UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number: 0-22888
CAI WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1324691
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18 Corporate Woods Boulevard, Albany, New York 12211
(Address and zip code of principal executive offices)
(518) 462-2632
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Number of shares outstanding of each of registrant's class of common stock at
February 13, 1998:
CLASS OUTSTANDING SHARES
Common Stock, no par value 40,540,539
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CAI WIRELESS SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 MARCH 31, 1997
----------------- --------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 2,170,436 $ 10,471,918
Subscriber accounts receivable, net 578,588 695,707
Prepaid expenses 511,679 1,034,106
Property and equipment, net 61,593,527 69,767,017
Wireless channel rights, net 197,042,749 207,680,551
Investment in CS Wireless Systems, Inc. 72,443,527 88,389,527
Investment in TelQuest Satellite Services LLC 3,097,203 -
Goodwill, net of accumulated amortization 98,043,766 104,204,716
Debt service escrow 32,862,035 47,865,389
Debt financing costs, net 8,820,690 9,249,934
Other assets 3,508,716 2,980,650
--------------- -------------
Total Assets $ 408,672,916 $ 542,339,515
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 5,801,849 $ 6,600,584
Accrued expenses 29,357,122 16,138,811
Wireless channel rights obligations 4,045,767 5,302,600
Obligations payable to TelQuest Satellite Services LLC 894,128 -
Interim debt financing 25,000,000 -
Term notes 36,599,695 36,786,596
Senior notes 275,000,000 275,000,000
--------------- ------------
376,698,561 339,828,591
=============== ============
Commitments and Contingencies
Mandatorily Redeemable Preferred Stock
14% Senior convertible preferred stock
(liquidation value $70,000,000) 69,265,000 69,160,000
Accrued preferred stock dividends 29,681,187 18,660,734
--------------- ------------
98,946,187 87,820,734
=============== ============
SHAREHOLDERS' EQUITY
Common stock, 100,000,000 shares authorized, no par
value; 40,540,539 shares issued and outstanding 275,769,414 275,769,414
Accumulated deficit (270,741,246) (161,079,224)
--------------- ------------
5,028,168 114,690,190
-------------- ------------
Total Liabilities and Shareholders' Equity $ 480,672,916 $ 542,339,515
============= ============
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine-Months Ended Three-Months Ended
December 31, December 31,
----------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues $ 21,977,384 $ 27,737,756 $ 6,591,341 $ 9,249,978
------------- ------------- ------------- -----------
Costs and expenses
Programming and licensing 10,973,934 11,989,352 3,702,771 4,129,802
Marketing 1,206,615 1,790,734 376,679 564,717
General and administrative 21,908,478 22,223,561 7,966,799 7,882,671
Depreciation and amortization 26,152,839 24,729,986 10,245,751 8,179,198
------------- ------------- ------------ -----------
60,241,866 60,733,633 22,292,000 20,756,388
------------- ------------- ------------
Operating loss (38,264,482) (32,995,877) (15,700,659) (11,506,410)
------------- ------------- ------------ -----------
Other income (expense)
Interest expense (40,128,505) (30,316,613) (17,198,770) (10,012,060)
Equity in losses of affiliates (23,118,008) (13,000,000) (9,378,008) (5,200,000)
Interest and other income 2,974,426 5,319,251 1,351,399 1,202,680
------------- ------------- ------------ -----------
(60,272,087) (37,997,362) (25,225,379) (14,009,380)
------------- ------------- ------------ -----------
Loss before income tax benefit (98,536,569) (70,993,239) (40,926,038) (25,515,790)
Income tax benefit - 13,500,000 - 4,500,000
------------- ------------- ------------ -----------
Net loss (98,536,569) (57,493,239) (40,926,038) (21,015,790)
Preferred stock dividends (11,125,453) (9,576,367) (3,850,594) (3,306,003)
------------- ------------ ------------ -----------
Loss applicable to common
stockholders $(109,662,022) $ (67,069,606) $ (44,776,632) $ (24,321,793)
============= ============ ============ ===========
Loss per common share $ (2.70) $ (1.68) $ (1.10) $ (0.60)
======== ======= ======== ========
Average common and equivalent shares
outstanding 40,540,539 39,915,020 40,540,539 40,464,356
============ ============ ============ ===========
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
AND THE YEAR ENDED MARCH 31, 1997
Common Stock
-------------------------- Accumulated
Shares Amount Deficit Total
--------- ---------- ----------- ------------
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 - - (11,125,453) (11,125,453)
NET LOSS - - (98,536,569) (98,536,569)
----------- ----------- ------------ -----------
Balance at December 31, 1997 40,540,539 $275,769,414 $(270,741,246) $ 5,028,168
=========== ============ ============= ============
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended December 31,
----------------------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (98,536,569) $ (57,493,239)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 26,152,839 24,729,986
Equity in losses of affiliates 23,118,008 13,000,000
Deferred income tax benefit - (13,500,000)
Debt financing costs and discount amortization 8,263,013 1,417,857
Write-off of projects and other costs 559,287 -
Gain on sale of assets (538,307) -
Other 74,665 (23,143)
Changes in assets and liabilities:
Subscriber accounts receivable 117,119 246,794
Other assets (406,763) 314,458
Accounts payable and accrued expenses 12,605,498 9,646,300
------------ -----------
Net cash used in operating activities (28,591,210) (21,660,987)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of wireless channel rights (2,221,096) (4,642,709)
Purchase of equipment (6,336,574) (28,886,102)
Proceeds from the sale of equipment 178,759 497,023
Investment in TelQuest Satellite Services LLC (3,138,797) -
Proceeds from sale of investments 15,354,855 13,844,342
Payments received from CS Wireless Systems, Inc. 3,529,689 363,900
Loans to related parties, net of collections (297,440) (600,000)
------------ -----------
Net cash provided by (used in) investing activities 7,069,396 (19,423,546)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from interim debt financing 20,793,979 -
Repayment of debt (2,608,004) (43,139,640)
Debt financing costs paid (4,965,643) -
------------ -----------
Net cash provided by (used in) financing activities 13,220,332 (43,139,640)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,301,482) (84,224,173)
Cash and cash equivalents, beginning of year 10,471,918 103,263,094
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,170,436 $ 19,038,921
============ ===========
CASH PAYMENTS FROM THE DEBT SERVICE ESCROW ACCOUNT DURING THE
PERIOD FOR INTEREST $ 18,038,893 $ 17,382,855
============ ============
See notes to consolidated financial statements.
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. CAI's 50.7% investment in CS Wireless
Systems, Inc. ("CS") at December 31, 1997, and 25%
investment in TelQuest Satellite Services LLC ("TSS"; see
Note 5) are accounted for on the equity method since CAI
does not control day to day operations of either company.
Current summarized financial information regarding CS is
presented in Note 3. In the opinion of management, all
adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of results
for interim periods have been included. Certain items in
the prior period financial statements have been
reclassified to conform with the current period's
presentation. Operating results for the quarter and nine
months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the
fiscal year ending March 31, 1998. The unaudited financial
statements presented herein should be read in conjunction
with the Company's Annual Report on Form 10-K for the year
ended March 31, 1997 which is on file with the Securities
and Exchange Commission.
GOING CONCERN
CAI's recurring losses, restrictions on its
ability to obtain additional financing, and substantial
commitments raise significant doubt about the continuation
of CAI as a going concern. For the last quarter of the
fiscal year ending March 31, 1998, the Company is
obligated to pay $2,500,000 for minimum license fees and
lease payments, approximately $1,200,000 in remaining MMDS
license auction fees, and to fund current operating costs.
On a short-term basis, CAI has
$45,000,000 of 13% Senior Secured Notes (the "Secured
Notes") due on June 1, 1998. See Note 4 - Interim Debt
Financing. On a long-term basis, CAI has substantial
indebtedness which, beginning in fiscal year 1999, will
include significant debt service requirements and
preferred stock dividend payments. As of December 31,
1997, CAI had outstanding consolidated long-term debt of
$311,600,000 and mandatorily redeemable preferred stock
(including accrued dividends) totaling $98,946,000.
The Company's business strategy has been to
explore digital wireless cable services for its MMDS
subscription television systems and alternative uses of
its MMDS spectrum for a variety of applications, including
data and voice transmission such as Internet access and
telephony delivery services and to petition the Federal
Communications Commission ("FCC") for the establishment of
rules governing full two-way flexible use of the MMDS
spectrum. In management's opinion, this strategy will help
meet current and perceived future competition and, in
relation to obtaining a new strategic partner, show the
flexibility and increased value of the Company's MMDS
spectrum, if such exploration and efforts at the FCC are
successful. In connection with achieving these objectives,
CAI is committed through additional open purchase orders
as of February 13, 1998 to spend approximately $7,900,000,
primarily for capital expenditures associated with
additional development of the Boston digital transmission
facilities. These commitments are to be funded, in part,
by the Interim Debt Financing (see Note 4).
CAI is continuing to work with its financial
advisors to devise a comprehensive plan for meeting the
Company's on-going working capital and other financial
needs, and has engaged BT Alex. Brown Incorporated as its
primary financial advisor. The Company projects that
operating cash requirements will be approximately
$7,500,000 for the three-month period ending March 31,
1998. Additionally, as of December 31, 1997, the Company
had outstanding trade payables of approximately
$4,500,000, exclusive of certain disputed amounts.
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's operating plans, including digital
video, voice and two-way data, Internet and intranet
access services and testing, will require additional
funding. The Company's ability to raise additional funds
through secured loans and the issuance of certain equity
is limited by the terms of the Indenture governing the
Company's 12.25% Senior Notes due 2002, the terms of
various outstanding securities and/or the terms of the
Secured Notes. The Company continues to implement cost-
saving measures while it reviews the alternatives that may
be available to it, including without limitation,
decreasing video operations, selling non-core assets and
the implementation of various plans of financial
restructuring.
NOTE 2. LITIGATION
SHAREHOLDERS' CLASS ACTION. During the year ended
March 31, 1997, the Company was named in six class action
lawsuits, each alleging various violations of the federal
securities laws. These actions were consolidated into one
lawsuit entitled IN RE CAI WIRELESS SYSTEMS, INC.
SECURITIES LITIGATION (96-CV-1857) (the "Securities
Lawsuit"), which is currently pending in the United States
District Court for the Northern District of New York. The
Securities Lawsuit is in its preliminary stages. The
amended, consolidated complaint, which names the Company
and certain officers and directors of CAI as defendants,
alleges a variety of violations of the antifraud
provisions of the federal securities laws by the
aforementioned defendants.
The defendants filed a motion to dismiss,
which motion was heard by the Northern District of New
York on October 17, 1997. While the motion is pending, all
other deadlines affecting motions and discovery have been
postponed. The Company and the individual defendants
continue to contest the Securities Lawsuit vigorously and
believe it is entirely without merit. Accordingly,
management believes that this lawsuit will not have a
material adverse effect on the Company's earnings,
financial condition, or liquidity.
OTHER LITIGATION. The Company is involved in
various claims and legal actions arising in the normal
course of business. In the opinion of management, the
ultimate disposition of these matters will not have a
material adverse effect on the Company's earnings,
financial condition or liquidity.
NOTE 3. INVESTMENTS IN CS WIRELESS SYSTEMS, INC. AND
TELQUEST SATELLITE SERVICES LLC
CS WIRELESS SYSTEMS, INC. The Company's percentage
interest in CS increased from 47.7% to 50.7% at December 31,
1997 due primarily to the rescission of a previously
recorded transaction wherein CAI would purchase the
Portsmouth, NH wireless channel rights from Heartland
Wireless Communications, Inc. ("Heartland") in exchange for
approximately 314,000 shares of CS held by CAI.
Additionally, the Company's investment in CS reflects an
equity loss of $20,146,000 (based on CAI's pro-rata share of
CS's net loss of $38,849,000 for the nine-month period ended
September 30, 1997) along with $1,800,000 of amortization of
the goodwill associated with this investment.
Pursuant to the terms of the Participation Agreement
dated as of December 12, 1995, as amended by Amendment No.
1 to the Participation Agreement dated as of February 22,
1996, among the Company, CS and Heartland, each of the
Company and Heartland, as the case may be, is subject to a
true-up adjustment, calculated in accordance with the
provisions of the Participation Agreement, in the event
that the number of channels available to CS in any market
contributed by such party is less than 16. The true-up
adjustment for any such channel deficiency may be
satisfied by the deficient party by delivering to CS
either (i) cash, (ii) a 5-year promissory note, (iii)
shares of CS stock, or (iv) any combination of the
foregoing. The Company has been notified by Heartland
that it believes there is a potential channel deficiency
arising out of the number of channels delivered by the
Company in connection with its contribution of MMDS assets
relating to the Charlotte, North Carolina market. The
Company believes that it has delivered 13 of the 16
required channels, and expects to be able to deliver at
least three additional channels in Charlotte, NC from
applications currently pending at the FCC. Heartland has
advised the Company that it believes that the Company has
delivered only 6 channels relating to the Charlotte
market. The Company disputes Heartland's position, and is
in the process of responding to Heartland on this issue.
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENTS IN CS AND TSS (CONTINUED)
The following is an unaudited condensed consolidated
balance sheet of CS derived from its Form 10-Q as of
September 30, 1997:
ASSETS
Cash and cash equivalents $ 83,453,000
Other current assets 6,602,000
Systems and equipment, net 42,837,000
Wireless channel rights, net 169,222,000
Goodwill, net of accumulated amortization 49,175,000
Net assets held for sale 4,609,000
Investment in and loans to equity affiliates 8,932,000
Debt issuance costs and other assets, net 10,924,000
------------
Total Assets $375,754,000
============
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 5,079,000
FCC Auction payable 5,206,000
Other liabilities 2,055,000
Debt 276,112,000
Deferred income taxes 1,357,000
Common stock and paid-in-capital 154,568,000
Treasury stock (40,000)
Accumulated deficit (68,583,000)
------------
Total Liabilities and Equity $375,754,000
============
The following are unaudited condensed consolidated
statements of operations of CS derived from its
September 30, 1997 Form 10-Q for the periods
presented:
Quarter Ended Nine Months Ended
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
Revenues $ 6,746,000 $ 20,246,000
------------ -------------
Operating expenses:
Systems operations 3,822,000 11,174,000
General and administrative 4,528,000 12,299,000
Depreciation and amortization 6,976,000 20,266,000
------------ -------------
Total operating expenses 15,326,000 43,739,000
------------ -------------
Operating loss (8,580,000) (23,493,000)
Interest income 1,379,000 4,261,000
Interest expense (7,863,000) (23,952,000)
Equity in losses of affiliates (385,000) (385,000)
Other ( 7,000) 648,000
------------ ------------
Loss before income tax benefit (15,456,000) (42,921,000)
Income tax benefit 1,358,000 4,072,000
------------ ------------
Net loss $(14,098,000) $(38,849,000)
============ ============
TELQUEST SATELLITE SERVICES LLC. The Company's
investment in TSS reflects an equity loss of $1,137,000
based on CAI's pro-rata share of TSS's net loss of
$4,549,000 from inception to December 31, 1997. TSS has
negative net worth of $1,078,000 at December 31, 1997,
inclusive of the receivables due from CAI and CS in
connection with their investment in TSS totaling
$1,679,000.
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INTERIM DEBT FINANCING
FOOTHILL CAPITAL CREDIT FACILITY. On November 25,
1997, the Company repaid all amounts outstanding and owing
to Foothill Capital Corporation and affiliates of Canyon
Capital Management, L.P. (the "Interim Debt Lenders")
The then-outstanding amount owed under the credit facility
provided by the Interim Debt Lenders (the "F/C Credit
Facility") was approximately $17,300,000, and was repaid
out of the proceeds of the sale by CAI and certain
subsidiaries of $25,000,000 principal amount of Secured
Notes. See discussion below regarding sale and issuance
of Secured Notes. The $17,300,000 paid to the Interim
Debt Lenders on November 25, 1997 consisted of:
$15,329,000 representing the principal amount of the loans
outstanding under the F/C Credit Facility; a $1,575,000
fee; and $350,000 representing interest on the outstanding
loans and fees.
In connection with the early termination of the F/C
Credit Facility, the Company recorded a third quarter
charge of approximately $4,700,000, representing the costs
associated with the F/C Credit Facility that the Company
was originally amortizing over the two-year term of the
F/C Credit Facility. This non-recurring charge is
reflected as interest expense in the Consolidated
Statement of Operations for the quarter and nine months
ended December 31, 1997.
During the quarter ended December 31, 1997 and
before the F/C Credit Facility was repaid, the Company
executed a series of continuing waiver agreements, which
waived compliance by the Company with certain post-closing
requirements, increased the interest rates payable on the
obligations outstanding under the F/C Credit Facility, and
imposed additional and/or modified existing covenants
relating to various items, including sales of non-core
assets, certain fundamental changes to the Company and the
Company's ability to incur additional indebtedness. The
two waivers executed during the quarter ended December 31,
1997 were in addition to a waiver agreement executed on
September 25, 1997, and all of the waivers executed and
delivered by the Company to the Interim Debt Lenders
contained a general release of the Interim Debt Lenders.
A final general release was required of and delivered by
the Company in connection with receipt of the pay-off
letter issued by the Interim Debt Lenders in connection
with the repayment of all Company obligations under the
F/C Credit Facility.
13% SENIOR SECURED NOTES. On November 25, 1997, the
Company sold $25,000,000 of its Secured Notes to Merrill
Lynch Global Allocation Fund, Inc. (the "Investor"). CAI
used approximately $17,300,000 of the proceeds to repay
all amounts outstanding under the F/C Credit Facility, and
the remaining proceeds of approximately $7,300,000, net of
expenses associated with this transaction, for working
capital purposes and build-out of the Company's wireless
cable business. On January 26, 1998, the Company issued
and sold an additional $2,000,000 Secured Note to the
Investor, and on February 17, 1998, the Company issued and
sold an additional $18,000,000 of its Secured Notes in
connection with the consummation of a series of
transactions by the Company, the Investor and various
affiliates of Bell Atlantic Corporation ("BANX"). See
Note 8 - Subsequent Events - Termination of BANX Rights.
The Secured Notes are short-term obligations of CAI,
maturing on June 1, 1998, and were issued and sold
pursuant to the terms of a Note Purchase Agreement between
CAI and certain of its wholly-owned subsidiaries and the
Investor (the "Note Purchase Agreement"). Interest at the
rate of 13% per annum on the Secured Notes is payable at
maturity. In addition to fees and expenses associated
with the issuance and sale of the Secured Notes, CAI is
required to pay a $720,000 commitment fee to the Investor,
which is also due at maturity.
As collateral for the Notes, CAI granted a blanket
lien on all of its assets, including the stock of
substantially all of its wholly-owned subsidiaries, as
well as a pledge of its interests in CS and TSS. The Note
Purchase Agreement contains covenants that are usual and
customary for transactions of this type, including a
series of negative covenants intended to preserve the
value of the collateral pledged by CAI for the benefit of
the Investor.
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SIGNIFICANT EVENTS
TELQUEST SATELLITE SERVICES
TSS is a joint venture between the Company, CS and
TelQuest Communications, Inc., a company controlled by Mr.
Jared E. Abbruzzese, Chairman and Chief Executive Officer
of the Company, formed on August 4, 1997, for the purpose
of developing and operating satellite systems providing
digital services. In connection with the Company's
$5,000,000 investment in TSS, the Company made a cash
payment of $447,064 to TSS on December 1, 1997. The cash
payment is the second of four quarterly installments that
the Company is required to make to satisfy the $2,500,000
cash portion of its investment in TSS. As of December 31,
1997, the Company owed TSS a total of $894,128 to satisfy
the remaining cash portion of the investment, which amount
is payable in two equal installments of $447,064 on March
1, and June 1, 1998.
The Company has also contributed a combination of
equipment (made available to TSS under the terms of a
five-year renewable lease at a nominal rental amount) and
cash (in lieu of equipment) in an amount equal to
$2,149,211 as part of the $2,500,000 equipment portion of
the Company's $5,000,000 investment in TSS. On January
28, 1998 and February 6, 1998, CAI contributed $30,000 and
$320,000, respectively, to TSS to complete CAI's equipment
obligation. Cash paid by CAI to TSS and credited against
the equipment portion of its investment is to be used by
TSS for installation and other costs associated with
equipment purchased by CAI and leased to TSS. In return
for CAI's $5,000,000 investment in TSS, CAI received a 25%
interest in TSS, which interest is subject to dilution
upon the occurrence of certain events.
NOTE 6. SUMMARY OF PERTINENT RIGHTS AND PRIVILEGES OF
COMPANY SECURITIES
STOCK CAPITALIZATION
The stock capitalization is as follows:
Shares Authorized Shares Issued and
CLASS OF STOCK AS OF 12/31/97 OUTSTANDING AS OF 12/31/97
- -------------- ----------------- -------------------------
Preferred Stock
14% Senior convertible
preferred stock, par
value $10,000 per share 15,000 7,000
-------- -------
Series Preferred Stock, no par value
Series A 8% preferred stock,
no par value 350,000 -
Undesignated 4,650,000 -
--------- -------
Total series preferred stock 5,000,000 -
--------- -------
Voting preferred stock, no par value 2,000,000 -
--------- -------
Total preferred stock 7,015,000 7,000
========= =======
Common stock, no par value 100,000,000 40,540,539
=========== ==========
SECURITIES ISSUED ORIGINALLY TO BANX
In March 1995 and in conjunction with the execution
of the Business Relationship Agreement (the "BR
Agreement") by the Company and BANX, CAI entered into a
securities purchase agreement with BANX Partnership,
another affiliate of Bell Atlantic and NYNEX (the "BANX
Partnership"), pursuant to which (i) BANX Partnership
purchased $30,000,000 of the Company's Term Notes due May
9, 2005
("BANX Term Notes") and warrants (the "BANX Warrants") to
purchase cumulative voting preferred stock, no par value
(the "Voting Preferred Stock") on May 9, 1995 (the "Stage
I Closing"), and (ii)
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SUMMARY OF COMPANY SECURITIES (CONTINUED)
$70,000,000 of the Company's 14% senior convertible
preferred stock, par value $10,000 per share ("Senior
Preferred Stock") and additional BANX Warrants (together
with the BANX Term Notes, Voting Preferred Stock and
Senior Preferred Stock, the "BANX Securities") on
September 29, 1995 (the "Stage II Closing"). Upon
issuance of the BANX Securities in September 1995, the
full conversion or exercise of the BANX Securities would
have resulted in the BANX Partnership having to make an
additional investment, at that time, in CAI of
approximately $202,000,000 (subject to adjustment in
accordance with the terms of the Modification Agreement
(as defined below)), to increase its ownership interest
in CAI, on a pro forma basis, to approximately 45%.
On December 12, 1996, the Company and BANX reached
an agreement (the "Modification Agreement") that modified
certain terms of the BR Agreement and provided CAI or its
designee with the right to acquire the BANX Securities.
In connection with the Modification Agreement, the average
per share exercise/conversion price of the BANX Securities
was reduced from $8.19 to $5.31, on full conversion and
exercise. This reduction resulted in BANX having to only
make an additional investment in CAI of approximately
$95,000,000 to acquire the approximately 45% ownership
interest in CAI in the event BANX elected to convert or
exercise the BANX Securities. The Modification Agreement
was subsequently amended on April 29, 1997, pursuant to
Amendment No.1 to the Modification Agreement (the
"Modification Agreement Amendment").
The Modification Agreement Amendment represented the
re-negotiation of an option granted to CAI to repurchase
the $100,000,000 face amount of BANX securities held by
BANX. The repurchase consideration was $40,000,000 in
cash and 100,000 shares of CAI convertible junior
preferred stock. The junior preferred stock would have
been non-voting, carried no coupon and no maturity, and
would have been convertible into 2.5 million shares of CAI
Common Stock. The repurchase option was exercisable
through February 28, 1998. These agreements, together
with the BR Agreement, were terminated on February 17,
1998 and the BANX Securities were transferred by BANX to
the Investor. See Note 8 - Subsequent Events -
Termination of BANX Rights.
A summary of the outstanding Senior Preferred
Stock, Voting Preferred Stock and BANX Warrants follows:
14% SENIOR CONVERTIBLE PREFERRED STOCK. As part of
the Stage II Closing, BANX purchased 7,000 shares of
Senior Preferred Stock. The Senior Preferred Stock has a
14% cumulative dividend, payable quarterly (optionally
before December 1, 1998 and mandatorily after December 1,
1998). The dividend rate was increased to 16% pursuant
to an adjunct agreement with BANX regarding licensing
issues. The terms of the Senior Preferred Stock require
mandatory redemption at par plus any accrued dividends on
September 29, 2005, absent any conversion. As of
December 31, 1997, there were 7,000 shares of Senior
Preferred Stock issued and outstanding.
VOTING PREFERRED STOCK. The Senior Preferred Stock
is convertible into Voting Preferred Stock (based on a
formula prescribed in the terms of the Senior Preferred
Stock) for a period of five years commencing on September
29, 1995. In turn, the Voting Preferred Stock is
convertible into CAI Common Stock, initially at the rate
of 100 shares of CAI Common Stock for one share of
Voting Preferred Stock. The terms include an conversion
feature wherein each outstanding share of Voting
Preferred Stock shall automatically be converted into
shares of CAI Common Stock based on enumerated conditions
and/or events. Voting rights are based on the underlying
shares of Common Stock per share of Voting Preferred
Stock. Additionally, holders of the Voting Preferred
Stock are entitled to receive dividends if, as, or when a
dividend is declared on shares of CAI Common Stock and in
an amount based on the underlying shares of CAI Common
Stock per share of Voting Preferred Stock. In the event
of liquidation or dissolution, Voting Preferred Stock is
subject to the prior rights of the Senior Preferred Stock
but ahead of the CAI Common Stock in an amount equal to
the underlying shares of CAI Common Stock per share of
Voting Preferred Stock. As of December 31, 1997, there
were no shares of Voting Preferred Stock issued and
outstanding.
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SUMMARY OF COMPANY SECURITIES (CONTINUED)
THE BANX WARRANTS. The BANX Warrants entitle the
holder thereof to purchase Voting Preferred Stock which
and are exercisable at an aggregate price of
approximately $95,000,000.
In connection with the transactions consummated on
February 17, 1998 and described more fully in Note 8
below, the Investor waived all conversion features of the
foregoing securities, pending the exchange of such
securities for a new subordinated note of the Company.
OTHER SECURITIES ISSUED BY CAI
COMMON STOCK. The Company's Common Stock is without
par value and carries one vote per share. Holders of
Company Common Stock are entitled to dividends if, as, or
when declared out of funds legally available which
consists of current or accumulated earnings. The Company
currently has an accumulated deficit. In liquidation or
dissolution, all preferred stock including accumulated
dividends thereon must be satisfied before holders of
Common Stock receive any distribution. As of December 31,
1997, there were 40,540,539 shares of Common Stock issued
and outstanding.
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 stock
option 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. There have been no options exercised under the
1995 Plan. As of December 31, 1997, there were options
to purchase approximately 1,181,000 shares of Company
common stock granted under the 1995 Plan.
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. There
have been no options exercised under the 1993 Plan. As
of December 31, 1997, there were options to purchase
997,500 shares of Company common stock granted under the
1993 Plan.
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 which will 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.
The options under the 1996 Directors' Plan 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. As of December 31, 1997, there have
been no options exercised under the 1996 Directors' Plan,
and the
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SUMMARY OF COMPANY SECURITIES (CONTINUED)
Company has not issued any additional options under the
1996 Directors' Plan during the nine months ended
December 31, 1997.
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. As of December
31, 1997, no options have been exercised under the 1993
Directors' Plan, and no additional options have been
issued under the 1993 Directors' Plan during the nine
months ended December 31, 1997.
WARRANTS
COMMON STOCK WARRANTS. The Company has issued and
outstanding warrants to purchase 5,083,563 shares of
Company Common Stock, which warrants were issued to
various bridge lenders, and the Interim Debt Lenders in
connection with various financings consummated by the
Company since its inception. The common stock warrants do
not include the warrants issued originally to BANX
Partnership. The weighted-average exercise price for the
non-BANX warrants, at December 31, 1997 was $3.84 per
share.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128
("SFAS 128") - "Earnings Per Share." The Company has
adopted SFAS 128 for the quarter and nine months ended
December 31, 1997. Accordingly, the Company replaced the
"primary" EPS requirements with a "basic" EPS computation
based upon weighted-average shares outstanding. Due to the
Company's net losses, only the basic loss per share
amounts are reflected in the accompanying Statements of
Operations.
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.
CAI WIRELESS SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SUBSEQUENT EVENTS
NASDAQ DE-LISTING. On January 8, 1998, trading of
the Company's common stock was removed from The Nasdaq
National Market<reg-trade-mark> ("NNM") and listed for
trading on the Nasdaq SmallCap Market{ SM}. The removal
was caused by the Company's failure to meet the net
tangible asset listing requirement imposed by Nasdaq upon
NNM-listed companies. As a condition to listing on the
Nasdaq SmallCap Market{ SM}, the Company was required to
maintain compliance with a $1.00 per share bid price for
an interim period. Effective January 13, 1998, as a
result of failing to maintain the $1.00 per share bid
price, CAI's common stock was de-listed from the Nasdaq
SmallCap Market{ SM}. The common stock currently trades
on the Electronic Bulletin Board system under the CAWS
symbol.
TERMINATION OF BANX RIGHTS. On February 17, 1998,
the Company consummated a series of transactions,
including the purchase by the Company of the remaining
interest of BANX under the BR Agreement and the
acquisition of BANX's approximately 9.9% equity interest
in CS. Under the terms of the Termination and Purchase
Agreement (the "Termination Agreement"), the Company
issued $7,000,000 aggregate principal amount of its
Secured Notes to BANX in consideration of the termination
of the BR Agreement, Modification Agreement and
Modification Agreement Amendment, and the transfer of
1,000,000 shares of CS common stock held by BANX. The
parties exchanged general releases in connection with the
transaction. The BR Agreement was originally entered into
by the parties in March 1995 and provided Bell Atlantic
the right to exercise options to utilize CAI's MMDS
spectrum in certain of its major markets exclusively for
Bell Atlantic video programming. Prior to its
termination, none of those major markets had been optioned
by BANX.
Simultaneously with the closing of the Termination
Agreement, the Company and the Investor amended the Note
Purchase Agreement to increase the aggregate amount of
Secured Notes issued and outstanding thereunder by an
additional $18,000,000 to $45,000,000, which amount
includes $25,000,000 of Secured Notes issued and sold to
the Investor on November 25, 1997, a $2,000,000 Secured
Note issued and sold to the Investor on January 26, 1998,
$7,000,000 of Secured Notes issued by the Company to BANX
in connection with the Termination Agreement and an
additional $11,000,000 Secured Note issued by the Company
and sold to the Investor on February 17, 1998. The
proceeds of the additional Secured Note will be used for
working capital and to meet certain other obligations of
the Company into the first quarter of its fiscal year
beginning April 1, 1998. All of the Secured Notes mature
on June 1, 1998.
As part of these transactions, the Investor advised
CAI that it had completed the purchase from BANX of all of
the BANX Securities representing BANX's initial
$100,000,000 investment in CAI in 1995, as well as the
Secured Notes issued by CAI to BANX in connection with the
Termination Agreement.
CAI and the Investor have entered into an agreement
in principle on February 17, 1998, pursuant to which the
Investor agreed to exchange all of the BANX Securities,
together with accrued but unpaid interest and dividends
thereon, for a $30,000,000 12% subordinated note due 2003,
subject to prepayment at a discount of up to $27,000,000
prior to June 1, 1998 in the event that certain
circumstances occur that result in the realization of a
significant increase in the current market value of CAI's
12 1/4 % Senior Notes due 2002. The exchange is subject
to certain conditions, including documentation
satisfactory to the parties. Pending the exchange, the
Investor has waived all conversion features contained in
the BANX Securities.
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 Company's ability to
attract one or more new strategic partners and their
willingness to enter into arrangements with CAI on a
timely basis, the terms of such arrangements, 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, practical success of CAI's engineered
technology, 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. Furthermore, there can be no
assurance that the financing obtained by the Company to
date will enable it to meet its future cash needs.
BUSINESS DEVELOPMENTS
Boston Digital Project. The Company has committed
significant funds and substantial engineering and
regulatory efforts to the build-out of its digital MMDS
system in Boston, Massachusetts. Initially, construction
of the Boston system was undertaken in fulfillment of the
Company's obligations under the Business Relationship
Agreement with affiliates of Bell Atlantic Corporation and
NYNEX Corporation (collectively, "BANX") for the provision
of subscription video services by BANX using MMDS
spectrum. When BANX abandoned its digital video plans,
CAI continued to construct the Boston system. In its
continuation of the construction, however, the Company
sought to build into the system flexibility it believed
was necessary to offer one-way, high-speed data services,
as well as two-way MMDS services, such as two-way data and
telephony services. The Company's Boston system is
currently testing digital video, voice and data
transmission services, which have been demonstrated to
certain third parties that have expressed interest in the
Company's technical capabilities.
In connection with the build-out of the digital
system in Boston, the Company has converted approximately
65% of the Instructional Television Fixed Service ("ITFS")
receive sites in Boston enabling the receive sites to
receive CAI's digital MMDS signal, as transmitted from its
digital head-end and several repeater sites located in the
Boston metropolitan area. The Company expects that the
remaining Boston ITFS receive sites should be converted
within the next 90 days.
The technology and equipment deployed and being used
in Boston for digital video and other uses was devised
primarily by CAI's engineering staff, working in
conjunction with various equipment vendors. Since the
technology and equipment is relatively new, the Company
and its principal vendors have had to reconfigure certain
aspects of the technology and equipment. The Company has
substantially eliminated many of the minor technical flaws
it experienced in the incipient stages of developing and
testing the Boston digital video technology, and is
working with vendors to improve the technology and
prototype equipment deployed in Boston for video and
alternative uses such as two-way data and telephony.
The Company originally indicated that it would
launch a digital subscription video product in Boston
during the second half of 1997. The video launch was not
only viewed by the Company as important as a means of
attracting a strategic investor, but also was required to
meet certain covenants imposed by the F/C Credit Facility
(defined below). (The covenants imposed upon the Company
in connection with the issuance of the Secured Notes
(defined below) do not include a digital video requirement
in Boston or any other CAI market.) The launch of a
commercial digital subscription video product in Boston
has been delayed due to three principal factors: the
unexpected delays associated with equipment, including
customer premises equipment of sufficient quality to
support a commercial launch of a digital subscription
video product; the Company's limited financial resources,
and the absence of a strategic partner willing to utilize
the digital MMDS system to the fullest capacity.
The Company has made significant progress, in
conjunction with its primary vendors, in improving the
quality of the digital video product being tested in
Boston. The customer premises and other equipment has
been reconfigured in some instances in an effort to
eliminate many of the technical flaws that were associated
with the early versions of this equipment. At this time,
however, the Company has no definitive plans to launch a
full-scale commercial digital subscription video service
in its Boston market, and is instead contemplating limited
roll-out of a digital subscription video product once all
of the technical flaws experienced by the Company with the
equipment have been eliminated to the Company's
satisfaction. The Company is fully committed to ensuring
that its ITFS licenseholders in Boston can serve their
respective receive sites with such licenseholders' digital
video programming, a project that the Company believes is
substantially completed in Boston The Company believes,
however, that its best position in connection with
discussions it is having or contemplates having with
potential strategic partners, and in light of its limited
financial resources, is to delay the full-scale launch of
a commercial video service for the immediate future.
The Company is pursuing a one-way, high-speed
Internet access service on a wholesale basis in its
Boston, Rochester and New York City markets. The
Company's data transport delivery service currently
utilizes a wireless downstream transmitted over CAI's MMDS
system and a telephone return path. Acting through its
wholly-owned subsidiary CAI Wireless Internet, Inc., the
Company will begin to offer bandwidth to Internet Service
Providers (ISPs) in the three markets in the first quarter
of 1998. By providing transport services to ISPs, the
Company believes that it will be able to eliminate a
significant amount of capital expenditure associated with
providing retail data delivery services. In connection
with the Company's wholesale Internet strategy, it has
curtailed its efforts with respect to previously-announced
commercial trials of its one-way Internet access service
in Rochester, New York City and Boston, and is focusing
its efforts on the wholesale strategy.
TELQUEST SATELLITE SERVICES. TelQuest Satellite
Services LLC ("TSS") is a joint venture between the
Company, CS Wireless Systems, Inc. ("CS") and TelQuest
Communications, Inc., a company controlled by Mr. Jared E.
Abbruzzese, Chairman and Chief Executive Officer of the
Company, formed on August 4, 1997 for the purpose of
developing and operating satellite systems providing
digital services. In connection with the Company's
$5,000,000 investment in TSS, the Company made a cash
payment of $447,064 to TSS on December 1, 1997. The cash
payment is the second of four quarterly installments that
the Company is required to make to satisfy the $2,500,000
cash portion of its investment in TSS. As of December 31,
1997, the Company owed TSS a total of $894,128 to satisfy
the remaining cash portion of the investment, which amount
is payable in two equal installments of $447,064 on March
1, and June 1, 1998.
The Company has also contributed a combination of
equipment (made available to TSS under the terms of a
five-year renewable lease at a nominal rental amount) and
cash (in lieu of equipment) in an amount equal to
$2,149,211 as part of the $2,500,000 equipment portion of
the Company's $5,000,000 investment in TSS. On January
28, 1998 and February 6, 1998, CAI contributed an
additional $30,000 and $320,000, respectively, to TSS to
complete its equipment obligation. Cash paid by CAI to
TSS and credited against the equipment portion of its
investment is to be used by TSS for installation and other
costs associated with equipment purchased by CAI and
leased to TSS. In return for CAI's $5,000,000 investment
in TSS, CAI received a 25% interest in TSS, which interest
is subject to dilution upon the occurrence of certain
events.
CAI has designated its Boston market as the first of
the Company's market to receive TSS digital video
programming. TSS is currently broadcasting approximately
40 channels of pre-digitized video programming, which
programming is being received at the Company's head-end
located in downtown Boston without significant technical
flaws. The Company is currently using the TSS programming
in Boston to test the digital MMDS delivery platform and
the customer premises equipment to be used for a
commercial subscription video product.
The Company continues to believe that the
affiliation agreement it has with TSS is the most cost-
efficient means of accessing pre-digitized video
programming for use at its transmission facilities. A
migration from the C-band satellite capacity that TSS
currently is transmitting to the contemplated Ku-band
satellite capacity will provide the Company with the
opportunity to expand its video offerings to include a
direct-to-home product as a supplement to any MMDS-based
video delivery system for those potential subscribers that
are not capable of receiving the MMDS signal. There can
be no assurance, however, that TSS will be able to
migrate from C-band satellite capacity to Ku-band
satellite capacity, or that the Company will be able to
expand its video offerings beyond its current subscription
video product.
NASDAQ DE-LISTING. On January 8, 1998, trading of
the Company's common stock was removed from The Nasdaq
National Market<reg-trade-mark> ("NNM") and listed for
trading on the Nasdaq SmallCap Market{ SM}. The removal
was caused by the Company's failure to meet the net
tangible asset listing requirement imposed by Nasdaq upon
NNM-listed companies. As a condition to listing on the
Nasdaq SmallCap Market{ SM}, the Company was required to
maintain compliance with a $1.00 per share bid price for
an interim period. Effective January 13, 1998, as a
result of failing to maintain the $1.00 per share bid
price, CAI's common stock was de-listed from the Nasdaq
SmallCap Market{ SM}. The common stock currently trades
on the Electronic Bulletin Board system under the CAWS
symbol.
CS WIRELESS TRUE-UP. Pursuant to the terms of the
Participation Agreement dated as of December 12, 1995, as
amended by Amendment No. 1 to the Participation Agreement
dated as of February 22, 1996, among the Company, CS and
Heartland Wireless Communications, Inc. ("Heartland"),
each of the Company and Heartland, as the case may be, is
subject to a true-up adjustment, calculated in accordance
with the provisions of the Participation Agreement, in the
event that the number of channels available to CS in any
market contributed by a party is less than 16. The true-
up adjustment for any such channel deficiency may be
satisfied by the deficient party by delivering to CS
either (i) cash, (ii) a 5-year promissory note, (iii)
shares of CS stock, or (iv) any combination of the
foregoing. The Company has been notified by Heartland
that it believes there is a potential channel deficiency
arising out of the number of channels delivered by the
Company in connection with its contribution of MMDS assets
relating to the Charlotte, North Carolina market. The
Company believes that it has delivered 13 of the 16
required channels, and expects to be able to deliver at
least three additional channels in Charlotte, NC from
applications currently pending at the FCC. Heartland has
advised the Company that it believes that the Company has
delivered only 6 channels relating to the Charlotte
market. The Company disputes Heartland's position, and is
in the process of responding to Heartland on this issue.
TERMINATION OF BANX RIGHTS. On February 17, 1998,
the Company consummated a series of transactions,
including the purchase by the Company of the remaining
interest of BANX under the BR Agreement and the
acquisition of BANX's approximately 9.9% equity interest
in CS. Under the terms of the Termination and Purchase
Agreement (the "Termination Agreement"), the Company
issued $7,000,000 aggregate principal amount of its
Secured Notes (defined below) to BANX in connection with
the closing of the Termination Agreement. The parties
exchanged general releases in connection with the
transaction, and terminated the Modification Agreement
dated December 12, 1996 by and among CAI and BANX and
Amendment No. 1 to Modification Agreement dated April 29,
1997. The BR Agreement was originally entered into by the
parties in March 1995 and provided Bell Atlantic the right
to exercise options to utilize CAI's MMDS spectrum in
certain of its major markets exclusively for Bell Atlantic
video programming. Prior to its termination, none of
those major markets had been optioned by BANX. Following
the consummation of the foregoing transaction and the
transactions discussed below in the section entitled,
"Liquidity and Capital Resources - Interim Debt Financing
- - 13% Senior Secured Notes," BANX ceased to have any
interest in the Company. See "Liquidity and Capital
Resources - Interim Debt Financing - 13% Senior Secured
Notes" below.
LIQUIDITY AND CAPITAL RESOURCES
NINE MONTHS ENDED DECEMBER 31, 1997
For the nine months ended December 31, 1997, cash
and cash equivalents decreased by $8,301,000. Operating
activities utilized $28,591,000 of cash, primarily to fund
the Company's net losses of $98,537,000, reduced for non-
cash expenditures including depreciation and amortization
of $26,153,000, equity losses for CS and TSS totaling
$23,118,000, and the increase in payables and accruals of
$12,605,000 (primarily interest on the 12.25% Senior
Notes). Cash provided from financing activities primarily
reflects the issuance of $25,000,000 of principal amount
of Secured Notes and the use of the proceeds thereof to
repay the approximately $17,300,000 outstanding under the
prior credit facility with Foothill Capital Corporation
and affiliates (see Interim Debt Financing below). The
remaining funds, net of issuance fees, are being used by
the Company for general operating requirements.
The Company's capital expenditures during the nine
months ended December 31, 1997 included the purchase of
$6,337,000 in equipment, primarily for the Boston digital
project, and to acquire $2,221,000 in wireless channel
rights.
INTERIM DEBT FINANCING
Foothill Capital Credit Facility. On November 25,
1997, the Company repaid all amounts outstanding and owing
to Foothill Capital Corporation and affiliates of Canyon
Capital Management, L.P. (the "Interim Debt Lenders")
The then-outstanding amount owed under the credit facility
provided by the Interim Debt Lenders (the "F/C Credit
Facility") was approximately $17,300,000, and was repaid
out of the proceeds of the sale by CAI and certain
subsidiaries of $25,000,000 principal amount of Secured
Notes. See discussion below regarding sale and issuance
of Secured Notes. The $17,300,000 paid to the Interim
Debt Lenders on November 25, 1997 consisted of:
$15,329,000 representing the principal amount of the loans
outstanding under the F/C Credit Facility; a $1,575,000
fee; and $350,000 representing interest on the outstanding
loans and fees.
In connection with the early termination of the F/C
Credit Facility, the Company recorded a third quarter
charge of approximately $4,700,000, representing the costs
associated with the F/C Credit Facility that the Company
was originally amortizing over the two-year term of the
F/C Credit Facility. This non-recurring charge is
reflected as interest expense in the Consolidated
Statement of Operations for the quarter and nine months
ended December 31, 1997.
During the quarter ended December 31, 1997 and
before the F/C Credit Facility was repaid, the Company
executed a series of continuing waiver agreements, which
waived compliance by the Company with certain post-closing
requirements, increased the interest rates payable on the
obligations outstanding under the F/C Credit Facility, and
imposed additional and/or modified existing covenants
relating to various items, including sales of non-core
assets, certain fundamental changes to the Company and the
Company's ability to incur additional indebtedness. The
two waivers executed during the quarter ended December 31,
1997 were in addition to a waiver agreement executed on
September 25, 1997, and all of the waivers executed and
delivered by the Company to the Interim Debt Lenders
contained a general release of the Interim Debt Lenders.
A final general release was required of and delivered by
the Company in connection with receipt of the pay-off
letter issued by the Interim Debt Lenders in connection
with the repayment of all Company obligations under the
F/C Credit Facility.
13% SENIOR SECURED NOTES. On November 25, 1997, the
Company issued and sold $25,000,000 of its 13% Senior
Secured Notes due June 1, 1998 (the "Secured Notes") to
Merrill Lynch Global Allocation Fund, Inc. (the
"Investor"). CAI used approximately $17,300,000 of the
proceeds to repay all amounts outstanding under the F/C
Credit Facility, and the remaining proceeds of
approximately $7,300,000, net of expenses associated with
this transaction, for working capital purposes and build-
out of the Company's wireless cable business. On January
26, 1998, the Company issued and sold an additional
$2,000,000 Secured Note to the Investor, and on February
17, 1998, the Company issued and sold an additional
$18,000,000 of Secured Notes in connection with the
consummation of a series of transactions by the Company,
the Investor and BANX. See "Business Developments -
Termination of BANX Rights" above.
The Secured Notes are short-term obligations of CAI,
maturing on June 1, 1998, and were issued and sold
pursuant to the terms of a Note Purchase Agreement between
CAI and certain of its wholly-owned subsidiaries and the
Investor (the "Note Purchase Agreement"). Interest at the
rate of 13% per annum on the Secured Notes is payable at
maturity. In addition to fees and expenses associated
with the issuance and sale of the Secured Notes, CAI is
required to pay a $720,000 commitment fee to the Investor,
which is also due at maturity.
As collateral for the Notes, CAI granted a blanket
lien on all of its assets, including the stock of
substantially all of its wholly-owned subsidiaries, as
well as a pledge of its interests in CS and TSS. The Note
Purchase Agreement contains covenants that are usual and
customary for transactions of this type, including a
series of negative covenants intended to preserve the
value of the collateral pledged by CAI for the benefit of
the Investor.
Simultaneously with the closing of the Termination
Agreement, the Company and the Investor amended the Note
Purchase Agreement to increase the aggregate amount of
Secured Notes issued and outstanding thereunder by an
additional $18,000,000 to $45,000,000, which amount
includes $25,000,000 of Secured Notes issued and sold to
the Investor on November 25, 1997, the $2,000,000 Secured
Note issued and sold to the Investor on January 26, 1998,
$7,000,000 of Secured Notes issued by the Company to BANX
in connection with the Termination Agreement and an
additional $11,000,000 Secured Note issued by the Company
and sold to the Investor on February 17, 1998. The
proceeds of the additional Secured Note will be used for
working capital and to meet certain other obligations of
the Company into the first quarter of its fiscal year
beginning April 1, 1998. All of the Secured Notes mature
on June 1, 1998.
As part of these transactions, the Investor advised
CAI that it had completed the purchase from BANX of all of
the CAI securities issued to BANX in connection with
BANX's initial $100,000,000 investment in CAI in 1995,
including $30,000,000 of term notes, $70,000,000 of senior
preferred stock and warrants to purchase voting preferred
stock of CAI (the "BANX Securities"), as well as the
Secured Notes issued by CAI to BANX in connection with the
Termination Agreement.
CAI and the Investor have entered into an agreement
in principle on February 17, 1998, pursuant to which the
Investor agreed to exchange all of the BANX Securities,
together with accrued but unpaid interest and dividends
thereon, for a $30,000,000 12% subordinated note due 2003,
subject to prepayment at a discount of up to $27,000,000
prior to June 1, 1998 in the event that certain
circumstances occur that result in the realization of a
significant increase in the current market value of CAI's
12 1/4 % Senior Notes due 2002. The exchange is subject
to certain conditions, including documentation
satisfactory to the parties. Pending the exchange, the
Investor has waived all conversion features contained in
the BANX Securities.
GOING CONCERN
CAI's recurring losses, restrictions on its ability
to obtain additional financing, and substantial
commitments raise significant doubt about the continuation
of CAI as a going concern. For the last quarter of the
fiscal year ending March 31, 1998, the Company is
obligated to pay $2,500,000 for minimum license fees and
lease payments, approximately $1,200,000 in remaining MMDS
license auction fees, and to fund current operating costs.
On a short-term basis, CAI has
$45,000,000 of Secured Notes due on June 1, 1998. See
"Interim Debt Financing" above. On a long-term basis,
CAI has substantial indebtedness which, beginning in
fiscal year 1999, will include significant debt service
requirements and preferred stock dividend payments. As
of December 31, 1997, CAI had outstanding consolidated
long-term debt of $311,600,000 and mandatorily
redeemable preferred stock (including accrued dividends)
totaling $98,946,000.
The Company's business strategy has been to
explore digital wireless cable services for its MMDS
subscription television systems and alternative uses of
its MMDS spectrum for a variety of applications, including
data and voice transmission such as Internet access and
telephony delivery services and to petition the Federal
Communications Commission ("FCC") for the establishment of
rules governing full two-way flexible use of the MMDS
spectrum. In management's opinion, this strategy will help
meet current and perceived future competition and, in
relation to obtaining a new strategic partner, show the
flexibility and increased value of the Company's MMDS
spectrum, if such exploration and efforts at the FCC are
successful. In connection with achieving these objectives,
CAI is committed through additional open purchase orders
as of January 30, 1998 to spend approximately $7,900,000,
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.
CAI is continuing to work with its financial
advisors to devise a comprehensive plan for meeting the
Company's on-going working capital and other financial
needs, and has engaged BT Alex. Brown Incorporated as its
primary financial advisor. The Company projects that
operating cash requirements will be approximately
$7,500,000 for the three-month period ending March 31,
1998. Additionally, as of February 13, 1998, the Company
had outstanding trade payables of approximately
$4,500,000, exclusive of certain disputed amounts.
The Company's operating plans, including digital
video, voice and two-way data, Internet and intranet
access services and testing, will require additional
funding. The Company's ability to raise additional funds
through secured loans and the issuance of certain equity
is limited by the terms of the Indenture governing the
Company's 12.25% Senior Notes due 2002, the terms of
various outstanding securities and/or the terms of the
Secured Notes. The Company continues to implement cost-
saving measures while it reviews the alternatives that may
be available to it, including without limitation,
decreasing video operations, selling non-core assets and
the implementation of various plans of financial
restructuring.
RESULTS OF OPERATIONS
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
The Company's strategy is not to pursue analog-based
television subscriber growth while it evaluates its
business opportunities in addition to subscription
television including high-speed Internet and Intranet
access, as well as digital video and telephony services.
The policy has had a negative impact on the Company's
subscription revenues. As of December 31, 1997, the
Company's subscriber base had decreased by approximately
19,500 to 57,500 subscribers from approximately 77,000 at
December 31, 1996. Consequently, subscriber revenues have
decreased $2,659,000 and $5,760,000 for the quarter and
nine months ended December 31, 1997, compared to the
corresponding periods last year.
Operating expenses were approximately $60,242,000
and $60,734,000 for the nine months and $22,292,000 and
$20,756,000 for the quarters ended December 31, 1997 and
1996, respectively. Programming costs did not decline in
proportion to the revenue decline due to minimum
provisions provided by certain of the programming
agreements. The approximately $500,000 reduction in
operating expenses for the nine months of 1997 versus 1996
reflects lower licensing and marketing costs which were in
line with the decline in subscribers, offset by an
increase in general and administrative expenses of
$2,067,000 consisting of financial and corporate
restructuring costs, attorneys fees in the class action
lawsuit, and various FCC filings.
Interest expense was $40,129,000 and $30,317,000 for
the nine months ended December 31, 1997 and 1996,
respectively, and was $17,199,000 and $10,012,000 for the
quarter ended December 31, 1997 and 1996, respectively,
and reflects primarily the interest on the $275,000,000 of
12.25% Senior Notes due 2002 and the $30,000,000 of Term
Notes issued to BANX. The increase in interest expense
for the quarter and nine months ended December 31, 1997
consists of interest incurred on the F/C Credit Facility
and Secured Notes, amortization of the financing fees
associated with those facilities, and the $4,700,000 non-
recurring charge related to the unamortized costs arising
from the termination of the F/C Credit Facility.
The decrease in CAI's investment in CS reflects
primarily the Company's 50.7% pro rata share of the
$38,849,000 net loss reported by CS for the nine months
ended September 30, 1997, along with $1,800,000 of
amortization of the goodwill associated with this
investment compared to an aggregate loss of $13,000,000
for the same period last year. The decrease in CAI's
investment in TSS reflects primarily the Company's 25%
pro-rata share of the $4,549,000 loss reported by TSS
since its inception to December 31, 1997.
.
Other income, comprised primarily of interest
income, for the nine months ended December 31, 1997 was
$2,974,000 compared to $5,319,000 for the comparable
period last year and was $1,351,000 and $1,203,000 for the
quarters ended December 31, 1997 and 1996 respectively.
Current period interest income on investments declined due
to the use of cash in the escrow account for semi-annual
interest payments on the Senior Notes totaling
approximately $33,700,000 during the prior twelve-month
period in addition to usage of the Company's unrestricted
accounts for operational requirements and capital
expenditures. There are funds available for two remaining
semi-annual interest payments in the debt service escrow
account. The decline in interest income was partially
offset by a $538,000 gain from the sale of certain assets.
The Company recorded an income tax benefit of
$4,500,000 for the first, second and third 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." The Company has
adopted SFAS 128 for the quarter and nine months ended
December 31, 1997. Accordingly, the Company replaced the
"primary" EPS requirements with a "basic" EPS computation
based upon weighted-average shares outstanding. Due to the
Company's net losses, only the basic loss per share
amounts are reflected in the accompanying Statements of
Operations.
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.
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.
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 REFERENCE
EXHIBIT NO. DESCRIPTION (SEE LEGEND)
3.1 Amended and Restated Certificate of Incorporation [1] Exhibit 3.1
of CAI
3.2 Amended and Restated Bylaws of CAI [1] Exhibit 3.2
<dagger>4.1 Note Purchase Agreement by and among registrant,
certain of its subsidiaries and the purchaser named
therein
<dagger>11.1 Schedule Regarding Computation of Loss Per Common
Share for the Quarter Ended December 31, 1997 and
1996
<dagger>11.2 Schedule Regarding Computation of Loss Per Common
Share for the Nine Months Ended December 31, 1997
and 1996
<dagger>27. Financial Data Schedule
<dagger>99.1 Press Release - CAI Wireless Systems, Inc. Issues
Additional $2 Million in 13% Senior Secured Notes
<dagger>99.2 Press Release - CAI Wireless Systems, Inc. Buys Out
Remaining Bell Atlantic Hold on MMDS Spectrum
LEGEND
[1] Incorporated by reference to the exhibits to the
Quarterly Report on Form 10-Q for 9/30/95.
<dagger> Filed herewith.
b) REPORTS ON FORM 8-K.
(1) Form 8-K dated November 25, 1997 was filed
December 29, 1997, regarding the following items under
Item 5, Other Events:
FINANCING MATTERS - CAI sold $25,000,000 of
its 13% Senior Secured Notes to an existing
investor and used approximately $17,300,000 to payoff
the existing credit facility.
STRATEGIC PARTNER UPDATE - CAI has focused its
recent efforts on two telecommunications companies, both of
which are currently performing various reviews of the
Company and its spectrum.
OPERATIONS - business strategy update.
BANX UPDATE - The Company made the election to
preserve its right to repurchase the BANX securities.
NASDAQ NOTIFICATION - The Company was notified
that its common stock no longer qualifies for listing on
the NASDAQ National Market and the Company could apply for
listing on the NASDAQ SmallCap Market.
CHANGES TO CORPORATE STRUCTURE - The Company
was required to create a number of wholly-owned direct
and indirect subsidiaries to hold certain assets in
connection with the F/C Credit Facility.
(2) Form 8-K dated January 7, 1998 was filed
January 22, 1998, regarding the following items
under Item 5, Other Events:
(A) Excerpts from a conference call for
financial analysts on January 14, 1998 concerning the full
two-way use of MMDS Spectrum and certain other Company matters.
(B) The following news releases were
issued:
(i) CAI Wireless Systems, Inc.
Common Stock to be listed on the
Nasdaq SmallCap Market dated
January 7,1998.
(ii) CAI Wireless Systems,
Inc. Common Stock to be delisted on
the Nasdaq SmallCap Market
dated January 12, 1998.
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 February 20, 1998
JARED E. ABBRUZZESE and Director (Principal Executive
Officer)
/S/ JAMES P. ASHMAN Executive VicePresident, Chief February 20, 1998
JAMES P. ASHMAN Financial Officer and Director
(Principal Financial Officer)
/S/ ARTHUR J. MILLER VicePresident and Controller February 20, 1998
ARTHUR J. MILLER (Principal Accounting Officer)