329 - - 1,470,329
Value assigned to
detachable warrants - - 1,350,000 - 1,350,000
Common stock issued to
acquire 49% minority
interest in Hampton Roads
Wireless, Inc. 652,523 8,000,000 - - 8,000,000
Less issuance cost - (47,058) - - (47,058)
Common stock issued in
ACS Merger 19,362,611 190,600,700 - - 190,600,700
Less registry costs - (1,316,743) - - (1,316,743)
Common stock issued in
ECNW Merger 1,880,565 18,652,859 - - 18,652,859
Senior preferred stock
issuance costs - - (1,349,984) - (1,349,984)
Preferred stock dividends - - (5,042,659) (836,301) (5,878,960)
Net loss for the year - - (40,985,572) (40,985,572)
Balance at March 31, 1996 37,829,482 257,701,130 - (65,090,206) 192,610,924
Series A 8% preferred
stock converted to
common stock 2,637,742 18,049,955 - - 18,049,955
Value assigned to
warrants exercised 73,315 18,329 - (18,329) -
Senior preferred stock
issuance costs - - - (661,212) (661,212)
Preferred stock dividends - - - (13,011,270) (13,011,270)
Net loss for the year - - - (82,298,207) (82,298,207)
Balance at March 31, 1997 40,540,539 $275,769,414 $ - $(161,079,224) $ 114,690,190
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(82,298,207) $ (40,985,572) $ (14,106,837)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 32,345,327 24,718,341 3,639,643
Equity in net loss of CS Wireless 17,600,000 - -
Deferred income tax benefit (15,000,000) (12,000,000) -
Investment and debt costs and discount 3,336,483 1,778,893 415,460
amortization
Write-off projects and other costs 2,087,144 - -
Minority interest in loss - (321,910) (896,700)
Other 260,969 (193,890) (282,343)
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable 690,092 (111,677) 185,689
Other assets (382,798) (128,117) (173,370)
Accounts payable and accrued expenses 6,608,567 (7,404,356) 3,146,463
Net cash used in operating activities (34,752,423) (34,648,288) (8,071,995)
Cash flows from investing activities
Cash paid for businesses acquired, net of cash - (77,407,837) (9,916,889)
Purchase of wireless channel rights (3,686,989) (24,489,840) (1,308,678)
Purchase of property and equipment (37,109,164) (14,498,395) (14,961,633)
Purchase of investments (15,087,990) (250,000) (6,004,297)
Proceeds from sale of investments 43,495,837 13,461,558 6,000,000
Other (278,810) (1,025,793) (1,174,374)
Net cash used in investing activities (12,667,116) (104,210,307) (27,365,871)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes, other debt
and warrants - 308,062,500 9,769,863
Payment of senior and other debt (45,263,492) (42,369,042) (2,309,130)
Cash paid for debt service escrow - (90,638,756) -
Proceeds from issuance of senior preferred stock
and warrants - 70,000,000 -
Debt financing costs paid - (2,581,183) -
Proceeds from issuance of common stock - 1,545,979 7,114,300
Registry and other stock issuance costs paid - (2,775,336) (351,350)
Other (108,145) (324,405) -
Net cash provided by (used in) financing (45,371,637) 240,919,757 14,223,683
activities
Net increase (decrease) in cash and cash
equivalents (92,791,176) 102,061,162 (21,214,183)
Cash and cash equivalents, beginning 103,263,094 1,201,932 22,416,115
Cash and cash equivalents, ending $ 10,471,918 $103,263,094 $ 1,201,932
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
1. During the years ended March 31, 1997, 1996, and 1995, in connection
with property and equipment acquisitions, the Company accrued obligations of
$1,213,335, $3,673,925, and $394,275, respectively.
2. During the years ended March 31, 1997, 1996, and 1995, in connection
with certain wireless channel rights acquisitions, the Company accrued
obligations of $2,380,234, $47,256,113, and $2,942,258, respectively.
3. During the fiscal years ended March 31, 1997 and 1996, dividends on
preferred stock were accrued totaling $13,011,270 and $5,812,562, respectively.
4. During the year ended March 31, 1997, all of the Series A Preferred
Stock, with a basis of $18,050,000, was converted into 2,637,742 shares of
common stock, less $45 representing cash paid in lieu of fractional shares.
5. During August 1996, the Company transferred 314,267 shares of CS
Wireless, valued at $6,000,000, to Heartland Wireless Communications, Inc. in
exchange for wireless channel rights in the Portsmouth, NH market.
6. The Company acquired two corporations with assets (principally
wireless channel rights), approximating $2,480,000, for a cash payment of
$1,050,000 and seller financed long-term debt obligations of $1,430,000 on
January 12, 1996.
7. The underwriter's discount of $8,937,500 was deducted from the
proceeds of the senior notes issued on September 29, 1995.
8. On September 29, 1995, the Company issued CAI common stock in two
acquisitions as follows:
<TABLE>
<CAPTION>
TOTAL ACS ECNW
<S> <C> <C> <C>
Fair value of assets acquired $284,375,604 $255,674,388 $28,701,216
Less:
Cash portion of purchase price 49,438,203 41,072,206 8,365,997
Liabilities assumed 22,672,180 22,367,053 305,127
Acquisition costs and fees 1,882,229 1,634,429 247,800
Note and interest receivable offset 1,129,433 - 1,129,433
Value of CAI common stock issued $209,253,559 $190,600,700 $18,652,859
</TABLE>
In addition, as part of the ACS acquisition, the Company paid ACS bank
debt of $22,334,298 and also advanced ACS $11,345,095 which is reflected in
ACS's cash balance of $8,250,488 at the date of acquisition.
In connection with the ECNW acquisition, the Company paid $500,000 for
non-compete agreements.
9. On July 13, 1995, the Company purchased the 49% minority interest in
Hampton Roads Wireless, Inc. for $8,000,000 in CAI common stock.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
10. In January 1995, the Company acquired the New York System. In
conjunction with the acquisition, the Company issued $18,050,000 of Series A
preferred stock and $11,000,000 of short-term notes as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired,
net of cash acquired $ 40,691,463
Liabilities assumed (1,724,574)
Preferred stock issued (18,050,000)
Short term notes issued (11,000,000)
Cash paid $ 9,916,889
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash payments for interest $34,341,025 $18,541,227 $271,427
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. CAI Wireless Systems, Inc. (the "Company" or "CAI") was
incorporated in August 1991, to invest in, lease, and purchase wireless
channel rights (including multi-channel, multi-point distribution services
("MMDS") licenses and instructional television fixed services ("ITFS")
licenses) and develop wireless cable systems. As of June 25, 1997, CAI had
40,540,539 shares of common stock, without par value (the "CAI Common
Stock"), issued and outstanding. The Company operates six analog-based
wireless cable systems providing service to approximately 70,800 subscribers
in New York City, Rochester, and Albany, NY, Philadelphia, PA, Washington,
DC, and Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of
wireless cable channel rights in eight additional markets, including Long
Island, Buffalo and Syracuse, NY, Providence, RI, Hartford, CT, Boston, MA,
Baltimore, MD, and Pittsburgh, PA. For the fiscal year ended March 31,
1997, approximately 59% of total revenue was derived from the Philadelphia
System and approximately 22% from the New York City System.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries and CS
Wireless Systems, Inc. ("CS Wireless") until February 23, 1996, when, as a
result of the CAI-Heartland closing, it became 52% owned. Subsequent
transactions have reduced the Company's interest to 47.7%. Since the
closing date, CS Wireless has been accounted for on the equity method of
accounting. All material inter-company accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates and assumptions.
CASH EQUIVALENTS. For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents consist
primarily of money market type funds. The Company has a concentration of
credit risk with regard to its cash in excess of the amount subject to
federal insurance and money market type funds. The Company does not require
collateral on cash equivalents. The Company has mitigated its risk by
depositing its cash in high credit quality financial institutions and by
investing in low risk, high grade money market type funds which invest in
U.S. government securities or high grade commercial paper.
ACCOUNTS RECEIVABLE. The Company has a geographic concentration of credit
risk with respect to accounts receivable since all of its subscribers are
located in the northeastern section of the United States. However, this
risk is mitigated based on subscribers being primarily residential with
diverse economic backgrounds.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation and amortization is calculated by the straight-line and
accelerated methods over the estimated useful lives of the related assets.
The Company capitalizes subcontractor and direct employee labor costs
incurred in connection with the installation of its television reception
equipment on subscriber premises. Amortization of such costs is based on
the estimated subscriber turnover rate for each system. These turnover
rates range from 2 to 5 years. In addition, projects in process are carried
at cost, including capitalized interest amounting to $953,300 and $144,900
for the years ended March 31, 1997 and 1996, respectively.
ACQUISITIONS. All acquisitions of companies have been accounted for on the
purchase method of accounting and the purchase prices have been "pushed
down" to the acquired companies, primarily to wireless channel rights and
goodwill, including provisions for deferred income taxes where applicable.
Some acquisitions required issuance of CAI common stock which was recorded
at the average market price per share as defined in the purchase agreements,
usually over a ten day period. Also, direct acquisition costs were included
as part of the purchase price. Costs to register CAI common stock in
connection with an acquisition were treated as a reduction of the fair
market value of shares issued for that acquisition.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
INVESTMENT IN CS WIRELESS SYSTEMS, INC. The investment in CS Wireless is
recorded at cost and the difference between CAI's cost and the pro-rata
ownership of the underlying equity of approximately $34,000,000 is being
amortized over 15 years, commensurate with goodwill and wireless channel
rights amortization periods to which the investment primarily relates. CAI
records its share of CS Wireless' net loss, adjusted for the amortization of
its investment, under the equity method because the Company does not control
day to day operations. CS Wireless was a wholly-owned subsidiary until
February 23, 1996. CS Wireless has adopted a December 31 fiscal year and
accordingly the Company records its proportionate share of the results of CS
Wireless' operations based on their fiscal period ending three months
earlier than that of the Company.
INTANGIBLES.
WIRELESS CHANNEL RIGHTS. Wireless channel rights are carried at cost
and amortized over their estimated useful lives, generally 15 years, when
the related market is placed in service or available for service.
GOODWILL. Goodwill, consisting of acquisition costs in excess of the
amounts allocated to assets and liabilities of the companies acquired, is
amortized over 15 years. Accumulated amortization was $11,578,300 and
$4,336,158 as of March 31, 1997 and 1996, respectively.
LOAN ACQUISITION COSTS. Costs incurred to obtain financing for the
acquisitions and for general corporate purposes are amortized over the
respective terms of the debt, primarily seven years.
LONG-LIVED ASSETS. The Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," on April 1, 1996. This statement requires that
long-lived assets and certain identifiable intangibles be periodically
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell. Pursuant to SFAS No. 121, the Company periodically reviews wireless
channel rights and other long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. When such circumstances occur, the Company evaluates the
possible effects on the carrying amount of such assets. The adoption of
this Statement did not have a significant effect on the Company's financial
position, results of operations, or liquidity.
The Company's estimates of future gross revenues and operating cash flows,
the remaining estimated lives of long-lived assets, or both could be reduced
in the future due to changes in, among other things, technology, the
Company's ability to obtain permission for flexible use of the wireless
channel rights, government regulation, available financing or competition.
The Company's estimate of future gross revenues and operating cash flows
assumes that the Company will successfully develop and provide digital
wireless cable systems as well as video, voice and data transmission such as
Internet access and telephony. Because these alternative uses of the MMDS
spectrum are in the early stages of development, there is no assurance that
the Company can commercially deploy such alternatives or that it will be
able to achieve positive cash flow from any operating activities. As a
result, the carrying amounts of long-lived assets, including goodwill, could
be reduced by amounts which would be material to the financial statements.
INVESTMENTS IN DEBT SERVICE ESCROW. Investments in the debt service escrow,
consisting of debt instruments maturing through September 1998 to coincide
with the interest payment dates of the senior notes, are carried at cost
since they will be held to maturity. Each investment is adjusted for
accretion of discounts and amortization of premiums which are reflected in
interest income.
REVENUE RECOGNITION. Revenues from subscribers are recognized in the period
that service is rendered. Installation fees are recognized as revenues upon
subscriber hook-up to the extent of costs to obtain subscribers.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
STOCK OPTIONS. On April 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires entities to
recognize as expense over the vesting period, the fair value of all stock-
based awards on the date of grant or alternatively, to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair value-based method
defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures of SFAS No. 123. Under APB Opinion No. 25, compensation
expense would be recorded on the date of grant only if the current market
price of the underlying stock exceeded the exercise price.
INCOME TAXES. The Company files a consolidated federal income tax return
with its subsidiaries in which it owns 80% or more of the outstanding common
stock. Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable
for future years to the difference between the financial statement and tax
basis of existing assets and liabilities. The effect of tax rate changes on
deferred taxes is recognized in the income tax provision in the period that
includes the enactment date. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that all, or some portion,
of such deferred tax asset will not be realized.
LOSS PER SHARE. Loss per share has been calculated on the basis of weighted
average number of shares outstanding during each period presented. The
weighted average number of shares outstanding were 40,069,258 shares,
27,075,578 shares, and 15,456,540 shares for the years ended March 31, 1997,
1996, and 1995, respectively. Outstanding options, warrants, and other
convertible securities were not considered for the purposes of calculating
the weighted average shares of common stock outstanding, since these
securities were determined to be anti-dilutive.
RECLASSIFICATION. The Company has reclassified certain items in prior
years' financial statements to make them comparative to the current year
presentation. The reclassification had no effect on results from
operations.
OTHER DEVELOPMENTS.
Financial Accounting Standards Board No. 125 - "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement which would be effective for all transfers
after December 31, 1997, addresses several matters that have a significant
impact on certain industries. It addresses how and when to record
transferred assets, transfers of partial interests, servicing of financial
assets, securitizations, transfers of sales-type and direct financing lease
receivables, securities lending transactions, repurchase agreements including
"dollar rolls," "wash sales," loan syndications and participations, risk
participations in banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities, collateral,
repurchase agreements and how to amortize servicing assets and liabilities.
CAI believes this statement will not have a material effect on CAI's
financial position or results of operations.
Financial Accounting Standards No. 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. CAI believes statement will not have a material effect on loss
per share.
Financial Accounting Standards Board No. 129 - "Disclosure of
Information About Capital Structure." Effective for financial statement
periods ending after December 15, 1997, this statement requires disclosure
about (a) the liquidation preference of preferred stock, (b) redeemable
stock, and (c) descriptive information of other securities previously omitted
since they were not part of the computation of earnings per share. CAI
generally provides the aforementioned disclosures, but will augment such
disclosures when and if necessary.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-ACQUISITIONS
HAMPTON ROADS WIRELESS, INC. On July 13, 1995, the Company acquired the
remaining 49% minority interest in the Hampton Roads Wireless, Inc. for
$8,000,000 in CAI Common Stock. In accordance with the purchase method of
accounting, the excess (approximately $7,890,000) over the book value of
the minority interest acquired has been allocated to the wireless channel
rights acquired.
TWO BOTT CORPORATIONS. On January 12, 1996, the Company acquired two
corporations (Chenango Associates, Inc. and Onondaga Wireless, Inc.) from
George Bott and a related Bott trust. The two corporations had no revenues,
or operations and hold wireless channel rights in Buffalo and Syracuse, NY,
respectively. The purchase price for the two corporations was $2,480,000 of
which $1,430,000 is payable without interest over six years with a balloon
payment of $1,029,500. This six year note has been recorded at a present
value of $757,000 using a 12.25% imputed interest rate. In accordance with
the purchase method of accounting, the excess (approximately $1,439,000) of
the purchase price over the carrying value (approximately $368,000) of the
net assets acquired has been allocated to the wireless channel rights.
NEW YORK SYSTEM. As of January 9, 1995, the Company, through its wholly-
owned subsidiary, New York Choice Television, Inc., acquired assets, and
assumed certain liabilities of the New York City wireless cable system of
The Microband Companies, Inc., an unaffiliated entity under protection of
Chapter 11 of the Bankruptcy Code at that date. The Company funded the
acquisition price of $39,050,000 with $18,050,000 of Series A preferred
stock, $11,000,000 of short-term notes, and $10,000,000 in cash. In
accordance with the purchase method of accounting, the excess (approximately
$31,700,000) of the acquisition cost over the fair value of the tangible
assets and liabilities has been allocated to wireless channel rights.
ACS ENTERPRISES, INC. On September 29, 1995, the Company acquired ACS
Enterprises, Inc. and Subsidiaries ("ACS"), a public company with operating
wireless cable systems in Philadelphia, PA, Cleveland, OH and Bakersfield,
CA and wireless channel rights in Stockton/Modesto, CA, for $3.50 per ACS
common share and 1.65 CAI common shares for each ACS common share. This
acquisition required $41,072,206 in cash and 19,362,611 shares of CAI common
stock valued at $190,600,700. The purchase price, including direct
acquisition costs, in excess of ACS's book value was allocated to wireless
channel rights and the remainder to goodwill. (See Note 5). ACS has been
included in the Company's operations since September 29, 1995.
EASTERN CABLE NETWORKS OF WASHINGTON, INC. On September 29, 1995, the
Company acquired Eastern Cable Networks of Washington, Inc. ("ECNW") which
operates a wireless cable system in the Washington, DC area for
approximately $8,366,000 in cash and 1,880,565 shares of CAI common stock
valued at $18,653,000. ECNW was merged into a subsidiary of CAI which was
renamed Washington Choice Television, Inc. The purchase price, including
direct acquisition costs, in excess of book value was allocated to wireless
channel rights. ECNW has been included in the Company's operations since
September 29, 1995.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Useful
LIFE 1997 1996
<S> <C> <C> <C>
Transmission equipment 3-7 years $10,529,180 $ 9,542,449
Subscriber equipment 2-5 years 46,982,451 41,950,370
Leasehold improvements 5-20 years 1,124,354 939,090
Office furniture and equipment 5-7 years 3,508,961 3,056,631
Vehicles 3 years 529,656 584,761
62,674,602 56,073,301
Less accumulated depreciation
and amortization 28,767,392 14,063,102
33,907,210 42,010,199
Projects in process 35,859,807 10,558,420
$69,767,017 $52,568,619
</TABLE>
Subscriber equipment includes recoverable equipment (antennas,
downconverters, set-top converters, and remote controls); non-recoverable
equipment (wiring, connectors, and miscellaneous small parts); and
installation costs (outside subcontractor charges, internal direct labor, and
other related installation costs are capitalized). The Company generally
does not capitalize the cost of disconnecting or reconnecting subscribers.
The projects in process primarily represent costs incurred to date
relative to establishing digital systems in Norfolk/Virginia Beach, VA and
Boston, MA. In connection with building the Boston digital system (the
"Boston Project") in accordance with the BR Agreement, CAI abandoned certain
improvements with a cost of approximately $2 million.
Depreciation and amortization of property and equipment for the years
ended March 31, 1997, 1996, and 1995 was $14,920,000, $12,922,000, and
$2,518,000, respectively.
NOTE 4 - WIRELESS CHANNEL RIGHTS
The Company has acquired wireless channel rights through direct
negotiation with licenseholders and with sub-lessors of certain licenses and
through business combinations. The Company's wireless channel rights are
predominately lease arrangements, however, the Company is the direct licensee
of certain licenses and has purchase options with respect to others. The
Company's wireless channel rights are principally located in the New York
City, Albany, Long Island, Buffalo, and Rochester, New York; Hartford,
Connecticut; Norfolk/Virginia Beach, Virginia; Boston, Massachusetts;
Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C., and Baltimore,
Maryland markets.
The lease and sub-lease agreements frequently require initial fees
followed by monthly fees based on subscriber volume, subject to certain
minimum fees. Some agreements require profit sharing with the
licenseholders. The lease and sub-lease periods generally follow the periods
corresponding to the actual FCC license dates with provisions for extensions
upon license renewal from the FCC. The FCC licenses are typically granted for
a ten-year period and there is no automatic renewal of such licenses. The
use of such channels by the lessors is subject to regulation by the FCC and,
therefore, the Company's ability to continue to enjoy the benefits of these
leases is dependent upon the lessors' continuing compliance with applicable
regulations. Most of the Company's leases provide that the lessor may
negotiate lease renewals with only the Company and, if a renewal agreement is
not reached within a specified time, grant the Company a right of first
refusal to match any competing offers. Although the Company does not believe
that the termination of or failure to renew a single channel lease would
adversely affect the Company, several of such terminations or failures in one
or more markets that the Company actively serves could have a material
adverse effect on the Company.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - WIRELESS CHANNEL RIGHTS (CONTINUED)
The Company is obligated to pay, as of March 31, 1997, minimum fees to
licenseholders or sub-lessors in future years as follows:
<TABLE>
<CAPTION>
Years ending
MARCH 31,
<S> <C>
1998 $ 5,032,000
1999 5,345,000
2000 5,602,000
2001 5,751,000
2002 5,780,000
Thereafter 12,792,000
Total $40,302,000
</TABLE>
Lease expense for the years ended March 31, 1997 and 1996 was
approximately $3,654,000 and $1,700,000, respectively. The Company
capitalizes the wireless channel rights acquisition costs and initial
fees and amortizes such costs when operations commence in the market
to which they relate. The non-operating wireless channel rights,
totaling approximately $52,000,000 as of March 31, 1997, and
$89,000,000 as of March 31, 1996, will be amortized when the related
market is either available for service or placed in service,
whichever occurs first. The following is a summary of wireless
channel rights:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cost of wireless channel rights $224,259,175 $212,691,464
Less accumulated amortization 16,578,624 6,717,624
$207,680,551 $205,973,840
</TABLE>
Amortization of the wireless channel rights for the years
ended March 31, 1997, 1996, and 1995 was $9,861,000, $6,468,000, and
$1,112,000, respectively.
Wireless channel rights obligations are generally due
within one year without interest. The amount due as of March
31, 1996 includes $35,101,033 due from the March 1996 FCC
Auction, and was net of $12,600,000 due from CS Wireless for
rights acquired by CAI on behalf of CS Wireless which was
substantially paid to CAI during the year ended March 31,
1997. FCC Auction obligations of $1,089,600 are anticipated
to become due in fiscal 1998.
NOTE 5 - INVESTMENT IN CS WIRELESS SYSTEMS, INC.
CAI closed a series of transactions on February 23, 1996
with Heartland Wireless Communications, Inc. ("Heartland") and
CS Wireless pursuant to a participation agreement between CAI
and Heartland dated December 12, 1995 (the "Participation
Agreement"). Concurrently, CS Wireless also closed an
offering of $400,000,000 face amount of units with gross
proceeds approximating $230,000,000 which were used in part to
make the cash payment to Heartland on February 23, 1996. Each
unit consisted of four $1,000 face amount 11.375% senior
discount notes, due March 1, 2006 and 1.1 shares of CS
Wireless common stock. CAI has not guaranteed this or any
other CS Wireless debt. Immediately following the closing of
such transactions, CAI owned approximately 52% of CS Wireless,
Heartland approximately 37%, an affiliate of Bell Atlantic
Corporation and NYNEX Corporation (the "BANX Partnership")
approximately 10%, and the unit holders approximately 1%,
taking into account certain true-up provisions.
CS Wireless, which had been a wholly-owned subsidiary of
CAI and the operator of a wireless cable system in Cleveland,
OH, acquired or had contributed to it, under the Participation
Agreement, operating wireless cable systems or wireless
channel rights held by CAI in Bakersfield, CA, Charlotte, NC,
and Stockton/Modesto, CA and held by Heartland in Dallas, Fort
Worth, and San Antonio, TX, Dayton, OH, Maysville and Sweet
Springs, MO, Minneapolis,
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INVESTMENT IN CS WIRELESS SYSTEMS, INC. (CONTINUED)
MN, Grand Rapids, MI and Salt Lake City, UT. The Heartland
contribution was valued at approximately $138,663,000, the
estimated fair value. Heartland originally received 3,578,834
shares of CS Wireless common stock, approximately $28,300,000
of cash, and $40,000,000 of notes from CS Wireless. Heartland
received another $5,000,000 and 257,201 shares of CS Wireless
pursuant to the "true-up" provisions of the Participation
Agreement.
Subsequently, CAI transferred 314,267 shares of its CS
Wireless common stock to acquire wireless channel rights in
Portsmouth, NH and CS Wireless issued additional shares in
another transaction causing CAI's ownership in CS Wireless to
decrease to 47.7% as of March 31, 1997.
The following is a condensed version of the Consolidated
Balance Sheet of CS Wireless Systems, Inc. and Subsidiaries as
of December 31, 1996 as presented in its Form 10-K as of that
date.
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $113,072,000
Other current assets 3,278,000
Systems and equipment, net 42,955,000
Wireless channel rights, net 172,953,000
Excess of cost over fair value of net assets acquired 52,011,000
(goodwill)
Net assets held for sale 19,366,000
Loan acquisition costs, net 10,602,000
$414,237,000
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 6,655,000
Other current liabilities 1,043,000
BTA auction payable to affiliates 4,902,000
Long-term debt 4,737,000
Heartland long-term note 15,000,000
Senior discount notes 251,637,000
Deferred income taxes 5,429,000
Common stock and paid-in capital 154,568,000
Accumulated deficit (29,734,000)
$414,237,000
</TABLE>
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a condensed version of the
Consolidated Statement of Operations for CS Wireless
Systems, Inc. and Subsidiaries for the year ended
December 31, 1996 as presented in its Form 10-K for that
period.
<TABLE>
<CAPTION>
<S> <C>
Total revenues $ 22,738,000
Operating expenses:
Systems operations 13,258,000
Selling, general and administrative 13,934,000
Depreciation and amortization 20,345,000
Total operating expenses 47,537,000
Operating loss (24,799,000)
Interest expense (24,959,000)
Interest income 6,600,000
Loss before income tax benefit (43,158,000)
Income tax benefit 14,631,000
Net loss $(28,527,000)
Loss per common share $ (3.06)
</TABLE>
NOTE 6 - DEBT SERVICE ESCROW
The debt service escrow relating to the $275,000,000 of 12.25%
Senior Notes (the "Senior Notes") is being used to pay the first
three years of interest on the Senior Notes. The escrow is held in
trust and consists of marketable government debt instruments that
mature as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED COST GAINS LOSSES MARKET VALUE
<S> <C> <C> <C> <C>
Maturing in fiscal year ending:
March 31, 1998 $31,276,518 $ 12,926 $ 48,038 $31,241,406
March 31, 1999 16,371,585 - 111,137 16,260,448
Total invested 47,648,103 $ 12,926 $159,175 47,501,854
Cash balance 23,532 23,532
Accrued interest 193,754 193,754
Total escrow balance $47,865,389 $47,719,140
</TABLE>
The Company receives face value upon maturity of the
securities in the escrow account with no gain or loss. Also the
Company has a concentration of credit risk with respect to the
investments in the escrow account which is mitigated by investing in
marketable U.S. government debt instruments.
NOTE 7 - OTHER ASSETS
Other assets consist of :
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Notes receivable $ 692,952 $ 501,815
Notes receivable-related parties 880,054 -
Other intangible assets 209,505 522,812
Deposits 637,143 579,273
Other 415,997 664,947
$2,835,651 $2,268,847
</TABLE>
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
SENIOR DEBT
12.25% senior notes due 2002{ (a)} $275,000,000 $275,000,000
NOTES PAYABLE
Term notes due May 9, 2005{ (b)} 29,813,550 29,753,550
Acquisitions{ (c)} 6,799,029 12,138,186
Vehicles, equipment and other 174,017 1,542,931
$311,786,596 $318,434,667
</TABLE>
Scheduled maturities of debt at March 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
<S> <C>
1998 $ 536,680
1999 274,865
2000 232,560
2001 5,390,880
2002 538,060
Thereafter 304,813,550
$311,786,596
</TABLE>
{(a)} CAI's offering of $275,000,000 of 12 1/4%
Senior Notes due 2002 closed on September 29,
1995. The proceeds were used in part to pay
the cash portions of certain acquisitions and
to fund a debt service escrow account
("Escrow") with approximately three years of
interest pursuant to the Indenture dated as of
September 15, 1995 (the "Indenture") governing
the Senior Notes. The Indenture requires semi-
annual interest payments (March and September)
from Escrow. The principal amount of the
Senior Notes is due in full on September 15,
2002. The Senior Notes are general unsecured
obligations of CAI except for a first priority
security interest in the Escrow and would rank
equal with any other senior debt of the
Company to be issued and senior to the
Company's other debt with respect to right of
payment. The Senior Notes are effectively
subordinated to all collateralized debt to the
extent of the value of assets collateralizing
such debt. The Indenture also imposes certain
limitations and restrictions on CAI, including
the ability to incur additional indebtedness,
pay dividends, make investments, consummate
certain asset sales, enter into certain
transactions with affiliates, incur liens,
engage in unrelated businesses, and enter
into mergers and/or consolidations without
express consent. (See Note 19 for subsequent
financing).
{(b)} Two $15,000,000 term notes issued to
affiliates of NYNEX and Bell Atlantic are due
on May 9, 2005 with interest at 16%, accruing
semi-annually on both principal and unpaid
accrued interest. Interest will be paid semi-
annually on March 1 and September 1 of each
year, commencing on March 1, 1999. The term
notes contain maintenance and compliance
covenants including compliance with the
Business Relationship Agreement and the
covenants mentioned in (a) above. The original
discount of $300,000 represents the value of
the Warrants issued with the term notes and is
amortized over the term note period as
interest expense. The term notes interest rate
increased to 16% from 14% per annum pursuant
to an adjunct agreement with certain other
affiliates of Bell Atlantic and NYNEX
regarding licensing issues. For the years
ended March 31, 1997 and 1996, interest
expense on the term notes approximated
$5,700,000 and $4,000,000, respectively, both
of which are included in accrued expenses at
March 31, 1997.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT (CONTINUED)
The term notes are convertible into 14% Senior
Preferred Stock at the initial Conversion
Price of $10,000 per Senior Preferred Share
until September 29, 2000. The 14% Senior
Preferred Shares are convertible into Voting
Preferred Stock based on a formula prescribed
in the terms of the Senior Preferred Stock.
In addition to the term notes, the Company has
issued to affiliates of Bell Atlantic and
NYNEX 7,000 shares of Senior Preferred Stock
and warrants to purchase Voting Preferred
Shares from the Company from time to time
based on formulas prescribed in the terms of
the Stage I Warrants until September 29,
2000. The Voting Preferred Stock is
convertible into common stock. Together, the
terms and intent of the term notes, 14% Senior
Preferred Stock, and the Stage I and Stage II
Warrants allow NYNEX and Bell Atlantic through
their affiliates to maintain a constant 45%
common stock position in CAI, assuming
exercising the Warrants and full conversion of
all shares to common shares. (See Note 17 for
defined terms and for updated information
concerning CAI's relationship with Bell
Atlantic and NYNEX).
{
(c)} The notes payable for acquisitions consist
of (1) a series of notes in the amount of
$2,793,000 relating to the Baltimore Asset
purchase due on September 29, 2000 with
interest payable quarterly at 8% per annum
through September 1998 and 12% per annum
thereafter to maturity, the notes are
subordinated to all other CAI obligations for
borrowed money unless, by its terms, such
obligations are not Senior Indebtedness and
all other obligations collateralized by liens
or a security interest on CAI property; and
(2) acquisition notes payable reflecting the
notes issued to Mr. Bott and the Bott Family
Trust in connection with the purchase of four
corporations with wireless channel rights.
Three Bott corporations were acquired on March
31, 1994 partly through the issuance of notes
with a face value of $3,750,000, discounted to
$2,910,000 based on an imputed interest rate
of 8.5%. Another Bott corporation was
acquired in January 1996 partly through the
issuance of a note with a face value of
$1,430,000, discounted to $757,000 based on an
imputed interest rate of 12.25%. Each of the
Bott notes is collateralized by the common
stock of the company acquired and mature
through January 2002.
Pursuant to CAI's debt instruments, CAI is
restricted from incurring additional indebtedness
(except in connection with purchases of goods and
services in the ordinary course of business, and
other ordinary course indebtedness permitted
thereunder, granting liens to secure repayment of
indebtedness, making investments (other than
investments specifically permitted thereunder),
pay dividends, dispose of assets, enter into any
merger, consolidation, reorganization, or
recapitalization plan, retire long-term debt, or
make any acquisitions without the prior consent
of the lenders. Further, in accordance with the
loan agreement governing the subsequent financing
(see Note 19), the Company is required to
maintain minimal levels of net worth and number
of subscribers, and is limited with respect to
the amount of annual capital expenditures.
The components of the consolidated income
tax benefit for the years ended March 31, 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred 15,000,000 12,000,000 -
Total $15,000,000 $12,000,000 $ -
</TABLE>
The primary items giving rise to the
difference between the federal statutory tax rate
and the Company's effective tax rate is the
recognition of certain tax benefits associated
with acquisitions as a reduction to goodwill
under the purchase accounting rules for the year
ended March 31, 1996 and the establishment of a
valuation allowance against deferred tax assets
for the years ended March 31, 1995 and 1997.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT (CONTINUED)
The significant components of deferred tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net operating loss carryovers $ 72,100,000 $ 24,915,000 $ 7,630,000
Intangibles (32,635,000) (34,841,000) (1,580,000)
Investment in CS Wireless (18,726,000) (24,000,000) -
Property and equipment (2,352,000) (1,434,000) (462,000)
Other, net 513,000 (50,000) 402,000
Total net deferred tax asset
(liability) 18,900,000 (35,410,000) 5,990,000
Less: Valuation allowance (18,900,000) - (5,990,000)
Net deferred tax asset (liability) $ - $(35,410,000) $ -
</TABLE>
NOTE 9 - INCOME TAXES
Approximately $47,410,000 of the
change in deferred taxes from March 31, 1995
to March 31, 1996 was recorded as a net
increase in goodwill incident to the
purchase accounting of certain acquisitions.
Subsequently, that amount was reduced by
$20,410,000 due to available net operating
losses not taken into account until a
determination was made of their
allowability.
A valuation allowance is provided to
reduce deferred tax assets to a level which,
more likely than not, will be realized. The
deferred tax assets recorded reflects
management's estimate of the amount which
will be realized based upon current
operating results and contingencies. During
the year ended March 31, 1996 the valuation
allowance of $5,990,000 as of March 31,
1995, was eliminated. During the year ended
March 31, 1997, a valuation allowance in the
amount of $18,900,000 was established.
The Company has available as of March
31, 1997 approximately $180,000,000 of net
operating loss carryforwards which begin to
expire in 1998. The use of these
carryforwards are limited on an annual basis
pursuant to the Internal Revenue Code due to
certain changes in ownership and equity
transactions.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
The following methods and assumptions
were used to estimate the fair value of each
class of financial instruments for which it
is practicable to estimate that value:
CASH AND CASH EQUIVALENTS. The carrying
amount approximates fair value because of the
short maturity of those instruments.
DEBT SERVICE ESCROW. The fair values of the
investments in the debt service escrow are
estimated based on market values.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS (CONTINUED)
DEBT. The fair value of the Company's debt
is primarily based on quoted market prices
for its publicly traded Senior Notes and for
the remaining debt, estimated based on
quoted market prices for the same or similar
issues or on the current rates offered to
the Company for debt with similar remaining
maturities. The fair value of debt maturing
within twelve months is estimated to be its
carrying value.
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Cash and cash equivalents $10,471,918 $103,263,094 $ 10,471,918 $103,263,094
Debt service escrow 47,865,389 77,621,088 47,719,140 77,654,796
Debt
Senior Notes 275,000,000 275,000,000 129,250,000 292,187,500
Term notes and other 36,786,596 43,434,667 21,073,046 45,556,117
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
PROGRAMMING CONTRACTS. In connection with
its distribution of television programming,
the Company has fixed-term contracts with
various program suppliers, such as HBO,
Showtime, CNN, MTV, USA, and A&E. Contract
terms range in length from one year to ten
years and expire at various dates through
2003. Most contracts are subject to
automatic renewal upon expiration unless
notice is given, by either party, of intent
not to renew. These contracts require the
Company to pay fees to programmers based on
the number of subscribers.
Equipment Replacement. Due to interference
caused by the new PCS telephone
frequencies, the Company intends to replace
approximately 24,000 subscriber
downconverters in the Philadelphia market
at a rate of approximately 500 replacements
per month plus all of the new installations
receiving the new equipment. Replacements
will cost approximately $84 per unit, while
new installations will incur a $62 per unit
additional cash outflow by not reusing
currently owned equipment. The total cost
of this replacement in Philadelphia is
approximately $1.7 million. Replace costs
in other CAI markets, if deemed necessary,
are not expected to be material.
PURCHASE COMMITMENTS. As of March 31,
1997, the Company had approximately
$3,200,000 of outstanding purchase orders,
primarily relating to equipment and
technical work for the digital projects.
RETIREMENT PLAN. Effective April 1, 1996,
the Company sponsored a defined contribution
pension plan pursuant to Internal Revenue
Code section 401(k), covering substantially
all of its employees. Contributions are
withheld from participating employees with
the Company matching 50% of the first 5% of
covered employees wages withheld and
contributed to the plan, which amounted to
$114,000 for the year ended March 31, 1997.
Legal Proceedings.
SHAREHOLDERS' CLASS ACTION LAWSUIT. CAI
has been named in six class action lawsuits
alleging various violations of the federal
securities laws filed in the United States
District Court for the Northern District of
New York. The 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 Northern District of
New York. The amended, consolidated
complaint, which names the Company, Jared E.
Abbruzzese, Chairman and Chief Executive
Officer of the Company, John J. Prisco,
President, Chief Operating Officer and a
Director of the Company, and Alan Sonnenberg,
the
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
(CONTINUED)
former President of the Company and a member
of the its Board of Directors, as
defendants, alleges a variety of violations
of the anti-fraud provisions of the Federal
securities laws by CAI arising out of its
alleged disclosure (or alleged omission from
disclosure) regarding its Internet and other
flexible use of MMDS spectrum, as well as its
business relationship with Bell Atlantic and
NYNEX. Specifically, the complaint alleges
that defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") and Rule 10b-
5 promulgated under the Exchange Act during
the specified Class Period (May 23, 1996
through December 6, 1996).
The Company has notified the carrier of
its Directors' and Officers' Liability
insurance policy, which is intended to cover
not only the Company's officers and
directors, but also the Company itself,
against claims such as those made in the
Securities Lawsuit. The policy covers up to
$5 million of any covered liability, subject
to a retention amount of $500,000.
The Securities Lawsuit is in its
preliminary stages. A scheduling conference
was held on June 3, 1997, at which the
briefing schedule for defendants' motion to
dismiss was agreed upon among the parties.
Based on such schedule, the Company believes
that such motion will not be ruled upon until
the fall of 1997. While the motion is
pending, all other deadlines affecting
motions and discovery have been postponed.
The Company and individual defendants are
contesting the Securities Lawsuit vigorously
and believe it is entirely without merit.
Accordingly, management believes that the
Securities 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 ordinary 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.
REGULATORY MATTERS. Due to the regulated
nature of the subscription television
industry, the Company's growth and
operations may be adversely impacted by the
adoption of new, or changes to existing,
laws or regulations or the interpretations
thereof.
NOTE 12 - REDEEMABLE PREFERRED STOCKS
As part of the BANX Transactions (see
Note 17) the BANX Partnership purchased
7,000 shares of Senior Convertible
Preferred Stock, par value $10,000 ("Senior
Preferred") and Stage II Warrants to
purchase Voting Preferred Stock, without par
value, of CAI. The Senior Preferred has a
14% cumulative dividend, payable quarterly
(optionally before December 1, 1998 and
mandatorily after December 1, 1998). The
dividend is increased by an amount
calculated at a rate of 14% per annum,
compounded semi-annually, on any accrued
dividends remaining unpaid. In addition, the
Company is subject to an additional dividend
at the rate of 0.5% per quarter on the par
value plus unpaid accrued dividends pursuant
to an adjunct agreement with affiliates of
Bell Atlantic and NYNEX regarding licensing
issues.
The Senior Preferred is convertible
into Voting Preferred Stock, based on a
formula prescribed in the terms of the
Senior Preferred for a period of five years
commencing on September 29, 1995, the date
of issue. In turn, the Voting Preferred
Stock is convertible into common stock,
initially at the rate of 100 shares of
common stock for one share of Voting
Preferred Stock. The terms and intent of the
Senior Preferred and the Term Notes,
together with the Stage I and Stage II
Warrants held by affiliates of NYNEX and
Bell Atlantic, are to allow them the ability
to maintain a 45% common stock ownership
position at all times, assuming exercise and
conversion of all warrants and preferred
shares. The Senior Preferred Stock also
provides for mandatory redemption at par
plus any accrued dividends on September 29,
2005, absent any conversion.
In conjunction with the January 9,
1995 acquisition of the New York System, the
Company issued 180,500 shares of Series A 8%
Redeemable Convertible Preferred Stock.
During the year ended March 31, 1997, all of
the Series A 8% Redeemable Convertible
Preferred Stock had been converted into a
total of 2,637,742 shares of CAI Common
Stock.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 13 - SHAREHOLDERS' EQUITY
In May 1996, 75,000 warrants were
exercised on a non-cash basis at $.25 by an
officer of the Company for 73,315 shares of
common stock. The value of the aggregate
exercise price was $18,329.
On September 29, 1995, the Company
amended and restated its Certificate of
Incorporation, with shareholder approval, to
increase the authorized number of CAI no par
Common Shares available for issuance from
45,000,000 to 100,000,000 and to authorize
15,000 shares of a new class of 14% Senior
Preferred Stock, par value $10,000 per share
and 2,000,000 shares of a new class of
Voting Preferred Stock, no par value. The
Senior Preferred Stock is convertible into
Voting Preferred Stock and the Voting
Preferred Stock is convertible into common
stock.
On March 8, 1995, the Company
authorized and issued 20,000 shares of
Series B preferred stock for $2,000,000
gross proceeds before a $100,000 placement
fee. All 20,000 shares of Series B
preferred stock were converted into 271,739
shares of common stock.
The stock capitalization is as follows:
<TABLE>
<CAPTION>
Shares Authorized Shares Issued and Outstanding
CLASS OF STOCK AS OF MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1996
<S> <C> <C> <C>
Preferred stock
14% Senior convertible preferred stock,
par value $10,000 per share 15,000 7,000 7,000
Series preferred stock, no par value
Series A 8% redeemable convertible
preferred stock, no par value 350,000 - 180,500
Undesignated 4,650,000 - -
Total series preferred stock 5,000,000 - 180,500
Voting preferred stock, no par value 2,000,000 - -
Total preferred stock 7,015,000 7,000 187,500
Common stock, no par value 100,000,000 40,540,539 37,829,482
</TABLE>
NOTE 14 - OPTIONS AND WARRANTS
STOCK OPTION PLANS
INCENTIVE AND NONQUALIFIED STOCK
OPTION PLANS. The Company's 1995 Incentive
Stock Plan (the "1995 Plan") provides for
the grant of incentive stock options
qualifying under Section 422 of the Internal
Revenue Code ("ISO's"), non-qualified stock
options ("NQSO's"), stock appreciation
rights, performance shares and restricted
stock or any combination of the foregoing,
as the Compensation Committee of the Board
of Directors (the "Committee") may
determine. The 1995 Plan will expire on
March 27, 2005. The number of shares
available for grants is 1,200,000 shares and
the 1995 Plan is administered by the
Committee. Vesting and the per share
exercise price for stock options granted
under the 1995 Plan, which will not be less
than 100% of the fair market value per share
of common stock on the date the option is
granted, is determined by the Committee at
the time of grant.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 14 - OPTIONS AND WARRANTS (CONTINUED)
In November 1993, the Company adopted
its 1993 Stock Option and Incentive Plan
(the "1993 Plan"). Under the 1993 Plan,
options to purchase an aggregate of not more
than 1,000,000 shares of common stock may be
granted, from time to time, to key employees
(including officers), advisors and
independent consultants to the Company or to
any of its subsidiaries. Options granted to
officers and employees may be designated as
incentive stock options ISO's or NQSO's.
Options granted to independent consultants
and other nonemployees may only be
designated NQSO's. The 1993 Plan is
administered by the Committee. Vesting and
the per share exercise price for stock
options granted under this Plan, which will
not be less than 100% of the fair market
value per share of common stock on the date
the option is granted, is determined by the
Committee at the time of grant.
OUTSIDE DIRECTORS' OPTION PLAN. In
October 1996, the Company adopted the 1996
Outside Directors' Stock Option Plan (the
"1996 Directors' Plan"). Under the 1996
Directors' Plan, options to purchase an
aggregate of not more than 45,000 shares of
common stock will be granted from time to
time to nonemployee directors. Each
qualifying director shall be granted an
option to purchase 7,500 shares at a price
not be less than 100% of fair market value
on the date of the grant. Such option shall
vest: 25% on the date of grant, and 25% on
each of the second, third, and fourth
anniversaries of the grant. These options
are exercisable for a period of ten years,
but not before an initial six-month period.
As of March 31, 1997, the Company has
granted options under this plan to purchase
30,000 shares of common stock at a weighted
average price of $6.63 per share.
In October 1993, the Company adopted
the 1993 Outside Directors' Option Plan (the
"1993 Directors' Plan"). Under the 1993
Directors' Plan, options to purchase an
aggregate of not more than 30,000 shares of
common stock may be granted from time to
time to nonemployee directors. These options
will vest at the rate of 20% a year over
five years, beginning one year after date of
grant and are exercisable for a
period of seven years. The exercise price
for stock options granted under the 1993
Directors' Plan will not be less than 100%
of the fair market value of the common stock
on the grant date. As of March 31, 1997, the
Company has granted outstanding options
under this plan to purchase 8,334 shares of
common stock at $11 per share.
VALUATION OF OPTIONS. The Company
applies APB Opinion No. 25 in accounting for
its Stock Option Plans and, accordingly, no
compensation cost has been recognized for
its stock options in the financial
statements. Had the Company determined
compensation cost based on the fair value at
the grant date for its stock options under
SFAS No. 123, the Company's net loss would
have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1997 1996
<S> <C> <C>
Net loss:
As reported $ (82,298,207) $(40,985,572)
Pro forma (88,839,207) (42,942,572)
Loss per common share:
As reported (2.38) (1.73)
Pro forma (2.54) (1.80)
</TABLE>
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 14 - OPTIONS AND WARRANTS (continued)
The initial impact of SFAS No. 123 on pro
forma earnings per share may not be
representative of the effect on income in
future years because options vest over
several years and additional option grants
may be made each year. The fair value of
each option grant is estimated on the date
of grant using the Black-Scholes option
pricing model with the following weighted
average assumptions used for grants issued
in the years ended March 31, as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Dividend yield 0% 0%
Risk free interest rate 6.0% 6.0%
Expected life (years) 9.2 3.6
Volatility 0.99 0.72
</TABLE>
OPTION ACTIVITY. A summary of the
status of the Company's stock option plans as
of March 31, 1997, 1996 and 1995, and changes
during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted- Weighted-
-Average Average Average
Exercise Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning 1,274,134 $7.74 941,834 $12.29 452,667 $11.00
Granted 1,071,803 $2.20 1,756,800 $8.52 743,834 $12.53
Forfeited 150,000 $7.75 (1,424,500) $11.69 (254,667) $11.00
Outstanding, ending 2,195,937 $4.91 1,274,134 $7.74 941,834 $12.29
Fair value of options
granted $1.57 $6.43
</TABLE>
The total number of shares of common stock
reserved for options is 2,275,000 as of
March 31, 1997.
The following table summarizes
information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted-
Average Weighted- Weighted-
RANGE OF Number Remaining Average NUMBER Average
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$1.75 to $2.06 981,803 10 years $1.75 91,803 $1.75
$6.63 to $8.00 1,205,800 9 years $7.68 866,150 $7.72
$11.00 8,334 5 years $11.00 8,334 $11.00
2,195,937 966,287
</TABLE>
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 14 - OPTIONS AND WARRANTS (CONTINUED)
WARRANTS
THE BANX WARRANTS. The BANX
Partnership holds warrants to purchase
Voting Preferred Stock which are exercisable
at an aggregate price of approximately
$95,000,000 and which entitle the BANX
Partnership to common stock aggregating 45%
of the then total outstanding shares of the
Company if exercised along with the
conversion provisions of the term notes and
senior preferred stock for which CAI has
already received $100,000,000. See Note 17
for updated information concerning CAI's
relationship with Bell Atlantic and NYNEX.
COMMON STOCK WARRANTS. Outstanding
warrants, except for those issued to the
BANX Partnership, are as follows:
<TABLE>
<CAPTION>
Weighted-Average Number of
EXERCISE PRICE Warrants
<S> <C> <C>
Outstanding, April 1, 1994 $9.56 1,214,000
Issued{(1)} $8.40 880,578
Exercised $0.25 (74,000)
Outstanding, March 31, 1995 $9.40 2,020,578
Issued{(2)} - 289,963
Outstanding, March 31, 1996 $7.72 2,310,541
Issued{(2)} - 616,912
Exercised $0.25 (75,000)
Outstanding, March 31, 1997 $6.24 2,852,453
</TABLE>
{(1) }The warrants were issued to
bridge lenders in connection with the
acquisition of the New York System.
{(2) }The warrants issued and certain
warrant exercise prices revised
during the years ended March 31,
1997 and 1996 were pursuant to
anti-dilutive clauses in agreements
relating to the warrants.
The average purchase price of
outstanding common stock warrants at March
31, 1997, 1996 and 1995 was $6.24, $7.72 and
$9.40 per share, based on an aggregate
purchase price of $17,811,114, $17,829,083,
and $18,989,050, respectively. Outstanding
warrants will expire over a period ending no
later than January 2000.
NOTE 15 - OPERATING LEASES
The Company leases office space in
each market it currently operates in under
non-cancelable agreements which expire
through March 2006, and requires various
minimum monthly payments and payment of
property taxes, certain maintenance, and
insurance.
The Company leases towers, land and/or
building space in each of its operating
markets and certain other markets for
broadcasting purposes. The leases are non-
cancelable agreements expiring through
December 2012. Most of the leases have
provisions for renewal periods. The leases
require various minimum monthly payments
and are subject to periodic fixed and
inflationary increases.
The Company leases vehicles for
customer service and other corporate use.
The agreements are non-cancelable, expire
through April 1997 and require various
monthly payments. The Company is responsible
for normal maintenance and insurance.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 15 - OPERATING LEASES (CONTINUED)
Additionally, the Company leases
certain office and broadcast test equipment
under various lease agreements for periods
up to thirty-six months. The Company pays
various monthly payments and is required to
maintain and insure such equipment.
The approximate minimum rental
commitments for operating leases as of March
31, 1997 due in future years is as follows:
<TABLE>
<CAPTION>
YEARS ENDING MARCH 31,
<S> <C>
1998 $ 3,505,000
1999 3,016,000
2000 2,370,000
2001 1,978,000
2002 998,000
Thereafter 5,583,000
Total $17,450,000
</TABLE>
Total rent expense for the years ended
March 31, 1997, 1996, and 1995 was
approximately $3,258,000, $2511,000, and
$1,080,000, respectively.
NOTE 16 - RELATED PARTY TRANSACTIONS
On May 8, 1995 CAI sold, subject to an
option to repurchase exercisable at any time
prior to January 1, 1996, all of the issued
and outstanding stock of TelQuest, Inc.
("TelQuest") with a negative net book value
of approximately $70,000, to Wave Holdings,
L.L.C., a Delaware limited liability company
controlled by Jared E. Abbruzzese, CAI's
Chairman and Chief Executive Officer, for
$25,000. The gain on this sale of
approximately $23,000 was deferred and was
not included in income. TelQuest's
involvement in certain operations could
have, at that time, violated the Modified
Final Judgment, if engaged in by an RBOC or
an affiliated enterprise. In May 1996, CAI
relinquished its option to repurchase
TelQuest for a 2% equity interest in
TelQuest Systems, Inc., the operating
successor of TelQuest's business.
In consideration of Mr. Abbruzzese's
guaranteeing the obligation of CAI to MMDS
Holdings, an affiliate of Bell Atlantic,
which permitted CAI to complete the
Microband acquisition in January 1995, the
CAI Board of Directors awarded options to
acquire 150,000 CAI Common Shares at $11.00
per share to Mr. Abbruzzese.
In October 1996, two of CAI's officers
formed a company, Telecom Service Support
LLC ("TSS"), to provide subscriber
installation, service calls, and warehouse
service to the subscription television
industry. CAI incurred approximately
$348,000 for such services during the year
ended March 31, 1997. Additionally, CAI has
advanced $80,000, provided leased vehicles,
and provided certain facility space to TSS.
CAI periodically charters an airplane
from Wave Air, Inc., which is primarily
owned by Mr. Abbruzzese, in order to carry
out business when airline schedules are not
compatible. Transactions with Wave Air, Inc.
amounted to approximately $278,000 and
$103,000 for the years ended March 31, 1997
and 1996, respectively (none for 1995).
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 16 - RELATED PARTY TRANSACTIONS
(CONTINUED)
During the year ended March 31, 1997,
CAI loaned $800,000 to Haig Capital L.L.C.
and $200,000 to TelQuest Communications,
Inc., entities in which Mr. Abbruzzese is a
principal member and stockholder,
respectively, of which approximately
$175,000 was repaid by Haig Capital. In
March 1997, Mr. Abbruzzese combined a
$19,000 February 1997 loan from CAI, the
remaining obligation of Haig Capital,
accrued interest on both loans, and an
additional $100,000 advance in April 1997
(subsequent to year-end) into one personal
unsecured, demand obligation in the amount
of $780,054, bearing interest at 14% per
annum. In March 1997, CAI separately
purchased certain used equipment for the
Boston Project from Haig Capital L.L.C. for
$107,000.
The loan to TelQuest Communications,
Inc. is evidenced by a promissory note in
the principal amount of $200,000, bears
interest at 14%, and matures in March 2000.
The note is convertible into TelQuest
Communications, Inc. common stock at the
election of CAI. The Company is currently
negotiating the terms of a joint venture
with TelQuest Communications and CS
Wireless, pursuant to which the Company will
be obligated to invest $2.5 million in cash
and purchase $2.5 million of equipment in
exchange for an initial equity interest in
the joint venture of 25%. The original
$200,000 loan to TelQuest Communications
will be contributed to the joint venture,
and CAI will receive a credit for the
principal and accrued interest on such
amount against the cash portion of its joint
venture investment obligation. Interest
earned all related party loans approximated
$63,400 for the year ended March 31, 1997.
During April 1997, CAI sold
approximately $2,112,000 of equipment at
book value from the Boston Project that was
not needed to CS Wireless for 20% down and
the balance due in 30 days after delivery.
Additionally, during April 1997, CAI placed
purchase orders approximating $1,612,000
with CS Wireless for equipment needed for
the Boston Project, taking advantage of CS
Wireless' favorable pricing arrangements
with its vendor.
NOTE 17 - TRANSACTIONS AND AGREEMENTS WITH
BELL ATLANTIC AND NYNEX
In March 1995, CAI entered into a
strategic business relationship with BANX
Partnership, an affiliate of Bell Atlantic
and NYNEX (the "BANX Partnership") and with
other affiliates of Bell Atlantic and NYNEX
(the "BANX Affiliates"). This relationship
consisted of (i) the signing of the Business
Relationship Agreement, as amended (the "BR
Agreement") with the BANX Affiliates, (ii)
the purchase by the BANX Partnership of $30
million of convertible Term Notes due May 9,
2005 ("BANX Term Notes") and Warrants (the
"BANX Warrants") to purchase convertible
preferred stock, no par value (the "Voting
Preferred Stock"), and (iii) the purchase by
the BANX Partnership of $70 million of 14%
Senior Convertible Preferred Stock, par
value $10,000 per share ("Senior Preferred
Stock") and additional Warrants. Upon
issuance of the CAI Securities in September
1995, the full conversion or exercise of the
CAI Securities would have resulted in the
BANX Partnership having to make an
additional investment in CAI of
approximately $202 million, and its pro
forma ownership interest in CAI increasing
to approximately 45%.
Pursuant to the BR Agreement, which was
intended to allow CAI to realize revenue in
certain of its markets without incurring
substantial capital expenditures required for
subscriber equipment and installation as well
as eliminate most operating costs, other than
channel license fees and distribution system
expenses, CAI granted to each BANX Affiliate
the ability, on a market by market basis, to
elect to become the marketer and provider of
subscription television services using CAI's
MMDS transmission systems in each market in
their respective service areas in exchange
for monthly service revenues based on the
number of serviceable households and
subscribers in each market so optioned by a
BANX Affiliate. In connection with the
Company's obligations under the BR Agreement,
CAI substantially completed the construction
of digital video delivery systems in Boston,
MA and Hampton Roads, VA. Through December
12, 1996, however, neither BANX Affiliate had
exercised their respective options under the
BR Agreement in these or any other markets
contemplated by the BR Agreement.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 17 - TRANSACTIONS AND AGREEMENTS WITH
BELL ATLANTIC AND NYNEX (CONTINUED)
On December 12, 1996, the Company and
the various BANX entities reached an
agreement (the "Modification Agreement")
modifying certain terms of the BR Agreement
and providing CAI or its designee with the
right to acquire the CAI Securities. The
Modification Agreement was subsequently
amended on April 29, 1997, pursuant to
Amendment No. 1 to the Modification Agreement
(the "Amendment").
The Amendment represents the
renegotiation of an option granted to CAI to
repurchase the $100 million face amount of
CAI securities held by the BANX Partnership.
The repurchase consideration is $40 million
in cash and 100,000 shares of CAI
convertible junior preferred stock. The
junior preferred stock, which is non-voting,
carries no coupon and has no maturity, is
convertible into 2.5 million shares of CAI
common stock. The repurchase option is
exercisable through February 28, 1998
As part of the Amendment, the BANX
Affiliates also immediately released CAI from
its obligation under the BR Agreement to make
CAI's wireless MMDS spectrum available to the
BANX Affiliates at a future date in Boston,
MA,
Pittsburgh, PA, and Albany, Syracuse and
Buffalo, NY. Upon a repurchase of the CAI
securities, as contemplated by the Amendment,
the BR Agreement will lapse in its entirety,
releasing a similar obligation in CAI's other
markets.
In connection with the execution of
the Amendment, the BANX Partnership also
suspended or released CAI from a number of
covenant restrictions and governance rights
and provided CAI with a blanket proxy on the
approximately 10% interest in CS Wireless
held by BANX entities If the repurchase is
consummated, the CS Wireless shares would be
returned to CAI without additional
consideration The parties also exchanged
mutual releases and reached an agreement to
share certain patent and intellectual
property rights related to their digital
wireless venture.
In addition to the $40 million in
cash, Bell Atlantic and NYNEX will receive
as consideration for the surrender of their
CAI securities, 100,000 shares of a series
of non-voting junior preferred stock. The
junior preferred stock carries a liquidation
preference of $30 million in the aggregate,
but carries no special dividends, covenants
or governance rights, except as provided by
the Connecticut Business Corporation Act,
under which CAI is incorporated. Each of
the 100,000 shares of junior preferred stock
is convertible into 25 shares of CAI common
stock in the hands of a subsequent purchaser
unrelated to Bell Atlantic or NYNEX. If the
junior preferred stock continues to be held
by Bell Atlantic and NYNEX at the end of
three years, and the value of the CAI common
stock is not at least $14.00 per share, then
Bell Atlantic and NYNEX would be entitled to
a value floor representing the difference
between the then-market value of the CAI
common stock and $14.00 per share (the
"Value Floor"). At CAI's election, the
Value Floor would be payable either in the
form of up to, but not more than, 1 million
additional shares of CAI common stock or in
the form of a ten-year subordinated note in
a principal amount of up to $15 million,
bearing interest at 8%, which is payable-in-
kind for the first five years.
NOTE 18 - GOING CONCERN
CAI's recurring losses, restrictions
to obtain additional financing, and
substantial commitments, raise
substantial doubt about CAI continuing as
a going concern. For the year ending
March 31, 1998, the Company is obligated
to pay approximately $8,500,000 in
minimum license fees and lease payments,
approximately $1,100,000 in MMDS license
auction fees and to fund operating costs.
On June 6, 1997, CAI completed a
$30,000,000 interim financing arrangement
with Foothill Capital Corporation and
affiliates of Canyon Capital Management, L.P.
to fund the Company's near term working
capital requirements. This credit facility
consists of $25,000,000 in term loans and a
$5,000,000 revolving loan, both of which
mature on March 1, 1999. Management estimates
that the present revenue stream and cash
resources available to the Company, including
this interim financing in June 1997 are
adequate to sustain the Company's needs
through December 1997.
<PAGE>
CAI WIRELESS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 18 - GOING CONCERN (CONTINUED)
On a long-term basis, CAI has
substantial indebtedness which beginning in
fiscal year 1999 will have significant debt
service requirements and senior preferred
stock dividend payments. As of March 31,
1997, CAI had outstanding consolidated long-
term debt of $312,000,000 and 14% senior
preferred stock of $70,000,000.
Additionally, pursuant to the terms of
the Amendment, CAI has been granted the right
to purchase the CAI Securities. 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 Amendment allows CAI to
buy out the BANX investment for $40 million
plus 100,000 shares of junior preferred
stock. 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.
The Company's business strategy has
shifted away from analog to digital wireless
cable systems for its MMDS subscription
television services and to explore
alternative uses of its MMDS spectrum for a
variety of applications including video,
voice and data transmission such as Internet
access and telephony delivery services. In
management's opinion, the new 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. In connection with achieving the
objectives set forth, CAI is committed
through additional open purchase orders as of
June 17, 1997 to spend approximately
$5,000,000 primarily for capital expenditures
associated with additional development of the
Boston digital transmission facilities. This
commitment is in addition to the $3,200,000
of open purchase orders as of March 31, 1997.
The increase in commitment is to be funded in
part by the new interim financing and the
balance through a new strategic partner.
NOTE 19 - SUBSEQUENT EVENTS
On June 6, 1997, the Company closed a
$30 million interim credit facility provided
by Foothill Capital Corporation and
affiliates of Canyon Capital Management, L.P.
(the "Interim Debt Lenders"). The credit
facility is comprised of $25 million of term
debt, of which $10 million was made available
at the closing and is currently outstanding.
The balance of the term debt will be made
available to CAI upon the achievement of
certain agreed-upon operational benchmarks.
The term debt bears interest at the rate of
13% per annum. So long as the Company is not
in default of its obligations under the
credit facility, 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. 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 Interim Debt Lenders have also
made available to CAI a $5 million revolving
loan, of which $3 million was made available
to CAI at the June 6th closing. The
remaining $2 million of the revolving loan
will be made available to CAI upon the
achievement by the Company of certain
operational benchmarks. The 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. As of June 17,
1997, the Company had not yet borrowed any
amount against the revolving loan.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF CAI WIRELESS SYSTEMS, INC.
The following table sets forth certain
information concerning each of the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME Age Position with Company
<S> <C> <C>
Jared E. Abbruzzese 42 Chairman, Chief Executive Officer and Director (1)
John J. Prisco 41 President, Chief Operating Officer and Director (1)
George M. Williams 56 Chief Administrative Officer, Secretary, Treasurer and Director(1)
Timothy J. Santora 42 Executive Vice President (1)
James P. Ashman 43 Executive Vice President, Chief Financial Officer and Director
Craig J. Kessler 40 Vice President and Controller
Arthur C. Belanger 71 Director(2)
Harold A. Bouton 53 Director(3)
David M. Tallcott 51 Director(2)(3)
Alan Sonnenberg 45 Director
Robert D. Happ 56 Director(2)(3)
</TABLE>
(1) Member of Executive Committee. The
Executive Committee conducts the affairs
and business of the Company between
meetings of the Board of Directors.
(2) Member of Audit Committee. The Audit
Committee assists the Board of Directors
in fulfilling its responsibilities with
respect to the Company's accounting and
financial reporting activities.
(3) Member of Compensation Committee. The
Compensation Committee determines the
compensation to be paid by the Company to
its officers and administers the 1995 and
1993 Stock Option Plans, the 1993 Outside
Directors' Option Plan and the 1996
Outside Directors' Option Plan.
The Certificate of Incorporation and
the Bylaws of the Company, as amended,
provide for a minimum of three and a maximum
of eleven members of the Company's Board of
Directors (the "Board") and permit the Board
to specify the number of directors within
that range by resolution. The Board has
currently established the size of the Board
at nine members. All directors hold office
until their successors have been elected and
qualified. The Company has agreed with
Gerard Klauer Mattison & Co., LLC, the
representative of the Underwriters of the
Company's initial public offering of Common
Stock (the "Representative"), that for the
five-year period ending February 1999, the
Company will use its best efforts to cause,
if requested by the Representative, an
individual selected by the Representative
and reasonably acceptable to the Company to
be elected to the Board who may be an
officer, director or affiliate of the
Representative. To date, the Representative
has made no such request.
JARED E. ABBRUZZESE has been the
Chairman, Chief Executive Officer and a
director of the Company since its formation
in August 1991. From August 1992 until
September 1993, Mr. Abbruzzese served in
various capacities for the prior operator of
a wireless cable system in Albany, NY, Mr.
Abbruzzese served as President of The
Diabetes Institute Foundation in Virginia
Beach, Virginia from October 1988 until
August 1991. Since February 1996, Mr.
Abbruzzese has served as Chairman and Chief
Executive Officer of CS Wireless.
JOHN J. PRISCO has been President,
Chief Operating Officer and a director of
CAI as of March 1, 1996. Mr. Prisco came to
CAI from Bell Atlantic Network Services,
Inc., where he spent the last three years as
a corporate officer, most recently as
President of CellularVision of New York, the
only LMDS (28 GHz) wireless cable operator
in the U.S. In 1986, Mr. Prisco founded Penn
Access Corporation , which operated a fiber
optic network in the greater Pittsburgh, PA
area. Mr. Prisco served as President and
Chief Executive Officer of Penn Access until
its sale in 1993 to Tele-Communications,
Inc. Penn Access currently operates as part
of the Teleport Communications Group.
JAMES P. ASHMAN has been Executive
Vice President and Chief Financial Officer
of CAI since December 1995. Previously, he
was Senior Vice President and Treasurer of
the Company from September 1994 to December
1995. He has been a director since March
1994. From November 1992 to September 1994,
he was a senior advisor of, and independent
consultant affiliated with, Carolina Barnes
Capital, Inc. ("CBC"), a registered broker
dealer. CBC served as a financial advisor
to the Company from January 1993 until
September 1994. Mr. Ashman was Vice
President of Richter & Co., Inc. from June
1990 to November 1992. Since February 1996,
Mr. Ashman has served as a director of CS
Wireless.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
CAI WIRELESS SYSTEMS, INC. (CONTINUED)
GEORGE M. WILLIAMS has been
Chief Administrative Officer and
Corporate Analyst, Treasurer and
Secretary of the Company since December
1995, and served as Executive Vice President
of Finance and Chief Financial Officer of
the Company from August 1993 until December
1995. Mr. Williams has been a director of
the Company since August 1993 and was
Treasurer from March 1994 through September
1994. Mr. Williams was a financial
consultant to the Company from September
1992 until his current appointment. From
1986 until August 1993 he was a partner in
Cable Management Services providing
management consultation to the hard-wire and
wireless cable industries in both the
domestic and international markets. He was
involved in the start-up of Schomann
Entertainment, Inc., a small hard-wire cable
multiple systems operator, as a partner and
controller with operational responsibilities
from 1987 until August 1993. He also has
been a consultant in the cable television
industry since 1986. Mr. Williams is
currently a 20% shareholder and officer of
Hamilton County Cable TV, Inc., a hard-wire
cable system operator.
TIMOTHY J. SANTORA has been Executive
Vice President of the Company since November
1995. From May 1993 until November 1995,
Mr. Santora was Senior Vice President and
Secretary of the Company, and from May 1993
until February 1994, Mr. Santora served as
the Company's Treasurer. Mr. Santora served
as a director of the Company from May 1993
until March 1996. From August 1991 to
September 1992, Mr. Santora provided
consulting services to the Company.
CRAIG J. KESSLER was Vice President
and Controller of CAI from March 1994
through June 1997. From June 1989 until
joining CAI, he was a senior manager and
assistant director of quality control at
Urbach, Kahn, and Werlin, PC, a public
accounting firm, responsible for the firm's
continuing professional education, client
service, and compliance with professional
standards. Mr. Kessler is a certified
public accountant and member of the American
Institute of Certified Public Accountants
and New York State Society of Certified
Public Accountants.
ARTHUR C. BELANGER has been a director
of the Company since March 1994. From
December 1979 to 1984, Mr. Belanger served
as Vice President and General Manager of GE
Cablevision. GE Cablevision merged with
United Artists Communications, Inc. ("UA")
in 1979. In 1984, Mr. Belanger became UA's
Executive Vice President and Chief Operating
Officer and held that position until his
retirement in January 1992. At that time,
UA served approximately 3 million
subscribers. Mr. Belanger is also a member
of the Board of Directors of TCI Ventures
Five, Inc.
HAROLD A. BOUTON has been a director
of the Company since September 1994. Mr.
Bouton is the President and Chief Executive
Officer of WTVI, Channel 42, the Public
Broadcast Service ("PBS") affiliate in
Charlotte, North Carolina, positions he has
held since 1983.
DAVID M. TALLCOTT has been a director
of the Company since March 1995. Since
1990, Mr. Tallcott has been President of
Lortech Corporation, a full service large
mainframe commercial data center serving the
insurance industry, labor unions and direct
mailers.
ALAN SONNENBERG has been a director of
the Company since September 29, 1995. Mr.
Sonnenberg served as President of CAI from
September 29, 1995, when ACS was acquired by
the Company, until February 23, 1996, when
he became President of CS Wireless.
Currently, Mr. Sonnenberg serves as Vice
Chairman of CS Wireless. Previously, Mr.
Sonnenberg served as Chairman of the Board
of Directors of ACS and its Chief Executive
Officer since 1988, and as its President
since 1987. Since 1989, Mr. Sonnenberg has
been a director of the Wireless Cable
Association International, Inc.
ROBERT D. HAPP has been a director of
CAI since September 1995. Mr. Happ served
as Senior Managing Partner of the New
England area for KPMG Peat Marwick ("KPMG"),
an accounting firm, from 1985 until his
retirement in 1994. Prior to that, he
served in various capacities with KPMG. Mr.
Happ is also a member of the Board of
Directors of Galileo Corporation. Since
February 1996, Mr. Happ has served as a
director of CS Wireless.
SECTION 16 REPORTS. Under the
securities laws of the United States, the
Company's directors, its executive officers
and any persons holding ten percent or more
of the common stock are required to report
their ownership of the Common Stock and any
changes in that ownership to the Securities
and Exchange Commission. Specific due dates
for the reports have been established. A
report for each of Messrs. Belanger,
Bouton, Happ and Tallcott were not timely
filed with respect to a grant of options
pursuant to a Company stock option plan. In
making these statements, the Company has
relied on the written representations of its
incumbent directors and officers and its ten
percent holders and copies of the reports
that they have filed with the Securities and
Exchange Commission. The Company has
implemented a Section 16 Reporting
Compliance Program in an effort to assist
the Company's directors and executive
officers with their Section 16 reporting
requirements.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table discloses three
fiscal periods of compensation received by
the Company's Executive Officers receiving
compensation in excess of $100,000 for the
year ended March 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
Securities
NAME AND PRINCIPAL POSITION Fiscal Other Annual Underlying All Other
PERIOD SALARY BONUS COMPENSATION OPTIONS COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Jared E. Abbruzzese 1997 $350,000 $ 0 $ 0{(1)} 350,000 $ 0
Chief Executive Officer 1996 277,300 150,000 0{(1)} 0 0
1995 166,327 0 0{(1)} 525,000 0
John J. Prisco 1997 200,000 40,000 0{(1)} 150,000 0
President and Chief Operating 1996 12,308 0 0{(1)} 200,000 0
Officer(2)
James P. Ashman 1997 183,000 0 0{(1)} 100,000 0
Chief Financial Officer 1996 140,100 0 0{(1)} 40,000 0
1995 54,400 0 0{(1)} 37,000 0
George M. Williams 1997 166,327 0 0{(1)} 65,000 0
Chief Administrative Officer 1996 144,000 0 0{(1)} 40,000 0
1995 124,900 0 0{(1)} 28,000 0
Timothy J. Santora 1997 170,000 0 0{(1)} 65,000 0
Executive Vice President 1996 144,500 0 0{(1)} 40,000 0
1995 112,600 0 0{(1)} 28,000 0
</TABLE>
_____________________________
(1) Other annual compensation, including
Company provided vehicle or
allowances, life insurance, or
membership dues, less than the lesser
of 10% of total annual salary and
bonus or $50,000 is not presented.
(2) Mr. Prisco became President and Chief
Operating Officer on March 1, 1996.
COMPENSATION OF DIRECTORS
Directors, other than those who are
full-time employees of the Company, are
paid an annual fee of $6,000 and a fee of
$750 per Board meeting attended and $500
per committee meeting attended, expenses,
$375 for each telephonic Board meeting
attended, and $250 for each telephonic
committee meeting attended, plus, in all
such cases, out-of-pocket expenses.
Directors who are full-time employees of
the Company receive no remuneration for
serving on the Board of Directors or
committees. Mr. Sonnenberg receives
compensation through a consulting
arrangement with CAI whereby CAI will pay
$75,000 per year through August 1998.
CAI has entered into a deferred
compensation agreement with David Tallcott,
which provides that all compensation he
would otherwise be paid as a director will
instead be set aside in an account to be
invested in such mutual funds offered by
Smith Barney Inc. as Mr. Tallcott shall
direct. The entire balance of the account
will be paid to Mr. Tallcott when he
attains age 59 1/2 , provided that CAI may
elect to pay the balance in the account
earlier in the event he terminates his
service as director. In the event of Mr.
Tallcott's death, any balance in the
account will be paid to his beneficiary or
estate. Upon payment of the balance in the
account to Mr. Tallcott, Mr. Tallcott will
recognize the amount paid as taxable
income, and CAI will recognize a tax
deduction in the same amount.
In October 1996, the Company
adopted the
1996 Outside Directors' Stock Option Plan
(the "1996 Directors' Plan"). Under the 1996
Directors' Plan, options to purchase an
aggregate of not more than 45,000 shares of
CAI Common Stock will be granted from time
to time to nonemployee directors. Each
qualifying director shall be granted an
option to purchase 7,500 shares at a price
of fair market value on the date of the
grant. Such option shall vest: 25% on the
date of grant, and 25% on each of the
second, third and fourth anniversaries of
the grant. These options are exercisable
for a period of ten years, but not before an
initial six-month period. The exercise price
for stock options granted under the 1996
Directors' Plan will not be less than 100%
of the fair market value of the common
<PAGE>
{ITEM 11. EXECUTIVE COMPENSATION (continued)
COMPENSATION OF DIRECTORS
stock
on the grant date. As of March 31, 1997, the
Company has granted options under this plan
to purchase 30,000 shares of common stock at
a weighted average price of $6.63 per share.
Under the Company's 1993 Outside
Directors' Option Plan (the "1993 Directors'
Plan") each new director who is not
otherwise an employee will receive options
to purchase 1,667 shares on the first
anniversary of their election to the Board.
Any director having received options will
automatically receive an additional 1,667
options on the following two anniversaries
of their initial receipt of options,
provided there are sufficient shares
remaining in the Directors' 1993 Plan and
that they continue to be an eligible
director. Options are exercisable for a
period of seven years following the date of
grant. The exercise price of options
granted under the 1993 Directors' Plan may
not be less than the greater of the fair
market value on the grant date or the
Company's initial public offering price of
$11. During the year ended March 31, 1995,
Mr. Belanger received options to purchase
1,667 shares of CAI Common Stock at an
exercise price of $11 per share. During the
year ended March 31, 1996, Messrs. Belanger,
Bouton, and Tallcott were each granted
options to purchase 1,667 shares of CAI
Common Stock at an exercise price of $11 per
share under the Directors' 1993 Plan.
Options granted under both of the
Directors' Plans are not transferable other
than by will or the laws of descent and
distribution. In the event the grantee
ceases to be a director for any reason, each
unexpired option may be exercised to the
extent exercisable on the date of such
cessation or at any time prior to the date
specified in such option. Notwithstanding
the foregoing, in the event of cessation by
reason of death, each unexpired option shall
become exercisable in full and may be
exercised at any time during the following
12 months. If the director is terminated
for cause, outstanding options shall be
terminated. Options granted under both of
the Directors' Plans become immediately
exercisable upon the occurrence of certain
events, including the death or disability of
a director or certain business combinations.
OPTION GRANTS IN LATEST FISCAL YEAR
The following table provides
information on options to purchase shares of
CAI Common Stock granted during the fiscal
year ended March 31, 1997 to the persons
named in the Summary Compensation Table
above.
<TABLE>
<CAPTION>
Potential realizable value at
% of Total assumed annual rates of
Number of Options stock price appreciation
Securities Granted Exercise FOR OPTION TERM
Underlying to Employees Price Expiration
NAME OPTIONS IN FISCAL YEAR Per SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Jared E. Abbruzzese(1) 350,000 33.6% $1.75 12/17/06 $171,400 $635,700
John J. Prisco(1) 150,000 14.4% $1.75 12/17/06 73,500 272,500
James P. Ashman(1) 100,000 9.6% $1.75 12/17/06 49,000 181,600
George M. Williams(2) 65,000 6.2% $1.75 12/17/06 31,800 118,100
Timothy J. Santora(2) 65,000 6.2% $1.75 12/17/06 31,800 118,100
</TABLE>
(1) Stock options granted to these
individuals during the fiscal year
ended March 31, 1997, were granted
under the Company's 1993 Stock Option
and Incentive Plan. These options
vest in full on June 19, 1997 (six
months following the date of grant),
and expire and lapse on December 17,
2006.
(2) Stock options granted to these
individuals during the fiscal year
ended March 31, 1997 were issued
under the Company's 1995 Stock Option
and Incentive Plan, upon the
surrender of options to purchase a
like number of shares of CAI Common
Stock at an exercise price of $7.75
per share. These options vest in
full on June 19, 1997 (six months
following the date of grant), and
expire and lapse on December 17,
2006.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (continued)
AGGREGATE OPTION EXERCISES IN LATEST
FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth
certain information with regard to the
outstanding options to purchase shares
of CAI Common Stock as of the end of the
fiscal year ended March 31, 1997 for the
persons named in the Compensation Table
above.
<TABLE>
<CAPTION>
Number of Securities VALUE OF UNEXERCISED IN-THE-
SHARES Underlying Unexercised MONEY OPTIONS AT
ACQUIRED ON VALUE Options at March 31, 1997 MARCH 31, 1997(1)
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Jared E. Abbruzzese --- $ --- 225,000 350,000 $ --- $ ---
John J. Prisco --- --- 100,000 150,000 --- ---
James P. Ashman --- --- 57,000 120,000 --- ---
George M. Williams --- --- 51,000 65,000 --- ---
Timothy J. Santora --- --- 39,000 65,000 --- ---
</TABLE>
(1) The value of unexercised in-the-
money options at March 31, 1997 is
based on the difference between the
March 31, 1997 closing price per
share of CAI Common Stock on NASDAQ
NM of $1.72 and the exercise prices
of the in-the-money options. All
unexercised options held by person
identified above are out-of-the-
money.
EMPLOYMENT AGREEMENTS
The Company has entered into
employment agreements with Messrs.
Abbruzzese, Prisco, Ashman,
Williams and Santora. Such
agreements continue in effect until
March 21, 1998, in the case of Mr.
Abbruzzese; until January 3, 1998
in the case of Mr. Prisco; and
until February 28, 1999 in the case
of Mr. Ashman. The employment
agreements are automatically
renewed for successive one year
terms, unless otherwise terminated.
The initial term of the employment
agreements for each of Mr. Santora
and Mr. Williams expired on October
1, 1996. Each agreement has been
renewed for a one-year term,
pursuant to the provisions of each
such agreement. Pursuant to his
employment agreement, Mr.
Abbruzzese serves as Chairman and
Chief Executive Officer of the
Company and is entitled to an
annual base salary of $350,000.
Pursuant to his employment
agreement, Mr. Prisco serves as
President and Chief Operating
Officer of the Company and is
entitled to a base salary of
$200,000. Pursuant to his
employment agreement, Mr. Ashman
serves as Executive Vice President
and Chief Financial Officer of the
Company and is entitled to a base
salary of $183,000. Mr. Santora
serves as Executive Vice President
and is entitled to an annual base
salary of $170,000. Mr. Williams
serves as Chief Administrative
Officer and Corporate Analyst,
Secretary and Treasurer and is
entitled to an annual base salary
of $165,000. Each of the foregoing
executive officers will be entitled
to an annual bonus to be determined
by the Compensation Committee.
Pursuant to their respective
employment agreements, Messrs.
Abbruzzese, Prisco, Ashman, Santora
and Williams agree to devote
substantially all of their working
time to the business of the
Company. Mr. Abbruzzese has agreed
to devote not less than 75% of his
working time to the Company. Mr.
Williams, however, may continue to
perform his duties as Treasurer of
Hamilton County Cable TV, as long
as such activities can be
accomplished outside of his normal
working time for the Company and do
not otherwise interfere with his
duties under his employment
agreement.
If their employment is
terminated without cause, Messrs.
Ashman, Williams and Santora will
be entitled to their base salary
and certain benefits for 12 months
following termination of
employment. Messrs. Abbruzzese and
Prisco would be entitled to a
severance amount equal to the
greater of such executive's then-
current base salary or the total
base salary that would have been
payable for the balance of the term
of his employment in the event such
executive's employment is
terminated without cause.
Messrs. Abbruzzese, Prisco,
Ashman and Williams are subject to
nondisclosure agreements with
respect to the confidential
information of CAI and are subject
to a noncompetition provision in
each of their employment
agreements.
<PAGE>
Mr. Sonnenberg, President of
CAI from September 29, 1995 until
February 23, 1996, entered into a
three-year Employment Agreement
with CAI pursuant to which he
became President of CAI and Chief
Executive Officer of the Wireless
Operating Group of CAI effective
September 29, 1995. Mr. Sonnenberg
also serves as a director of CAI.
He served as Vice Chairman of the
CAI Board of Directors from
September 29, 1995 until February
23, 1996. Under Mr. Sonnenberg's
employment agreement, Mr.
Sonnenberg was entitled to receive
a base salary of $275,000 per year,
received options to purchase
300,000 shares of CAI Common Stock
at an exercise price of $11.00 per
share and received a signing bonus
of $500,000 upon execution of such
agreement. Upon the closing of the
transactions contemplated by the
Participation Agreement, Mr.
Sonnenberg entered into a
Termination Agreement with the
Company pursuant to which his
employment agreement was
terminated, he surrendered options
to purchase 300,000 shares of CAI
Common Stock, and agreed to certain
noncompetition provisions similar
to those imposed upon Mr. Prisco.
The Company also entered into a
Consulting Agreement with Mr.
Sonnenberg pursuant to which he
agreed to provide CAI with certain
consulting services for a thirty-
month period beginning on February
23, 1996 for an annual fee of
$75,000.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets
forth as of May 21, 1997 (i) each
stockholder who based on public
filings, is known to the Company to
be the beneficial owner of more
than 5% of the outstanding shares
of CAI Common Stock, (ii) each
Director and Executive Officer and
(iii) all Directors and Executive
Officers of CAI as a group:
<TABLE>
<CAPTION>
NEFICIAL OWNERSHIP
Percentage of Outstanding
NUMBER OF SHARES SHARES
<S> <C> <C> <C>
BANX Partnership 36,751,085(1) 47.9%
3900 Washington Street
Wilmington, DE 19802
Jared E. Abbruzzese 1,757,552(2) 4.3%
John J. Prisco 255,000(3) *
James P. Ashman 281,094(4) *
George M. Williams 231,000(5) *
Timothy J. Santora 152,200(6) *
Craig J. Kessler 67,000(7) *
Arthur C. Belanger 6,875(8) *
Harold A. Bouton 3,789(9) *
Robert D. Happ 1,875(10) *
Alan Sonnenberg 599,227(11) 1.5%
David M. Tallcott 8,042(12) *
All directors and officers as a group
(11 persons) 3,363,654 8.0%
</TABLE>
_______________________________
* less than 1%
(1) Consists of 36,751,083 shares
issuable upon the exercise of
warrants to purchase Common
Stock, the conversion of the
Company's senior preferred
stock, the exercise of
warrants to purchase voting
preferred stock and upon
conversion of such voting
preferred stock to Common
Stock. The general partners
of BANX Partnership are MMDS
Holdings, Inc. and NYNEX MMDS
Holding Company, which are
subsidiaries of Bell Atlantic
Corporation and NYNEX
Corporation, respectively.
The address of MMDS Holdings
and Bell Atlantic Corporation
is 1717 Arch Street,
Philadelphia, PA 19103, and
the address of NYNEX MMDS
Holding and NYNEX Corporation
is 1113 Westchester Avenue,
White Plains, NY 10604.
(2) Includes 176,000 shares held
by relatives over which
shares Jared E. Abbruzzese
retains voting control,
575,000 shares issuable upon
exercise of options
exercisable currently or
within 60 days of May 21,
1997, and 20,000 shares held
by The Corotoman Foundation,
Inc., of which Jared E.
Abbruzzese is a director and
over which shares he retains
voting control.
(3) Includes 250,000 shares
issuable upon the exercise of
options exercisable currently
or within 60 days of May 21,
1997.
(4) Includes 157,000 shares
issuable upon the exercise of
options exercisable currently
or within 60 days of May 21,
1997.
(5) Includes 116,000 shares
issuable upon the exercise of
options exercisable currently
or within 60 days of May 21,
1997.
(6) Includes 104,000 shares
issuable upon the exercise of
options exercisable currently
or within 60 days of May 21,
1997, and 1,500 shares given
to relatives over which
shares Mr. Santora retains
voting control.
(7) Shares are issuable upon the
exercise of options
exercisable currently or
within 60 days of May 21,
1997.
(8) Shares are issuable upon the
exercise of options
exercisable currently or
within 60 days of May 21,
1997.
(9) Includes 127 shares held by
an immediate family member
and 3,542 shares issuable
upon the exercise of options
exercisable currently or
within 60 days of May 21,
1997.
(10) Shares are issuable upon
the exercise of options
exercisable currently or
within 60 days of May 21,
1997.
(11) Includes 33,000 shares
held by the Sonnenberg
Foundation over which shares
Mr. Sonnenberg retains voting
control and 98 shares held by
an immediate family member.
(12) Includes 1,000 shares
held by Lortech Corporation
over which shares Mr.
Tallcott retains voting
control and 3,542 shares
issuable upon exercise of
options exercisable currently
or within 60 days of May 21,
1997.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
THE BANX TRANSACTIONS.
Reference is hereby made to
Item 1. Business - Current
Relationship with Bell Atlantic and
NYNEX; and - Background - BANX
TRANSACTIONS for a description of
the relationship among the Company,
and affiliates of Bell Atlantic and
NYNEX.
OTHER.
On May 8, 1995 CAI sold,
subject to an option to repurchase
exercisable at any time prior to
January 1, 1996, all of the issued
and outstanding stock of TelQuest,
Inc. ("TelQuest") (with a negative
net book value of approximately
$70,000) to Wave Holdings, L.L.C.,
a Delaware limited liability
company controlled by Jared E.
Abbruzzese, CAI's Chairman and
Chief Executive Officer, for
$25,000. The gain on this sale of
approximately $23,000 was deferred
and was not included in income.
TelQuest's involvement in certain
operations could have, at that
time, violated the Modified Final
Judgment, if engaged in by an RBOC
or an affiliated enterprise. In
May 1996, CAI relinquished its
option to repurchase TelQuest for a
2% equity interest in TelQuest
Systems, Inc., the operating
successor of TelQuest's business.
In consideration of Mr.
Abbruzzese guaranteeing the
obligation of CAI to MMDS Holdings,
an affiliate of Bell Atlantic, which
permitted CAI to complete the
Microband acquisition in January
1995, the CAI Board of Directors
awarded options to acquire 150,000
shares of CAI Common Stock at $11.00
per share to Mr. Abbruzzese.
In October 1996, two of CAI's
officers formed a company, Telecom
Service Support LLC ("TSS"), to
provide subscriber installation,
service calls, and warehouse service
to the subscription television
industry. CAI incurred
approximately $348,000 for such
services during the year ended March
31, 1997. Additionally, CAI has
advanced $80,000, provided leased
vehicles, and provided certain
facility space to TSS.
Additionally, CAI periodically
charters an airplane owned by Wave
Air, Inc., which is primarily owned
by Mr. Abbruzzese, in order to
carry out business when airline
schedules are not compatible.
Transactions with Wave Air, Inc.
amounted to approximately $278,000
for the year ended March 31, 1997.
During the year ended March 31,
1997, CAI loaned $800,000 to Haig
Capital LLC and $200,000 to TelQuest
Communications, Inc., entities in
which Mr. Abbruzzese is a principal
member and stockholder, respectively,
of which approximately $175,000 was
repaid by Haig Capital. In March
1997, Mr. Abbruzzese combined a
$19,000 February 1997 loan from CAI,
the remaining obligation of Haig
Capital, accrued interest on both
loans, and an additional $100,000
advance in April 1997 (subsequent to
year-end) into one personal
unsecured, demand obligation in the
amount of $780,054, bearing interest
at 14% per annum. In March 1997, CAI
separately purchased certain used
equipment for the Boston Project from
Haig Capital L.L.C. for $107,000.
The loan to TelQuest
Communications, Inc. is evidenced by
a promissory note in the principal
amount of $200,000, bears interest at
14%, and matures in March 2000. The
note is convertible into TelQuest
Communications, Inc. common stock at
the election of CAI. The Company is
currently negotiating the terms of a
joint venture with TelQuest
Communications and CS Wireless,
pursuant to which the Company will be
obligated to invest $2.5 million in
cash and purchase $2.5 million of
equipment in exchange for an initial
equity interest in the joint venture
of 25%. The original $200,000 loan
to TelQuest Communications will be
contributed to the joint venture, and
CAI will receive a credit for the
principal and accrued interest on
such amount against the cash portion
of its joint venture investment
obligation. Interest earned on
related party loans approximated
$63,400 for the year ended March 31,
1997.
During April 1997, CAI sold
approximately $2,112,000 of
equipment at book value from the
Boston Project that was not needed
to CS Wireless for 20% down and the
balance due in 30 days after
delivery. Additionally, during
April 1997, CAI placed purchase
orders approximating $1,612,000 with
CS Wireless for equipment needed for
the Boston Project, taking advantage
of CS Wireless' favorable pricing
arrangements with its vendor.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and
Schedules
The financial statements
listed in the accompanying
index to financial statements
and schedules are filed as
part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
The Company filed a Current
Report on Form 8-K dated
November 25, 1996 (filed
January 3, 1997), that
reported the following events
under Item 5: (A) "CAI"
entered into a Modification
Agreement dated December 12,
1996 with affiliates of Bell
Atlantic Corporation and NYNEX
Corporation. The Modification
Agreement suspends the
Business Relationship
Agreement among the parties
for one year and gives CAI or
its designee an option to
purchase the $100 million RBOC
investment in CAI; (B) CAI has
recently announced that it has
retained J.P. Morgan
Securities Inc. and Smith
Barney Inc. to act as
financial advisors to CAI in
connection with exploring
strategic alternatives for the
Company; (C) The following
news releases were issued by
the Company: (i) CAI WIRELESS
SYSTEMS, INC. RESPONDS TO
CLASS ACTION LAWSUIT, issued
on November 25, 1996 (See
Exhibit 99.1), (ii) CAI
WIRELESS SYSTEMS, INC.
RESPONDS TO RECENT NEWS,
issued on December 6, 1996
(See Exhibit 99.2), (iii) CAI
WIRELESS SYSTEMS, INC.
RECEIVES FIRST FCC MARKET
TRIAL APPROVAL TO USE WIRELESS
CABLE SPECTRUM FOR TWO-WAY
SERVICES, issued on December
16, 1996 (See Exhibit 99.3);
and (D) CAI has been named in
a class action lawsuit
alleging various violations of
the federal securities laws
filed in the United State
District Court for the
Northern District of New York.
The Company filed a Current
Report on Form 8-K dated
January 31, 1997 (filed
February 7, 1997), that
reported under Item 5 that the
following news releases were
issued: CAI WIRELESS SYSTEMS
AND ADC TELECOMMUNICATIONS
ANNOUNCE PLANS TO JOINTLY
DESIGN AND IMPLEMENT TWO-WAY
WIRELESS SERVICES on February
3, 1997 (see Exhibit 99.1);
CAI WIRELESS RECEIVES THE
FIRST PERMANENT APPROVAL FROM
THE FCC TO USE WIRELESS CABLE
SPECTRUM FOR TWO-WAY SERVICES
on January 31, 1997 (see
Exhibit 99.2); CAI WIRELESS
SYSTEMS TO RELOCATE FROM
ALBANY TO PHILADELPHIA on
January 31, 1997.
The Company filed a Current
Report on Form 8-K dated March
6, 1997 (filed March 12, 1997)
that reported under Item 5 the
following news release: CAI
WIRELESS SYSTEMS, INC. SIGNS
LETTER OF INTENT FOR INTERIM
FINANCING (see Exhibit 99.1).
The Company filed a Current
Report on Form 8-K dated March
17, 1997 (filed June 27, 1997)
that reported the following
events under Item 5: (A) CAI
Entered Into Amendement No. 1
To The Affiliates Of Bell
Atlantic Corporation And NYNEX
Corporation on April 29, 1997;
(B) CAI Closed A $30 Million
Interim Credit Facility
Provided By The "Interim Debt
Lenders" on June 6, 1997; (C)
the following news releases
were issued: (1) CAI WIRELESS
FILES FOR FCC APPROVAL TO TEST
TWO-WAY WIRELESS SERVICES IN
PITTSBURGH on March 17, 1997
(see Exhibit 99.1); (2) CAI
WIRELESS FILES FOR AUTHORITY
TO PROVIDE TELEPHONE SERVICE
IN NEW YORK STATE on March
19, 1997 (see Exhibit 99.2);
(3) CAI WIRELESS RECEIVES FCC
APPROVAL TO TEST FIXED TWO-WAY
WIRELESS SERVICES IN
PITTSBURGH on April 2, 1997
(see Exhibit 99.3); (4) CAI
RENEGOTIATES TERMS WITH RBOCS
ON SECURITIES REPURCHASE
OPTION on April 30, 1997 (see
exhibit 99.4); and (5) CAI
WIRELESS CLOSES INTERIM
FINANCING on June 6, 1997
(see Exhibit 99.5).
(c) Exhibits
See index to exhibits filed as
part of this Annual Report on Form
10-K.
(d) Schedules
Schedules, specified under
Regulation S-X, are omitted
because of the absence of
conditions under which they
are required or because the
required information is
included in the financial
statements submitted. In
accordance with Rule 3-09(a),
separate financial statements
of CS Wireless are not
required to be filed.
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND
SCHEDULES
Page No.
IN FORM 10-K
FINANCIAL STATEMENTS
Reports of Independent
Accountants 33
Consolidated Balance Sheets -
March 31, 1997 and 1996 35
Consolidated Statements of Operations - Years
Ended March 31, 1997, 1996, and 1995 36
Consolidated Statements of Shareholders' Equity - Years
Ended March 31, 1997, 1996, and 1995 37
Consolidated Statements of Cash Flows - Years Ended March 31,
1997, 1996, and 1995 38
Notes to Consolidated Financial Statements 41
<PAGE>
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the
Securities Exchange Act of 1934, CAI
Wireless Systems, Inc. has duly
caused this annual report on Form
10-K to be signed on its behalf by
the undersigned thereunto duly
authorized.
CAI WIRELESS SYSTEMS, INC.
(Registrant)
BY:
/S/ JARED E. ABBRUZZESE
Jared E. Abbruzzese,Chairman,
Date: JUNE 30, 1997 Chief Executive Officer and Director
Pursuant to the requirements
of the Securities Exchange Act of
1934, this report has been signed
below by the following persons on
behalf of CAI Wireless Systems, Inc.
and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
/S/ JARED E. ABBRUZZESE Chairman, Chief Executive Officer June 30, 1997
Jared E. Abbruzzese and Director
(Principal Executive Officer)
/S/ JOHN J. PRISCO President, Chief Operating Officer June 30, 1997
John J. Prisco and Director
/S/ JAMES P. ASHMAN Executive Vice President, Chief June 30, 1997
James P. Ashman Financial Officer and Director
(Principal Financial Officer)
/S/ GEORGE M. WILLIAMS Chief Administrative Officer, June 30, 1997
George M. Williams Secretary, Treasurer and Director
/S/ CRAIG J. KESSLER Vice President and Controller June 30, 1997
Craig J. Kessler (Principal Accounting Officer)
/S/ ARTHUR C. BELANGER Director June 30,1997
Arthur C. Belanger
<S><C><C>
</TABLE>
<PAGE>
SIGNATURES (continued)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
/S/ HAROLD A. BOUTON Director June 30, 1997
Harold A. Bouton
/S/ DAVID M. TALLCOTT Director June 30, 1997
David M. Tallcott
/S/ ROBERT D. HAPP Director June 30, 1997
Robert D. Happ
<S><C><C>
</TABLE>
<TABLE>
<CAPTION>
Director June , 1997
Alan Sonnenberg
<S><C><C>
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Incorporation by
Reference (SEE PAGE
EXHIBIT NO. DESCRIPTION LEGEND) NO.
<S> <C> <C> <C>
2.1 Asset Purchase Agreement-New York System 5-Exhibit 2
2.2 Bott Acquisition Agreement 2-Exhibit 2
2.3 Agreement and Plan of Merger, as amended, by and among 7-Exhibit 2.1
CAI, CAI Merger Sub and ACS
2.4 Agreement and Plan of Merger by and among CAI, ECN 7-Exhibit 2.2
and ECNW dated as of March 28, 1995
2.5 Asset Purchase Agreement by and among CAI, ECN and 7-Exhibit 2.3
ECNMII dated as of March 28, 1995
2.6 Option Agreement dated March 28, 1996 7-Exhibit 2.4
2.7 Purchase Agreement by and between CAI and WCTV 7-Exhibit 2.5
dated as of March 28, 1995
2.8 Purchase Agreement by and between CAI and AWS dated 7-Exhibit 2.6
as of March 28, 1995
2.9 Agreement and Plan of Merger by and among CAI, HRW 7-Exhibit 2.7
and the Minority Shareholders named therein, dated as of
March 28, 1995
2.10 Participation Agreement among Heartland Wireless 9-Exhibit 2.1
Communications, Inc., CAI Wireless Systems, Inc. and CS
Wireless Systems, Inc. dated as of December 12, 1995.
2.11 Amendment No. 1 to Participation Agreement among 12-Exhibit 2.2
Heartland Wireless Communications, Inc., CAI Wireless
Systems, Inc., and CS Wireless Systems, Inc. dated as of
December 12, 1995.
3.1 Amended and Restated Certificate of Incorporation 9-Exhibit 3.1
of CAI
3.2 Amended and Restated Bylaws of CAI 9-Exhibit 3.2
4.1 Form of Indenture for Senior Notes 6-Exhibit 4.1
4.2 First Supplemental Indenture 11-Exhibit 4.1
4.3 Form of Escrow Agreement among CAI and Chemical Bank 6-Exhibit 4.30
4.4 Subordinated Unsecured Promissory Note dated August 1-Exhibit 4.7
31, 1993 by and between CAI and Hope E. Carter
4.5 Promissory Note-Bott Family Trust 2-Exhibit 4.1
4.6 Guaranty and Security Agreement-Bott Family Trust 2-Exhibit 4.2
4.7 Promissory Note-Bott 2-Exhibit 4.3
4.8 Guaranty and Security Agreement-Bott 2-Exhibit 4.4
4.9 Term Note due May 9, 2005 in the principal amount 16-Exhibit 4.9
of $15.0 million issued to MMDS Holdings II, Inc.
4.10 Term Note due May 9, 2005 in the principal amount 16-Exhibit 4.10
of $15.0 million issued to NYNEX Holding Company
10.1 1993 Stock Option and Incentive Plan 1-Exhibit 10.1, 3
10.2 Form of 1993 Incentive Stock Option Agreement 1-Exhibit 10.2, 3
10.3 Form of 1993 Non-Qualified Stock Option Agreement 1-Exhibit 10.3, 3
10.4 Outside Director's Stock Option Plan 1-Exhibit 10.4, 3
10.5 Form of Outside Director's Stock Option Agreement 1-Exhibit 10.5, 3
10.6 Employment Agreement dated March 21, 1996 by and 16-Exhibit 10.6
between Jared E. Abbruzzese and CAI
10.7 Letter Agreement dated October 13, 1993 by and 1-Exhibit 10.10
between Hampton Roads Wireless, Inc. and CAI
10.8 Employment Agreement dated October 1, 1993 by and 1-Exhibit 10.9, 3
between George M. Williams and CAI and Amendment to
Employment Agreement dated December 15, 1993
10.9 Master Sublease dated June 19, 1993 by and between 1-Exhibit 10.11
Tri-Mark Communications, Ltd. and George Bott
10.10 Agreement between CAI and SNET 1-Exhibit 10.14
10.11 Consulting Agreement dated May 15, 1993 between 1-Exhibit 10.7
Jared E. Abbruzzese and CAI
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS (CONTINUED)
INCORPORATION
Exhibit NO. by Reference (SEE PAGE
DESCRIPTION LEGEND) NO.
<S> <C> <C> <C>
10.12 Business Relationship Agreement among CAI, its Subsidiaries 7-Exhibit 10.13
and BANX Affiliate dated as of March 28, 1995, as amended by
Amendment Agreement No. 1
10.13 Securities Purchase Agreement dated as of March 28, 1995 4-Exhibit 2
among CAI, its Subsidiaries and BANX Partnership, including forms
of Stage I and Stage II Warrants
10.14 Stage I Warrant 8-Exhibit 4.19
10.15 Stage II Warrant 16-Exhibit 10.15
10.16 1995 Incentive Stock Plan 16-Exhibit 10.16
10.17 Consulting and Employment Agreement dated as of January 1, 16-Exhibit 10.17
1996 between the Company and John Prisco
10.18 Termination Agreement dated February 23, 1996 between CAI 16-Exhibit 10.18
and Alan Sonnenberg
10.19 Consulting Agreement dated February 23, 1996 between the 16-Exhibit 10.19
Company and Alan Sonnenberg
10.21 Form of Representative's Warrant Agreement with Form of 1-Exhibit 4.3
Warrant Certificate attached thereto
10.22 Warrant Agreement dated August 30, 1993 between CAI and 1-Exhibit 4.13
Richard McKenzie
10.23 Warrant Agreement dated August 30, 1993 between CAI and Phil 1-Exhibit 4.14
Hempleman
10.24 Warrant Agreement dated September 10, 1993 between CAI and 1-Exhibit 4.15
John Oppenheimer
10.25 Warrant Agreement dated August 30, 1993 between CAI and Marc 1-Exhibit 4.16
Howard
10.26 Warrant Agreement dated September 10, 1993 between CAI and 1-Exhibit 4.17
Les Alexander
10.27 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.26
Phil Hempleman
10.28 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.27
Marc Howard
10.29 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.28
Richard
McKenzie
10.30 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.29
John Oppenheimer
10.31 Warrant Agreement dated November 9, 1993 between CAI and Les 1-Exhibit 4.30
Alexander
10.32 Modification Agreement dated December 12, 1996, among the 14-Exhibit 10.
registrant and various affiliates of Bell Atlantic
Corporation and NYNEX Corporation
10.33 1996 Outside Directors' Stock Option Plan 15-Appendix A
10.34 Amendment No.1 to the Modification Agreement dated April 17-Exhibit 99.7
29, 1997 among the registrant and various affiliates of
Bell Atlantic Corporation and NYNEX Corporation
10.35 Employment Agreement dated as of February 29, 1997 between 17-Exhibit 99.6
the registrant and James P. Ashman
10.36 Loan and Security Agreement dated as of May 16, 1997 by and 17-Exhibit 99.9
among registrant and certain of its subsidiaries,
Foothill Capital Corporation, as agent, and the
financial institutions listed therein (confidential
treatment of certain portions of this exhibit has been requested)
10.37 Release and Agreement dated as of April 29, 1997 among 17-Exhibit 99.8
registrant and various affiliates of Bell Atlantic Corporation
and NYNEX Corporation
<dagger>11.1 Schedule Regarding Computation of Loss Per Common Share
<dagger>11.2 Schedule Regarding Computation of Fully Diluted Loss Per
Common Share
12. Statements re Computation of Ratios 13
<dagger>21. Subsidiaries of the Registrant
<dagger>23.1 Consent of Coopers & Lybrand L.L.P.
<dagger>23.2 Consent of KPMG Peat Marwick, LLP
27. Financial Data Schedule
</TABLE>
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
LEGEND
<S> <C>
1 Incorporated by reference to the exhibits to the Registration Statement on Form S-
1 (No. 33-71662).
2 Incorporated by reference to exhibits to the Current Report on Form 8-K dated
March 23, 1994 (No. 0-22888).
3 Management contract or compensation plan or arrangement.
4 Incorporated by reference to the exhibits to the Schedule 13D of BANX Partnership
dated March 29, 1995, filed with the Commission on April 10, 1995.
5 Incorporated by reference to the exhibit to the Current Report on Form 8-K dated
January 9, 1995 (No. 0-22888).
6 Incorporated by reference to the exhibits to the Registration Statement on Form S-
1 (No. 33-93062).
7 Incorporated by reference to the exhibits to the Registration Statement on Form S-
4 (No. 33-94222).
8 Incorporated by reference to the exhibits to the Annual Report on Form 10-K for
March 31, 1995
9 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for
September 30, 1995.
10 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated
December 12, 1995.
11 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for
December 31, 1995 (No. 0-22888).
12 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated
February 23, 1996 (No. 0-22888).
13 The information is not included because the ratio is less than 1 and the earnings
deficiency is included in the Selected Financial Data of CAI.
14 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for
December 31, 1996.
15 Incorporated by reference to the registrant's Proxy Statement dated September 18,
1996.
16 Incorporated by reference to the exhibits to the Annual Report on Form 10-K for
March 31, 1996.
17 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated
June 27, 1997.
<dagger> Filed herewith.
</TABLE>
<PAGE>
EXHIBIT 11.1
CAI WIRELESS SYSTEMS, INC.
LOSS PER SHARE COMPUTATION
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
March 31, March 31, March 31,
1997 1996 1995
<S> <C> <C> <C>
Net loss $(82,298,207) $ (40,985,572) $(14,106,837)
Preferred stock dividend (13,011,270) ( 5,878,960) (328,011)
Loss applicable to common stock
shareholders $(95,309,477) $ (46,864,532) $(14,434,848)
Weighted average number of shares 40,069,258 27,075,578 15,456,540
outstanding
Loss per share $ (2.38) $ (1.73) $ (0.93)
</TABLE>
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
<TABLE>
<CAPTION>
Weighted Shares
COMMON STOCK TRANSACTIONS SHARES OUTSTANDING
<S> <C> <C>
For the year ended March 31, 1995
Beginning Balance 15,410,000 15,410,000
Warrants exercised 74,000 29,417
Series A Preferred Stock}(1)(2){ 1,640,909 0
Series B Preferred Stock}(3){ 271,739 17,123
Warrants}(1){ 2,020,578 0
Options}(1){ 956,500 0
15,456,540
For the year ended March 31, 1996
Beginning Balance 15,754,018 15,754,018
Common stock sold 179,765 174,824
Common stock issued to acquire 49% minority
interest in Hampton Roads Wireless, Inc. 652,523 467,107
Common stock issued in ACS Merger 19,362,611 9,734,209
Common stock issued in ECNW Merger 1,880,565 945,420
Series A Preferred Stock}(1)(2){ 2,546,198 0
Warrants}(1){ 2,310,541 0
Options}(1){ 1,274,134 0
27,075,578
For the year ended March 31, 1997
Beginning Balance 37,829,482 37,829,482
Series A Preferred Stock converted to common
stock 2,637,742 2,178,513
Warrants exercised 73,315 61,263
Warrants - BANX 36,751,085 0
Warrants-other 2,852,453 0
Options 2,195,937 0
40,069,258
</TABLE>
EXHIBIT 11.1
COMPUTATION OF WEIGHTED SHARES
OUTSTANDING (CONTINUED)
}
(1) {For the periods
subsequent to the public
offering, outstanding
convertible preferred
stock, warrants and
options
are not considered for the
purposes of calculating
the weighted shares
outstanding since these
securities are anti-
dilutive.
}(2){ The Series A 8%
Redeemable Convertible
Preferred Stock of
180,500 shares would be
converted at a minimum
into 1,640,909 Common
Shares assuming the
maximum conversion price
of $11 per share as of
March 31, 1995. As of
March 31, 1996, 2,546,198
shares are assumed based
on actual shares issued
upon conversion
subsequent to March 31,
1996, and $9.00 per share
for those preferred
shares not converted. As
of March 31, 1997, all of
the Series A Preferred
Stock was converted into
a total of 2,637,742
shares of CAI Common
Stock.
}(3){ The Series B 6%
Redeemable Convertible
Preferred Stock of 20,000
shares was converted into
271,739 Common Shares in
April 1995 which is
reflected as being issued
on March 8, 1995, the
date of issuance of the
Series B Preferred Stock.
}
<PAGE>
{
EXHIBIT 11.2
CAI WIRELESS SYSTEMS, INC.
COMPUTATION OF FULLY DILUTED LOSS
PER COMMON SHARE
<TABLE>
<CAPTION>
Year ended Year ended
MARCH 31, 1996 MARCH 31, 1997
<S> <C> <C> <C>
Loss applicable to common stock shareholders $ (46,864,532) $ (95,309,477)
Less: Preferred stock dividends 5,878,960 13,011,270
Net loss used to calculate fully diluted loss
per common share, before adjustments (40,985,572) (82,298,207)
LESS: ADJUSTMENTS:
Interest expense on term notes assumed to be
converted, net of deferred tax effect 2,432,557 3,431,000
Interest expense reduction resulting from the
assumed proceeds from exercise of warrants
and options in excess of the 20% buyback
applied against short and long term debt,
net of deferred tax effect. * 5,574,056 6,331,000
Adjusted net loss $(32,978,959) $(72,496,207)
Weighted average common and equivalent shares
outstanding as of March 31, 1996 and 1997 27,075,578 40,069,258
ADD SHARES ASSUMING CONVERSION OF:}
Warrants ** 2,310,541 2,852,453
Options ** 1,274,134 2,195,937
Series A preferred stock (Converted as of March 2,546,158 0
31, 1997)
Treasury stock repurchase with proceeds ** (3,075,454) (8,108,108)
Total before BANX 30,130,957 37,009,540
Assumed conversion of Term Note and Senior
Preferred Stock - BANX (collectively 45%)** 36,751,083 36,751,085
Less shares assumed repurchased, with
proceeds applicable to above **
Treasury stock repurchase 20% limit 7,565,896
Less amount used above (3,075,454) (4,490,442) 0
BANX shares for a full year 32,260,641 0
BANX shares outstanding for 184/366 days 16,218,464 0
Weighted average number of shares used to 73,760,625
compute fully diluted loss per share 46,349,421
WEIGHTED AVERAGE FULLY DILUTED LOSS PER SHARE $ (0.71) $ (0.98)
</TABLE>
* Interest expense reduction
resulting from excess
proceeds (over 20% treasury
stock purchase) used to
reduce debt is limited to
interest calculated at
12 1/4 % per annum, of
excess proceeds.
** Treasury stock method used on
options and warrants to the
extent of their proceeds and
then to the 20% limit on BANX.
This calculation is submitted in
accordance with Regulation S-K item
601(b)(11) although it is contrary
to paragraph 40 of APB Opinion No.
15 because it produces an anti-
dilutive result.
EXHIBIT 21
CAI WIRELESS SYSTEMS, INC.
LIST OF SUBSIDIARIES OF THE
REGISTRANT
SUBSIDIARIES OF THE
REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY NAME UNDER WHICH SUBSIDIARY STATE OF
CONDUCTS BUSINESS INCORPORATION
<S> <C> <C>
Greater Albany Wireless Systems, Inc. Capital Choice Television New York
Rochester Choice Television, Inc. Delaware
Hampton Roads Wireless, Inc. Delaware
Eastern New England TV, Inc. Delaware
Connecticut Choice Television, Inc. Connecticut
Commonwealth Choice Television, Inc. Delaware
Atlantic Microsystems, Inc. Delaware
Housatonic Wireless, Inc. New York
New York Choice Television, Inc. Wireless Cable of New York New York
Niskayuna Associates, Inc. Delaware
Onteo Associates, Inc. New York
Washington Choice Television, Inc. Atlantic Wireless Delaware
CAI CT Holdings Corp. Delaware
CAI Developments, Inc. Delaware
CAI/AMI Spectrum Management, Inc. Delaware
Philadelphia Choice Television, Inc. Popvision Delaware
ACS License, Inc. Pennsylvania
Onondaga Wireless, Inc. New York
Chenango Associates, Inc. New York
AMI Boston, Inc. Delaware
CAI Data Systems, Inc. Delaware
CAI Wireless Internet, Inc. Delaware
Springfield License, Inc. Delaware
Springfield Choice Television, Inc. Delaware
</TABLE>
_______________
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by
reference in the Registration Statement
of CAI Wireless Systems, Inc. on Form S-8
(File No. 0-22888) of our report, which
includes an explanatory paragraph
regarding substantial doubt about the
ability of the Company to continue as a
going concern, dated June 26, 1997, on
our audits of the consolidated financial
statements of CAI Wireless Systems, Inc.
as of March 31, 1997 and 1996, and for
the years ended March 31, 1997, 1996 and
1995, which report is included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND LLP
Albany, New York
June 26, 1997
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CAI Wireless Systems, Inc.
We consent to the incorporation by
reference in the registration statement
(No. 0-22888) on Form S-8 of CAI Wireless
Systems, Inc. of our report dated March
21, 1997, relating to the consolidated
balance sheet of CS Wireless Systems,
Inc. and subsidiaries as of December 31,
1996 and the related consolidated
statements of operations, stockholders'
equity and cash flows for the year then
ended, which report appears in the March
31, 1997 Annual Report on Form 10-K of
CAI Wireless Systems, Inc.
KPMG
Peat Marwick LLP
Dallas, Texas
June 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1997 financial statements contained in this Form 10-K as is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,471,918
<SECURITIES> 0
<RECEIVABLES> 1,447,085
<ALLOWANCES> 751,378
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 98,534,409
<DEPRECIATION> 28,767,392
<TOTAL-ASSETS> 542,339,515
<CURRENT-LIABILITIES> 0
<BONDS> 311,786,596
87,820,734
0
<COMMON> 275,769,414
<OTHER-SE> (161,079,224)
<TOTAL-LIABILITY-AND-EQUITY> 542,339,515
<SALES> 0
<TOTAL-REVENUES> 36,326,816
<CGS> 0
<TOTAL-COSTS> 30,966,463
<OTHER-EXPENSES> 17,600,000
<LOSS-PROVISION> 1,968,726
<INTEREST-EXPENSE> 40,805,791
<INCOME-PRETAX> (97,298,207)
<INCOME-TAX> (15,000,000)
<INCOME-CONTINUING> (82,298,207)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,298,207)
<EPS-PRIMARY> (2.38)
<EPS-DILUTED> 0
</TABLE>
