UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0-22888
CAI WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1324691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Corporate Woods Boulevard, Albany, New York 12211
(Address and zip code of principal executive offices)
(518) 462-263
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Number of shares outstanding of each of registrant's class of common stock at
August 10, 1997:
Class Outstanding Shares
- ----- -------------------
Common Stock, no par value 40,540,539
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
CAI WIRELESS SYSTEMS, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1997 March 31, 1997
------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 7,798,406 $10,471,918
Subscriber accounts receivable, less allowance for bad debts of
$629,000 for June and $751,000 for March 792,716 695,707
Prepaid expenses 1,024,311 1,034,106
Property and equipment, net 65,854,657 69,767,017
Wireless channel rights, net 207,164,531 207,680,551
Investment in CS Wireless Systems, Inc. 81,773,527 88,389,527
Goodwill, net of accumulated amortization 102,151,066 104,204,716
Debt service escrow 48,567,531 47,865,389
Debt financing costs, net 13,139,238 9,249,934
Other assets 5,798,371 2,980,650
------------ -------------
Total Assets $534,064,354 $542,339,515
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable $ 4,306,630 $ 6,600,584
Accrued expenses 26,035,705 16,138,811
Wireless channel rights obligations 5,704,100 5,302,600
Interim financing 11,500,000 -
Notes payable 36,758,854 36,786,596
Senior notes 275,000,000 275,000,000
------------ -------------
359,305,289 339,828,591
------------ -------------
Commitments and Contingencies
Mandatorily Redeemable Preferred Stock
14% Senior convertible preferred stock
(liquidation value $70,000,000) 69,195,000 69,160,000
Accrued preferred stock dividends 22,193,692 18,660,734
------------ -------------
91,388,692 87,820,734
------------ -------------
Shareholders' Equity
Common stock, 40,540,539 shares issued and outstanding 275,769,414 275,769,414
Accumulated deficit (192,399,041) (161,079,224)
------------ -------------
83,370,373 114,690,190
------------ -------------
Total Liabilities and Shareholders' Equity $534,064,354 $542,339,515
============ =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Quarter ended June 30,
1997 1996
<S> <C> <C>
Revenues $ 8,091,252 $ 9,304,823
----------- -----------
Costs
and
expenses
Programming and licensing 3,702,910 3,892,596
Marketing 368,848 574,605
General and administrative 7,103,485 6,913,514
Depreciation and amortization 7,938,832 8,095,227
----------- -----------
19,114,075 19,475,942
----------- -----------
Operating loss (11,022,823) (10,171,119)
----------- -----------
Other income (expense)
Interest expense (10,973,673) (10,160,834)
Equity in net loss of CS Wireless Systems, Inc. (6,616,000) (3,000,000)
Interest income and other income 860,637 2,211,518
----------- -----------
(16,729,036) (10,949,316)
----------- -----------
Loss before income tax benefit (27,751,859) (21,120,435)
Income tax benefit - 4,500,000
----------- -----------
Net loss (27,751,859) (16,620,435)
Preferred stock dividends (3,567,958) (3,075,617)
----------- -----------
Loss applicable to common shareholders $(31,319,817) $(19,696,052)
=========== ===========
$ (0.77) $ (0.51)
=========== ===========
Average common and equivalent shares outstanding 40,540,539 38,859,743
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CAI WIRELESS SYSTEMS, INC.
Consolidated Statements of Shareholders' Equity
For the Quarter Ended June 30, 1997 (unaudited)
and the Year Ended March 31, 1997
Common Stock Accumulated
Shares Amount Deficit Total
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at April 1, 1996 37,829,482 $257,701,130 $(65,090,206) $192,610,924
Senior preferred stock issuance costs
reclassified from project costs - - (661,212) (661,212)
Series A 8% redeemable convertible
preferred stock converted into common 2,637,742 18,049,955 - 18,049,955
Value assigned to warrants exercised 73,315 18,329 (18,329) -
Preferred stock dividends accrued - - (13,011,270) (13,011,270)
Net loss (82,298,207) (82,298,207)
---------- ----------- ------------ -------------
Balance at March 31, 1997 40,540,539 275,769,414 (161,079,224) 114,690,190
Preferred stock dividends accrued - - (3,567,958) (3,567,958)
Net loss - - (27,751,859) (27,751,859)
---------- ----------- ------------ -------------
Balance at June 30, 1997 40,540,539 $275,769,414 $(192,399,041) $ 83,370,373
========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended June 30,
1997 1996
----------- ------------
Cash flows from operating activities
<S> <C> <C>
Net loss $ (27,751,859) $ (16,620,435)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 7,938,832 8,095,227
Equity in net loss of CS Wireless Systems, Inc. 6,616,000 3,000,000
Deferred income tax benefit - (4,500,000)
Debt financing costs and discounts amortization 711,500 502,325
Debt service escrow interest income (702,142) (1,092,917)
Changes in assets and liabilities:
Subscriber accounts receivable (97,009) 36,394
Other assets (54,169) (121,094)
Accounts payable and accrued expenses 7,559,589 8,880,700
----------- ------------
Net cash used in operating activities (5,779,258) (1,819,800)
----------- ------------
Cash flows from investing activities
Purchase of wireless channel rights (1,238,253) (1,129,955)
Purchase of equipment (1,850,022) (9,999,304)
Payments received from CS Wireless Systems, Inc. 422,378 -
Loan to related parties (136,080) -
Cash paid for investment (356,025) -
Other (269,053) (279,893)
----------- ------------
Net cash used in investing activities (3,427,055) (11,409,152)
----------- ------------
Cash flows from financing activities
Proceeds from interim debt financing 8,500,000 -
Repayment of debt (504,580) (10,329,492)
Debt financing costs paid (1,462,619) -
----------- ------------
Net cash provided by (used in) financing activities 6,532,801 (10,329,492)
----------- ------------
Net decrease in cash and cash equivalents (2,673,512) (23,558,444)
Cash and cash equivalents, beginning of year 10,471,918 103,263,094
----------- ------------
Cash and cash equivalents, end of period $ 7,798,406 $ 79,704,650
=========== ============
Cash Payments During the Period for Interest $ 97,531 $ 290,466
=========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAI WIRELESS SYSTEMS, INC.
Notes to Consolidated Financial Statements
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include
all the information and notes required by generally accepted accounting
principles for complete financial statements.
The consolidated financial statements include the accounts of CAI
Wireless Systems, Inc. and its wholly-owned subsidiaries (the "Company" or
"CAI"). All intercompany transactions have been eliminated in consolidation.
The Company's 47.7% investment in CS Wireless Systems, Inc. ("CS") is accounted
for on the equity method. Current summarized financial information regarding
CS is presented in Note 3. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation of results for interim periods have been included. Certain items
in the prior period financial statements have been reclassified to conform with
the current period's presentation. Operating results for the three months ended
June 30, 1997 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 1998. The unaudited financial
statements presented herein should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended March 31, 1997 which is on
file with the Securities and Exchange Commission.
Going Concern
CAI's recurring losses, restrictions to obtain additional financing, and
substantial commitments, raise substantial doubt about the continuation of CAI
as a going concern. For the current fiscal year ending March 31, 1998, the
Company is obligated to pay approximately (i) $6,400,000 for minimum
license fees and lease payments, and (ii) $1,100,000 in MMDS license auction
fees and to fund operating costs for such period.
On a long-term basis, CAI has substantial indebtedness which beginning
in fiscal year 1999 will include significant debt service requirements and
senior preferred stock dividend payments. As of June 30, 1997, CAI had
outstanding consolidated long-term debt of $323,300,000 and senior preferred
stock including accrued dividends totaling $91,389,000.
The Company's business strategy has shifted away from being solely a
provider of subscription television services to becoming a provider of a full
array of video, voice and data transmission services using its MMDS spectrum.
In management's opinion, this strategy will help meet the current and perceived
future competition and in relation to obtaining a new strategic partner, show
the flexibility and increased value of the Company's MMDS spectrum. In
connection with achieving these objectives, CAI is committed through additional
open purchase orders as of August 11, 1997 to spend approximately $9,700,000,
primarily for capital expenditures associated with additional development of
the Boston digital transmission facilities. These commitments are to be funded
in part by the Interim Debt Financing.
The Company's operating plans, including digital video, two-way voice and
data, Internet and Intranet access services and testing, will require
additional funding. Such additional funds may take the form of debt or equity
securities issuances, borrowings under loan arrangements or sales of assets
including channel rights or wireless cable systems. CAI's ability to engage in
financings, asset sales or acquisition transactions is limited by the
contractual arrangements entered into with BANX Partnership and the Interim
Debt Lenders, and significant transactions likely will require their prior
consent. In addition, the Company's 12.25% Senior Notes due 2002 impose
similar restrictions on the incurrence of additional debt and on the
ability to effect asset sales. Therefore, there can be no assurance that
the Company will be able to engage in any financing transactions or that
financing will be available to the Company. If such financing is available,
there can be no assurance that the terms thereof will be favorable to the
Company.
Note 2. Litigation
Shareholders' Class Action
During the year ended March 31, 1997, the Company was named in six
class action lawsuits, each alleging various violations of the federal
securities laws. These actions were consolidated into one lawsuit entitled In
Re CAI Wireless Systems, Inc. Securities Litigation (96-CV-1857) (the
"Securities Lawsuit"), which is currently pending in the United States District
Court for the Northern District of New York. The Securities Lawsuit is in its
preliminary stages. The amended, consolidated complaint, which names the
Company and certain officers and directors of CAI as defendants, alleges a
variety of violations of the antifraud provisions of the Federal securities
laws by the aforementioned defendants.
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 this lawsuit will not have a material adverse effect on the Company's
earnings, financial condition or liquidity.
Other Litigation
The Company is involved in various claims and legal actions
arising in the normal course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the Company's earnings, financial condition or liquidity.
Note 3. Investment in CS
The Company's investment in CS reflects the equity loss of $6,016,000
(based on CAI's pro-rata share of CS's net loss of $12,606,000) for the three-
month period ended March 31, 1997 along with $600,000 of amortization of the
goodwill associated with the Company's investment.
1
<PAGE>
CAI WIRELESS SYSTEMS, INC.
Notes to Consolidated Financial Statements (continued)
Note 3. Investment in CS (continued)
The following is an unaudited condensed consolidated balance sheet of
CS derived from its Form 10-Q as of March 31, 1997:
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents $107,185,000
Other current assets 1,975,000
Systems and equipment, net 41,240,000
Wireless channel rights, net 172,828,000
Goodwill, net of accumulated amortization 51,040,000
Net assets held for sale 20,368,000
Debt issuance costs, net 10,504,000
Total Assets $405,140,000
Liabilities and Equity
Accounts payable and accrued expenses $ 6,860,000
FCC Auction payable 5,152,000
Other liabilities 660,000
Debt 276,168,000
Deferred income taxes 4,072,000
Common stock and paid-in-capital 154,568,000
Accumulated deficit (42,340,000)
Total Liabilities and Equity $405,140,000
</TABLE>
The following is an unaudited condensed consolidated statement of
operations of CS derived from its Form 10-Q for the three months ended
March 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Revenues $ 6,678,000
Operating expenses:
Systems operations 3,695,000
General and administrative 3,815,000
Depreciation and amortization 6,585,000
Total operating expenses 14,095,000
Operating loss ( 7,417,000)
Interest income 1,450,000
Interest expense (7,996,000)
Loss before income tax benefit (13,963,000)
Income tax benefit 1,357,000
Net loss $(12,606,000)
</TABLE>
<PAGE>
CAI WIRELESS SYSTEMS, INC.
Notes to Consolidated Financial Statements (continued)
Note 4. Interim Debt Financing
On June 6, 1997 (the "Closing Date"), the Company closed a $30,000,000
interim credit facility (the "Interim Credit Facility") with certain financial
institutions, including Foothill Capital Corporation (the "Interim Debt
Lenders"). The Interim Credit Facility is governed by the terms of a Loan and
Security Agreement dated as of May 15, 1997 (the "Agreement") among CAI,
certain of its subsidiaries and the Interim Debt Lenders. The Interim Credit
Facility, which matures on March 1, 1999, consists of (i) a $5,000,000
revolving credit facility (the "Revolver"), which bears interest at 4.75
percentage points above the Reference Rate (as announced periodically by
Norwest Bank, currently at 8.5%), but in no instance shall the interest rate
on the revolving credit facility be less than 13% per annum, and of which
$3,000,000 was available to the Company on the Closing Date, (ii) a $5,000,000
Term Loan A credit facility, all of which was made available to the Company on
the Closing Date, and (iii) a $20,000,000 Term Loan B facility, of which
$5,000,000 was made available to the Company on the Closing Date. The Term
Loans bear interest at 13% per annum. The balance of the Revolver and Term
Loan B facilities will be made available to the Company when and if certain
operational benchmarks are achieved by the Company. The Company's incoming
cash flow must be applied to repay the Revolver to the extent of any
outstanding balances thereunder. The Term Loans are due and payable, together
with all accrued and unpaid interest, at the termination of the Agreement on
March 1, 1999. So long as no defaults exist under the Agreement, the Company
may elect, and has elected, to accrue one-half of the interest on the Term
Loan facilities,
having it added to the principal amount outstanding on the Term Loans, and pay
the remaining one-half of interest on a current basis.
The Company initially borrowed $10,000,000 under the Interim Credit
Facility, consisting of $5,000,000 from each of Term Loan A and Term Loan B,
which funds were advanced by the Interim Debt Lenders on the Closing Date, net
of a $1,500,000 closing fee payable to the Interim Debt Lenders on the Closing
Date. An additional closing fee in the amount of $1,500,000 was also incurred
by the Company on the Closing Date, which fee is represented by a promissory
note in the principal amount of such fee and payable to the Interim Debt
Lenders. This note bears interest at 14% per annum, with interest payable
quarterly. The Company has elected to accrue such interest and have it added
to the principal balance of the note, which is due and payable in full at the
termination of the Agreement (pursuant to the terms of the note whether at
maturity or by prepayment or acceleration).
Pursuant to the Agreement, the Company has granted a first priority
lien on all of its assets not already subject to existing liens. The primary
assets collateralizing the Interim Debt Facility are the Company's wireless
channel rights, property and equipment, and the stock of certain of CAI's
subsidiaries and its investment in CS. The Agreement restricts the Company's
ability to, among other things, incur additional indebtedness, dispose of
assets or pay dividends on its capital stock without the prior consent of the
Interim Debt Lenders. Furthermore, the Company is required to maintain a
certain level of net worth and number of subscribers, and is limited on the
amount of annual capital expenditures.
Note 5. Subsequent Events
TelQuest Satellite Services
On August 4, 1997, the Company secured access to digitally-compressed
programming for its subscription television business through an affiliation
agreement (the "Affiliation Agreement") with TelQuest Satellite Services LLC
("Satellite Services"). Pursuant to the terms of the Affiliation Agreement,
the Company will receive digital video programming for any of its markets in
which it may elect to launch a digital subscription television business. The
Satellite Services signal will initially be a C-Band satellite signal
transmitted to the Company's MMDS headends from the TelStar 5 Satellite
successfully launched and deployed by Loral Skynet in July. Satellite Services
also plans to offer a direct-to-home ("DTH") digital video programming service
commencing in 1998. Upon launch of such service, the Company will have an
opportunity to market and sell the Satellite Services DTH product along with
the Company's headend service in the Company's markets. The Company has the
right to be the exclusive provider of Satellite Services programming in each of
its markets, subject to the payment of certain minimum fees in certain
circumstances and meeting certain performance standards. The Company expects
to use the Satellite Services programming in Boston this fall in connection
with the launch of the Boston digital subscription television service.
The Satellite Services headend service will eliminate the need for CAI
to construct and operate a digital compression center in each of the markets
in which it decides to launch a digital subscription television service. As the
Company planned the build-out of its systems in fulfilment of its obligations
to Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX")
under the Business Relationship Agreement (the "BR Agreement") among the
Company, Bell Atlantic and NYNEX, it did not contemplate the need to secure
digitally-compressed video programming as the Company was only required to
provide the MMDS transport system to Bell Atlantic and NYNEX under the BR
Agreement, and not any programming services. Under the BR Agreement, Bell
Atlantic and NYNEX would provide the programming for transmission over the
Company's facilities. With the decision by Bell Atlantic and NYNEX to abandon
their plans to utilize the Company's digital MMDS facilities to broadcast Bell
Atlantic/NYNEX programming in December 1996, the Company needed an alternative
programming solution for any market in which it decided to launch a digital
subscription television system. The Company believes that the use of Satellite
Service's national headend service is a substantially more cost-efficient means
of obtaining digitally-compressed video programming at this time than the
construction and operation of a digital compression center in each of the
markets in which it elects to launch a digital subscription television
services.
Satellite Services was formed as a joint venture among the Company, CS
and TelQuest Communications, Inc. ("Communications"), an entity in which Jared
E. Abbruzzese, Chairman and Chief Executive Officer of the Company, is the
majority stockholder. Satellite Services was created to develop and operate
satellite systems utilizing C-band and Ku-band satellite capacity to provide
digitally-compressed video programming to MMDS and hard-wire cable operators
and other users through headend and DTH services. In connection with the
formation of Satellite Services, CAI agreed to contribute $2,500,000 in cash
and lease to Satellite Services $2,500,000 of equipment at a nominal rental
amount under a five-year renewable lease in exchange for a minority interest
in Satellite Services. Upon the achievement of certain benchmarks, Satellite
Services is required to purchase the equipment from the Company at not less
than its then-current fair market value. The cash portion of the contribution
is payable in installments, the first of which was paid on August 4, 1997 in
the amount of $711,744, and included principal and accrued interest from an
investment by the Company in Communications in March 1997. The balance of the
cash portion will be payable in four equal quarterly installments of $447,064
beginning on September 1, 1997.
CAI Data Systems
CAI Data Systems, Inc. ("Data Systems"), a subsidiary of CAI, announced
on July 23, 1997 that it had filed an application with the Federal
Communications Commission ("FCC") to construct, launch and operate a Ka-band
satellite. The application, which is currently pending before the FCC,
contemplates a July 1999 launch date for the satellite. The estimated cost of
constructing and launching the satellite is approximately $292,500,000, which
Data Systems plans to finance through the issuance of its own debt and/or
equity securities. There can be no assurance that Data Systems' application
will be granted by the FCC or, if granted, that Data Systems will be able to
secure financing necessary to construct and launch a satellite.
Note 6. Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 ("SFAS 128") -
"Earnings Per Share." This statement which is effective for financial
statements issued for periods ending after December 15, 1997, simplifies the
computation of earnings per share (EPS) by replacing the "primary" EPS
requirements with a "basic" EPS computation based upon weighted-average shares
outstanding. This new standard requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Due to the Company's net losses, the loss per
share amounts included in the accompanying Statements of Operations would not
differ from the basic or the dilutive loss per share amounts calculated under
SFAS 128.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", which was issued in June 1997 is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
believes that it does not have a significant amount of comprehensive income
(loss) as defined, if any. Accordingly, the Company believes that this
statement will not have a material effect on CAI's future financial statement
presentations.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was also issued. This pronouncement is effective for fiscal years
beginning after December 15, 1997 and requires disclosures about operating
segments and enterprise-wide disclosures about products and services,
geographic areas and major customers. Effective April 1, 1998, the Company
will comply with the requirements of SFAS 131 and make the necessary
disclosures.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements contained in this Quarterly Report on Form 10-Q, including
the exhibits hereto, relating to the Company's future operations may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results of the Company may differ
materially from those in the forward-looking statements and may be affected by
a number of factors including the availability of new strategic partners and
their willingness to enter into arrangements with CAI, the terms of such
arrangements, the ability of CAI to achieve the operating benchmarks necessary
to receive the balance of the funds contemplated by 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 the Company to
redeploy or sell excess equipment, the assumptions, risks and uncertainties set
forth below in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere herein, as well as other
factors contained herein and in the Company's other securities filings.
Business Developments
Boston Digital Project
In Boston, Massachusetts, the Company intends to launch commercially its
digital subscription television service and to provide high speed Internet
access by the fall of 1997. Furthermore, the Company anticipates offering its
subscribers more than 70 channels which the Company believes will be
competitive with other subscription television providers in this market. The
Internet service to be offered will have the capacity to transmit data at
speeds of up to 27 Mbps, many times faster than traditional telephone lines.
There can be no assurance, however, that the Company will be able to
successfully launch and operate a digital subscription video business in this
market, nor can there be any assurance that the Company will be able to
successfully deploy, in a commercial manner, an Internet access service
over its MMDS spectrum in Boston or any other market in which it may seek to
initiate such a service.
TelQuest Satellite Services
On August 4, 1997, the Company secured access to digitally-compressed
programming for its subscription television business through an affiliation
agreement (the "Affiliation Agreement") with TelQuest Satellite Services LLC
("Satellite Services"). Pursuant to the terms of the Affiliation Agreement,
the Company will receive digital video programming for any of its markets in
which it may elect to launch a digital subscription television business. The
Satellite Services signal will initially be a C-Band satellite signal
transmitted to the Company's MMDS headends from the TelStar 5 Satellite
successfully launched and deployed by Loral Skynet in July. Satellite Services
also plans to offer a direct-to-home ("DTH") digital video programming service
commencing in 1998. Upon launch of such service, the Company will have an
opportunity to market and sell the Satellite Services DTH product along with
the Company's headend service in the Company's markets. The Company has the
right to be the exclusive provider of Satellite Services programming in each of
its markets, subject to the payment of certain minimum fees in certain
circumstances and meeting certain performance standards. The Company expects
to use the Satellite Services programming in Boston this fall in connection
with the launch of the Boston digital subscription television service.
The Satellite Services headend service will eliminate the need for CAI
to construct and operate a digital compression center in each of the markets in
which it decides to launch a digital subscription television service. As the
Company planned the build-out of its systems in fulfilment of its obligations
to Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX")
under the Business Relationship Agreement (the "BR Agreement") among the
Company, Bell Atlantic and NYNEX, it did not contemplate the need to secure
digitally-compressed video programming as the Company was only required to
provide the MMDS transport system to Bell Atlantic and NYNEX under the BR
Agreement, and not any programming services. Under the BR Agreement, Bell
Atlantic and NYNEX would provide the programming for transmission over the
Company's facilities. With the decision by Bell Atlantic and NYNEX to abandon
their plans to utilize the Company's digital MMDS facilities to broadcast Bell
Atlantic/NYNEX programming in December 1996, the Company needed an alternative
programming solution for any market in which it decided to launch a digital
subscription television system. The Company believes that the use of Satellite
Service's national headend service is a substantially more cost-efficient means
of obtaining digitally-compressed video programming at this time than the
construction and operation of a digital compression center in each of the
markets in which it elects to launch a digital subscription television
services.
Satellite Services was formed as a joint venture among the Company, CS
Wireless Systems, Inc., a 48%-owned subsidiary of the Company ("CS"), and
TelQuest Communications, Inc. ("Communications"), an entity in which Jared E.
Abbruzzese, Chairman and Chief Executive Officer of the Company, is the
majority stockholder. Satellite Services was created to develop and operate
satellite systems utilizing C-band and Ku-band satellite capacity to provide
digitally-compressed video programming to MMDS and hard-wire cable operators
and other users through headend and DTH services. Satellite Services expects
to begin providing headend services this fall via its national uplink
facility being constructed Hawley, PA. In connection with the
formation of Satellite Services, CAI agreed to contribute $2,500,000 in cash
and lease to Satellite Services $2,500,000 of equipment at a nominal rental
amount under a five-year renewable lease in exchange for a minority
interest in Satellite Services. Upon the achievement of certain benchmarks,
Satellite Services is required to purchase the equipment from the Company at
not less than its then-current fair market value. The cash portion of the
contribution is payable in installments, the first of which was paid on August
4, 1997 in the amount of $711,744, and included principal and accrued interest
from an investment by the Company in Communications in March 1997. The balance
of the cash portion will be payable in four equal quarterly installments of
$447,064 beginning on September 1, 1997.
CAI Data Systems
CAI Data Systems, Inc. ("Data Systems"), a subsidiary of CAI, announced
on July 23, 1997 that it had filed an application with the Federal
Communications Commission ("FCC") to construct, launch and operate a Ka-band
satellite. The application, which is currently pending before the FCC,
contemplates a July 1999 launch date for the satellite. The estimated cost of
constructing and launching the satellite is approximately $292,500,000, which
Data Systems plans to finance through the issuance of its own debt and/or
equity securities. There can be no assurance that Data Systems' application
will be granted by the FCC or if granted that Data Systems will be able to
secure financing necessary to construct and launch a satellite.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended June 30, 1997
For the quarter ended June 30, 1997, cash and cash equivalents decreased by
$2,674,000. Cash provided from financing activities of $6,533,000 included the
proceeds from the Interim Credit Facility, net of fees. Cash utilized by
operations of $5,779,000 consisted of the loss for the quarter of $27,752,000
reduced primarily by non-cash expenditures including depreciation and
amortization totaling $7,939,000 and the $6,616,000 equity loss related to
the CS investment, and further offset by a $7,560,000 increase in accruals
(primarily interest).
The Company's capital expenditures during the three months ended June 30,
1997 included the purchase of $1,850,000 in equipment and $1,238,000 in
wireless channel rights.
Interim Debt Financing
The Company has current borrowings of $10,000,000 under the $30,000,000
Interim Credit Facility provided by Foothill Capital Corporation and affiliated
companies (reference is made to Note 4 of Notes to Consolidated Financial
Statements). The terms of the Interim Credit Facility require that CAI achieve
certain operational benchmarks in order to access the balance of funds
available to the Company. Management estimates that the Company's present
revenue stream and cash resources, including full availability under the
Interim Credit Facility, are adequate to sustain the Company's needs through
December 1997. There can be no assurance that the Company will achieve such
benchmarks
and thereby obtain the remaining financing available under this facility.
Failure to obtain such additional financing will have a material adverse
effect on the Company's current liquidity needs.
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 and NYNEX, the
Company has been granted the right to purchase the $30,000,000 of BANX Term
Notes, $70,000,000 of Senior Preferred Stock and BANX Warrants (collectively
the "CAI Securities"), for an aggregate purchase price of $40,000,000 and the
issuance of 100,000 shares of a series of CAI junior preferred stock having a
liquidation value of $30,000,000. The right to purchase the CAI Securities has
been granted to CAI through February 28, 1998 (the "Option Period"), and CAI
must give notice to Bell Atlantic and NYNEX of its election to exercise this
right no later than November 21, 1997. Upon the consummation of such purchase,
the BR Agreement would terminate eliminating CAI's strategic relationship with
the BANX Affiliates including all restrictions relating thereto. The Company
is actively seeking a new strategic partner to replace the BANX Partnership and
to provide the necessary interim and long-term funding to carry out CAI's short
and long term objectives. CAI's ability to locate such strategic partner(s) to
replace BANX may be limited by the BANX Partnership's willingness to negotiate
the terms and conditions of the purchase of the CAI Securities. In the event
that CAI does not deliver, on or before November 21, 1997, a notice of election
to exercise its right to purchase the CAI Securities, Bell Atlantic and NYNEX
have the right to sell the CAI Securities. If CAI does not purchase the
CAI Securities on or before February 28, 1998, the BR Agreement will be
reinstated with respect to each market contemplated thereby with the exception
of Boston, MA, Pittsburgh, PA and Albany, Syracuse and Buffalo, NY.
The amendments also relieve CAI from any of its obligations under the
BR Agreement with respect to its Boston, MA, Pittsburgh, PA and Albany,
Syracuse and Buffalo, NY markets with the same effect as if such markets had
never been subject to the BR Agreement, and suspend, through February 28, 1998,
CAI's obligations under the BR Agreement with respect to the remaining markets
contemplated by the BR Agreement. Upon consummation of the purchase of the CAI
Securities, the BR Agreement will terminate as to such remaining markets. In
addition, Bell Atlantic and NYNEX have granted to CAI an irrevocable
proxy during the Option Period with respect to the approximately 10% interest
held by Bell Atlantic and NYNEX in CS, and have agreed to transfer such
interest to CAI upon consummation of a purchase of the CAI Securities held by
Bell Atlantic and NYNEX.
Going Concern
CAI's recurring losses, restrictions to obtain additional financing, and
substantial commitments, raise substantial doubt about the continuation of CAI
as a going concern. For the current fiscal year ending March 31, 1998, the
Company is obligated to pay approximately (i) $6,400,000 for minimum
license fees and lease payments, and (ii) $1,100,000 in MMDS license auction
fees and to fund operating costs for such period.
On a long-term basis, CAI has substantial indebtedness which beginning
in fiscal year 1999 will include significant debt service requirements and
senior preferred stock dividend payments. As of June 30, 1997, CAI had
outstanding consolidated long-term debt of $323,300,000 and senior preferred
stock including accrued dividends totaling $91,389,000.
The Company's business strategy has shifted away from being solely a
provider of subscription television services to becoming a provider of a full
array of video, voice and data transmission services using its MMDS spectrum.
In management's opinion, this strategy will help meet the current and perceived
future competition and in relation to obtaining a new strategic partner, show
the flexibility and increased value of the Company's MMDS spectrum. In
connection with achieving these objectives, CAI is committed through additional
open purchase orders as of August 11, 1997 to spend approximately $9,700,000,
primarily for capital expenditures associated with additional development of
the Boston digital transmission facilities. These commitments are to be funded
in part by the Interim Debt Financing.
The Company's operating plans, including digital video, two-way voice and
data, Internet and Intranet access services and testing, will require
additional funding. Such additional funds may take the form of debt or equity
securities issuances, borrowings under loan arrangements or sales of assets
including channel rights or wireless cable systems. CAI's ability to engage in
financings, asset sales or acquisition transactions is limited by the
contractual arrangements entered into with BANX Partnership and the Interim
Debt Lenders, and significant transactions likely will require their prior
consent. In addition, the Company's 12.25% Senior Notes due 2002 impose
similar restrictions on the incurrence of additional debt and on the
ability to effect asset sales. Therefore, there can be no assurance that
the Company will be able to engage in any financing transactions or that
financing will be available to the Company. If such financing is available,
there can be no assurance that the terms thereof will be favorable to the
Company.
<PAGE>
OPERATIONS
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996
Comparative Quarterly Results
The Company's strategy is not to pursue analog-based television subscriber
growth while it evaluates its business opportunities in addition to analog-
based subscription television including high speed Internet and Intranet
access, as well as digital video and telephony services. Such policy has had a
negative impact on the Company's subscription revenues. As of June 30, 1997,
the Company's subscriber base had decreased by approximately 16,300 to 65,700
subscribers from approximately 82,000 at June 30, 1996. Consequently,
subscriber revenues have decreased $1,214,000 to $8,091,000 for the quarter
ended June 30, 1997 from $9,305,000 for the same period last year.
Operating expenses were approximately $19,114,000 and $19,476,000 for
the quarter ended June 30, 1997 and 1996, respectively. This decrease is
primarily attributable to programming, licensing and marketing costs which were
lower in-line with the decline in subscribers. The increase in general and
administrative expenses reflects costs relative to the Company's shifting
business strategy, as well as legal fees associated with the pending securities
lawsuit.
Interest expense was $10,974,000 and $10,161,000 for the quarters ended
June 30, 1997 and 1996, respectively, and relates primarily to the interest
recorded on the $275,000,000 of 12.25% Senior Notes due 2002 and the
$30,000,000 of Term Notes issued to Bell Atlantic and NYNEX. On June 6, 1997,
the Company closed the $30,000,000 Interim Credit Facility. Interest incurred
on the $10,000,000 outstanding under such facility as of June 30, 1997,
the $1,500,000 fee financed by an additional note plus the amortization
of the loan fees, totaled $327,000 for the month of June 1997.
The decrease in CAI's investment in CS of $6,616,000 reflects
primarily the Company's 47.7% pro rata share of the $12,606,000 net loss
reported by CS for the three months ended March 31, 1997 along with
$600,000 of amortization of the goodwill associated with the Company's
investment compared to an aggregate loss of $3,000,000 for the same
period last year.
Other income for the quarter ended June 30, 1997, comprised primarily of
interest income, was $861,000 compared to $2,212,000 for the comparable period
last year. Current period interest income on investments declined due to the
use of cash in the escrow account for semi-annual interest payments totaling
approximately $33,700,000 for the prior twelve-month period in addition to
use of the Company's unrestricted accounts for operational requirements and
capital expenditures.
The Company recorded an income tax benefit of $4,500,000 for the first
quarter of 1996 to offset existing deferred tax liabilities. There is no tax
benefit for the current period since there were no available deferred tax
liabilities and it is more likely than not that any benefit recorded on the
Company's current losses would not be realized in the foreseeable future.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 128 ("SFAS 128") -
"Earnings Per Share." This statement which is effective for financial
statements issued for periods ending after December 15, 1997, simplifies the
computation of earnings per share (EPS) by replacing the "primary" EPS
requirements with a "basic" EPS computation based upon weighted-average shares
outstanding. This new standard requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Due to the Company's net losses, the loss per
share amounts included in the accompanying Statements of Operations would not
differ from the basic or the dilutive loss per share amounts calculated under
SFAS 128.
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income", which was issued in June 1997 is effective
for fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
believes that it does not have a significant amount of comprehensive income
(loss) as defined, if any. Accordingly, the Company believes that this
statement will not have a material effect on CAI's future financial statement
presentations.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131") was also issued. This pronouncement is effective for fiscal years
beginning after December 15, 1997 and requires disclosures about operating
segments and enterprise-wide disclosures about products and services,
geographic areas and major customers. Effective April 1, 1998, the Company
will comply with the requirements of SFAS 131 and make the necessary
disclosures, as applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 2 of Notes to Consolidated Financial Statements
in Part I, Item 1 of this filing.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
The following Exhibits are filed herewith or incorporated by
reference as indicated:
Incorporation
by Reference Page
Exhibit No. Description (see Legend)
Reference
3.1 Amended and Restated Certificate of
Incorporation of CAI 1-Exhibit 3.1
3.2 Amended and Restated Bylaws of CAI 1-Exhibit 3.2
+ 11. Schedule Regarding Computation of Loss
Per Common Share for the Quarter
Ended June 30, 1997 and 1996
+ 27. Financial Data Schedule
Legend
1 Incorporated by reference to the exhibits to the Quarterly
Report on Form 10-Q for September 30, 1995.
+ Filed herewith.
b) Reports on Form 8-K.
Form 8-K dated March 17, 1997 was filed on June 27, 1997,
regarding the following items under Item 5, Other Events:
(A) CAI Wireless entered into Amendment No. 1 to
the Modification Agreement among CAI and its
Subsidiaries and Affiliates of Bell Atlantic
Corporation and NYNEX Corporation on April 29, 1997.
(B) CAI Wireless 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.
(2) "CAI Wireless Files For Authority To Provide
Telephone Service In New York State" on
March 19, 1997.
(3) "CAI Wireless Receives FCC Approval To Test Fixed
Two-Way Wireless Services In Pittsburgh" on
April 2, 1997.
(4) "CAI Renegotiates Terms With RBOCS On Securities
Repurchase Option" on April 30, 1997.
(5) "CAI Wireless Closes On Interim Financing" on
June 6, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Signature Title Date
/s/ Jared E. Abbruzzese Chairman, Chief Executive Officer August 14, 1997
JARED E. ABBRUZZESE and Director (Principal Executive
Officer)
/s/ James P. Ashman Executive Vice President, Chief August 14, 1997
JAMES P. ASHMAN Financial Officer and Director
(Principal Financial Officer)
/s/ Arthur J. Miller Vice President and Controller August 14, 1997
ARTHUR J. MILLER (Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
CAI WIRELESS SYSTEMS, INC.
Computation of Loss per Common Share
Quarter Ended June 30,
1997 1996
----------- -----------
<S> <C> <C> <C>
Primary Loss Per Common Share:
1 Net loss $(27,751,859) $(16,620,435)
2 Less preferred dividends (3,567,958) (3,075,617)
----------- -----------
3 Loss applicable to common shareholders $(31,319,817) $(19,696,052)
=========== ===========
4 Weighted average shares outstanding 40,540,539 38,859,743
5 Add additional shares issuable upon exercise of
outstanding stock options and warrants *
- -
6 Adjusted weighted average shares outstanding 40,540,539 38,859,743
=========== ===========
7 Net loss per common share (line 3 / line 6) $(0.77) $(0.51)
=========== ===========
Fully Diluted Loss Per Common Share:
8 Line 3 above $(31,319,817) $(19,696,052)
9 Add back preferred dividends 3,567,958 3,075,617
10 Add back interest, net of tax, assuming conversion of Term Notes 999,000 729,000
11 Add interest, net of tax, assuming proceeds from
exercise of warrants and options in excess of the
20% treasury stock buyback applied against
short-term debt
1,505,000 2,627,000
----------- -----------
12 Adjusted net loss $(25,247,859) $(13,264,435)
=========== ===========
13 Weighted average shares outstanding (line 4) 40,540,539 38,859,743
14 Add additional shares issuable upon the assumed exercise
of outstanding stock options 2,195,937 1,274,134
15 Add additional shares issuable upon the assumed exercise
of BANX warrants (Term Notes and Senior Preferred Stock) 36,751,085 36,751,083
16 Add additional shares issuable upon the assumed exercise
of other warrants 2,852,453 2,310,541
17 Add Series A preferred stock (not converted until November 1996) - 64,167
18 Deduct treasury stock repurchased with proceeds (8,108,108) (8,062,294)
----------- -----------
19 Adjusted weighted average shares outstanding 74,231,906 71,197,374
=========== ===========
20 Net loss per common share (line12 / line19) ** $(0.34) $(0.19)
=========== ===========
</TABLE>
* For the calculation of loss per share, the inclusion of the
assumed exercise of options and warrants is not dilutive for the periods
presented and, therefore, such assumed exercise is excluded from the per share
calculations.
** The fully diluted loss per share is anti-dilutive and is,
therefore, not presented in the Consolidated Statements of Operations.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CAI WIRELESS SYSTEMS, INC. AND SUBSIDARIES
FINANCIAL DATA SCHEDULE
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 1997
<MULTIPLIER> 1
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-START> APR-01-1997
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 7,798,406
<SECURITIES> 0
<RECEIVABLES> 1,422,011
<ALLOWANCES> 629,295
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 98,125,134
<DEPRECIATION> 32,270,477
<TOTAL-ASSETS> 534,064,354
<CURRENT-LIABILITIES> 0
<BONDS> 323,258,854
91,388,692
0
<COMMON> 275,769,414
<OTHER-SE> (192,399,041)
<TOTAL-LIABILITY-AND-EQUITY> 534,064,354
<SALES> 0
<TOTAL-REVENUES> 8,091,252
<CGS> 0
<TOTAL-COSTS> 19,114,075
<OTHER-EXPENSES> 6,616,000
<LOSS-PROVISION> 229,500
<INTEREST-EXPENSE> 10,973,673
<INCOME-PRETAX> (27,751,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,751,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,751,859)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> 0
</TABLE>
