UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-22888
CAI WIRELESS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1324691
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
18 Corporate Woods Blvd., Third Floor, Albany, NY 12211
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 462-2632
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes _X_ No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at June 23, 1998 was approximately $8,326,366.
The number of shares of Registrant's Common Stock outstanding on June 23,
1998 was 40,543,039.
PART I
THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING
THE EXHIBITS HERETO, RELATING TO CAI'S FUTURE OPERATIONS MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS OF THE COMPANY MAY DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AND MAY BE AFFECTED BY
A NUMBER OF FACTORS INCLUDING THE COMPANY'S ABILITY TO ATTRACT ONE OR MORE NEW
STRATEGIC PARTNERS, THEIR WILLINGNESS TO ENTER INTO ARRANGEMENTS WITH CAI ON A
TIMELY BASIS AND 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 CONTEMPLATED BY THE COMPANY'S BUSINESS PLAN, 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, THE FINANCING OBTAINED BY THE COMPANY TO DATE WILL NOT ENABLE IT
TO MEET ITS FUTURE CASH NEEDS.
ITEM 1. BUSINESS
OVERVIEW
CAI Wireless Systems, Inc. ("CAI" or the "Company") is a leading
developer, owner and operator of wireless telecommunications transport systems
utilizing Multichannel Multipoint Distribution Services ("MMDS") spectrum, in
terms of number of subscription video subscribers and number of Estimated Total
Service Area households. In CAI's 14 primary markets, there are a total of
16,135,174 Estimated Total Service Area households. Initially, the Company
focused on the development of analog MMDS subscription video systems in major
metropolitan markets, primarily in the northeast and mid-Atlantic regions of
the United States. The Company then focused on developing digital MMDS
television systems under a joint venture arrangement with Bell Atlantic
Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"), regional bell
operating companies with a combined operating territory substantially identical
to the spectrum footprint of CAI. Following the termination of the joint
venture arrangement with Bell Atlantic and NYNEX, the Company has endeavored to
develop alternative uses of its MMDS spectrum and has actively sought one or
more strategic partners interested in pursuing the development of other lines
of business, including high speed data access and fixed wireless telephony
services. CAI had approximately 50,000 analog video subscribers as of May 31,
1998.
CAI's operating strategy, since the potential availability of digital
technology deployment on a commercial basis (approximately late-1994), has been
to execute a business plan with one or more strategic users of its most
valuable asset, a substantial amalgamation of MMDS spectrum concentrated in the
northeastern and mid-Atlantic regions of the United States. Recognizing that
there are significant capital expenditures associated with the construction and
operation of a broad-based MMDS system capable of serving a large segment of
its markets, CAI formulated a business plan that would result in a large
portion of such expenditures being borne by a strategic partner. Under this
business plan, CAI would become a wholesale transport services provider, and,
over time, not engage directly in any retail business.
In March 1995, CAI sought to implement this business plan with Bell
Atlantic and NYNEX. The joint venture, which was memorialized in a Business
Relationship Agreement (the "BR Agreement") between CAI and certain affiliates
of Bell Atlantic and NYNEX (the "BANX Affiliates") and coupled with a $100
million investment by BANX Partnership, a general partnership whose partners
were certain other affiliates of Bell Atlantic and NYNEX (the "BANX
Partnership"), was consummated by September 1995, simultaneously with (i) the
consummation by CAI of five acquisitions, including the purchase of ACS
Enterprises, Inc., a publicly-held MMDS operator based in Philadelphia, PA, and
(ii) the $275 million offering of the Company's 12 1/4 % Senior Notes due 2002
(the "Senior Notes"). (Bell Atlantic, NYNEX, the BANX Affiliates and BANX
Partnership, or combinations thereof (as the context warrants), are sometimes
referred to herein as "BANX".)
The BR Agreement contemplated that the BANX Affiliates, at their option,
could elect to become the provider of subscription video programming in any of
CAI's markets utilizing CAI's MMDS spectrum in such markets. The video
programming, which was to be assembled and packaged by Tele-TV, a joint venture
formed by Bell Atlantic, NYNEX and Pacific Telesis, would be delivered to CAI's
state-of-the-art digital MMDS transmission facilities, and transmitted to Bell
Atlantic/NYNEX customers under the Bell Atlantic/NYNEX name. In fulfillment of
its obligations under the BR Agreement, CAI began the construction of such
digital transmission facilities in Hampton Roads, VA and Boston, MA, the first
two markets identified by the BANX Affiliates as potential markets for this new
digital subscription video product.
Notwithstanding the significant expenditure of resources by all involved,
neither BANX Affiliate ever exercised an election to utilize CAI's digital
transport services in Hampton Roads, Boston or any other market subject to the
BR Agreement. In December 1996, when it became apparent to CAI that the focus
of Bell Atlantic and NYNEX had shifted away from subscription video utilizing
CAI's transport system, CAI and Bell Atlantic/NYNEX entered into a series of
agreements that resulted in a termination of the BR Agreement and the
disposition and eventual cancellation or exchange of all of the CAI securities
originally issued to the BANX Partnership in connection with its $100 million
investment in CAI.
During the period prior to December 1996, by Bell Atlantic/NYNEX, and due
in part to CAI's concerns over such inaction, CAI embarked upon a strategy of
preserving the value of its MMDS spectrum and expanding the authorized uses of
such spectrum to fully realize the spectrum's technical capabilities. Through
a series of demonstrations and trials, CAI has been an industry leader in its
efforts to engineer and obtain regulatory authority for fixed, flexible two-way
use of the MMDS spectrum for services such as data transmission and telephony.
In addition to a series of specific flexible use authorizations received by CAI
during the last two years, CAI has participated with the industry trade group
in seeking to obtain from the Federal Communications Commission ("FCC")
authority for fixed, flexible two-way use of the MMDS spectrum on an industry-
wide basis. CAI expects the FCC to issue such authority during the summer of
1998.
CAI continues to believe that a strategic partner is necessary for the
MMDS industry to fully realize the potential of this spectrum. Believing that
a national-level strategic partner would have the financial resources and
infrastructure to fully utilize the MMDS spectrum for video, voice and data
transmission, CAI has aggressively sought one or more strategic partners since
the departure of Bell Atlantic/NYNEX. The Company has demonstrated, and
continues to demonstrate, its technological capabilities for each of video,
voice and data to several potential strategic partners and potential financial
partners. In addition to a variety of demonstrations, the Company has been
conducting an on-site trial for a telecommunications company providing
transport services for Internet access and such company's corporate intranet,
which services recently have included two-way data transmission at transmission
speeds of up to 7 megabits per second ("Mbps") for downstream transmissions and
600 kilobits per second ("Kbps") return capacity. The two-way transmission
services are provided using first generation transverters designed by a high-
technology equipment manufacturer, in conjunction with Company engineers,
specifically for MMDS spectrum. Business discussions between CAI and these
entities have been wide ranging, and no definitive agreement has been reached
with any entity at this time. CAI also has invested in TelQuest Satellite
Services LLC ("TSS") in order to access pre-digitized video programming and to
provide a vehicle for a complementary Direct-to-Home ("DTH") video service that
could, eventually, free additional MMDS spectrum for these alternative uses.
CAI is a Connecticut corporation. Its principal executive offices are
located at 18 Corporate Woods Boulevard, 3rd floor, Albany, New York 12211.
CAI's telephone number is (518) 462-2632. CAI also maintains offices at 101
Pond's Edge Drive, Suite 300, Chadds Ford, PA 19317, where its operational
headquarters, including the president and chief operating officer and the
Company's accounting and human resources departments are located, and at 2101
Wilson Boulevard, Suite 100, Arlington, VA 22201, where the Company's
engineering and regulatory affairs departments are located. Unless the context
indicates otherwise, all references to the "Company" or "CAI" refer
collectively to CAI Wireless Systems, Inc. and its subsidiaries.
RECENT FINANCIAL DEVELOPMENTS; ANTICIPATED REORGANIZATION
CAI's recurring losses, restrictions on its ability to obtain additional
financing, and substantial commitments, raise substantial doubt about CAI
continuing as a going concern. For the year ending March 31, 1999, the Company
is obligated to pay approximately $9.1 million in minimum license fees and
operating lease payments, approximately $3.5 million in MMDS license
obligations, in addition to funding operating losses. On a short-term basis,
CAI has $45 million of 13% Senior Secured Notes (the "Secured Notes") due on
June 30, 1998. See " - Senior Secured Financing" below. On a long-term basis,
CAI has substantial indebtedness which, beginning in the fiscal year ending
March 31, 1999, will include significant debt service requirements. As of
March 31, 1998, CAI had outstanding consolidated debt of approximately $357.1
million and trade payables of approximately $4.9 million.
On or about the date of the filing of this Annual Report on Form 10-K,
the Company intends to commence a pre-petition solicitation of votes (the
"Solicitation") with respect to a prepackaged reorganization plan (the "Plan")
from the holders of Senior Notes and certain other impaired creditors. CAI has
not yet commenced a reorganization case under Chapter 11 of the U.S. Bankruptcy
Code (11 U.S.C. <section><section> 101-1330)(the "Bankruptcy Code"). If,
however, CAI receives the requisite votes indicating acceptance of the Plan,
CAI intends to file a voluntary petition (the "Petition") under Chapter 11 of
the Bankruptcy Code, and to seek, as promptly thereafter as practicable,
confirmation of the Plan. Accordingly, the Company has provided approximately
$5.1 million of restructuring costs in the Statement of Operations for the
fiscal year ended March 31, 1998. Costs include legal and financial advisory
fees.
CAI Wireless Systems, Inc. and one of its wholly-owned operating
subsidiaries, Philadelphia Choice Television, Inc., a Delaware corporation
("Philadelphia Choice"), are expected to file the Petition following the
Solicitation. None of CAI's other subsidiaries, including any of the
subsidiaries that are holders of MMDS licenses issued by the FCC or are lessees
under MMDS excess capacity leases, will be parties to the Petition. In
addition, the Company intends that only those claims against and interests in
CAI specifically identified in the Plan (I.E., the holders of the Senior Notes,
holders of certain subordinated indebtedness, holders of securities claims and
holders of equity securities claims) will be impaired. The Company intends
that all other holders of claims against CAI, including trade creditors,
licensors and lessors, will be unimpaired claims against CAI.
The Company intends to continue to operate its business in Chapter 11 in
the ordinary course and to seek to obtain the necessary relief from the
Bankruptcy Court to pay its employees, trade and certain other creditors in
full and on time. To fund its operations during the bankruptcy proceeding, the
Company has arranged for Debtor-in-Possession financing (the "DIP Facility") in
the principal amount of $60 million. The DIP Facility is expected to be
provided by Merrill Lynch Global Allocation Fund, Inc. ("MLGAF"), the Company's
current secured lender. See " - Senior Secured Financing" below. A portion of
the proceeds of the DIP Facility will be used to repay all amounts owed under
the Company's current senior secured facility (approximately $47.8 million,
including interest and fees as of May 31, 1998). The balance of the DIP
Facility will be used to fund operations and working capital throughout the
bankruptcy proceeding. The Company intends to repay the DIP Facility out of
the proceeds of a credit facility (the "Exit Facility") currently being sought
by the Company. The Company is seeking an Exit Facility, which is expected to
be a two-year, senior secured facility in the principal amount of approximately
$80 million. A portion of the proceeds of the Exit Facility is expected to be
used to repay the DIP Facility in full, with the balance of the Exit Facility
to be used to fund operations and working capital for approximately 12 months
following the consummation of the Plan. The Company, in consultation with BT
Alex. Brown Incorporated, its financial advisor, is actively seeking lending
sources willing to participate in the Exit Facility. There can be no
assurance, however, that the Company will be able to obtain the Exit Facility,
or if able to obtain the Exit Facility, that the financing will be on terms and
conditions satisfactory to the Company.
The Plan contemplates that the holders of securities claims, debt
securities claims, equity securities claims and equity securities interests,
including the holders of CAI's common stock, without par value (the "CAI Common
Stock"), and any and all options, warrants or other rights to acquire the CAI
Common Stock will not receive or retain any property or interest in property on
account of such claims.
The Company expects that the Solicitation will be completed on or about
July 27, 1998 and that the Company will file its Petition in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") shortly
thereafter, assuming that the Company receives the requisite acceptances from
the Solicitation. There can be no assurance that the Company will receive the
requisite acceptances from the Solicitation, or, if the Company does receive
the requisite acceptances, that the Plan will be confirmed by the Bankruptcy
Court and consummated.
RECENT DEVELOPMENTS
CERTAIN ASSET SALES. On March 18, 1998, the Company and its wholly-owned
subsidiaries, Philadelphia Choice, Washington Choice Television, Inc. and
Washington License, Inc. sold assets relating to Satellite Master Antenna
Television ("SMATV") operations in the Washington-Baltimore metropolitan area
to Mid-Atlantic Telcom Plus, LLC, d/b/a OnePoint Communications ("OnePoint").
The net proceeds to the Company from the sale of these assets were
approximately $1.6 million and were used to help fund working capital.
The Company and Philadelphia Choice have entered into a letter of intent
for the sale of assets relating to 64 SMATV and multi-dwelling unit ("MDU")
operations in the Company's Philadelphia market (the "Philadelphia MDU
Operation") to OnePoint. Under the terms of the letter, OnePoint has agreed to
purchase assets used in connection with the Philadelphia MDU Operation, and to
assume identified agreements for master television service, pursuant to which
the cable operator is granted access to the MDU as the exclusive provider of
subscription television services. The purchase price for the Philadelphia MDU
Operation is $6 million, subject to certain post-closing adjustments. The
parties anticipate consummating the sale and purchase of the Philadelphia MDU
Operation under the auspices of the Bankruptcy Court as part of the Plan or
pursuant to Section 363 of the Bankruptcy Code.
NASDAQ DE-LISTING. On January 8, 1998, trading of the CAI'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, the CAI
Common Stock was de-listed from the Nasdaq SmallCap Market{SM}. The CAI Common
Stock currently trades on the Electronic Bulletin Board system under the CAWS
symbol.
SENIOR SECURED FINANCING
13% SENIOR SECURED NOTES. On November 25, 1997, the Company issued and
sold $25 million of its 13% Senior Secured Notes (the "Secured Notes") to
MLGAF. CAI used approximately $17.3 million of the proceeds to repay all
amounts outstanding under the F/C Credit Facility (defined below), and the
remaining proceeds of approximately $7.3 million, 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 million Secured Note to MLGAF, and on February 17, 1998,
the Company issued and sold an additional $18 million of Secured Notes in
connection with the consummation of a series of transactions by the Company,
MLGAF and BANX. See " -Termination of BANX Rights" below.
The Secured Notes are short-term obligations of CAI, maturing on June 30,
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 MLGAF,
as amended from time to time (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 $730,000 commitment fee to MLGAF, which is also
due at maturity. All outstanding amounts under the Note Purchase Agreement are
expected to be converted into and deemed to be outstanding obligations under
the DIP Facility.
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 60% interest in CS Wireless Systems,
Inc. ("CS Wireless") and its 25% interest in 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 MLGAF.
FOOTHILL CAPITAL CREDIT FACILITY. On November 25, 1997, the Company used
a portion of the proceeds from the issuance of the Secured Notes to repay all
amounts outstanding and owing to Foothill Capital Corporation and affiliates of
Canyon Capital Management, L.P. (the "F/C Lenders") under that certain credit
facility provided by the F/C Lenders (the "F/C Credit Facility") to CAI in June
1997. At the time of repayment, there was approximately $17.3 million
outstanding under the F/C Credit Facility, consisting of approximately $15.3
million representing the principal amount of the loans outstanding under the
F/C Credit Facility; a $1.6 million fee, and $350,000 representing interest on
the outstanding loans and fees.
The repayment of the F/C Credit Facility in November 1997 represented the
early termination of the F/C Credit Facility. Prior to its termination and
repayment in full, 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. All of the waivers executed and
delivered by the Company to the F/C Lenders contained a general release of the
F/C 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 F/C
Lenders in connection with the repayment of all Company obligations under the
F/C Credit Facility. The early termination of the F/C Credit Facility resulted
in the Company recording a third quarter extraordinary charge of approximately
$4.7 million, 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.
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 the BANX
Affiliates under the BR Agreement (See -Background - BANX TRANSACTIONS below)
and the acquisition of BANX's approximately 9.9% equity interest in CS
Wireless. Under the terms of the Termination and Purchase Agreement (the
"Termination Agreement"), the Company issued $7 million aggregate principal
amount of its Secured Notes to BANX in consideration of the termination of the
BR Agreement, Modification Agreement (defined below) and Modification Agreement
Amendment (defined below), and the transfer of 1,000,000 shares of CS Wireless
common stock held by BANX to CAI. The parties exchanged general releases in
connection with the transaction. Prior to its termination, none of the markets
contemplated by the BR Agreement had been optioned by Bell Atlantic or NYNEX.
As part of these transactions, MLGAF 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 million investment in CAI in September
1995, including $30 million of term notes, $70 million of senior preferred
stock and warrants to purchase voting preferred stock of CAI (collectively, the
"BANX Securities"), as well as the Secured Notes issued by CAI to BANX in
connection with the Termination Agreement. On March 3, 1998, CAI exchanged the
BANX Securities then held by MLGAF for a new $30 million 12% subordinated note
due October 1, 2005 (the "Subordinated Note"). As a result of the exchange
transactions, the Company eliminated approximately $117 million of Senior
Preferred Stock, accumulated preferred stock dividends, and accrued interest on
the Term Notes, of which approximately $102 million was reclassed to paid-in
capital, and recorded an approximately $10 million extraordinary gain from the
early extinguishment of debt.
The Subordinated Note issued to MLGAF accrues interest at the rate of 12%
per annum, compounded semi-annually, and is payable at maturity on October 1,
2005. The Subordinated Note is expressly subordinate to the Senior Notes and
to the $45 million aggregate principal amount of Secured Notes. The
Subordinated Note is a joint and several obligation of CAI and certain of its
wholly-owned subsidiaries. The obligation of the subsidiaries to repay the
Subordinated Note, however, is limited by the terms of the Indenture dated as
of September 15, 1995 (the "Indenture") governing the Senior Notes.
In conjunction with the transaction, the Company also exchanged 2,500
shares of CAI Common Stock for all warrants to purchase CAI equity that were
held by BANX and acquired by MLGAF on March 3, 1998. The Common Stock was
issued in reliance upon an exemption from the registration requirements of the
Securities Act of 1933, as amended, and contains a legend restricting its
transfer without such registration or an exemption therefrom. The issuance of
the CAI Common Stock to MLGAF increased the number of issued and outstanding
shares of CAI Common Stock to 40,543,039 at March 31, 1998.
BUSINESS AND OPERATING STRATEGIES
GENERAL. The Company, since its formation, has focused on the
development and operation of MMDS subscription video systems concentrated in
major metropolitan areas located in the northeast and mid-Atlantic regions of
the United States. With the suspension of the BR Agreement and the receipt of
regulatory approvals not previously sought by MMDS operators or granted by the
FCC, the Company has endeavored to develop the full capabilities of its MMDS
spectrum in addition to subscription video. The Company believes that its MMDS
spectrum can be utilized as the transport system for fixed, flexible two-way
uses that eventually could be combined into a wireless broadband network.
Although the Company recognizes that there are significant regulatory,
technological and financial issues surrounding the development of such a system
in any of CAI's markets, the Company believes that such systems can be deployed
in a reasonable manner to develop a commercially-viable means of delivering
video, voice and data transmission services.
MMDS subscription video programming and other MMDS-based
telecommunications transport services are transmitted through the air via
microwave frequencies from a central transmission facility to a small receiving
antenna at each subscriber's location, and require a line-of-sight ("LOS") path
between the transmit point to the receive antenna. Therefore, in communities
with tall trees, hilly terrain, tall buildings or other obstructions in the
transmission path, MMDS transmission can be difficult or impossible to receive
at certain locations without the use of low power signal repeaters (known as
"beambenders") or signal boosters, which retransmit an otherwise blocked signal
over a limited area. Certain of these LOS constraints may be overcome by the
placement of beambenders and/or signal boosters, or by properly designing a
cellular network within a service area. The use of beambenders and/or signal
boosters increases the cost per subscriber.
MMDS spectrum is regulated by the FCC, which governs, among other things,
the issuance, renewal, assignment, transfer and modification of licenses
necessary for MMDS systems to operate. "MMDS" is the vernacular term used to
describe CAI's business and includes both MMDS and Multichannel Distribution
Service ("MDS") channels, as well as Instructional Television Fixed Service
("ITFS") channels. To date, the MMDS spectrum has been licensed by the FCC
for one-way video and data transmission on an industry-wide basis. In
addition, CAI has applied for and received a variety of authorizations from the
FCC for fixed, flexible use of its MMDS spectrum in certain of CAI's markets.
The Company has received from the FCC (i) authorization for a market trial of
up to 500 customers for CAI's high speed one-way Internet access product (which
uses a telephone line for the return path) in Rochester, New York, (ii)
authorization for a market trial of up to 1,000 customers for CAI's high speed
one-way Internet access product in New York City, (iii) permanent authorization
for fixed, two-way flexible use of five channels for 16 customer sites located
in and around the Boston market, (iv) permanent authorization for fixed two-way
flexible use of two channels for unlimited customer sites within ten miles of
seven hub sites (four of which require further FCC authorization) located in
and around Boston, MA, and (v) authorization from the FCC to utilize its MMDS
spectrum in Pittsburgh, PA for a variety of tests, including the simulation of
a commercial roll-out of fixed, two-way services to customers located within a
20-mile radius of CAI's main transmission facility in Pittsburgh. The Company
has also received developmental authorization to test fixed, flexible two-way
uses on two channels located in its Hartford, CT market; however, the Company
does not have any plans to conduct any testing in this market at this time.
The Company has assembled significant spectrum rights in the northeast
and mid-Atlantic regions of the United States. The Company is focused on
preserving these substantial channel rights in anticipation of developing
digital systems that will allow CAI to utilize higher output power and
compression technologies to increase channel capacity. CAI began to acquire
its spectrum capacity in preparation for its obligations under the BR
Agreement, which required CAI to deliver a minimum number of channels in each
of the markets subject to the BR Agreement. With the termination of the BANX
rights, the Company has continued to implement a preservation strategy that
will allow CAI to utilize its significant spectrum capacity for the delivery of
video, voice and data services, or various combinations thereof, subject to
regulatory approval, as necessary for one or more strategic partners. This
preservation strategy includes the continued build-out of the transmission
facilities in conformity with the FCC license perfection regulations, as well
as the re-negotiation of spectrum leases when and as such leases mature.
Although the Company believes that it will be possible to offer all three
services in any given market once regulatory approval for fixed, flexible two-
way use of the MMDS spectrum is obtained for such market, the allocation of
channels among the various services is expected to be driven by the needs of a
strategic partner, whose needs, presumably, will be driven by consumer demand
for such services in the Company's markets. Not all services may be offered in
all markets, and there can be no assurance that the Company will be able to
locate one or more strategic partners interested in utilizing the Company's
spectrum for such services. The Company's initial efforts with respect to the
development of fixed, flexible two-way use of the MMDS spectrum have been
limited primarily to its Boston and greater New York City markets and have been
limited to the conduct of tests.
For most of its channel rights, CAI is dependent upon leases of
transmission capacity with various third-party license holders. ITFS licenses
generally are granted for a term of ten years and are subject to renewal by the
FCC. MDS licenses generally will expire on May 1, 2001 unless renewed. FCC
licenses also specify construction deadlines which, if not met, could result in
the loss of the license. Requests for additional time to construct a channel
may be filed and are subject to review pursuant to FCC rules. Certain of CAI's
ITFS and MMDS/MDS channel rights are subject to pending extension requests and
it is anticipated that additional extensions will be required. There can be no
assurance that the FCC will grant any particular extension request or license
renewal request. CAI's channel leases typically cover four ITFS channels
and/or one to four MMDS/MDS channels each. Under the rules of the FCC, the
term of leases for ITFS channels, which generally constitute up to 20 of the 33
available wireless channels within any major MMDS market, may not exceed ten
years. There is no such restriction on MMDS leases. Following the expiration
of the initial term of a lease for ITFS channels, the leases under which CAI
operates generally provide that the ITFS license holders may negotiate for the
lease of channel capacity for one or more additional renewal terms with only
CAI or its sublessor. In addition, if a renewal agreement is not reached
within a specified time frame during which only CAI or its sublessor has the
use of the channel capacity, CAI will thereafter typically have a right of
first refusal to match any competing offers from one or more third parties.
Because the ITFS license holders have generally received their FCC licenses
within the last ten years, CAI and other similarly situated entities in the
industry have had little or no experience negotiating renewals of ITFS channel
lease agreements. CAI anticipates, however, that it will be able to negotiate
additional renewals with either the incumbent license holder, or with successor
license holders, although there is no assurance that it will be successful in
doing so. The MMDS channel leases held by CAI generally grant CAI the right to
renew the channel lease. All ITFS and MMDS channel leases are dependent upon
the continued validity of the corresponding FCC license. CAI anticipates that
upon the expiration of the current license terms, all such FCC licenses will be
renewed following completion of the FCC review process, although there is no
assurance that such renewal applications will be granted. The non-renewal or
termination of a channel lease (due to a breach by CAI, or its lessor,
cancellation of the license held by a third party lessor for failure to comply
with the FCC's rules, including construction deadlines, or otherwise) or the
failure to obtain an extension of time to construct an authorized station or
renewal of the licenses for an authorized station, would result in CAI being
unable to deliver programming on such channel(s), unless, in the latter
instances, CAI were able to lease capacity from a third party successor license
holder, if any. Such a termination or failure in a market that CAI actively
serves could have a material adverse effect on CAI's operations.
ANALOG-BASED SUBSCRIPTION VIDEO. CAI currently operates six analog-based
subscription video systems in New York City, Rochester and Albany, NY;
Philadelphia, PA; Washington, DC, and Norfolk/Virginia Beach, VA. In addition,
CAI has a portfolio of wireless cable channel rights in eight additional
markets, including Long Island, Buffalo and Syracuse, NY; Providence, RI;
Hartford, CT; Boston, MA; Baltimore, MD, and Pittsburgh, PA. As of May 31,
1998, CAI provided analog subscription video services to approximately 50,000
subscribers. The Company's principal subscription video competitors in each of
its markets are the hard-wire cable companies, and include Comcast Corp., Tele-
Communications, Inc., Cox Cable Communications, Time Warner Cable and
Cablevision Systems Corp.
The table below outlines as of March 31, 1998 (except as indicated in the
footnotes) the characteristics of the markets in which the Company has an
operational subscription video system or in which the Company holds significant
spectrum rights:
TABLE I
Estimated Number of New
Total Service Analog/Digital Analog/Digital
DMA Area Channels Channels Number of
MARKET RANK(1) HOUSEHOLDS(2) AVAILABLE(3) APPLIED FOR SUBSCRIBERS(4)
------ ---- ---------- --------- ----------- -----------
New York City 1 4,996,976 40 0 6,100
Long Island(5) N/A 1,083,780 20 8 0
Philadelphia 4 2,154,389 41 2 30,900
Boston 6 1,007,198 31 2 0
Washington, DC 7 1,479,278 28 0 700
Pittsburgh 19 1,011,310 32 1 0
Baltimore 23 1,053,959 32 1 0
Hartford 26 471,532 22 0 0
Buffalo 39 501,314 33 0 0
Norfolk 40 531,833 32 1 1,900
Providence 46 842,658 24 9 500
Albany 52 320,742 32 0 7,700
Syracuse 69 278,630 22 3 0
Rochester 73 401,575 27 6 1,800
---------- ------
SUB TOTAL 16,135,174 49,600
======
BTA MARKETS (SEE TABLE II BELOW) 3,022,138
----------
GRAND TOTAL 19,157,312
==========
(1) DMA is the Designated Market Area as determined by A.C. Nielsen Company
as of December 1995.
(2) The Estimated Total Service Area Households in the service area
represents the approximate number of households within a 35 mile radius of
the Company's Tower sites. These households may have been adjusted downward
if any of the Company's markets overlapped with a newly acquired market (see
Table II). This information is based on estimates of the Company obtained
using two EDX Engineering software programs, MSITE{TM} and POP90{TM}. Both
of these programs use 1990 Census data to compile their information. Some
of these households will be "shadowed" and therefore unable to receive the
Company's service due to LOS constraints. The percentage of Estimated
Households in the Service Area that the Company estimates may be shadowed
due to LOS constraints generally ranges from 10% to 60% depending upon the
market. Certain of these LOS constraints may be overcome by the placement
of beambenders and/or signal boosters or by properly designing a cellular
network within a service area.
(3) The Number of Channels Available comprises wireless cable channels and
local broadcast channels that can be received by subscribers. Wireless
cable channels are either licensed to CAI or leased to CAI from other
license holders. The Number of Channels Available includes 10 off-air
channels in Philadelphia and 11 in New York City. The Number of Channels
Available includes certain channels that are subject to FCC approvals or
third party interference agreements. CAI has pending FCC applications
concerning co-location of transmission sites and/or an increase in broadcast
power with respect to 5 channels in Hartford, 8 channels in New York City,
17 channels in Providence, 3 channels in Buffalo, 15 channels in Norfolk, 5
channels in Boston and 6 channels in Long Island. The Number of Channels
Available includes ITFS channels that may not be available for commercial
programming by CAI. CAI also has rights, either through licenses or leases,
to the following channels: (1) in Greensboro, NC, 1 available channel, 4
channels applied for; (2) in Memphis, TN, 8 available channels; and (3) in
Winston-Salem, NC, 2 available channels.
(4) The Number of Subscribers represents the number of analog subscription
video subscribers as of May 31, 1998.
(5) The Long Island market includes Nassau and Suffolk counties in New York
State.
The table below outlines as of March 31, 1998 the characteristics of the
potential markets for which CAI was the successful bidder at the completion of
the FCC Auction (defined below). See "-Regulation-Licensing Procedures below.
The Estimated Service Area households in Table I above may have been adjusted
if the 35-mile Protected Service Area ("PSA") overlapped with any of the
markets identified below. To the extent there was overlap between two PSAs,
the number of Estimated Total Service Area households in such overlapping area
was divided equally between the two affected markets.
TABLE II
Estimated Number of New
Total Service Analog/Digital Analog/Digital
DMA Area Channels Channels
MARKET RANK HOUSEHOLDS AVAILABLE(1) APPLIED FOR
------ ---- ---------- --------- -----------
Dover, DE N/A 155,360 3 12
Hyannis, MA N/A 213,629 1 0
Manchester, NH N/A 316,004 1 0
Worcester, MA N/A 352,646 9 0
New Haven, CT N/A 541,263 3 6
New London, CT N/A 96,380 1 0
Springfield, MA 102 366,198 9 20
Poughkeepsie, NY N/A 258,221 2 4
Pittsfield, MA N/A 116,365 1 0
Glens Falls, NY N/A 141,702 4 9
Ithaca, NY N/A 183,496 1 8
Utica, NY 166 153,219 2 4
Summit, NJ N/A 127,655 8 0
---------
TOTAL 3,022,138
=========
{(1)} The number of channels currently owned or leased by CAI.
The Company has not actively sought to increase its video subscriber base
in its existing analog operating systems. Originally, this decision was made
in connection with the BR Agreement, which contemplated that CAI would be
required to transfer all of its analog video subscribers to the appropriate
BANX Affiliate at the time such BANX Affiliate became the provider of video
programming in a particular market. CAI was not entitled to any compensation
for subscribers so transferred, and there was no incentive for CAI to increase
its subscriber base. With the suspension of the BR Agreement, the Company
continues to explore the full capabilities of its MMDS spectrum, including uses
for such spectrum other than subscription video delivery. Consequently, the
Company has maintained its strategy of not pursuing television subscriber
growth while it evaluates its business opportunities other than subscription
video services. The policy of not pursuing subscriber growth has had a
negative impact on the Company's revenues, which is only partially mitigated by
the cost-savings associated with reduced marketing and other efforts ordinarily
pursued in connection with increasing a subscriber base.
In each of the principal analog-based subscription video markets served
by CAI there is, and the Company believes there will continue to be,
significant competition for households that are presently subscribers of a
hard-wire cable service. Additionally, the Company has experienced loss of
subscribers to hard-wire cable providers in markets where the Company's channel
offering is significantly less, as a result of channel capacity limitations
inherent in an analog-based MMDS operation, than the hard-wire cable providers,
such as in the Company's New York City market.
In addition to the markets set forth above, CAI owns 60% of CS Wireless,
a joint venture formed on February 23, 1996 by the Company and Heartland
Wireless Communications, Inc., an MMDS subscription video operator of small-
and medium-sized markets ("Heartland"). Pursuant to the terms of a
Participation Agreement dated December 12, 1995 (as amended, the "Participation
Agreement") among the Company, Heartland and CS Wireless, each of CAI and
Heartland contributed MMDS assets and channel rights or the stock of
subsidiaries owning such assets and channel rights to CS Wireless. As a result
of the contributions and transactions effected by CS Wireless following its
formation, CS Wireless currently has 21 markets, encompassing approximately 7.7
million television households, approximately 6.4 million of which are LOS
households. As of December 31, 1997, CS Wireless provided service to
approximately 67,125 subscribers.
DIGITAL SUBSCRIPTION VIDEO. 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 BR Agreement with the BANX Affiliates for the provision of subscription
video services by BANX using CAI's 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 has sought to build into
the system the flexibility it believes 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 an interest in the Company's
technical capabilities.
In connection with the build-out of the digital system in Boston, the
Company has converted nearly 100% of the 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 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 partner, but also was required to meet certain covenants imposed by
the F/C Credit Facility prior to its early termination in November 1997. The
covenants imposed upon the Company in connection with the issuance of the
Secured Notes 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: 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, in conjunction with its primary vendors, has made
significant progress 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. CAI
has substantially completed construction of a second digital system in Hampton
Roads, VA. The Company does not yet have a definitive timetable for the
commercial deployment of digital subscription video service in this market;
however, if and when CAI decides to launch a digital subscription television
service in Hampton Roads or any other of CAI's markets, availability of
necessary subscriber equipment must be secured in connection with any such
service launch.
ONE-WAY, HIGH-SPEED INTERNET ACCESS. The Company believes that MMDS
technology presents a viable option to traditional telephony providers as a
"pipeline" through which Internet and commercial on-line services can be
carried, especially for small- to medium -sized businesses seeking a cost-
effective means of accessing such on-line services. To date, except for
limited circumstances in which two-way use is authorized, the FCC has licensed
the MMDS spectrum for one-way video and data transmission. CAI further
believes that the MMDS industry's systems, which can currently reach more than
50% of the nation's households, are superior to traditional telephone lines in
terms of speed. An MMDS system can transmit data at speeds of up to 27 Mbps.
Several MMDS operators, including CAI, have successfully tested one-way
Internet access capabilities over their existing systems, using a traditional
telephone line for the typically less data-intensive return path. During the
Fall of 1997, CAI conducted commercial trials of its one-way Internet access
service in its New York, Rochester, NY and Boston markets. This service
transmitted data at speeds of up to 27 Mbps downstream and utilized a telephony
return path. Approximately 200 recipients participated in the trials.
In connection with the development of CAI's Internet strategy, the
Company engaged a national Internet consulting firm, Maloff Group International
("MGI"), and appointed MGI's principal, Joel Maloff, as CAI's acting Senior
Vice President and General Manager of Internet Services. In consultation with
MGI, CAI developed a wholesale Internet access strategy. This strategy
includes the Company providing retransmission services to Internet Service
Providers ("ISPs") on a market-by-market basis. Pursuant to CAI's standard
form of retransmission agreement, an ISP can purchase MMDS spectrum capacity
from CAI in 1.544 Mbps bandwidth segments (each a "T1 Equivalent") for a fixed
monthly rate. The ISP can serve as many subscribers from the T1 Equivalent as
it chooses, however, CAI recommends serving not more than 300 subscribers per
T1 Equivalent to fully maximize download transmission speeds. The ISP
maintains the subscriber relationship, although in most instances, CAI provides
the installation services to the ISP for a fee. CAI has currently contracted
with four ISPs, which provide Internet access services in Rochester, New York
City and Boston.
Internet access service is a new application for the MMDS platform.
Although the Company has previously demonstrated the technology and equipment
necessary to transmit data over its MMDS spectrum on several occasions and in
various markets, there can be no assurance that the Company will be able to
successfully deploy, in a commercial manner, an Internet access service over
its MMDS spectrum in Rochester, New York City, Boston or any other market in
which it may seek to initiate such a service.
TWO-WAY, FIXED FLEXIBLE USE OF MMDS SPECTRUM. The Company believes that
two-way, fixed flexible use of the MMDS spectrum offers a significantly
enhanced service capability and would present new opportunities for CAI and
other MMDS operators. On October 10, 1997, the FCC issued a Notice of Proposed
Rulemaking ("NPRM") with respect to two-way, fixed wireless transmissions for
MMDS/MDS and ITFS licensees. The Company believes that the FCC has
acknowledged that two-way use of MMDS spectrum is permitted, and that the focus
of the NPRM is on the technical and engineering parameters that must be met in
order for MMDS operators to use their spectrum in a coordinated two-way
environment. Comments on the NPRM were due at the FCC by January 8, 1998 and
reply comments were submitted by February 9, 1998.
The NPRM is consistent with CAI's strategy of expanding the use of MMDS
spectrum beyond analog video services to a full complement of
telecommunications services including two-way data transmission and telephony
services. CAI believes that the proposed rules, if adopted, would streamline
the process by which CAI could apply for two-way authority for its MMDS
spectrum and increase its opportunities to implement this strategy, and in turn
help CAI to 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.
Prior to and during the pendency of the NPRM process, CAI has received
from the FCC authorizations permitting it to develop two-way, fixed flexible
uses of its MMDS spectrum in specified CAI markets for specific customer
locations. The Company has applied for, and received from the FCC, a permanent
authorization for fixed, flexible two-way use of five of its MMDS/MDS channels
for 16 customer sites located in and around CAI's Boston market. This
authority represented the first of its kind awarded to an MMDS operator. In
response to another application, CAI received FCC authorization to use 10 MHz
of MMDS spectrum for two-way transmissions to and from customer locations
located throughout the greater Boston metropolitan area. The applications
contemplated that the customer locations would be served by seven strategically
located hub sites, three of which were previously authorized, and four of which
need further FCC authorization, that would transmit and collect information to
and from the customer locations. CAI is actively seeking strategic partners
interested in developing two-way, fixed flexible uses for its MMDS spectrum in
Boston, and potentially, other CAI markets.
There can be no assurance that the authorized customer locations
permitted under the above-described authorizations will enable CAI to
successfully develop fixed, flexible uses of its MMDS spectrum in Boston in a
commercial manner and, therefore, CAI will need to apply for authorization in
Boston for additional channels and/or additional customer locations. Such
applications have not been made as of the date hereof. If the proposed rules
contemplated by the NPRM are adopted by the FCC, the Company will not have to
file such applications for specific customer locations. There can be no
assurance, however, if such applications are made, that CAI would receive
authorization from the FCC for additional channels and/or additional customer
locations in the Boston market.
The Company also believes that two-way, fixed flexible use of its MMDS
spectrum should include telephony delivery services. The Company believes that
the combination of digital compression, fiber loop and cellular technologies
can be integrated into the MMDS network architecture, resulting in a single
wireless platform capable of delivering a wide range of services, including
telephony delivery services. Adaptation of newly available, but as of yet
commercially untested, technologies has been explored by the Company, with the
intention of assessing Broadband MMDS spectrum's ability to simultaneously
provide a combination of video, voice and data delivery services. See
"-Wireless Broadband Network" below. CAI believes that an MMDS system having
one main transmitter and multiple booster sites can be designed using standard
cellular network design principles to produce a relatively low-cost telephony
delivery platform. The Company has commenced preliminary testing and has taken
initial steps in furtherance of developing a telephony application for its MMDS
spectrum. Although the Company believes that an MMDS system can be designed to
provide telephony delivery services, there can be no assurance that such a
system could be designed, or that the Company would be capable of designing and
constructing such a system. Furthermore, in the event that such a system could
be designed, there can be no assurance that the Company would receive the
requisite regulatory approvals to offer a telephony delivery service, that the
Company would have the financial resources, alone or in conjunction with a
strategic partner, necessary to design and construct a telephony delivery
service in one or more of its markets, or that such service, if it was designed
and constructed by the Company in one or more markets, could be successfully
deployed in a commercially successful manner.
WIRELESS BROADBAND NETWORK. Subject to receipt of regulatory approval
for fixed, flexible use of its MMDS spectrum and successful testing, the
successful deployment of digital video, one- and two-way data transmission and
telephony delivery services utilizing the MMDS platform and sufficient capital
resources, the Company intends to launch a wireless broadband network (the
"WBN"). The Company believes that this network would be able to provide quick
and relatively inexpensive household coverage on a broad scale. CAI believes
that the concept of a WBN will enhance the Company's ability to attract one or
more strategic partners by giving such partners the ability to provide
competitive access products over CAI's MMDS spectrum. The Company also
believes that its network design will be capable of providing a combination of
analog and/or digital video services for residential, as well as for corporate
and institutional/instructional subscribers, bundled with high speed Internet
and intranet access services, and ultimately, telephony delivery services. The
Company expects to be able to alter the channel allocation among the various
services depending on the needs of a strategic partner and consumer demand,
thereby increasing the potential to derive multiple revenue streams from each
system.
The Company has not yet implemented a WBN system in any of its markets.
CAI believes that the various regulatory approvals it has received and the
joint development projects with which it is involved will enable CAI to assess
the viability of the broadband, large-scale system in any of its markets. The
Company has not, however, tested a broadband system in any of its markets.
There are a number of risk factors, including, without limitation, receipt of
all requisite regulatory approvals, technology development and the availability
of additional financing, that will affect the implementation of a broadband
system in any of the Company's markets, some of which are outside the control
of the Company. There can be no assurance that the Company will be able to
develop a broadband system in any of its markets, or that if a WBN system is
developed, that the Company will be able to deploy a variety of services in a
commercially reasonable manner, if at all.
MMDS subscription video is not a new technology; however, it is a new
industry with a relatively short operating history. Fixed, flexible two-way
uses of the MMDS spectrum have relatively no operating history. There are
difficulties and uncertainties normally associated with new industries, such as
lack of consumer acceptance, difficulty in obtaining financing, increasing
competition, advances in technology and changes in laws and regulations. There
can be no assurance that the MMDS industry will develop or continue as a viable
or profitable industry.
REGULATION
GENERAL. The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment and/or transfer of control of such licenses;
to approve the location of wireless cable system headends; to regulate the
kind, configuration and operation of equipment used by wireless cable systems;
and to impose certain equal employment opportunity and other obligations and
reporting requirements on wireless cable channel license holders and operators.
The FCC has determined that wireless cable systems are not "cable
systems" for purposes of the Communications Act. Accordingly, a wireless cable
system does not require a local franchise and is subject to fewer local
regulations than a hard-wire cable system. Moreover, all transmission and
reception equipment for a wireless cable system can be located on private
property; hence, there is no need to make use of utility poles or dedicated
easements or other public rights of way. Although wireless cable operators
typically have to lease from third parties the right to use a certain portion
of the channels utilized in any given system, unlike hard-wire cable operators
they do not have to apply for and be awarded a local franchise, or pay local
franchise fees. Recently, legislation has been introduced in some states,
including Illinois, Maryland, Pennsylvania and Virginia, to authorize state and
local authorities to impose on all video program distributors (including
wireless cable operators) a tax on the distributors' gross receipts comparable
to the franchise fees cable operators pay. Similar legislation might be
introduced in several other states. While the proposals vary among states, the
bills all would require, if passed, as much as 5.0% of gross receipts to be
paid by wireless distributors to local authorities. Efforts are underway by the
industry trade association to pre-empt such state taxes through federal
legislation. In addition, the industry is opposing the state bills as they are
introduced, and, in Virginia and Maryland, it has succeeded in either blocking
the legislation or being exempted from the video tax that was eventually
enacted into law. However, it is not possible to predict whether new state laws
will be enacted which impose new taxes on wireless cable operators.
The FCC licenses and regulates the use of channels by license holders and
system operators. In the 50 largest markets, 33 6-MHz channels are available
for wireless cable delivery services (in addition to any local broadcast
television channels that can be offered to subscribers via an off-air antenna).
In each geographic service area of all other markets, 32 6-MHz channels are
available for wireless cable (in addition to any local broadcast television
channels that can be offered to subscribers via an off-air antenna). Except in
limited circumstances, 20 wireless cable channels in each of these geographic
service areas are generally licensed only to qualified non-profit educational
organizations (commonly referred to as ITFS channels). In general, each of
these channels must be used a minimum of 20 hours per week per channel for
instructional programming. The remaining "excess air time" on an ITFS channel
may be leased to wireless cable operators for commercial use, without further
restrictions (other than the right of the ITFS license holder, at its option,
to recapture up to an additional 20 hours of air time per week for educational
programming). Lessees of ITFS "excess air time," including the Company,
generally have the right to transmit to their customers the educational
programming provided by the lessor at no incremental cost. The FCC's rules
permit ITFS license holders to consolidate their educational programming on one
or more of their ITFS channels, thereby providing wireless cable operators
leasing such channels, including the Company, greater flexibility in their use
of ITFS channels. The remaining 13 analog channels available in most of the
Company's operating and targeted markets are made available by the FCC for
full-time usage without programming restrictions.
LICENSING PROCEDURES. The actual number of wireless cable channels
available for licensing in any market is determined by the FCC's interference
protection and channel allocation rules. The FCC awards ITFS and MMDS licenses
based upon applications demonstrating that the applicant is legally,
financially and technically qualified to hold the license and that the
operation of the proposed station will not cause harmful interference to other
stations or proposed stations entitled to interference protection.
During the year ended March 31, 1996, CAI participated in the FCC's MMDS
Spectrum auction (the "FCC Auction") for awarding available commercial wireless
spectrum in 493 markets (the "Auction Markets") throughout the United States,
identified as Basic Trading Areas( in accordance with material copyrighted by
Rand McNally & Company. The winner of an Auction Market has the right to apply
for the available MDS frequencies throughout the Auction Market, consistent
with certain specified interference criteria that protect existing ITFS and
MMDS channels. Existing ITFS and MMDS channel right holders also must protect
the Auction Market winner's spectrum from power increases, tower relocations
and other changes to their stations. CAI was the successful bidder for 32
Auction Markets costing CAI a total of $48.8 million. Pursuant to an agreement
with CS Wireless, CAI has transferred five Auction Markets located in CS
Wireless' operating regions and for which CAI was the successful bidder,
costing an aggregate of $12.6 million, to CS Wireless at cost, and will
transfer two additional Auction Markets located in CS Wireless' operating
regions and for which CAI was the successful bidder upon the granting of such
Auction Market awards by the FCC. For each of the Auction Markets in which CAI
was the successful bidder, CAI was required to submit the requisite FCC
applications and make a down-payment (20% of such successful bid offset by
amounts previously paid) within five business days of the announcement by
public notice of the successful bid. When the authorization for an Auction
Market is ready to be issued by the FCC, the FCC will release a public notice
to that effect. Within 5 business days of such public notice, the successful
bidder is required to remit the balance of its bid to the FCC, whereupon the
Auction Market authorization will be issued by the FCC. As of March 31, 1998,
authorizations for all but two Auction Markets for which CAI was the successful
bidder (excluding those markets that are required to be conveyed at cost to CS
Wireless) have been issued by the FCC and paid for by CAI. Authorizations for
the remaining two Auction Markets are expected to be issued during the fiscal
year ending March 31, 1999, and payment, in the aggregate amount of $1.1
million for such remaining Auction Markets, will be due upon such issuance.
In February 1995, the FCC amended its rules and established "windows" for
the filing of new ITFS applications or major modifications to authorized ITFS
facilities. The first filing "window" was October 16-20, 1995. The Company
supported a number of new ITFS and major modification applications. Where two
or more ITFS applicants file applications for the same channels and the
proposed facilities could not be operated without impermissible interference,
the FCC employs a set of comparative criteria to select from among the
competing applicants. More recently, the FCC commenced a rule-making
proceeding that contemplates conducting auctions where two or more ITFS
applicants file competing applications. That rulemaking proceeding remains
pending, and it is uncertain whether the FCC will adopt a series of auctions,
or continue the existing comparative selection process. If the FCC adopts the
auctions, there can be no assurance that the Company and/or its ITFS lessors
will be the successful bidders for new ITFS facilities, or for major
modifications of facilities. Construction of ITFS stations generally must be
completed within 18 months of the date of grant of the authorization.
If construction of MDS or ITFS stations is not completed within the
authorized construction period, the licensee must file an application with the
FCC seeking additional time to construct the station and demonstrate therein
compliance with certain FCC standards. If the extension application is not
filed or is not granted, the license will be deemed forfeited. ITFS and MDS
licenses generally have terms of 10 years. Licenses must be renewed thereafter,
and may be revoked for cause in a manner similar to other FCC licenses. FCC
rules prohibit the sale for profit of a conditional MDS license or a
controlling interest in the conditional licensee prior to construction of the
station or, in certain circumstances, prior to the completion of one year of
operation. However, the FCC does permit the leasing of 100% of an MDS
licensee's spectrum to a wireless cable operator and the granting of options to
purchase a controlling interest in a license even before such holding period
has lapsed.
Wireless cable transmissions are subject to FCC regulations governing
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). Until recently, FCC regulations required wireless cable systems to
transmit only analog signals and those regulations needed to be modified,
either by rulemaking or by individual application, to permit the use of digital
transmissions. CAI was a party to a petition for declaratory ruling filed in
July 1995 seeking adoption of interim regulations authorizing digital
transmission. This petition was granted on July 9, 1996, and allows wireless
licenseholders to operate digitally under current FCC interference rules. The
license holder is, however, required to file for digital authorization. It is
likely that, in the longer term, the FCC will consider adopting both new
technical and service rules tailored to digital operations. The service rules
could modify the respective rights and obligations of the ITFS lessors and
their commercial lessees of "excess air time" in light of the increased
capacity that would result from digital compression. Even if the FCC does
adopt new service rules governing the allocation of "excess air time" in a
digital environment, it is anticipated that there would be a dramatic increase
in the number of channels that will be available to the Company following the
conversion to digital transmission. The Company demonstrated transmission of
digital satellite television programming and digital local broadcast television
signals in its Rochester, NY market in June 1996. The Company believes that
the necessary FCC approvals will be obtained to permit use of digital
compression by the time it becomes commercially available on a wide-spread
basis; however, there can be no assurance that these approvals will be
forthcoming or timely. In addition, such modifications filed with the FCC after
the FCC Auction will be subject to the interference protection rights of
adjacent FCC Auction winners.
The FCC also regulates transmitter locations and signal strength. The
operation of a wireless cable television system requires the co-location of a
commercially viable number of MMDS channels and operations with transmission
characteristics (such as power and polarity). In order to commence the
operations of certain of the Company's markets, applications have been or will
be filed with the FCC to relocate and modify existing transmission facilities.
Under current FCC regulations, a wireless cable operator generally may
serve subscribers anywhere within the LOS of its transmission facility,
provided that the signal complies with FCC interference standards. Under rules
adopted by the FCC on June 15, 1995, an MMDS channel license holder generally
has a protected service area of 35 miles around its transmitter site. The
current rules became effective on September 15, 1995. An ITFS channel license
holder has protection as to all of its receive sites, but the same protected
service area during excess capacity use by a wireless cable operator as an MMDS
license holder. In launching or upgrading a system, the Company may wish to
relocate its transmission facility or increase its height or power. If such
changes cause the Company's signal to violate interference standards with
respect to the protected service area of other wireless license holders, the
Company would be required to obtain the consent of such other license holders;
however, there can be no assurance that such consents would be received.
INTERFERENCE ISSUES. Interference from other wireless cable systems can
limit the ability of a wireless cable system to serve any particular point. In
licensing ITFS and MDS systems, a primary concern of the FCC is avoiding
situations where proposed stations are predicted to cause interference with the
reception of previously proposed stations. Pursuant to FCC rules, a wireless
cable system is generally protected from interference within a radius of 35
miles of the transmission site. In addition, modification applications
submitted after the FCC Auction will be required to protect FCC Auction winners
from interference. The FCC's interference protection standards may make one
or more of these proposed modifications or new grants unavailable. In such
event, it may be necessary to negotiate interference agreements with the
licensees of the systems which would otherwise block such modifications or
grants. There can be no assurance that the Company will be able to negotiate
all necessary interference agreements that are on terms acceptable to the
Company. In the event the Company cannot obtain interference agreements
required to implement the Company's plans for a market, the Company may have to
curtail or modify operations in that market, including reducing available
capacity, utilize a less optimal tower location, or reduce the height or power
of the transmission facility, any of which could have a material adverse effect
on the growth of the Company in that market. In addition, while the Company's
leases with ITFS and MDS licensees require their cooperation, it is possible
that one or more of the Company's channel lessors may hinder or delay the
Company's efforts to use the channels in accordance with the Company's plans
for the particular market.
THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable
Act, which compels the FCC to, among other things, (i) adopt comprehensive
federal standards for the local regulation of certain rates charged by hard-
wire cable operators, (ii) impose customer service standards on hard-wire cable
operators, (iii) govern carriage of certain broadcast signals by all multi-
channel video providers, and (iv) compel non-discriminatory access to
programming owned or controlled by vertically-integrated cable operators.
The rate regulations adopted by the FCC do not regulate cable rates once
other multi-channel video providers serve, in the aggregate, at least 15% of
the households within the cable franchise area. The customer service rules
adopted by the FCC establish certain minimum standards to be maintained by
traditional hard-wire cable operators. These standards include prompt responses
to customer telephone inquiries, reliable and timely installations and repairs,
and readily understandable billing practices. These rules do not apply to
wireless cable operators, although the Company believes that it provides and
will continue to provide customer service superior to its hard-wire cable
competitors.
Under the retransmission consent provisions of the 1992 Cable Act and the
FCC's implementing regulations, all multi-channel video providers (including
both hard-wire and wireless cable) seeking to retransmit certain commercial
broadcast signals must first obtain the permission of the broadcast station.
Hard-wire cable systems, but not wireless cable systems, are required under the
1992 Cable Act and the FCC's "must carry" rules to retransmit a specified
number of local commercial television or qualified low power television
signals. See "Retransmission Consent."
The 1992 Cable Act and the FCC's implementing regulations impose limits
on exclusive programming contracts and prohibit programmers in which a cable
operator has an attributable interest from discriminating against cable
competitors with respect to the price, terms and conditions of programming.
Certain provisions of the 1992 Cable Act and the FCC's implementing regulations
have been challenged in the courts and before the FCC. Under the
Telecommunications Act of 1996 (the "1996 Act"), Congress has directed the FCC
to eliminate cable rate regulations for "small systems," as defined in the 1996
Act, and for large systems under certain prescribed circumstances, and for all
cable systems effective three years after enactment of the 1996 Act.
While current FCC regulations are intended to promote the development of
a competitive subscription television industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse
effect on the Company. In addition, a number of legal challenges to the 1992
Cable Act and the regulations promulgated thereunder have been filed, both in
the courts and before the FCC. These challenges, if successful, could result in
increases in the Company's operating costs and otherwise have a material
adverse effect on the Company. The Company's costs to acquire satellite-
delivered programming may be affected by the outcome of those challenges. Other
aspects of the 1992 Cable Act that have been challenged, the outcome of which
could adversely affect the Company, including the 1992 Cable Act's provisions
governing rate regulation to be met by traditional hard-wire cable companies.
The 1992 Cable Act empowered the FCC to regulate the basic subscription rates
charged by traditional hard-wire cable operators. The FCC recently issued rules
requiring such cable operators, under certain circumstances, to reduce the
rates charged for non-premium services by as much as 17%. Should these
regulations withstand court and regulatory challenges, the extent to which
wireless cable operators may continue to maintain a price advantage over
traditional hard-wire cable operators could be diminished. On the other hand,
continued strict rate regulation of cable rates would tend to impede the
ability of hard-wire cable operators to upgrade their cable plant and gain a
competitive advantage over wireless cable.
THE 1996 ACT. The 1996 Act, enacted in February 1996, could have a
material impact on the MMDS industry and the competitive environment in which
the Company operates. The 1996 Act has continued to result in comprehensive
changes to the regulatory environment for the telecommunications industry as a
whole. The legislation, among other things, substantially reduced regulatory
authority over cable rates. Another provision of the 1996 Act afforded hard-
wire cable operators greater flexibility to offer lower rates to certain of its
subscribers, thereby permitting cable operators to offer discounts on hard-wire
cable service to the Company's subscribers or prospective subscribers. The
legislation permits telephone companies to enter the video distribution
business, subject to certain conditions. The entry of telephone companies into
the video distribution business, with greater access to capital and other
resources, could provide significant competition to the companies in the MMDS
industry, including the Company. In addition, the legislation afforded relief
to direct broadcast satellite providers by exempting such providers from local
restrictions on reception antennas and preempting the authority of local
governments to impose certain taxes. The Company cannot predict the substance
of future rules and policies to be adopted by the FCC in implementing the
provisions of the legislation.
COPYRIGHT. Under the federal copyright laws, permission from the
copyright holder generally must be secured before a video program may be
retransmitted. Under Section 111 of the Copyright Act, certain "cable systems"
are entitled to engage in the secondary transmission of programming without the
prior permission of the holders of copyrights in the programming. In order to
do so, a cable system must secure a compulsory copyright license. Such a
license may be obtained upon the filing of certain reports with and the payment
of certain fees to the U.S. Copyright Office. In 1994, Congress enacted the
Satellite Home Viewers Act of 1994 which enables operators of wireless cable
television systems to rely on the cable compulsory license under Section 111 of
the Copyright Act. For the year ended March 31, 1998, the Company paid
approximately $180,000 in copyright fees.
RETRANSMISSION CONSENT. Under the retransmission consent provisions of
the 1992 Cable Act, wireless and hard-wire cable operators seeking to
retransmit certain commercial television broadcast signals must first obtain
the permission of the broadcast station in order to cover their signal.
However, wireless cable systems, unlike hard-wire cable systems, are not
required under the FCC's "must carry" rules to retransmit a specified number of
local commercial television or qualified low power television signals. Although
there can be no assurances that the Company will be able to obtain requisite
broadcaster consents, the Company believes in most cases it will be able to do
so for little or no additional cost.
In addition to regulation by the FCC, MMDS operators are subject to
regulations by the Federal Aviation Administration ("FAA") with respect to
construction of transmission towers and to certain local zoning regulations
affecting construction of towers and other facilities. There also may be
restrictions imposed by local authorities, neighborhood associations and other
similar organizations limiting the use of certain types of reception equipment
used by CAI. Future changes in the foregoing regulations or any other
regulations applicable to CAI could have a material adverse effect on CAI's
results of operations and financial condition.
Certain states have legislated that each resident of a MDU should not be
denied access to programming provided by franchised cable systems,
notwithstanding the fact that the MDU entered into an exclusive agreement with
a non-franchised video program distributor. States with such "mandatory
access" laws where CAI provides MMDS service include Connecticut, Delaware,
District of Columbia, New Jersey, New York, Pennsylvania and Rhode Island. In
several district courts, mandatory access laws have been held unconstitutional.
Such laws could increase the competition for subscribers in MDUs. There may
also be restrictions imposed by local authorities. There can be no assurance
that the Company will not be required to incur additional costs in complying
with such regulations or restrictions.
Due to the regulated nature of the subscription television industry, the
Company's growth and operations may be adversely impacted by the adoption of
new, or changes to existing, laws or regulations or the interpretations
thereof.
COMPETITION
The subscription television industry is highly competitive. CAI's
principal subscription video competitors in each market are traditional hard-
wire cable, direct broadcast satellite ("DBS") and private cable operators.
Hard-wire cable companies generally are well established and known to potential
customers and have significantly greater financial and other resources than
CAI. Premium movie services offered by the cable television systems have
encountered significant competition from the home video cassette recorder
industry. In areas where several local off-air VHF/UHF broadcast channels can
be received without the benefit of subscription television, cable television
systems also have faced competition from the availability of broadcast signals
generally and have found market penetration to be more difficult. Legislative,
regulatory and technological developments may result in additional and
significant competition, including competition from local telephone companies.
A more detailed discussion follows:
HARD-WIRE CABLE. CAI's principal subscription video competitors in each
market are traditional hard-wire cable operators. Hard-wire cable companies
are generally well established and known to potential customers and have
significantly greater financial and other resources than CAI. The hard-wire
cable companies competing in CAI's markets generally offer significantly
increased channel line-ups to their subscribers, compared to between 22 to 43
channels (consisting of between 17 and 33 wireless cable channels and between 5
and 10 local off-air VHF/UHF broadcast channels) generally offered by CAI in
its markets. According to a report issued by the FCC in September 1995, of the
approximately 96 million total television households nationwide, approximately
85 million are passed by hard-wire cable systems, and of those homes that are
passed by cable, approximately 62 million are hard-wire cable subscribers.
DIRECT-TO-HOME ("DTH"). DTH satellite television services originally were
available via satellite receivers which generally were 7-to-12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has reduced their popularity, although CAI
will to some degree compete with these systems in marketing its services.
Another form of DTH service is DBS. DBS involves the transmission of an
encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than most satellite-transmitted
signals, its reception can be accomplished with a relatively small (18-inch)
dish mounted on a rooftop or in the yard. DBS, for technical and legal
reasons, cannot generally provide local VHF/UHF broadcast channels as part of
its service, although many DBS subscribers receive such channels via standard
over-the air receive antennas. Moreover, DBS may provide subscribers with
access to broadcast network distant signals only when such subscribers reside
in areas unserved by any broadcast station. The cost to a DBS subscriber for
equipment and service is generally substantially higher than the cost to
wireless cable subscribers. According to DBS Digest, there are approximately
8.5 million subscribers using DBS services.
PRIVATE CABLE. Private cable is a multi-channel subscription video
service where the programming is received by satellite receiver and then
transmitted via coaxial cable throughout private property, often MDUs, without
crossing public rights of way. Private cable operates under an agreement with
a private landowner to service a specific MDU, commercial establishment or
hotel. The FCC amended its rules to provide point-to-point delivery of video
programming by private cable operators and other video delivery systems in the
18 GHz band. Private cable operators compete with CAI for exclusive rights of
entry into larger MDUs.
TELEPHONE COMPANIES. The 1996 Act removed many of the restrictions on the
ability of local exchange carriers ("LECs"), including Regional Bell Operating
companies ("RBOCs"), to provide video programming directly to subscribers in
their respective telephone service areas. Thus, while there remains a
prohibition against an LEC acquiring a hard-wire cable operator within its
telephone service area, LECs can build their own hard-wire cable systems. In
addition to having the opportunity to install traditional hard-wire cable, LECs
also have the option of installing high capacity fiber optic facilities. CAI
believes that it will continue to maintain a cost advantage over installing
hard-wire, fiber optic or open video distribution platforms due to the high
capital expenditures associated with such technologies. Bell South Corporation
has acquired wireless cable channel rights in Atlanta, GA, New Orleans, LA, and
Miami, FL and begun to offer services in New Orleans and Atlanta. Pacific
Telesis Group launched a 150 channel digital video system in Los Angeles, CA.
The competitive effect of the entry of telephone companies into the
subscription video business, including wireless cable, is still uncertain.
LOCAL OFF-AIR VHF/UHF BROADCASTS. Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox) provide free programming to
the public. Previously, subscription video operators could retransmit these
broadcast signals without permission. However, effective October 6, 1993,
pursuant to the 1992 Cable Act, local broadcasters may require that
subscription video operators obtain their consent before retransmitting local
television broadcasts. The Company has obtained such consents for its
operating systems. The Company will be required to obtain such consents in
certain of its markets to re-broadcast any such channels. The Company believes
that it will be able to obtain such consents, but no assurance can be given
that it will be able to obtain all such consents. The FCC also has recently
permitted broadcast networks to acquire, subject to certain restriction,
ownership interests in hard-wire cable systems. In some areas, several low
power television ("LPTV") stations authorized by the FCC are used to provide
multi-channel subscription television service to the public. LPTV transmits on
conventional VHF/UHF broadcast channels, but is restricted to very low power
levels, which limits the area where a high-quality signal can be received.
LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS"). In 1993, the FCC
initially proposed to redesignate the 28 GHz band to create a new video
programming delivery service referred to as LMDS. In July 1995, the FCC
proposed to award licenses in each of 493 BTAs pursuant to auctions. Final
rules were issued by the FCC, and the auction for LMDS spectrum was conducted
in February 1998. Bidders bid on an A-block license, consisting of 1,150 MHz of
spectrum, and a B-block license, consisting of 150 MHz of spectrum, in each
BTA<copyright>. A total of 864 licenses were sold to 104 bidders for bids
totaling $578.6 million. 122 licenses were not sold, including 109 A-block
licenses. The FCC intends to re-auction the unsold licenses at an undetermined
date. The LMDS licensees will share the 28 GHz frequency band with the Mobile
Satellite Service and the 31 GHz band with state and local governments. The FCC
contemplates allowing the LMDS licensees to use the spectrum for a variety of
services, including telephony, interactive video, video distribution, data
transmission, teleconferencing, and other application. Depending on the type
and number of services offered, the cost of the customer-premises equipment
could range from $300 (for a video receive antenna) to $1,000 (for telephony,
video, and data capabilities).
In addition, within each market, CAI initially must compete with others
to acquire, from the limited number of MMDS channels issued or issuable, rights
to a minimum number of MMDS channels needed to establish a commercially viable
system. Digital capability is essential for MMDS to compete with hard-wire
cable, which in its current analog state offers between 36 to 90 channel
offerings depending on a given market. With the deployment of digital, hard-
wire cable is expected to offer over 150 channels. CAI has lost video
subscribers to hard-wire cable competitors in each of its markets due to the
channel capacity limitations inherent in an analog-based MMDS operation. In
addition, within each market, CAI initially must compete with others to
acquire, from the limited number of MMDS channels issued or issuable, rights to
a minimum number of MMDS channels needed to establish a commercially viable
system. Aggressive price competition or the passing of a substantial number of
presently unpassed households by any existing or new subscription video service
could have a material adverse effect on CAI's results of operations and
financial condition.
New and advanced technologies for the subscription video industry, such
as digital compression, fiber optic networks, DBS transmission, video dialtone
and LMDS, are in various stages of development or commercial deployment. These
technologies are being developed and supported by entities, such as hard-wire
cable companies and regional telephone companies, that have significantly
greater financial and other resources than CAI. These new technologies could
have a material adverse effect on the demand for MMDS subscription video
services. There can be no assurance that CAI will be able to compete
successfully with existing competitors or new entrants in the market for
subscription video services.
The Company will also face intense competition from other providers of
data and telephony transmission services if the Company implements, on a
commercial basis, such services. Such competition is increased due to the fact
that MMDS spectrum has not traditionally been utilized to deliver such
alternative services, and consumer acceptance of such services delivered via
MMDS technology is unknown at this time. Many of the existing providers of
data transmission and telephony services, such as long distance and regional
telephone companies have significantly greater financial and other resources
than the Company. In addition, recent transactions involving DBS providers,
software companies and media conglomerates will impact the competitive nature
of the video, voice and data markets, including an increased difficulty for
wireless cable providers to obtain access to attractive video programming.
There can be no assurance that there will be consumer demand for
alternative uses of the MMDS spectrum such as data transmission, including
Internet access services, and telephony delivery services, that the Company
will be able to compete successfully against other providers of such services
or that the Company will be able to achieve profitability from such services in
future years.
BACKGROUND
GENERAL. The Company was formed in 1991 to invest in and operate MMDS
subscription video systems. Through a series of acquisitions culminating in
the September 29, 1995 acquisition of ACS Enterprises, Inc., an MMDS operator
based in Philadelphia, Pennsylvania with operating systems in Philadelphia,
Cleveland, Ohio and Bakersfield, California, and Eastern Cable Networks of
Washington, Inc. ("ECNW") that operated the Washington, D.C. MMDS system, the
Company has grown to become the largest MMDS operator in the United States in
terms of both television and LOS households. The Company enhanced its spectrum
capacity during 1996 by being the top bidder in the FCC Auction with bids
totaling $36.2 million for the Auction Markets for its existing markets as well
as for new contiguous markets.
The Company completed its initial public offering in February 1994, and
issued $275 million aggregate principal amount of its 12 1/4 % Senior Notes due
2002 (the "Senior Notes") in September 1995. As of March 31, 1998, the Company
had 40,543,039 shares of CAI Common Stock, issued and outstanding.
BANX TRANSACTIONS. In addition to the consummation of several
acquisitions and the offering of CAI's Senior Notes, the Company also completed
a series of transactions with affiliates of Bell Atlantic and NYNEX in
September 1995. In March 1995, CAI entered into strategic business
relationships with the BANX Affiliate and the BANX Partnership. This
relationship consisted of (i) the signing of the BR Agreement with the BANX
Affiliates, (ii) the purchase by the BANX Partnership of $30 million of
convertible Term Notes due May 9, 2005 ("BANX Term Notes") and Warrants (the
"BANX Warrants") to purchase convertible preferred stock, no par value (the
"Voting Preferred Stock"), and (iii) the purchase by the BANX Partnership of
$70 million of 14% Senior Convertible Preferred Stock, par value $10,000 per
share ("Senior Preferred Stock"; and together with the BANX Term Notes and BANX
Warrants, the "BANX Securities"). 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 million (subject to adjustment in
accordance with the terms of the Modification Agreement (as defined below)),
and its pro forma ownership interest in CAI increasing to approximately 45%.
Pursuant to the BR Agreement, which was intended to allow CAI to realize
revenue in certain of its markets without incurring substantial capital
expenditures required for subscriber equipment and installation as well as
eliminate most operating costs, other than channel license fees and
distribution system expenses, CAI granted to each BANX Affiliate the ability,
on a market by market basis, to elect to become the marketer and provider of
subscription video services using CAI's MMDS transmission systems in each
market in their respective service areas in exchange for monthly service
revenues based on the number of serviceable households and subscribers in each
market so optioned by a BANX Affiliate. In connection with the Company's
obligations under the BR Agreement, CAI substantially completed the
construction of digital video delivery systems in Boston, MA and Hampton Roads,
VA. Through December 12, 1996, however, neither BANX Affiliate had exercised
their respective options under the BR Agreement in these or any other markets
contemplated by the BR Agreement.
On December 12, 1996, the Company and the various BANX entities reached
an agreement (the "Modification Agreement") modifying certain terms of the BR
Agreement and providing CAI or its designee with the right to acquire the 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 would result in the
BANX Partnership having to make an additional investment in CAI of
approximately $95.0 million to acquire an approximately 45% ownership interest
in CAI. The Modification Agreement was subsequently amended on April 29, 1997,
pursuant to Amendment No.1 to the Modification Agreement ( the "Amendment").
The Amendment represented the renegotiation of an option granted to CAI
to repurchase the $100 million face amount of BANX securities held by the BANX
Partnership. The repurchase consideration contemplated by the Amendment was
$40 million in cash and 100,000 shares of convertible junior preferred stock,
having a liquidation preference of $30 million in the aggregate. The
repurchase option was exercisable through February 28, 1998.
As part of the Amendment, the BANX Affiliates also immediately released
CAI from its obligation under the BR Agreement to make CAI's wireless MMDS
spectrum available to the BANX Affiliates at a future date in Boston, MA,
Pittsburgh, PA and Albany, Syracuse and Buffalo, NY. Upon a repurchase of the
CAI securities, as contemplated by the Amendment, the BR Agreement was to have
lapsed in its entirety, releasing a similar obligation in CAI's other markets.
In connection with the execution of the Amendment, the BANX Partnership
also suspended or released CAI from a number of covenant restrictions and
governance rights and provided CAI with a blanket proxy on the approximately
10% interest in CS Wireless held by BANX entities. If the repurchase were
consummated in accordance with the terms of the Amendment, the CS Wireless
shares would have been returned to CAI without additional consideration. The
parties also exchanged mutual releases and reached an agreement to share
certain patent and intellectual property rights related to their digital
wireless venture.
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 Wireless. Under the terms of the Termination and Purchase
Agreement (the "Termination Agreement"), the Company issued $7 million
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 Wireless common
stock held by BANX. The parties exchanged general releases in connection with
the transaction.
Simultaneously with the closing of the Termination Agreement, the Company
and MLGAF amended the Note Purchase Agreement to increase the aggregate amount
of Secured Notes issued and outstanding thereunder by an additional $18 million
to $45 million, which amount includes $25 million of Secured Notes issued and
sold to MLGAF on November 25, 1997, a $2 million Secured Note issued and sold
to MLGAF on January 26, 1998, $7 million of Secured Notes issued by the Company
to BANX in connection with the Termination Agreement and an additional $11
million Secured Note issued by the Company and sold to MLGAF on February 17,
1998. The proceeds of the additional Secured Note are being used for working
capital and to meet certain other obligations of the Company. All of the
Secured Notes mature on June 30, 1998.
As part of these transactions, MLGAF advised CAI that it had completed
the purchase from BANX of all of the BANX Securities representing BANX's
initial $100 million investment in CAI in 1995, as well as the Secured Notes
issued by CAI to BANX in connection with the Termination Agreement.
CAI and MLGAF also entered into an agreement in principle on February 17,
1998, pursuant to which MLGAF agreed to exchange all of the BANX Securities,
together with accrued but unpaid interest and dividends thereon, for a $30
million 12% subordinated note due 2003, which agreement in principal was
consummated on March 3, 1998. Prior to the consummation of the exchange, MLGAF
waived all conversion features contained in the BANX Securities.
INVESTMENT IN CS WIRELESS. Pursuant to the terms of a Participation
Agreement dated December 12, 1995 between CAI, CS Wireless and Heartland, CAI
and Heartland agreed to contribute to CS Wireless certain wireless cable
assets, including related operating liabilities, or the stock of subsidiaries
owning wireless cable assets for systems located principally in the Midwestern
and Southwestern regions of the country. The combination of these assets into
CS Wireless resulted in a company with approximately 7.7 million Estimated
Total Service Area households and 56,500 subscribers, as of March 31, 1996,
making it one of the largest wireless cable companies in the United States in
terms of subscribers and Estimated Total Service Area households.
The transaction closed on February 23, 1996 (the "CS Closing").
Immediately following the CS Closing, and after giving effect to the issuance
of equity by CS Wireless in connection with the Unit Offering (defined below)
and true-up adjustments contemplated by the Participation Agreement, CAI owned
approximately 52% of the equity in CS Wireless, Heartland owned approximately
37% of the equity in CS Wireless, and affiliates of Bell Atlantic and NYNEX
owned approximately 10% of the equity in CS Wireless. The remaining 1% equity
interest was sold to purchasers of an aggregate of 100,000 units ("the "Unit
Offering"), each unit consisting of four $1,000 principal amount at maturity of
11-3/8% Senior Discount Notes due 2006 and 1.1 shares of common stock of CS
Wireless in a private placement closing contemporaneously with the CS Closing.
The notes will accrete in value for five years and cash interest will be paid
beginning 2001. The gross proceeds to CS Wireless were approximately $230.0
million. The net proceeds of the Unit Offering were used in part to make the
cash payment to Heartland at the CS Closing, as required under the
Participation Agreement, and the remaining net proceeds will be used by CS
Wireless for capital expenditures to build-out its systems and to add
subscribers, for certain formation costs, working capital, and general
corporate purposes.
Prior to the contributions contemplated by the Participation Agreement,
CS Wireless, a wholly-owned subsidiary of the Company, operated a wireless
cable system in Cleveland, Ohio. Under the Participation Agreement, CS
Wireless acquired, or had contributed to it, stock of subsidiaries of CAI
owning wireless cable systems or channel rights, and operating wireless cable
systems or wireless channel rights held by CAI in Bakersfield, CA, Charlotte,
NC, and Stockton/Modesto, CA and held by Heartland in Dallas, Fort Worth, and
San Antonio, TX, Dayton, OH, Maysville and Sweet Springs, MO, Minneapolis, MN,
Grand Rapids, MI, and Salt Lake City, UT. The CAI assets contributed in the
transactions consisted of the above-mentioned four properties located outside
the operating territories of Bell Atlantic and NYNEX. The Heartland
contribution was originally valued at approximately $138.7 million, the
estimated fair value. Heartland received 3,578,834 shares of CS Wireless
common stock, approximately $28.3 million of cash, and $40.0 million of notes
from CS Wireless, before "true-up" adjustments.
As part of the series of transactions consummated by the Company and BANX
during the fourth quarter, CAI received BANX's approximately 10% interest in CS
Wireless, thereby increasing CAI's ownership interest in CS Wireless to 60%.
Pursuant to the terms of the Participation Agreement 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 Wireless 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
Wireless either (i) cash, (ii) a 5-year promissory note, (iii) shares of CS
Wireless stock, or (iv) any combination of the foregoing. The Company has been
notified by Heartland that Heartland 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 has
disputed Heartland's position, and is in discussions with Heartland on this
issue.
INDUSTRY OVERVIEW
SUBSCRIPTION TELEVISION INDUSTRY. The subscription television industry
began in the late 1940s to serve the needs of residents in predominantly rural
areas with limited access to local broadcast television stations. The industry
expanded to metropolitan areas due to, among other things, the fact that it
offered better reception and more programming. Currently, such systems offer
various types of programming, which generally include basic service, enhanced
basic, premium service and, in some instances, pay-per-view service.
A subscription television customer generally pays an initial connection
charge and a fixed monthly fee for basic service. The amount of the monthly
basic service fee varies from one area to another and is a function, in part,
of the number of channels and services included in the basic service package
and the cost of such services to the television system operator. In most
instances, a separate monthly fee for each premium service and certain other
specific programming is charged to customers, with discounts generally
available to customers receiving multiple premium services. Monthly service
fees for basic, enhanced basic and premium services constitute the major source
of revenue for subscription television systems. Converter rentals, remote
control rentals, installation charges and reconnect charges for customers who
were previously disconnected are also included in a subscription television
system's revenues, but generally are not a major component of such revenues.
Traditional cable systems, as defined in Section 602 of the Communications Act
of 1934 (the "Communications Act"), are subject to both federal and local
regulation. In addition, the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") imposed strict federal and local
rules governing aspects of cable prices for programming and equipment. See
"Business- Regulation."
WIRELESS CABLE INDUSTRY BACKGROUND. In 1983, the FCC reallocated a
portion of the electromagnetic radio spectrum located between 2.5 and 2.7 GHz,
permitted this spectrum to be used for commercial purposes, and modified its
rules on the usage of the remaining portion of such spectrum. Regulatory and
other obstacles nevertheless impeded the growth of the wireless cable industry
through the remainder of the 1980s. In addition, before the 1992 Cable Act
became effective, wireless cable operators' ability to obtain programming from
cable-controlled, hard-wire cable owned programmers was not assured. The
factors contributing to the increasing growth of wireless cable systems since
that time include (i) regulatory reforms by the FCC to facilitate competition
with hard-wire cable, (ii) federal legislation that increased the availability
of programming for wireless cable systems, (iii) consumer demand for
alternatives to traditional hard-wire cable service, (iv) enhanced ability of
wireless cable operators to aggregate a sufficient number of channels in each
market to create a competitive product, and (v) increased availability of
capital to wireless cable operators in the public and private markets.
According to Paul Kagan Associates, Inc., there were approximately 200 wireless
cable systems currently operating in the United States, serving approximately
850,000 subscribers at the end of 1995.
Wireless cable systems can provide subscribers with the same or superior
video signal as that of traditional hard-wire systems. Both hard-wire cable
systems and wireless cable systems receive programming at a headend. Wireless
cable programming, however, is then retransmitted by microwave transmitters
from an antenna located on a tower associated with the headend to a small
receiving antenna located on a subscriber's rooftop. At the customer's
location, the signals are converted to frequencies that can pass through
conventional coaxial cable into a descrambling converter located on top of a
television set. Wireless cable requires a clear LOS, because the microwave
frequencies used will not pass through dense foliage, hills, buildings or other
obstructions. To ensure the clearest line-of-sight possible in CAI's markets,
CAI has placed, and plans to place, such towers on top of tall buildings or
accessible mountain tops located in such markets. There exists, in each of
CAI's operating and targeted markets, a number of acceptable locations for the
placement of its towers, and CAI does not believe that the failure to secure
any one location for such placement in any single market will materially affect
CAI's operations in such market. Additionally, some LOS obstructions can be
overcome with the use of signal boosters and beam benders which retransmit an
otherwise blocked signal over a limited area. CAI believes that its coverage
will be further enhanced upon the implementation of digital technology and/or
cellularization.
Wireless cable programming is transmitted through the air via microwave
frequencies from a transmission facility to a small receiving antenna at each
subscriber's location, which generally requires an unobstructed LOS from the
transmission facility to the subscriber's receiving antenna. Traditional hard-
wire cable television systems also transmit signals from a central transmission
facility, but deliver the signal to a subscriber's location through an
extensive network of fiber optic and/or coaxial cable and amplifiers. Since
wireless cable systems do not require a network of fiber optic and coaxial
cable, wireless cable operators such as CAI can provide subscribers with a high
quality picture with fewer transmission disruptions at a significantly lower
capital cost per installed subscriber than traditional hard-wire cable systems.
In addition, not having to maintain a hard-wire transmission system results in
lower ongoing maintenance costs for wireless cable systems. As a result of the
generally low capital expenditure requirements and low maintenance costs, CAI
believes it should be able to achieve positive cash flow at lower levels of
subscriber penetration than hard-wire cable companies.
CAI provides its subscribers with a variety of programming choices,
including local television broadcast stations; cable television networks such
as CNN, ESPN, A&E, MTV, Nickelodeon, Discovery, HBO, Showtime and
Disney; pay-per-view programming services; and various feature films and
sporting events. CAI currently offers variations of such programming packages
in its six operating markets. The majority of CAI's subscribers are equipped
with fully addressable converter boxes which enables CAI to offer pay-per-view
and other pay video services to such subscribers. The channels that CAI offers
vary in each market depending upon subscribers' viewing preferences.
EMPLOYEES
As of June 3, 1998, CAI had a total of 128 employees, of which none were
subject to collective bargaining agreements. CAI has never experienced a work
stoppage and believes that employee relations are good.
ITEM 2. PROPERTIES
CAI leases various office sites in Albany, New York; Arlington, Virginia;
Chadds Ford, Pennsylvania; and in each region in which an operating system
exists or is being constructed. CAI also leases transmission tower sites in
the regions of its operating systems. CAI believes adequate office space and
tower sites are readily available in all markets.
CAI owns substantially all of the equipment which is necessary to conduct
its operations, except certain vehicles, test equipment, and office equipment.
A significant portion of CAI's investment in plant and equipment consists of
subscriber equipment, which includes antennas, block downs, converters and
remotes (and related installation costs, principally located at the
subscribers' premises), and the reception and transmitter equipment located at
the transmitter sites.
ITEM 3. LEGAL PROCEEDINGS
CAI has been named in six class action lawsuits alleging various
violations of the federal securities laws filed in the United States District
Court for the Northern District of New York. The actions were consolidated
into one lawsuit entitled IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES
LITIGATION (96-CV-1857) (the "Securities Lawsuit"), which is currently pending
in the Northern District of New York. The amended, consolidated complaint,
which names the Company, Jared E. Abbruzzese, chairman and chief executive
officer of the Company, John J. Prisco, president, chief operating officer and
a director of the Company, and Alan Sonnenberg, the former president of the
Company, as defendants, alleges a variety of violations of the anti-fraud
provisions of the Federal securities laws by CAI arising out of its alleged
disclosure (or alleged omission from disclosure) regarding its Internet and
other flexible use of MMDS spectrum, as well as its business relationship with
Bell Atlantic and NYNEX. Specifically, the complaint alleges that defendants
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 10b-5 promulgated under the Exchange Act
during the specified Class Period (May 23, 1996 through December 6, 1996).
The Company has notified the carrier of its Directors' and Officers'
Liability insurance policy, which is intended to cover not only the Company's
officers and directors, but also the Company, itself, against claims such as
those made in the Securities Lawsuit. The policy covers up to $5 million of
any covered liability, subject to a retention amount of $500,000.
The Securities Lawsuit is in its preliminary stages. A scheduling
conference was held on June 3, 1997, at which the briefing schedule for
defendants' motion to dismiss was agreed upon among the parties. The
defendants' motion to dismiss was heard by the Northern District of New York on
October 17, 1997 and is still pending. While the motion is pending, all other
deadlines affecting motions and discovery have been postponed.
The Company and individual defendants are contesting the Securities
Lawsuit vigorously and believe it is entirely without merit at this time.
Accordingly, management believes the Securities Lawsuit will not have a
material adverse effect on the Company's earnings, financial condition or
liquidity.
The Company is also a defendant in JOE HAND PROMOTIONS, INC. V. 601 L&P,
INC. V. CAI WIRELESS SYSTEMS, INC. and JOE HAND PROMOTIONS, INC. V. CAI
WIRELESS SYSTEMS, INC. D/B/A POPVISION WIRELESS CABLE pending in the U.S.
District Court for the Eastern District of Pennsylvania. These actions arise
out of the alleged improper broadcasts of certain sporting events in commercial
establishments in violation of Federal statutes. The plaintiff is the
exclusive distributor of such sporting events in the greater Philadelphia area
for commercial establishments, and has alleged the improper broadcast by CAI in
approximately five instances. The lawsuits are in preliminary stages and are
being vigorously defended by CAI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the last three months of
the fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
On January 8, 1998, trading of the CAI 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, the CAI Common Stock was de-
listed from the Nasdaq SmallCap Market{ SM}. The CAI Common Stock currently
trades on the Electronic Bulletin Board system under the CAWS symbol. The
approximate number of stockholders of record on June 23, 1998 was 699. The high
and low sales prices for the CAI Common Stock on the NNM, the Nasdaq SmallCap
Market or the Electronic Bulletin Board system, as applicable, are as follows:
HIGH LOW
---- ---
FISCAL YEAR ENDED MARCH 31, 1997:
First Quarter $ 17.50 $ 6.25
Second Quarter 9.38 6.63
Third Quarter 7.38 0.84
Fourth Quarter 4.00 0.97
FISCAL YEAR ENDED MARCH 31, 1998:
First Quarter 2.00 1.03
Second Quarter 1.94 0.94
Third Quarter 2.50 0.88
Fourth Quarter 1.41 0.38
FISCAL YEAR ENDING MARCH 31, 1999:
First Quarter (through June 18, 1998) 0.50 0.25
DIVIDENDS
The Company has never paid cash dividends on the CAI Common Stock and
does not currently intend to pay cash dividends on the CAI Common Stock in the
foreseeable future.
Since the Company generally conducts, and in the future intends to
conduct, operations through subsidiaries, the Company's ability to declare or
pay cash dividends will depend in part on the ability of the Company's present
and future subsidiaries to declare or pay cash dividends to the Company.
Any future determination by the Company to pay cash dividends on the CAI
Common Stock will be within the discretion of the Company's Board of Directors
and will depend upon the earnings of the Company, the Company's financial
condition and capital requirements and other financial factors which are
considered relevant by the Company's Board of Directors.
Pursuant to certain restrictive covenants contained in the instruments
governing the Company's indebtedness, including the indenture governing the
Senior Notes and the Note Purchase Agreement governing the terms of the Secured
Notes, the Company cannot declare or pay any dividends or make any
distributions on shares of the Company. Also, the Company may not purchase or
redeem any of its shares, including warrants and options.
ITEM 6. SELECTED FINANCIAL DATA
The following summary should be read in conjunction with the consolidated
financial statements and related notes contained elsewhere herein (in
thousands, except per share data):
Seven- Eight-
month month
Period Period
Year Ended Year Ended Year Ended Year Ended Ended Ended
March 31, March 31, March 31, March 31, March 31, August 31,
1998 1997 1996(2) 1995(3) 1994 1993
---- ---- ---- ---- ---- ----
Summary of Operations:
Revenues $ 28,622 $ 36,327 $ 30,682 $ 5,148 $ 918 $ -
Write-down of goodwill (73,500) - - - - -
Restructuring costs (5,033) - - - - -
Interest expense (47,227) (40,806) (24,608) (1,734) (3,371) (1,050)
Write-down equity
investment (23,570) - - - - -
Extraordinary gain from
early extinguishment of
debt 5,346 - - - - -
Net loss (230,073) (82,298) (40,986) (14,107) (7,521) (1,378)
Preferred stock dividends 13,891 13,011 5,879 328 - -
Ratio of earnings to
fixed charges(1) - - - - - -
Per Share Data:
Loss per common share:
Before extraordinary
gain (6.15) (2.38) (1.73) (.93) (.61) (.12)
Extraordinary gain .13 - - - - -
Net loss per common share (6.02) (2.38) (1.73) (.93) (.61) (.12)
Weighted average common
shares outstanding 40,541 40,069 27,076 15,457 12,278 11,777
March 31, March 31, March 31, March 31, March 31, August 31,
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
Financial Condition:
Wireless channel rights $ 194,051 $ 207,681 $ 205,974 $ 46,192 $ 10,791 $ 1,350
Investment in CS Wireless 43,338 88,535 113,054 - - -
Property and equipment 49,898 69,767 52,569 21,840 2,434 763
Total assets 351,466 542,340 698,795 78,461 41,047 2,499
Debt 357,089 311,787 318,435 29,532 3,130 3,511
Redeemable preferred
stock - 87,821 92,883 18,378 - -
Shareholders' equity
(deficit) (27,561) 114,690 192,611 22,115 34,346 (1,597)
(1) In calculating the ratio of earnings to fixed charges, earnings consists
of losses prior to income tax benefit, minority interest in loss,
extraordinary items and fixed charges. Fixed charges consist of interest
expense, amortization of debt issuance costs and one-third of rental payments
on operating leases (such amount having been deemed by CAI to represent
the interest portion of such payments). Earnings were inadequate to cover
fixed charges by the amount of $235,419, $97,298, $53,307, $15,004,
$7,552, and $1,378 for the periods ended in 1998, 1997, 1996, 1995, 1994,
and 1993, respectively.
{(2)} The Company acquired ACS and ECNW on September 29, 1995. Also, the
Company closed a series of transactions with Heartland wherein CS Wireless
received certain assets from Heartland in exchange for CS Wireless common
stock and cash.
{(3)} The Company acquired the New York System on January 9, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Annual Report on Form 10-K, including
the exhibits hereto, relating to CAI's future operations may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results of the Company may differ
materially from those in the forward-looking statements and may be affected by
a number of factors including the Company's ability to attract one or more new
strategic partners, their willingness to enter into arrangements with CAI on a
timely basis and the terms of such arrangements, the receipt of regulatory
approvals for alternative uses of its MMDS spectrum contemplated by the
Company's business plan, 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, the financing obtained by the Company to date will not enable it
to meet its future cash needs.
RECENT FINANCIAL DEVELOPMENTS: ANTICIPATED REORGANIZATION
CAI's recurring losses, restrictions on its ability to obtain additional
financing, and substantial commitments, raise substantial doubt about CAI
continuing as a going concern. For the year ending March 31, 1999, the Company
is obligated to pay approximately $9 million in minimum license fees and
operating lease payments, approximately $3.5 million in MMDS license
obligations, in addition to funding operating losses. The Company projects
that operating cash requirements will be approximately $20 million for the
year ended March 31, 1999. On a short-term basis, CAI has $45 million of its
Secured Notes due on June 30, 1998. See " - Senior Secured Financing" below.
On a long-term basis, CAI has substantial indebtedness which, beginning in the
fiscal year ending March 31, 1999, will include significant debt service
requirements. As of March 31, 1998, CAI had outstanding consolidated debt of
approximately $357 million, and the Company had trade payables of approximately
$4.9 million.
On or about the date of the filing of this Annual Report on Form 10-K,
the Company intends to commence the Solicitation with respect to the Plan from
the holders of Senior Notes and certain other impaired creditors. CAI has not
yet commenced a reorganization case under Chapter 11 of the Bankruptcy Code.
If, however, CAI receives the requisite votes indicating acceptance of the
Plan, CAI intends to file the Petition under Chapter 11 of the Bankruptcy Code,
and to seek, as promptly thereafter as practicable, confirmation of the Plan.
Accordingly, the Company has provided approximately $5.1 million of
restructuring costs in the Statement of Operations for the fiscal year ended
March 31, 1998. Costs include legal and financial advisory fees.
CAI Wireless Systems, Inc. (the parent holding company) and one of its
wholly-owned operating subsidiaries, Philadelphia Choice, are expected to file
the Petition following the solicitation of certain CAI creditors. None of
CAI's other subsidiaries, including any of the subsidiaries that are holders of
MMDS licenses issued by the FCC or are lessees under MMDS excess capacity
leases, will be parties to the Petition. In addition, the Company intends that
only those claims against and interests in CAI specifically identified in the
Plan (I.E., the holders of the Senior Notes, holders of certain subordinated
indebtedness, holders of securities claims and holders of equity securities
claims) will be impaired. The Company intends that all other holders of claims
against CAI, including trade creditors, licensors and lessors, will be
unimpaired claims against CAI.
The Company intends to continue to operate its business in Chapter 11 in
the ordinary course and to seek to obtain the necessary relief from the
Bankruptcy Court to pay its employees, trade and certain other creditors in
full and on time. To fund its operations during the bankruptcy proceeding, the
Company has arranged for the DIP Facility financing (the "DIP Facility") in the
principal amount of $60 million . The DIP Facility is expected to be provided
by MLGAF, the Company's current secured lender. See " - Senior Secured
Financing" below. A portion of the proceeds of the DIP Facility will be used
to repay all amounts owed under the Company's current senior secured facility
(approximately $47.8 million, including interest and fees as of May 31, 1998).
The balance of the DIP Facility will be used to fund operations and working
capital throughout the bankruptcy proceeding. The Company intends to repay the
DIP Facility out of the proceeds of the Exit Facility currently being sought by
the Company. The Exit Facility is expected to be a two-year, senior secured
facility in the principal amount of approximately $80 million . A portion of
the proceeds of the Exit Facility is intended to be used to repay the DIP
Facility in full, with the balance of the Exit Facility to be used to fund
operations and working capital for the 12 months following the consummation of
the Plan. The Company, in consultation with BT Alex. Brown Incorporated, its
financial advisor, is actively seeking additional lending sources willing to
participate in the Exit Facility. There can be no assurance, however, that the
Company will be able to obtain the Exit Facility, or if able to obtain the Exit
Facility, that the financing will be on terms and conditions satisfactory to
the Company.
The Plan contemplates that the holders of equity securities claims and
equity securities interests, including the holders of CAI Common Stock, and any
and all options, warrants or other rights to acquire the CAI Common Stock will
not receive or retain any property or interest in property on account of such
claims.
The Company expects that the Solicitation will be completed on or about
July 27, 1998 and that the Company will file its Petition in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") shortly
thereafter, assuming that the Company receives the requisite acceptances from
the Solicitation. There can be no assurance that the Company will receive the
requisite acceptances from the Solicitation, or, if the Company does receive
the requisite acceptances, that the Plan will be confirmed by the Bankruptcy
Court and consummated.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable industry requires significant capital. CAI's plan for
continued expansion requires substantial capital investment on a continuing
basis and availability of sufficient financing is essential to that plan.
Funds are required for the lease or acquisition of channel rights, the
construction of system head-end and transmission equipment, start-up costs
related to the commencement of operations and subscriber installation costs.
CAI has financed its capital requirements since inception through a combination
of the issuance of debt and equity securities, the incurrence of loans and the
assumption of debt and other liabilities in connection with acquisitions. CAI
has incurred operating losses since inception and its cash flow from operating
activities has to date been insufficient to cover its operating expenses.
CAI has incurred net losses since inception in 1991 of approximately $377
million through March 31, 1998 and expects to realize additional net losses on
a consolidated basis while it develops and expands its MMDS systems.
Additionally, CAI has substantial indebtedness and, beginning in fiscal year
1999, will have significant debt service requirements. As of March 31, 1998,
CAI had total liabilities in excess of total assets of $28 million, including
outstanding consolidated long-term debt of approximately $357 million.
Pursuant to CAI's debt instruments, CAI is restricted from incurring
additional indebtedness (except in connection with purchases of goods and
services in the ordinary course of business, and other ordinary course
indebtedness permitted thereunder), granting liens to secure repayment of
indebtedness, making investments (other than investments specifically permitted
thereunder), paying dividends, disposing of assets, entering into any merger,
consolidation, reorganization, or recapitalization plan, retiring long-term
debt, or making any acquisitions without the prior consent of the lenders.
RECENT DEVELOPMENTS
CERTAIN ASSET SALES. On March 18, 1998, the Company and its wholly-owned
subsidiaries, Philadelphia Choice, Washington Choice Television, Inc. and
Washington License, Inc. sold assets relating to SMATV operations in the
Washington-Baltimore metropolitan area to Mid-Atlantic Telcom Plus, LLC, d/b/a
OnePoint Communications ("OnePoint"). The net proceeds to the Company from the
sale of these assets of $1.6 million were used to help fund working capital
requirements.
The Company and Philadelphia Choice have entered into a letter of intent
for the sale of assets relating to Philadelphia MDU Operation to OnePoint.
Under the terms of the agreement, OnePoint has agreed to purchase assets used
in connection with the Philadelphia MDU Operation, and to assume identified
agreements for master television service, pursuant to which the cable operator
is granted access to the MDU as the exclusive provider of subscription
television services. The purchase price for the Philadelphia MDU Operation is
$6 million, subject to certain post-closing adjustments. The parties
anticipate consummating the sale and purchase of the Philadelphia MDU Operation
under the auspices of the Bankruptcy Court as part of the Plan or pursuant to
Section 363 of the Bankruptcy Code.
NASDAQ DE-LISTING. On January 8, 1998, trading of the CAI 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, the CAI
Common Stock was de-listed from the Nasdaq SmallCap Market{ SM}. The CAI
Common Stock currently trades on the Electronic Bulletin Board system under the
CAWS symbol.
SENIOR SECURED FINANCING
13% SENIOR SECURED NOTES. On November 25, 1997, the Company issued and
sold $25 million of its Secured Notes to MLGAF. CAI used approximately $17.3
million of the proceeds to repay all amounts outstanding under the F/C Credit
Facility, and the remaining proceeds of approximately $7.3 million, 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 million Secured Note to MLGAF, and on
February 17, 1998, the Company issued and sold an additional $18 million of
Secured Notes in connection with the consummation of a series of transactions
by the Company, MLGAF and BANX. See " - Termination of BANX Rights" below.
The Secured Notes are short-term obligations of CAI, maturing on June 30,
1998, and were issued and sold pursuant to the terms of the Note Purchase
Agreement between CAI. 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 $730,000
commitment fee to MLGAF, which is also due at maturity. All outstanding amounts
under the Note Purchase Agreement are expected to be converted into and deemed
to be outstanding obligations under the DIP Facility.
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 Wireless 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 MLGAF.
FOOTHILL CAPITAL CREDIT FACILITY. On November 25, 1997, the Company used
a portion of the proceeds from the issuance of the Secured Notes to repay all
amounts outstanding and owing to F/C Lenders under the F/C Credit Facility to
CAI in June 1997. At the time of repayment, there was approximately $17.3
million outstanding under the F/C Credit Facility, consisting of $15.3 million
representing the principal amount of the loans outstanding under the F/C Credit
Facility; a $1.6 million fee, and $350,000 representing interest on the
outstanding loans and fees.
The repayment of the F/C Credit Facility in November 1997 represented the
early termination of the F/C Credit Facility. Prior to its termination and
repayment in full, 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. All of the waivers executed and
delivered by the Company to the F/C Lenders contained a general release of the
F/C 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 F/C
Lenders in connection with the repayment of all Company obligations under the
F/C Credit Facility. The early termination of the F/C Credit Facility resulted
in the Company recording a third quarter extraordinary charge of approximately
$4.7 million, 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.
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 Wireless. Under the terms of the Termination Agreement, the
Company issued $7 million 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 million
shares of CS Wireless common stock held by BANX to CAI. The parties exchanged
general releases in connection with the transaction.
As part of these transactions, MLGAF advised CAI that it had completed
the purchase from BANX of all of the Securities issued to BANX in connection
with BANX's initial $100 million investment in CAI in September 1995, as well
as the Secured Notes issued by CAI to BANX in connection with the Termination
Agreement. On March 3, 1998, CAI exchanged the BANX Securities then held by
MLGAF for the Subordinated Note. As a result of the exchange transactions, the
Company eliminated approximately $117 million of Senior Preferred Stock,
accumulated preferred stock dividends, and accrued interest on the Term Notes,
of which approximately $102 million was reclassed to paid-in capital and
recorded an approximately $10 million extraordinary gain from the early
extinguishment of debt.
The Subordinated Note issued to MLGAF accrues interest at the rate of 12%
per annum, compounded semi-annually, and is payable at maturity on October 1,
2005. The Subordinated Note is expressly subordinate to the Senior Notes and
to the $45 million aggregate principal amount of Secured Notes. The
Subordinated Note is a joint and several obligation of CAI and certain of its
wholly-owned subsidiaries. The obligation of the subsidiaries to repay the
Subordinated Note, however, is limited by the terms of the Indenture governing
the terms of the Senior Notes.
In conjunction with the transaction, the Company also exchanged 2,500
shares of CAI Common Stock for all warrants to purchase CAI equity that were
held by BANX and acquired by MLGAF on March 3, 1998. The CAI Common Stock was
issued in reliance upon an exemption from the registration requirements of the
Securities Act of 1933, as amended, and contains a legend restricting its
transfer without such registration or an exemption therefrom. The issuance of
the CAI Common Stock to MLGAF increased the number of issued and outstanding
shares of CAI Common Stock to 40,543,039 at March 31, 1998.
With the termination of the BANX rights, the Company has embarked upon a
preservation strategy that will allow CAI to utilize its significant spectrum
capacity for the delivery of video, voice and data, or various combinations
thereof, subject to regulatory approval, as necessary for one or more strategic
partners. This preservation strategy includes the continued build-out of the
transmission facilities in conformity with the FCC license perfection
regulations, as well as the re-negotiation of spectrum leases when and as such
leases mature.
Subject to receipt of regulatory approval for fixed, flexible use of its
MMDS spectrum and successful testing, the successful deployment of digital
video, one- and two-way data transmission and telephony delivery services
utilizing the MMDS platform and sufficient capital resources, the Company
intends to launch a wireless broadband network. The Company believes that its
system would be able to provide quick and relatively inexpensive household
coverage on a broad scale. CAI believes that the concept of a wireless
broadband network will enhance the Company's ability to attract one or more
strategic investors by giving such partners the ability to provide competitive
access products over CAI's MMDS spectrum. The Company believes that its
systems will be capable of providing a combination of analog and/or digital
video services for residential, as well as for corporate and
institutional/instructional subscribers, bundled with high speed Internet and
intranet access services, and ultimately, telephony delivery services. The
Company expects to be able to alter the channel allocation among the various
services depending on the needs of the strategic partner and consumer demand,
thereby deriving multiple revenue streams from each system.
CAI continues to believe that a strategic partner is necessary for the
MMDS industry to fully realize the potential of this spectrum. Believing that
a national-level strategic partner has the financial resources and
infrastructure to fully utilize the MMDS spectrum for video, voice and data
transmission, CAI has aggressively sought one or more strategic partners since
the departure of Bell Atlantic/NYNEX. To date, CAI has demonstrated its
technological capabilities to several potential strategic partners, and is
currently conducting an on-site trial for a telecommunications company,
providing wireless Internet and corporate intranet access for trial
participants at various locations in the greater New York City area. Recently,
this trial has been expanded to include two-way data transmission with the
deployment of first generation transverters developed by a high-technology
equipment manufacturer in conjunction with CAI engineers. CAI also has
invested in TSS in order to access pre-digitized video programming and to
provide a vehicle for a complementary DTH video service that could, eventually,
free additional MMDS spectrum for these alternative uses.
Although the Company believes that it will be possible to offer all three
services in any given market once regulatory approval for fixed, flexible two-
way use of the MMDS spectrum is obtained for such market, the allocation of
channels among the various services is expected to be driven by the needs of a
strategic partner, whose needs, presumably, will be driven by consumer demand
for such services in the Company's markets. Not all services may be offered in
all markets, and there can be no assurance that the Company will be able to
locate one or more strategic partners interested in utilizing the Company's
spectrum for such services. The Company's initial efforts with respect to the
development of fixed, flexible two-way use of the MMDS spectrum have been
limited primarily to its Boston and greater New York City markets and have been
limited to the conduct of tests.
CASH FLOW INFORMATION
During the year ended March 31, 1998, CAI expended approximately $47.9
million to fund operating activities, $7.2 million for equipment purchases,
$4.4 million to invest in TelQuest, $4.7 million to obtain interim financing,
$3.1 million to pay wireless channel rights obligations and other debt, and
$2.0 million to acquire wireless channel rights. During this period CAI funded
its cash requirements out of existing cash balances, net proceeds from the
issuance of senior secured notes of $33.7 million, and the disposition of
equipment generating net proceeds of approximately $1.8 million. At March 31,
1998, CAI had available funds of approximately $1.3 million and restricted cash
of approximately $9.1 million which will be used to fund the operations of the
Company.
During the year ended March 31, 1997, CAI expended approximately $37.1
million to purchase equipment, $34.8 million to fund operating activities, $3.7
million to acquire wireless channel rights and $45.3 million to pay senior and
other debt, including $34.0 million due to the FCC for the purchase of MMDS
licenses at the 1996 auction. During this period, CAI funded its cash
requirements out of existing cash balances. At March 31, 1997, CAI had cash
and cash equivalents of approximately $10.5 million.
During the year ended March 31, 1996, CAI expended approximately $14.5
million to purchase equipment, $34.6 million to fund operating activities and
$24.5 million to acquire wireless channel rights. During fiscal 1996, CAI
funded its cash requirements out of existing cash balances and funds from
financing activities. At March 31, 1996, CAI had cash and cash equivalents of
approximately $103.3 million.
On September 29, 1995, the Company received $265.9 million from the
Senior Notes Offering, net of $9.1 million in underwriting costs and interest,
of which $90.6 million was placed in escrow to cover three years of interest,
plus $70 million from the sale of 7,000 shares of Senior Preferred Stock and
the BANX Warrants. These funds were used in part to pay the cash portions of
the following acquisitions: ACS ($41.1 million), ECNW ($8.9 million), the
Baltimore Assets ($11.3 million) and the Pittsburgh Assets ($6.4 million). The
non-cash portion of the purchase prices was satisfied with CAI Common Stock or
debt, primarily notes.
Additionally, the Company loaned ACS $22.3 million to repay certain ACS
bank debt and another $11.3 million to pay other costs incurred by ACS relating
to the ACS acquisition and for other corporate purposes. CAI also used $12.4
million to repay the interim financing it received from Smith Barney Holdings,
Inc. in June 1995, including interest, and another $2.1 million to pay legal
and other fees relating to the acquisition, Stage II Closing and the offering
of the Senior Notes.
In April 1995, CAI raised an additional $1.5 million of equity capital
through the issuance of 179,765 shares of common stock. On May 9, 1995, at the
Stage I Closing CAI received $30.0 million from Bell Atlantic and NYNEX, the
proceeds of which were used to retire $21.3 million of short-term notes issued
in connection with the purchase of the New York System, provide a required $4.0
million cash deposit under the ACS Merger Agreement, and to pay $3.0 million of
cost associated with the short-term debt issued for the acquisition of the New
York System and for transaction expenses and working capital. In June 1995,
CAI received $12.0 million from Smith Barney Holdings, Inc. for working capital
purposes.
OPERATIONS
As of March 31, 1998, the Company had approximately 52,000 analog video
subscribers compared to 70,800 subscribers as of March 31, 1997. The 18,800 net
decline in subscribers is due primarily to the Philadelphia System decrease of
approximately 10,400 subscribers and New York System decline of approximately
4,700 subscribers for the comparable periods. The Philadelphia and the New
York Systems are losing subscribers to hard-wire cable operators primarily due
to limited channel capacity and lack of marketing efforts. This trend is likely
to continue. The decrease in subscribers experienced in the other systems was
primarily attributable to the sale of certain Washington System SMATVs
including approximately 1,500 subscribers and a curtailment of marketing
efforts. The overall decline in subscribers has continued through May 31, 1998
at which time the Company's total subscribers were approximately 50,000.
The net result of disconnects minus reconnects divided by the number of
subscribers at the beginning of the period is considered the churn rate in the
subscription television industry. The churn rate is calculated monthly and year
to date for an average monthly rate over a year. CAI's average monthly churn
rate for the year ended March 31, 1998 was 4.1% overall with individual
operating systems ranging from 2.7% to 5.0%. CAI's average monthly churn rate
for the year ended March 31, 1997 was 4.6% overall with individual operating
systems ranging from 2.5% to 5.5%. The improvement in the churn rate is
indicative of the prior year's retention strategy of charging increased
installation fees which translated into increased commitment and therefore
retention. Churn rates within the 2% to 5% range are common in this industry,
with 2% being excellent, 3% the standard norm, and 5% or above being
unfavorable.
The cost of disconnecting and/or reconnecting customers is generally
expensed. Subscriber equipment includes the capitalized labor to install, but
depreciation rates are different based on recoverability or lack thereof.
Subscriber equipment that is recoverable (i.e. antennas and converters) is
generally depreciated over five years based on the life of the equipment. The
non-recoverable portion, consisting of installation labor, wire, small parts
and supplies, is generally depreciated over two or three years based on the
applicable churn rate of each operating system, which approximates subscriber
lives.
Long-lived assets and certain identifiable intangibles are periodically
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. The Company
periodically reviews wireless channel rights and other long-lived assets
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. When such circumstances occur, the
Company evaluates the possible effects on the carrying amount of such assets.
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both could be
reduced in the future due to changes in, among other things, technology, the
Company's ability to obtain permission for flexible use of the wireless channel
rights, government regulation, available financing or competition. The
Company's estimate of future gross revenues and operating cash flows assumes
that the Company will successfully develop and provide digital wireless cable
systems as well as video, voice and data transmission such as Internet access
and telephony. Since these alternative uses of the MMDS spectrum are in the
early stages of development, there is no assurance that the Company can
commercially deploy such alternatives or that it will be able to achieve
positive cash flow from any operating activities. As a result of valuations
completed for the year ended March 31, 1998, the Company reduced the carrying
value of goodwill by $73.5 million, net of accumulated amortization of $14.7
million, which was associated with the Philadelphia and Washington companies
purchased by CAI in September 1995.
COMPARISON OF OPERATING RESULTS
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
CAI's revenue decreased $7.7 million ($28.6 million FY 1998; $36.3
million FY 1997) in the year ended March 31, 1998 compared to the prior year.
The decrease resulted primarily from the Company's strategy not to pursue
analog-based television subscriber growth while it evaluates its business
opportunities in addition to subscription television. As anticipated, the
policy had a negative impact on the Company's subscription revenues. As of
March 31, 1998, the Company's subscriber base had decreased by approximately
18,800 to 52,000 subscribers from approximately 70,800 at March 31, 1997.
CAI's television subscription revenue was $26.1 million for the year
ended March 31, 1998 compared to $33.1 million for the year ended March 31,
1997 as generated by the following operating systems: Albany, NY ($3.0 vs.
$3.2 million), Rochester, NY ($0.7 vs. $0.7 million), New York City, NY ($4.7
vs. $7.3 million), Hampton Roads, VA ($0.9 vs. $1.1 million), Philadelphia, PA
($15.6 vs. $19.4 million), Washington, DC ($1.0 vs. $1.2 million), and by the
SMATV operations in Providence, RI ($0.2 vs. $0.2 million).
Operating expenses were $166.0 million and $81.6 million for the years
ended March 31, 1998 and 1997, respectively. The $84.4 million increase is
attributable primarily to (a) the $73.5 million write-down of goodwill; (b)
restructuring costs of $5.0 million; (c) increased depreciation and
amortization of $2.4 million ($34.7 million FY 1998; $32.3 million FY 1997) due
to the commencement of depreciation of the Boston project of $2.2 million; (d)
Boston operating costs of $4.0 million for the current year; and (e) the write-
off of $7.1 million of project costs in FY 1998 versus $2 million in FY 1997
reflecting the change in business strategy given the Company's limited capital
resources. License fees did not decrease commensurate with the revenue
decrease due to minimum monthly payment requirements.
CAI recorded equity losses of $31.7 million for the year ended March 31,
1998 relating to its 60% investment in CS Wireless and 25% investment in TSS.
The decrease in CAI's investment in CS reflects the Company's pro rata share of
the $52.3 million net loss reported by CS Wireless for its year ended December
31, 1997 along with $2.4 million of amortization of the goodwill associated
with this investment compared to an aggregate loss of $17.6 million for the
same period last year. In addition, based on the current depressed industry
conditions of the wireless industry and CS Wireless's continuing losses,
management has re-evaluated the goodwill associated with its investment in CS
Wireless. Accordingly, the goodwill portion of the CS Wireless investment had
been written-down by $23.6 million during the year ended March 31, 1998. The
decrease in CAI's investment in TSS of $1.8 million reflects the Company's pro-
rata share of the $7.0 million loss reported by TSS since its inception through
March 31, 1998, and amortization of goodwill.
Other income, primarily interest income on the debt escrow funds, for the
year ended March 31, 1998 was $4.4 million compared to $6.4 million for last
year. Interest income on investments continues to decline as funds are used to
make the semi-annual interest payments on the Senior Notes (totaled $33.7
million during the year ended March 31, 1998). The debt service escrow account
has funds available for the September 1998 semi-annual interest payment as
required by the Indenture for the Senior Notes. The decline in interest income
was partially offset by a $1.2 million gain from the sale of certain assets.
Interest expense increased $6.5 million ($47.3 million FY 1998; $40.8
million FY 1997) for the year ended March 31, 1998. The increase in interest
expense for the year consists of interest incurred on the F/C Credit Facility
and Secured Notes, and amortization of the financing fees associated with those
facilities.
The Company recorded an income tax benefit of $15.0 million for the year
ended March 31, 1997 to offset existing deferred tax liabilities. There is no
tax benefit for the current year 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.
Additionally, the Company realized a net extraordinary gain of $5.3
million for the year ended March 31, 1998, consisting of a $10 million gain as
a result of the Termination Agreement, the exchange of BANX Securities, and the
forgiveness of accrued interest related to the BANX Term Notes,offset, in part,
by the $4.7 million non-recurring charge related to the write off of the
unamortized costs arising from the early termination of the F/C Credit Facility.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
The following tables illustrate the changes discussed below in
management's discussion of the results of operations.
OPERATING REVENUES
(in millions of dollars)
YEAR ENDED MARCH 31,
1997 1996 CHANGE
---- ---- ------
Same Systems $13.4 $15.4 $ (2.0)
Acquired Systems (FY 96) 22.9 12.0 10.9
----------------------------------------------
Total 36.3 27.4 8.9
Disposals:
Disposed Systems (FY 96) - 3.3 (3.3)
----------------------------------------------
Total operating revenues $36.3 $30.7 $ 5.6
===== ===== ======
OPERATING EXPENSES
(in millions of dollars)
YEAR ENDED MARCH 31,
1997 1996 CHANGE
---- ---- ------
Same Systems $27.9 $30.9 $ (3.0)
Acquired Systems (FY 96) 33.3 16.4 16.9
Corporate operations 20.4 13.1 7.3
---------------------------------------------
Total 81.6 60.4 21.2
Disposals:
Disposed Systems (FY 96) - 5.1 (5.1)
Total operating expenses $81.6 $65.5 $ 16.1
CAI's revenue increased $5.6 million ($36.3 million FY 1997; $30.7
million FY 1996) in the year ended March 31, 1997 over the same period in the
prior year. The increase resulted primarily from the acquisition of ACS, with
operating systems in Philadelphia, Cleveland, and Bakersfield, and the
acquisition of ECNW, with an operating system in Washington D.C. ("Acquired
Systems" except for the "Disposed Systems" (Cleveland and Bakersfield) which
were contributed to CS Wireless). Both acquisitions were made on September
29, 1995. Acquired Systems revenue increased $10.9 million ($22.9 million FY
1997; $12.0 million FY 1996) over the six-month period included in the prior
year. Revenue from operations that were owned throughout both years ("Same
Systems") decreased $2.0 million ($13.4 million FY 1997; $15.4 million FY
1996) in the year ended March 31, 1997, primarily due to the decrease in
the number of subscribers mentioned above. During December 1996, CAI
instituted a $2 per subscriber rate increase that, while increasing the average
revenue per subscriber; may have caused additional net reduction of
subscribers in the last quarter FY 1997 and into the future.
CAI's television subscription revenue was $33.1 million for the year
ended March 31, 1997 as compared to $28.1 million for the year ended March 31,
1996 generated by the following systems: Albany ($3.2 vs. $3.1 million),
Rochester ($0.7 vs. $0.7 million), New York City ($7.3 vs. $9.2 million),
Hampton Roads ($1.1 vs. $0.8 million), Philadelphia ($19.4 vs. $10.8 million) ,
Cleveland ($0 vs. $2.1 million), Bakersfield ($0 vs. $0.9 million), Washington
($1.2 vs. $0.2 million), Hartford VDT ($0 vs. $0.1 million), and Providence
SMATV ($0.2 vs. $0.2 million). The systems with zero for the current year were
either Disposed Systems or systems in which service was discontinued (Hartford
VDT) in the prior year.
Operating expenses were $81.6 million and $65.5 million for the years
ended March 31, 1997 and 1996, respectively. The $21.2 million increase,
excluding the Disposed Systems, is attributable primarily to increases in (a)
operations of acquired systems (ACS and ECNW) of $10.3 million ($20.3 million
FY 1997; $10.0 million FY 1996), excluding depreciation and amortization, due
to a year of operations of the Philadelphia and Washington systems in FY 1997
versus only six months in FY 1996; (b) general and administrative corporate
operations of $3.2 million ($9.4 million FY 1997; $6.2 million FY
1996),excluding depreciation and amortization, primarily due to increased
staffing and effort to maintain a larger operation, developing digital markets,
and developing other potential uses of the wireless channel rights; (c)
depreciation and amortization of $9.4 million ($32.3 million FY 1997; $22.9
million FY 1996) primarily due to the acquisition of ACS and ECNW fixed assets,
wireless channel rights, and goodwill; and (d) abandoned project costs of $2.1
million in FY 1997; offset by a decrease in marketing costs of the Same Systems
of $1.1 million ($2.0 million FY 1997; $3.1 million FY 1996) due to a
concentrated effort to reduce marketing costs and limit subscriber growth in
light of the then anticipated implementation of the BR Agreement with BANX.
CAI has a $17.6 million equity in net loss of affiliate for the year
ended March 31, 1997, relating to its 48% investment in CS Wireless. In the
prior year, CAI's operating systems contributed to CS Wireless on February 23,
1996 were consolidated in the operating results of CAI from October 1, 1995 to
December 31, 1995.
Interest income increased $0.4 million ($6.4 million FY 1997; $6.0
million FY 1996) for the year ended March 31, 1997. The increase is primarily
due to interest earned on the Debt Service Escrow established in connection
with the Company's offering of 12 1/4 % Senior Notes Due 2002 and the
investment of the cash remaining from the net proceeds of the Senior Notes
offering. In future periods, interest income is anticipated to steadily
decrease as the Debt Service Escrow and investments are used to fund debt
service, project costs, capital purchases, and operations of the Company.
Interest expense increased $16.2 million ($40.8 million FY 1997; $24.6
million FY 1996) for the year ended March 31, 1997. The increase is primarily
due to interest expense incurred on the Senior Notes issued on September 29,
1995. Interest expense is expected to increase in FY 1998 with the addition of
the $30 million of interim financing.
INFLATION
Management does not believe that inflation has had or will have a
material impact on the Company's results of operations.
THE YEAR 2000 ISSUE
The Company is in the process of assessing issues relating to what is
generally referred to as the Year 2000 Issue. Based on preliminary
information, as of the date of this report, the Company believes that it will
be able to implement successfully the systems and programming changes necessary
to address the Year 2000 Issue, and does not expect the cost of such changes to
have a material impact on the Company's financial position, results of
operation or cash flows in future periods.
SEASONALITY OF INSTALLATION ACTIVITIES
The rate at which new subscriber installations occur can be affected by
severe winter or other weather conditions and limited daylight hours in the
winter months in certain markets. Therefore, CAI may experience lower than
average subscriber growth and capital expenditures primarily during the winter
season.
NEW ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 125 ("SFAS No. 125") -
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This statement, which would be effective for all transfers
after December 31, 1997, addresses several matters that have a significant
impact on certain industries. SFAS No. 125 addresses how and when to record
transferred assets, transfers of partial interests, servicing of financial
assets, securitizations, transfers of sales-type and direct financing lease
receivables, securities lending transactions, repurchase agreements including
"dollar rolls," "wash sales," loan syndications and participations, risk
participations in banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities, collateral,
repurchase agreements and how to amortize servicing assets and liabilities.
CAI's adoption of this pronouncement in the 4th quarter of the fiscal year
ended March 31, 1998 did not have a material effect on CAI's financial position
or results of operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income", which was issued in June 1997 is effective
for fiscal years beginning after December 15, 1997. SFAS No. 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. Effective April 1, 1998, the Company will comply with the
requirements of SFAS No. 130 not already met.
In June 1997, STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131 ("SFAS
No. 131"), "Disclosures About Segments of an Enterprise and Related
Information," 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 No. 131 and make the necessary
disclosures.
In April 1998, AICPA STATEMENT OF POSITION 98-5 ("SOP 98-5"), "Reporting
on the Costs of Start-Up Activities" was also issued. This pronouncement is
effective for fiscal years beginning after December 31, 1998 and requires that
costs of start-up activities, including organizational costs, should be
expensed as incurred. CAI's adoption of this pronouncement in the 4th quarter
of the fiscal year ended March 31, 1998 did not have a material effect on CAI's
financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page No.
IN FORM 10-K
FINANCIAL STATEMENTS
Reports of Independent Accountants 35
Consolidated Balance Sheets - March 31, 1998 and 1997 37
Consolidated Statements of Operations - Years Ended March31, 1998, 1997, and 1996 38
Consolidated Statements of Shareholders' Equity (Deficit) - Years Ended
March 31, 1998, 1997, and 1996 39
Consolidated Statements of Cash Flows - Years Ended March31, 1998, 1997, and 1996 40
Notes to Consolidated Financial Statements 43
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors
CAI Wireless Systems, Inc. and Subsidiaries
Albany, New York
We have audited the accompanying consolidated balance sheets of CAI Wireless
Systems, Inc. and Subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of CS Wireless Systems,
Inc., the Company's investment in which is accounted for by use of the equity
method. The Company's investment of $43,337,527 and $88,534,526 in CS Wireless
Systems, Inc. as of March 31, 1998 and 1997 and its share of losses of
$27,522,000 and $17,600,000 in CS Wireless Systems, Inc.'s operations for the
years ended March 31, 1998 and 1997 are included in the accompanying financial
statements. The financial statements of CS Wireless Systems, Inc. were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for CS Wireless Systems, Inc., is
based on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of CAI Wireless Systems, Inc. and
Subsidiaries as of March 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and incurred substantial debt, of which $45,000,000 is
due on June 30, 1998. The Company also has a capital deficiency. The
Company's operating plans require additional funds which may take the form of
debt or equity security issuances, borrowings or asset sales. In addition, the
Company intends to, if approved by its creditors, file a pre-packaged
reorganization plan under Chapter 11 of the U.S. Bankruptcy Code. Recovery of
the Company's intangible and other long-lived assets is dependent on the
Company's ability to implement its operating plans. There can be no assurance
that additional financing will be available or that the Company will be able to
implement its operating plans. The uncertainty over the Company's ability to
obtain such additional financing or that the Company can execute its operating
plans raises substantial doubt about the ability of the Company to continue as
a going concern. Management's plans in regard to these matters are described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
June 15, 1998, except for Note 2,
as to which the date is June 24, 1998
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CS Wireless Systems, Inc.:
We have audited the consolidated balance sheets of CS Wireless Systems, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended (not presented separately herein). These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits{ }in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CS Wireless
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years{ }then ended in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 13, 1998
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 1,275,020 $ 10,471,918
Restricted cash 9,134,651 -
Debt service escrow 16,418,922 47,865,389
Subscriber receivables, net 387,144 695,707
Prepaid expenses 661,669 1,034,106
Property and equipment, net 49,898,337 69,767,017
Wireless channel rights, net 194,050,792 207,680,551
Investment in CS Wireless Systems, Inc. 43,337,527 88,534,526
Investment in TelQuest Satellite Services LLC 3,174,732 -
Goodwill, net 22,985,876 104,204,716
Debt financing costs, net 7,079,424 9,249,934
Other assets 3,061,780 2,835,651
------------ ------------
Total Assets $351,465,874 $542,339,515
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Accounts payable $ 4,852,091 $ 6,600,584
Accrued expenses 12,253,286 16,138,811
Wireless channel rights obligations 4,832,971 5,302,600
Interim debt financing 45,000,000 -
Notes payable 37,088,506 36,786,596
Senior notes 275,000,000 275,000,000
------------ ------------
379,026,854 339,828,591
============ ============
Mandatorily redeemable preferred stock
14% Senior convertible preferred stock
(liquidation value $70,000,000) - 69,160,000
---------- -----------
Accrued preferred stock dividends - 18,660,734
---------- -----------
- 87,820,734
---------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, none outstanding - -
Common stock, 100,000,000 shares authorized, no par
value; shares issued and outstanding:
March 31, 1998 - 40,543,039
March 31, 1997 - 40,540,539 275,770,764 275,769,414
Additional paid-in capital 101,711,759 -
Accumulated deficit (405,043,503) (161,079,224)
----------- ------------
(27,560,980) 114,690,190
----------- ------------
Total Liabilities and Shareholders' Equity
(Deficit) $351,465,874 $542,339,515
============ ============
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
1998 1997 1996
---- ---- ----
Revenues $ 28,621,710 $ 36,326,816 $ 30,682,486
------------ ------------- ------------
Costs and expenses:
Programming and license fees 15,459,663 16,051,094 12,582,750
Marketing 1,373,265 2,033,107 3,525,396
General and administrative 35,875,749 31,196,446 24,689,572
Depreciation and amortization 34,713,610 32,345,327 24,718,341
Write-down of goodwill 73,500,000 - -
Restructuring costs 5,033,316 - -
------------ ------------ -----------
165,955,603 81,625,974 65,516,059
------------ ------------ -----------
Operating loss (137,333,893) (45,299,158) (34,833,573)
------------ ------------ -----------
Other income (expense):
Interest expense (47,226,574) (40,805,791) (24,608,258)
Equity in net losses of affiliates (31,747,268) (17,600,000) -
Write-down of equity investment (23,570,000) - -
Interest and other income 4,458,782 6,406,742 6,134,349
----------- ------------ -----------
(98,085,060) (51,999,049) (18,473,909)
----------- ----------- -----------
Loss before income tax benefit,
extraordinary items and minority interest (235,418,953) (97,298,207) (53,307,482)
Income tax benefit - 15,000,000 12,000,000
----------- ----------- -----------
Loss before extraordinary items and
minority interest (235,418,953) (82,298,207) (41,307,482)
Extraordinary net gain from early
extinguishment of debt 5,345,699 - -
Minority interest - - 321,910
----------- ---------- ----------
Net loss (230,073,254) (82,298,207) (40,985,572)
Preferred stock dividends (13,891,025) (13,011,270) (5,878,960)
------------ ----------- -----------
Loss applicable to common shareholders $(243,964,279) $(95,309,477) $ (46,864,532)
============= ============ ============
Basic and diluted loss per common share:
Loss before extraordinary items $ (6.15) $ (2.38) $ (1.73)
Extraordinary gain 0.13 - -
----------- ----------- -----------
Net loss $ (6.02) $ (2.38) $ (1.73)
=========== =========== ===========
Weighted average number of common shares
outstanding 40,540,731 40,069,258 27,075,578
========== ========== ==========
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
BALANCE AT APRIL 1, 1995 15,754,018 $ 40,341,043 $ 5,042,643 $ (23,268,333) $ 22,115,353
Net proceeds from sale of common stock 179,765 1,470,329 - - 1,470,329
Value assigned to detachable warrants - - 1,350,000 - 1,350,000
Common stock issued to acquire 49% minority
interest in Hampton Roads Wireless, Inc. 652,523 8,000,000 - - 8,000,000
Less issuance costs - (47,058) - - (47,058)
Common stock issued in ACS Merger 19,362,611 190,600,700 - - 190,600,700
Less registry costs - (1,316,743) - - (1,316,743)
Common stock issued in ECNW Merger 1,880,565 18,652,859 - - 18,652,859
Senior preferred stock issuance costs - - (1,349,984) - (1,349,984)
Preferred stock dividends - - (5,042,659) (836,301) (5,878,960)
Net loss for the year - - - (40,985,572) (40,985,572)
---------- ----------- ----------- ------------ -----------
BALANCE AT MARCH 31, 1996 37,829,482 257,701,130 - (65,090,206) 192,610,924
Series A 8% preferred stock converted to
common stock 2,637,742 18,049,955 - - 18,049,955
Value assigned to warrants exercised 73,315 18,329 - (18,329) -
Senior preferred stock issuance costs - - - (661,212) (661,212)
Preferred stock dividends - - - (13,011,270) (13,011,270)
Net loss for the year - - - (82,298,207) (82,298,207)
---------- ----------- ----------- ------------ -----------
BALANCE AT MARCH 31, 1997 40,540,539 275,769,414 - (161,079,224) 114,690,190
Common stock issued in exchange for BANX
warrants 2,500 1,350 - - 1,350
Senior preferred stock and accumulated
dividends contributed to capital pursuant
to the BANX termination agreement on
March 3, 1998 - - 101,711,759 - 101,711,753
Preferred stock dividends - - - (13,891,025) (13,891,025)
Net loss for the year - - - (230,073,254) (230,073,254)
---------- ----------- ----------- ------------ -----------
BALANCE AT MARCH 31, 1998 40,543,039 $275,770,764 $101,711,759 $(405,043,503) $ (27,560,980)
========== =========== =========== ============ ============
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997, AND 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(230,073,254) $(82,298,207) $ (40,985,572)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 34,713,610 32,345,327 24,718,341
Goodwill write-down 73,500,000 - -
Equity in net losses of affiliates 31,747,268 17,600,000 -
Write-down of equity investment 23,570,000 - -
Extraordinary net gain on early extinguishment of debt (5,345,699) - -
Deferred income tax benefit - (15,000,000) (12,000,000)
Debt financing costs and discount amortization 4,915,160 3,336,483 1,778,893
Write-off of projects and other costs 7,136,940 2,087,144 -
Gain on the sale of assets (1,239,175) (16,851) -
Minority interest - - (321,910)
Other 180,230 277,820 (193,890)
Changes in assets and liabilities:
Subscriber receivables 273,604 690,092 (111,677)
Other assets 638,880 (382,798) (128,117)
Accounts payable and accrued expenses 12,040,324 6,608,567 (7,404,356)
---------- ---------- ----------
Net cash used in operating activities (47,942,112) (34,752,423) (34,648,288)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired - - (77,407,837)
Purchase of wireless channel rights (2,024,526) (3,686,989) (24,489,840)
Purchase of property and equipment (7,167,875) (37,109,164) (14,498,395)
Purchase of investments - (15,087,990) (250,000)
Proceeds from sale of investments 31,514,960 43,495,837 13,461,558
Proceeds from sale of assets 1,841,057 486,307 -
Investment in affiliate (4,388,433) - -
Other 2,146,551 (765,117) (1,025,793)
---------- ---------- -----------
Net cash provided by (used in) investing
activities 21,921,734 (12,667,116) (104,210,307)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes,
other debt and warrants 33,714,321 - 308,062,500
Proceeds from debt issuances held in
restricted accounts (9,134,651) - (90,638,756)
Repayment of senior and other debt (3,056,834) (45,263,492) (42,369,042)
Debt financing costs paid (4,699,356) - (2,581,183)
Proceeds from issuance of senior
preferred stock and warrants - - 70,000,000
Proceeds from issuance of common stock - - 1,545,979
Registry and other stock issuance costs paid - - (2,775,336)
Other - (108,145) (324,405)
---------- ---------- -----------
Net cash provided by (used in) financing
activities 16,823,480 (45,371,637) 240,919,757
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents (9,196,898) (92,791,176) 102,061,162
Cash and cash equivalents, beginning 10,471,918 103,263,094 1,201,932
---------- ----------- -----------
Cash and cash equivalents, ending $ 1,275,020 $ 10,471,918 $103,263,094
=========== =========== ===========
See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
1. During the years ended March 31, 1998, 1997, and 1996, in connection
with purchases of property and equipment, the Company accrued obligations of
$832,549, $1,213,335, and $3,673,925, respectively.
2. During the years ended March 31, 1998, 1997, and 1996, in connection
with certain wireless channel rights acquisitions, the Company accrued
obligations of $2,143,855, $2,380,234, and $47,256,113, respectively.
3. During the years ended March 31, 1998, 1997 and 1996, dividends on
preferred stock were accrued totaling $13,761,561, $12,848,172 and $5,812,562,
respectively. Accumulated preferred stock dividends totaling $32,422,295 were
contributed to capital in March 1998 in connection with the BANX termination
agreement (see items 5 and 6 below).
4. On November 25, 1997, all amounts outstanding and owing under the
Foothill Capital Credit Facility, totaling $17.3 million, were repaid with
proceeds from the sale by CAI of $25 million principal amount of 13% Senior
Secured Notes (the "Secured Notes") to Merrill Lynch Global Allocation Fund,
Inc. ("MLGAF").
5. 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 Business Relationship Agreement ("BR Agreement") and the
acquisition of BANX's approximately 9.9% equity interest in CS Wireless. Under
the terms of the Termination and Purchase Agreement (the "Termination
Agreement"), the Company issued $7 million 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
to CAI of 1,000,000 shares of CS Wireless common stock held by BANX.
6. In conjunction with the BANX termination transactions on March 3,
1998, MLGAF exchanged the BANX Term Notes and the BANX Senior Preferred Stock,
together with accrued but unpaid interest ($15,709,804) and dividends
($32,422,295) thereon, acquired by MLGAF on February 17, 1998, for a $30
million 12% subordinated note due 2005 and exchanged the BANX warrants for
2,500 shares of CAI Common Stock valued at $1,350.
7. During the year ended March 31, 1997, all of the Series A Preferred
Stock, with a basis of $18,050,000, was converted into 2,637,742 shares of
common stock.
8. On January 12, 1996 the Company acquired two corporations with assets
(principally wireless channel rights) approximating $2,480,000 for a cash
payment of $1,050,000 and seller financed long-term debt obligations of
$1,430,000.
9. The underwriter's discount of $8,937,500 was deducted from the
proceeds of the Senior Notes issued on September 29, 1995.
10. On September 29, 1995, the Company issued CAI Common Stock in two
acquisitions as follows:
TOTAL ACS ECNW
Fair value of assets acquired $284,375,604 $255,674,388 $28,701,216
Less:
Cash portion of purchase price 49,438,203 41,072,206 8,365,997
Liabilities assumed 22,672,180 22,367,053 305,127
Acquisition costs and fees 1,882,229 1,634,429 247,800
Note and interest receivable offset 1,129,433 - 1,129,433
----------- ----------- ----------
Value of CAI common stock issued $209,253,559 $190,600,700 $18,652,859
=========== =========== ==========
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL INFORMATION ON NON-CASH
INVESTING AND FINANCING ACTIVITIES
In addition, as part of the ACS acquisition, the Company paid ACS bank
debt of $22,334,298 and also advanced ACS $11,345,095 which was reflected in
ACS's cash balance of $8,250,488 at the date of acquisition.
In connection with the ECNW acquisition, the Company paid $500,000 for
non-compete agreements.
11. On July 13, 1995, the Company purchased the 49% minority interest in
Hampton Roads Wireless, Inc. for $8 million in CAI Common Stock.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1998 1997 1996
Cash payments for interest
$34,944,126 $34,341,025 $18,541,227
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. CAI Wireless Systems, Inc. (the "Company" or "CAI") was
incorporated in August 1991, to invest in, lease, and purchase wireless channel
rights including multi-point distribution services ("MDS") licenses and
instructional television fixed services ("ITFS") licenses, collectively multi-
channel, multi-point distribution services ("MMDS"), and develop wireless cable
systems. The Company operates six analog-based wireless cable systems providing
service to approximately 52,000 subscribers as of March 31, 1998 in New York
City, Rochester, and Albany, NY; Philadelphia, PA; Washington, DC; and
Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of wireless cable
channel rights in eight additional markets, including Long Island, Buffalo and
Syracuse, NY; Providence, RI; Hartford, CT; Boston, MA (built-out with limited
Internet operations); Baltimore, MD; and Pittsburgh, PA. For the fiscal year
ended March 31, 1998, approximately 60%, 18% and 11% of total revenues were
derived from the Philadelphia, New York City and Albany systems, respectively,
as compared to 59%, 22% and 9% last year.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
All acquisitions of companies have been accounted for on the purchase method of
accounting and the purchase prices have been "pushed down" to the acquired
companies, primarily to wireless channel rights and goodwill.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates and
assumptions. Estimates are adjusted and write-downs are made when events and
circumstances occur that warrant such action.
CASH EQUIVALENTS AND RESTRICTED CASH. For purposes of reporting cash flows,
the Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market type funds. The Company has a
concentration of credit risk with regard to its cash in excess of the amount
subject to federal insurance and money market type funds. The Company has
mitigated its risk by depositing its cash in high credit quality financial
institutions and by investing in low risk, high grade money market type funds
which invest in U.S. government securities or high grade commercial paper. The
net proceeds from the issuance to MLGAF of the Secured Notes are held in an
account controlled by MLGAF. The release of funds is limited by MLGAF to
expenditures that are in accordance with the Company's operating plan as
submitted to MLGAF.
ACCOUNTS RECEIVABLE. The Company has a geographic concentration of credit risk
with respect to accounts receivable since all of its subscribers are located in
the northeastern section of the United States. However, this risk is mitigated
based on subscribers being primarily residential with diverse economic
backgrounds. The Company provides an allowance for doubtful accounts, which
amounted to $221,000 and $751,000 at March 31, 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT. Property and equipment are carried at cost.
Depreciation and amortization is calculated by the straight-line and
accelerated methods over the estimated useful lives of the related assets. The
Company capitalizes subcontractor and direct employee labor costs incurred in
connection with the installation of its television reception equipment on
subscriber premises. Amortization of such costs is based on the estimated
subscriber turnover rate for each system. These turnover rates range from 2 to
5 years.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENT IN AFFILIATES
CS WIRELESS SYSTEMS, INC. The investment in CS Wireless Systems, Inc.
("CS Wireless") is recorded at cost and the difference between CAI's cost and
the pro-rata ownership of the underlying equity is being amortized over 15
years, commensurate with goodwill and wireless channel rights amortization
periods to which the investment primarily relates. CAI records its share of CS
Wireless's net loss, adjusted for the amortization of its investment, under the
equity method because the Company does not control day to day operations and
due to the significant participation rights of the minority shareholder. CS
Wireless was a wholly-owned subsidiary until February 23, 1996 when, as a
result of the CAI-Heartland closing, it became 52% owned. Subsequent
transactions have changed the Company's interest to 60%. CS Wireless reports
on a December fiscal year basis and, accordingly, the Company records its
proportionate share of the results of CS Wireless' operations based on their
fiscal period ending three months earlier than that of the Company.
TELQUEST SATELLITE SERVICES LLC. The investment in TelQuest Satellite
Services LLC ("TSS") is recorded at cost and the difference between CAI's cost
and the pro-rata ownership of the underlying equity is amortized over 15 years,
commensurate with the affiliation agreement between CAI and TSS. The Company
records its share of TSS' net loss, adjusted for the amortization of its excess
investment, under the equity method.
INTANGIBLES
WIRELESS CHANNEL RIGHTS.Wireless channel rights are carried at cost and
amortized over their estimated useful lives, generally 15 years, commencing
when the related market is placed in service or available for service.
GOODWILL. Goodwill, consisting of acquisition costs in excess of the
amounts allocated to assets and liabilities of the companies acquired, is
amortized over 15 years. Accumulated amortization was $4,597,136 as of March
31, 1998 and $11,578,300 as of March 31, 1997.
DEBT FINANCING Costs. Costs incurred to obtain financing are amortized
over the respective terms of the debt, primarily seven years.
LONG-LIVED ASSETS. The Company adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
on April 1, 1996. This statement requires that long-lived assets and certain
identifiable intangibles be periodically reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Pursuant to SFAS No. 121, the Company
periodically reviews wireless channel rights and other long-lived assets
whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. When such circumstances occur, the
Company evaluates the possible effects on the carrying amount of such assets.
The Company's estimates of future gross revenues and operating cash
flows, the remaining estimated lives of long-lived assets, or both could be
reduced in the future due to changes in, among other things, technology, the
Company's ability to obtain permission for flexible use of the wireless channel
rights, government regulation, available financing or competition. The
Company's estimate of future gross revenues and operating cash flows assumes
that the Company will successfully develop and provide digital wireless cable
systems as well as video, voice and data transmission such as Internet access
and telephony. Since these alternative uses of the MMDS spectrum are in the
early stages of development, there is no assurance that the Company can
commercially deploy such alternatives or that it will be able to achieve
positive cash flow from any operating activities. Based on
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
the results of its valuation as of March 31, 1998, the Company recorded a $73.5
million write-down (net of an accumulated amortization adjustment of $14.7
million) of the goodwill associated with the wireless channel rights acquired
from companies purchased by CAI in September 1995.
INVESTMENTS IN DEBT SERVICE ESCROW. Investments in the debt service escrow,
consisting of debt instruments maturing at September 1998 to coincide with the
final escrow interest payment on the Senior Notes, are carried at cost since
they will be held to maturity. Each investment is adjusted for accretion of
discounts and amortization of premiums which are reflected in interest income.
REVENUE RECOGNITION. Revenues from subscribers are recognized in the period
that service is rendered. Subscriber installation fees are recognized as
revenue to the extent of costs to obtain subscribers.
STOCK OPTIONS. On April 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires entities to recognize as expense
over the vesting period, the fair value of all stock-based awards on the date
of grant or alternatively, to continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as
if the fair value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosures of SFAS No. 123. Under APB Opinion No.
25, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
INCOME TAXES. The Company files a consolidated federal income tax return with
its subsidiaries in which it owns 80% or more of the outstanding common stock.
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable for future
years to the difference between the financial statement and tax basis of
existing assets and liabilities. The effect of tax rate changes on deferred
taxes is recognized in the income tax provision in the period that includes the
enactment date. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that all, or some portion, of such
deferred tax asset will not be realized.
LOSS PER SHARE. The Company has adopted Statement of Financial Accounting
Standards No. 128 ("SFAS No. 128") - "Earnings Per Share" for the year ended
March 31, 1998. Accordingly, the Company replaced the "primary" EPS
requirements with a "basic" EPS computation based upon the weighted-average
common shares outstanding. Due to the Company's net losses, only the basic
loss per share amounts are reflected in the accompanying Statements of
Operations. Outstanding options, warrants, and other convertible securities
were not considered for the purposes of calculating the weighted average common
shares outstanding since these securities were determined to be anti-dilutive.
RECLASSIFICATION. The Company has reclassified certain items in prior years'
financial statements to make them comparative to the current year presentation.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
RECENT ACCOUNTING PRONOUNCEMENTS.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 125 ("SFAS No. 125") -
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." This statement, which would be effective for all transfers
after December 31, 1997, addresses several matters that have a significant
impact on certain industries. SFAS No. 125 addresses how and when to record
transferred assets, transfers of partial interests, servicing of financial
assets, securitizations, transfers of sales-type and direct financing lease
receivables, securities lending transactions, repurchase agreements including
"dollar rolls," "wash sales," loan syndications and participations, risk
participations in banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities, collateral,
repurchase agreements and how to amortize servicing assets and liabilities.
CAI's adoption of this pronouncement in the 4{th} quarter of fiscal year ended
March 31, 1998 did not have a material effect on CAI's financial position or
results of operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income", which was issued in June 1997 is effective
for fiscal years beginning after December 15, 1997. SFAS No. 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. Effective April 1, 1998, the Company will comply with the
requirements of SFAS No. 130 not already met.
In June 1997, STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131 ("SFAS
No. 131"), "Disclosures About Segments of an Enterprise and Related
Information," 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 No. 131 and make the necessary
disclosures.
In April 1998, AICPA STATEMENT OF POSITION 98-5 ("SOP 98-5"), "Reporting
on the Costs of Start-Up Activities" was also issued. This pronouncement is
effective for fiscal years beginning after December 31, 1998 and requires that
costs of start-up activities, including organizational costs, should be
expensed as incurred. CAI's adoption of this pronouncement in the 4th quarter
of fiscal year ended March 31, 1998 did not have a material effect on CAI's
financial position or results of operations.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - GOING CONCERN AND FINANCIAL RESTRUCTURING
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 year ending March 31, 1999,
the Company is obligated to pay approximately $5.5 million for minimum license
fees and channel lease payments, approximately $3.7 million for operating
leases, approximately $3.5 million in wireless channel rights obligations
including MMDS license auction fees, and to fund current operating costs. The
Company projects that operating cash requirements will be approximately $20
million for the year ending March 31, 1999. Additionally, as of March 31,
1998, the Company had outstanding trade payables of approximately $4.9 million.
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, if successful, 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. In connection with achieving these objectives, CAI is committed
through additional open purchase orders as of March 31, 1998 to spend
approximately $1.8 million, primarily for capital expenditures associated with
additional development of the Boston digital transmission facilities.
FINANCIAL RESTRUCTURING
CAI's recurring losses, restrictions on its ability to obtain additional
financing, and substantial commitments, raise substantial doubt about CAI
continuing as a going concern as mentioned above. On a short-term basis, CAI
has $45 million of 13% Senior Secured Notes (the "Secured Notes") due on June
30, 1998. See Note 8. On a long-term basis, CAI has substantial indebtedness
which, beginning in the fiscal year ended March 31, 1999, will include
significant debt service requirements. As of March 31, 1998, CAI had
outstanding consolidated debt of $357,089,000.
On or about the date of the filing of this Annual Report on Form 10-K,
the Company intends to commence a pre-petition solicitation (the
"Solicitation") of votes with respect to a prepackaged reorganization plan (the
"Plan") from the holders of CAI's 12 1/4 % Senior Notes due 2002 (the "Senior
Notes") and certain other impaired creditors. CAI has not yet commenced a
reorganization case under Chapter 11 of the U.S. Bankruptcy Code (11 U.S.C.
<section><section> 101- 1330)(the "Bankruptcy Code"). If, however, CAI
receives the requisite votes indicating acceptance of the Plan, CAI intends to
file a voluntary petition (the "Petition") under Chapter 11 of the Bankruptcy
Code, and to seek, as promptly thereafter as practicable, confirmation of the
Plan.
CAI Wireless Systems, Inc. and one of its wholly-owned operating
subsidiaries, Philadelphia Choice Television, Inc., a Delaware corporation
("Philadelphia Choice") are expected to file the Petition following the
solicitation of certain CAI creditors. None of CAI's other subsidiaries,
including any of the subsidiaries that are holders of MMDS licenses issued by
the FCC or are lessees under MMDS excess capacity leases, will be parties to
the Petition. In addition, the Company intends that only those claims against
and interests in CAI specifically identified in the Plan (I.E., the holders of
the Senior Notes, holders of certain subordinated indebtedness, holders of
securities claims and holders of equity securities claims) will be impaired.
The Company intends that all other holders of claims against CAI, including
trade creditors, licensors and lessors, will be unimpaired claims against CAI.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - RESTRUCTURING (CONTINUED)
The Company intends to continue to operate its business in Chapter 11 in
the ordinary course and to seek to obtain the necessary relief from the
Bankruptcy Court to pay its employees, trade and certain other creditors in
full and on time. To fund its operations during the bankruptcy proceeding, the
Company has arranged for Debtor-in-Possession financing (the "DIP Facility") in
the principal amount of $60 million. The DIP Facility is expected to be
provided by MLGAF, the Company's current senior lender. See Note 8 below. A
portion of the proceeds of the DIP Facility will be used to repay all amounts
owed under the Company's current senior facility (approximately $47.8 million ,
including interest and fees as of May 31, 1998). The balance of the DIP
Facility will be used to fund operations and working capital throughout the
bankruptcy proceeding. The Company intends to repay the DIP Facility out of
the proceeds of a credit facility (the "Exit Facility") currently being sought
by the Company. The Exit Facility is expected to be a two-year, senior
facility in the principal amount of approximately $80 million, collateralized
by all of the assets of the Company. A portion of the proceeds of the Exit
Facility will be used to repay the DIP Facility in full, with the balance of
the Exit Facility to be used to fund operations and working capital for the 12
months following the consummation of the Plan. The Company, in consultation
with BT Alex. Brown Incorporated, its financial advisor, is actively seeking
additional lending sources willing to participate in the Exit Facility. There
can be no assurance, however, that the Company will be able to obtain the Exit
Facility, or if able to obtain the Exit Facility, that the financing will be on
terms and conditions satisfactory to the Company.
The Plan contemplates that the holders of securities claims, debt
securities claims, equity securities claims and equity securities interests,
including the holders of CAI's common stock, without par value (the "CAI Common
Stock"), and any and all options, warrants or other rights to acquire the CAI
Common Stock will not receive or retain any property or interest in property on
account of such claims.
The Company expects that the Solicitation will be completed on or about
July 27, 1998 and that the Company will file its Petition in the United States
Bankruptcy Court for the District of Delaware shortly thereafter, assuming that
the Company receives the requisite acceptances from the Solicitation.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Useful
LIFE 1998 1997
Transmission equipment 3-7 years $26,729,489 $10,529,180
Subscriber equipment 2-5 years 45,971,855 46,982,451
Leasehold improvements 5-20 years 7,102,765 1,124,354
Furniture and equipment 3-7 years 4,339,192 4,038,617
---------- ----------
84,143,301 62,674,602
Less accumulated depreciation and amortization 42,027,561 28,767,392
---------- ----------
42,115,740 33,907,210
Projects in process 7,782,597 35,859,807
---------- ----------
$49,898,337 $69,767,017
========== ==========
Subscriber equipment includes recoverable equipment (antennas,
downconverters, set-top converters, and remote controls); non-recoverable
equipment (wiring, connectors, and miscellaneous small parts); and installation
costs (outside subcontractor charges, internal direct labor, and other related
installation costs which are capitalized). The Company generally does not
capitalize the cost of disconnecting or reconnecting subscribers.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT (CONTINUED)
The projects in process primarily represent costs incurred to date
relative to establishing digital systems in Norfolk/Virginia Beach, VA and
Boston, MA. The Boston project costs, net of write-downs, were reclassified to
depreciable property and equipment, primarily transmission equipment, during
the year ended March 31, 1998. In connection with building the Boston digital
system in accordance with the Business Relationship Agreement with BANX which
was later terminated, CAI abandoned certain improvements and wrote-off certain
project costs of approximately $4 million for the year ended March 31, 1998 in
addition to other project write-offs of approximately $2.6 million and $2
million for the years ended March 31, 1998 and 1997, respectively.
Depreciation and amortization of property and equipment for the years
ended March 31, 1998, 1997, and 1996 was $14.8 million, $14.9 million, and
$12.9 million, respectively.
NOTE 4 - WIRELESS CHANNEL RIGHTS
The Company has acquired wireless channel rights through direct
negotiation with licenseholders and with sublessors of certain licenses and
through business combinations. The Company's wireless channel rights are
predominately lease arrangements, however, the Company is the direct licensee
of certain licenses and has purchase options with respect to others. The
Company's wireless channel rights are principally located in the New York City,
Albany, Long Island, Buffalo, and Rochester, New York; Hartford, Connecticut;
Norfolk/Virginia Beach, Virginia; Boston, Massachusetts; Philadelphia and
Pittsburgh, Pennsylvania; Washington, D.C.; and Baltimore, Maryland markets.
The lease and sublease agreements frequently require initial fees
followed by monthly fees based on subscriber volume, subject to certain minimum
fees. Some agreements require profit sharing with the licenseholders. The
lease and sublease periods generally follow the periods corresponding to the
actual FCC license dates with provisions for extensions upon license renewal
from the FCC. The FCC licenses are typically granted for a ten-year period and
there is no automatic renewal of such licenses. The use of such channels by
the lessors is subject to regulation by the FCC and, therefore, the Company's
ability to continue to enjoy the benefits of these leases is dependent upon the
lessors' continuing compliance with applicable regulations. Most of the
Company's leases provide that the lessor may negotiate lease renewals with only
the Company and, if a renewal agreement is not reached within a specified time,
grant the Company a right of first refusal to match any competing offers.
Although the Company does not believe that the termination of or failure to
renew a single channel lease would adversely affect the Company, several of
such terminations or failures in one or more markets that the Company actively
serves could have a material adverse effect on the Company.
The Company is obligated as of March 31, 1998 to pay minimum fees to
licenseholders or sublessors in future years as follows:
Years ending
MARCH 31,
1999 $ 5,455,000
2000 5,670,000
2001 5,813,000
2002 5,678,000
2003 5,529,000
Thereafter 6,960,000
----------
Total $35,105,000
==========
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - WIRELESS CHANNEL RIGHTS (CONTINUED)
Lease expense for the years ended March 31, 1998, 1997, and 1996 was
approximately $4.3 million, $3.7 million, and $1.7 million, respectively. The
Company capitalizes wireless channel rights acquisition costs and initial fees
and amortizes such costs when operations commence in the market to which they
relate. The non-operating wireless channel rights, totaling approximately $45
million as of March 31, 1998, and $52 million as of March 31, 1997, will be
amortized when the related market is either available for service or placed in
service, whichever occurs first. Amortization of the wireless channel rights
for the years ended March 31, 1998, 1997, and 1996 was $12 million, $9.9
million, and $6.5 million, respectively. The following is a summary of
wireless channel rights:
1998 1997
Cost of wireless channel rights $222,666,188 $224,259,175
Less accumulated amortization 28,615,396 16,578,624
----------- -----------
$194,050,792 $207,680,551
=========== ===========
Wireless channel rights obligations are generally due within one year
without interest. Wireless channel rights obligations of approximately $3.5
million, including FCC Auction obligations, are anticipated to become due in
the fiscal year ending March 31, 1999.
NOTE 5 - EQUITY INVESTMENTS
CS WIRELESS SYSTEMS, INC. The Company's equity interest in CS Wireless
increased from 50.7% to 60.0% on February 17, 1998 pursuant to the Termination
and Purchase Agreement between CAI and BANX under which CAI reacquired
1,000,000 shares of CS Wireless from BANX valued at $2.4 million. The
Company's equity interest in CS Wireless had increased from 47.7% to 50.7% as
of September 30, 1997 due to the recission of a previously recorded transaction
wherein CAI was to purchase the Portsmouth, NH wireless channel rights from
Heartland Wireless Communications, Inc. ("Heartland") in exchange for
approximately 314,000 shares of CS Wireless held by CAI. Additionally, the
Company's investment in CS Wireless reflects an equity loss of $27.5 million
and $17.6 million (based on CAI's pro-rata share of CS Wireless' net loss of
$52.6 million and $28.5 million for the years ended December 31, 1997 and 1996,
respectively) along with $2.4 million of amortization of the associated
goodwill each year.
Based on the depressed market condition of the wireless industry and CS
Wireless' continuing losses, management has re-evaluated the goodwill
associated with its investment in CS Wireless. During the year ended March 31,
1998, the goodwill portion of the CS Wireless investment was written off in the
amount of $23.6 million.
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 Wireless 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 Wireless 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
Wireless either (i) cash, (ii) a 5-year promissory note, (iii) shares of CS
Wireless 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 has disputed
Heartland's position and is in discussion with Heartland on this issue. In the
opinion of management of the Company, any settlement with Heartland would not
have a material adverse effect on the Company's financial condition, liquidity,
or results of operations.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EQUITY INVESTMENTS (CONTINUED)
The following are condensed versions of the Consolidated Balance Sheets
of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1997 and 1996
as presented in its Form 10-K for the year ended December 31, 1997:
1997 1996
ASSETS
Cash and cash equivalents $ 74,564,000 $113,072,000
Restricted cash 5,030,000 -
Other current assets 1,965,000 3,278,000
Property and equipment, net 50,519,000 42,955,000
Wireless channel rights, net 170,689,000 172,953,000
Goodwill, net 48,243,000 52,011,000
Assets held for sale - 19,366,000
Investment in and loans to equity affiliates 8,503,000 -
Debt issuance costs, net 8,260,000 9,016,000
Other assets, net 2,930,000 1,586,000
----------- -----------
$370,703,000 $414,237,000
=========== ===========
LIABILITIES AND EQUITY
Accounts payable and accrued expenses $ 8,652,000 $ 6,655,000
Other current liabilities 1,523,000 1,043,000
FCC auction payable 4,396,000 4,902,000
Long-term debt 283,903,000 271,374,000
Deferred Income Tax - 5,429,000
Equity 72,229,000 124,834,000
----------- -----------
$370,703,000 $414,237,000
=========== ===========
The following are condensed versions of the Consolidated Statements of
Operations for CS Wireless Systems, Inc. and subsidiaries for the years ended
December 31, 1997 and 1996 as presented in its Form 10-K for the year ended
December 31, 1997:
Total revenues $ 26,920,000 $ 22,738,000
----------- -----------
Operating expenses:
Systems operations 14,976,000 13,258,000
Selling, general and administrative 15,849,000 13,934,000
Depreciation and amortization 26,858,000 20,345,000
----------- -----------
Total operating expenses 57,683,000 47,537,000
----------- -----------
Operating loss (30,763,000) (24,799,000)
Interest expense (31,995,000) (24,959,000)
Interest income 5,469,000 6,600,000
Other (705,000) -
----------- -----------
Loss before income tax benefit (57,994,000) (43,158,000)
Income tax benefit 5,429,000 14,631,000
----------- -----------
Net loss $(52,565,000) $ (28,527,000)
=========== ===========
Loss per common share $ (4.94) $ (3.06)
======== ========
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - EQUITY INVESTMENTS (CONTINUED)
TELQUEST SATELLITE SERVICES LLC. The Company's investment in TelQuest
Satellite Services LLC ("TSS") reflects an equity loss of approximately $1.8
million based on CAI's pro-rata share of TSS' net loss of $7.1 million from
inception to March 1998 (see Note 15). TSS has negative net worth of
approximately $2.5 million at March 31, 1998, inclusive of a $411,567
receivable due from CAI in connection with the Company's initial investment in
TSS (see Note 8).
NOTE 6 - DEBT SERVICE ESCROW
The debt service escrow account was established to pay the first three
years of interest on the Senior Notes. Reference is made to Note 8. The
escrow is held in trust and consists of marketable government debt instruments
that will mature by the next semiannual interest payment due in September 1998.
At March 31, 1998, the debt service escrow account balance consisted of:
Gross Unrealized
AMORTIZED COST GAINS MARKET VALUE
Investments $16,360,503 $ 21,576 $16,382,079
========
Cash balance 20,575 20,575
Accrued interest 37,844 37,844
---------- ----------
Total escrow balance $16,418,922 $16,440,498
=========== ===========
The Company receives face value upon maturity of the securities in the
escrow account with no gain or loss. Also the Company has a concentration of
credit risk with respect to the investments in the escrow account which is
mitigated by investing in marketable U.S. government debt instruments.
NOTE 7 - OTHER ASSETS
Other assets consist of :
1998 1997
Related party receivables $ 954,223 $1,028,169
Deposits 1,314,226 637,143
Other 793,331 1,170,339
---------- ---------
$3,061,780 $2,835,651
========== ==========
NOTE 8 - DEBT
Debt consists of the following:
1998 1997
SENIOR DEBT
12 1/4 % Senior Notes due September 15, 2002(a) $275,000,000 $275,000,000
NOTES PAYABLE
Term notes due May 9, 2005(b) - 29,813,550
Subordinated Note due October 1, 2005(b) 30,000,000 -
Senior Secured Notes due June 30, 1998(c) 45,000,000 -
Acquisition-related notes(d) 6,634,349 6,799,029
Due to TSS(e) 411,567 -
Other 42,590 174,017
----------- -----------
$357,088,506 $311,786,596
=========== ===========
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT (CONTINUED)
Scheduled maturities of debt at March 31, 1998 are as follows:
YEARS ENDING MARCH 31,
1999 $ 45,729,755
2000 228,560
2001 5,485,120
2002 645,071
2003 275,000,000
Thereafter 30,000,000
-----------
$357,088,506
===========
(a) CAI completed an offering of $275 million of 12 1/4 % Senior Notes on
September 29, 1995. The proceeds were used in part to pay the cash portions
of certain acquisitions and to fund a debt service escrow account ("Escrow")
pursuant to the Indenture dated as of September 15, 1995 (the "Indenture")
governing the Senior Notes. The Indenture requires semi-annual interest
payments (March and September) from Escrow. The principal amount of the
Senior Notes is due in full on September 15, 2002. The Senior Notes are
general unsecured obligations of CAI except for a first priority security
interest in the Escrow and would rank equal with any other senior debt of
the Company to be issued and senior to the Company's other debt with respect
to right of payment. The Senior Notes are effectively subordinated to all
collateralized debt to the extent of the value of assets collateralizing
such debt. The Indenture also imposes certain limitations and restrictions
on CAI, including the ability to incur additional indebtedness, pay
dividends, make investments, consummate certain asset sales, enter into
certain transactions with affiliates, incur liens, engage in unrelated
businesses, and enter into mergers and/or consolidations without express
consent.
(b) Two $15 million term notes at 14% issued to affiliates of NYNEX and Bell
Atlantic ("BANX") were due on May 9, 2005. Interest accrued semi-annually
on both principal and unpaid accrued interest. The term notes contained
maintenance and compliance covenants including compliance with the Business
Relationship Agreement and the covenants mentioned in (a) above. The
original discount of $300,000 represented the value of the warrants issued
with the term notes and was amortized over the term note period as interest
expense. The interest rate increased to 16% from 14% per annum pursuant to
an adjunct agreement with certain other BANX affiliates regarding licensing
issues. For the years ended March 31, 1998 and 1997, interest expense on
the term notes approximated $6.1 million and $5.7 million, respectively.
Pursuant to the final termination of the business arrangement with BANX on
February 17, 1998, the term notes (including accumulated interest) along
with preferred equity securities held by BANX were acquired by MLGAF and
exchanged on March 3, 1998 with CAI for a new $30 million 12% subordinated
note (the "Subordinated Note") due October 1, 2005. The Statement of
Operations for the year ended March 31, 1998 reflects an extraordinary net
gain on debt restructuring, including a gain of approximately $10 million
related to the accrued interest forgiven, net of the BANX payment and
related closing costs. Interest on the Subordinated Note compounds semi-
annually and is payable at maturity. The Subordinated Note is subordinate to
the $45 million of 13% Senior Secured Notes currently held by MLGAF (see (c)
below) and the Senior Notes. The Subordinated Note is a joint and severable
obligation of CAI and certain of its wholly owned subsidiaries. The
obligation of the subsidiaries to repay the Subordinated Note, however, is
limited by the terms of the Indenture governing the Senior Notes.
(c) INTERIM DEBT FINANCING
13% SENIOR SECURED NOTES. On November 25, 1997, the Company issued and sold
$25 million of Secured Notes to MLGAF. CAI used approximately $17 million
of the proceeds to repay all amounts outstanding under the F/C Credit
Facility (defined below), and the remaining proceeds of approximately $7.3
million, 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 million
Secured Note to MLGAF, and on February 17, 1998, the Company issued and sold
an additional $18 million of Secured Notes in connection with the
consummation of the BANX termination agreement.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT (CONTINUED)
The Secured Notes are short-term obligations of CAI, maturing on June 30,
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
MLGAF, as amended from time to time (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 $730,000 commitment fee
to MLGAF, which is also due at maturity. All outstanding amounts under the
Note Purchase Agreement are expected to be converted into and deemed to be
outstanding obligations under the DIP Facility.
As collateral for the Secured 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 Wireless 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 MLGAF.
FOOTHILL CAPITAL CREDIT FACILITY. On November 25, 1997, the Company used a
portion of the proceeds from the issuance of the Secured Notes to repay all
amounts outstanding and owing to Foothill Capital Corporation and affiliates
of Canyon Capital Management, L.P. (the "F/C Lenders") under the credit
facility provided by the F/C Lenders (the "F/C Credit Facility") to CAI in
June 1997. At the time of repayment, there was approximately $17.3 million
outstanding under the F/C Credit Facility, consisting of $15.3 million
representing the principal amount of the loans outstanding under the F/C
Credit Facility; a $1.6 million fee, and $350,000 representing interest on
the outstanding loans and fees.
The repayment of the F/C Credit Facility in November 1997 represented the
early termination of the F/C Credit Facility. Prior to its termination and
repayment in full, 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. All of the waivers
executed and delivered by the Company to the F/C Lenders contained a general
release of the F/C 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 F/C Lenders in connection with the repayment of all Company
obligations under the F/C Credit Facility. The early termination of the F/C
Credit Facility resulted in the Company recording a third quarter
extraordinary charge of approximately $4.7 million, 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.
(d) The notes payable for acquisitions consist of (1) a series of notes in the
aggregate amount of $2.8 million relating to the Baltimore Asset purchase
due on September 29, 2000, with interest payable quarterly at 8% per annum
through September 1998 and 12% per annum thereafter to maturity. The notes
are subordinated to all other CAI obligations for borrowed money unless, by
its terms, such obligations are not Senior Indebtedness and all other
obligations collateralized by liens or a security interest on CAI property;
and (2) acquisition notes payable reflecting the notes issued to Mr. Bott
and the Bott Family Trust in connection with the purchase of four
corporations with wireless channel rights. Three Bott corporations were
acquired on March 31, 1994 partly through the issuance of notes with a face
value of $3.8 million, discounted to $2.9 million based on an imputed
interest rate of 8.5%. Another Bott corporation was acquired in January
1996 partly through the issuance of a note with a face value of $1.4
million, discounted to $757,000 based on an imputed interest rate of
12 1/4 %. Each of the Bott notes is collateralized by the common stock of
the company acquired and mature through January 2002.
(e) The $411,567 payment to TSS reflects the final cash portion of the
Company's initial investment in TSS which was scheduled for payment on June
1,1998; paid early on April 1, 1998.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT (CONTINUED)
Pursuant to CAI's debt instruments, CAI is restricted from incurring
additional indebtedness (except in connection with purchases of goods and
services in the ordinary course of business, and other ordinary course
indebtedness permitted thereunder), granting liens to secure repayment of
indebtedness, making investments (other than investments specifically permitted
thereunder), paying dividends, disposing of assets, entering into any merger,
consolidation, reorganization, or recapitalization plan, retiring long-term
debt, or making any acquisitions without the prior consent of the lenders.
NOTE 9 - INCOME TAXES
The components of the consolidated income tax benefit for the years ended
March 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996
Current $ - $ - $ -
Deferred - 15,000,000 12,000,000
------- ---------- ----------
Total $ - $15,000,000 $12,000,000
======= ========== ==========
The primary items giving rise to the difference between the federal
statutory tax rate and the Company's effective tax rate is the recognition of
certain tax benefits associated with acquisitions as a reduction to goodwill
under the purchase accounting rules for the year ended March 31, 1996 and the
establishment of a valuation allowance against deferred tax assets for the
years ended March 31, 1998 and 1997.
The significant components of deferred tax assets (liabilities) are as
follows:
1998 1997 1996
Net operating loss carryovers $103,213,000 $ 72,100,000 $ 24,915,000
Intangibles (31,911,000) (32,635,000) (34,841,000)
Investment in CS Wireless (6,305,000) (18,726,000) (24,000,000)
Property and equipment (908,000) (2,352,000) (1,434,000)
Other, net 306,000 513,000 (50,000)
----------- ---------- ----------
Total net deferred tax asset
(liability) 64,395,000 18,900,000 (35,410,000)
Less: Valuation allowance (64,395,000) (18,900,000) -
---------- ---------- ----------
Net deferred tax liability $ - $ - $(35,410,000)
============ =========== ============
A valuation allowance is provided to reduce deferred tax assets to a level
which, more likely than not, will be realized. Accordingly, the Company has
recorded a full valuation allowance. The deferred tax assets recorded reflects
management's estimate of the amount which will be realized based upon current
operating results and contingencies. During the year ended March 31, 1997, the
valuation allowance established in the amount of $18.9 million was increased by
approximately $45.5 million during the year ended March 31, 1998.
The Company had available as of March 31, 1998 approximately $258 milion
of net operating loss carryforwards that expire during the period from March
31, 1999 to March 31, 2013, of which $115,000 will expire during the fiscal
year ending March 31, 1999. The use of these carryforwards are limited on an
annual basis pursuant to the Internal Revenue Code due to certain changes in
ownership and equity transactions.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value because
of the short maturities of those instruments.
DEBT SERVICE ESCROW. The fair values of the investments in the debt service
escrow are estimated based on market values.
DEBT. The fair value of the Company's debt is based on quoted market prices
for its publicly traded Senior Notes. The remaining debt is valued based on
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt with similar remaining maturities. The fair
value of debt maturing within twelve months is estimated to be its carrying
value.
Carrying Amount Fair Value
----------------------------- --------------------------------
1998 1997 1998 1997
Cash and cash equivalents $ 1,275,020 $ 10,471,918 $ 1,275,020 $ 10,471,918
Restricted cash 9,134,651 - 9,134,651 -
Debt service escrow 16,418,922 47,865,389 16,440,498 47,719,140
Debt
Senior Notes 275,000,000 275,000,000 77,000,000 129,250,000
Term notes and other 82,088,506 36,786,596 57,493,506 21,073,046
NOTE 11 - COMMITMENTS AND CONTINGENCIES
PROGRAMMING CONTRACTS. In connection with its distribution of television
programming, the Company has fixed-term contracts with various program
suppliers, such as HBO, Showtime, CNN, MTV, USA, and A&E. Contract terms range
in length from one year to ten years and expire at various dates through 2011.
Most contracts are subject to automatic renewal upon expiration unless notice
is given, by either party, of intent not to renew. These contracts require the
Company to pay fees to programmers based on the number of subscribers.
Purchase Commitments. As of March 31, 1998, the Company had approximately $1.8
million of outstanding purchase orders, primarily relating to equipment and
technical work for the digital projects.
RETIREMENT PLAN. Effective April 1, 1996, the Company sponsored a defined
contribution pension plan pursuant to Internal Revenue Code section 401(k),
covering substantially all of its employees. Contributions are withheld from
participating employees with the Company matching 50% of the first 5% of
covered employees wages withheld and contributed to the plan, which amounted to
$114,700 and $114,000 for the years ended March 31, 1998 and 1997,
respectively.
Legal Proceedings. CAI has been named in six class action lawsuits alleging
various violations of the federal securities laws filed in the United States
District Court for the Northern District of New York. The actions were
consolidated into one lawsuit entitled IN RE CAI WIRELESS SYSTEMS, INC.
SECURITIES LITIGATION (96-CV-1857) (the "Securities Lawsuit"), which is
currently pending in the Northern District of New York. The amended,
consolidated complaint, which names the Company, Jared E. Abbruzzese, chairman
and chief executive officer of the Company, John J. Prisco, president, chief
operating officer and a director of the Company, and Alan Sonnenberg, formerly
the president of the Company, as defendants, alleges a variety of violations of
the anti-fraud provisions of the Federal securities laws by CAI arising out of
its alleged disclosure (or alleged omission from disclosure) regarding its
Internet and other flexible use of MMDS spectrum, as well as its business
relationship with Bell Atlantic and NYNEX. Specifically, the complaint alleges
that defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5 promulgated under
the Exchange Act during the specified Class Period (May 23, 1996 through
December 6, 1996).
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has notified the carrier of its Directors' and Officers'
Liability insurance policy, which is intended to cover not only the Company's
officers and directors, but also the Company, itself, against claims such as
those made in the Securities Lawsuit. The policy covers up to $5 million of
any covered liability, subject to a retention amount of $500,000.
The Securities Lawsuit is in its preliminary stages. A scheduling
conference was held on June 3, 1997, at which the briefing schedule for
defendants' motion to dismiss was agreed upon among the parties. The
defendants' motion to dismiss was heard by the Northern District of New York on
October 17, 1997 and is still pending. While the motion is pending, all other
deadlines affecting motions and discovery have been postponed.
The Company and individual defendants are contesting the Securities
Lawsuit vigorously and believe it is entirely without merit at this time.
Accordingly, management believes the Securities Lawsuit will not have a
material adverse effect on the Company's earnings, financial condition or
liquidity.
The Company is also a defendant in JOE HAND PROMOTIONS, INC. V. 601 L&P,
INC. V. CAI WIRELESS SYSTEMS, INC. and JOE HAND PROMOTIONS, INC. V. CAI
WIRELESS SYSTEMS, INC. D/B/A POPVISION WIRELESS CABLE pending in the U.S.
District Court for the Eastern District of Pennsylvania. These actions arise
out of the alleged improper broadcasts of certain sporting events in commercial
establishments in violation of Federal statutes. The plaintiff is the
exclusive distributor of such sporting events in the greater Philadelphia area
for commercial establishments, and has alleged the improper broadcast by CAI in
approximately five instances. The lawsuits are in preliminary stages and are
being vigorously defended by CAI.
NOTE 12 - SHAREHOLDERS' EQUITY (DEFICIT)
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 in which $15.7 million of interest on the BANX Term Notes was
forgiven along with $32.4 million of accrued dividends. In addition, the
preferred stock MLGAF acquired from BANX in the amount of $69.3 million was
given to CAI and contributed to capital. In conjunction with the BANX
termination transactions on March 3, 1998, MLGAF exchanged the BANX Securities
acquired together with accrued but unpaid interest and dividends thereon, for a
$30 million 12% subordinated note due 2005 and exchanged the BANX warrants for
2,500 shares of CAI common stock valued at $1,350.
On September 29, 1995, the Company amended and restated its Certificate
of Incorporation, with shareholder approval, to increase the authorized number
of CAI no par Common Shares available for issuance from 45,000,000 to
100,000,000 and to authorize 15,000 shares of a new class of 14% Senior
Preferred Stock, par value $10,000 per share and 2,000,000 shares of a new
class of Voting Preferred Stock, no par value. The Senior Preferred Stock is
convertible into Voting Preferred Stock and the Voting Preferred Stock is
convertible into Common Stock.
In conjunction with the January 9, 1995 acquisition of the New York
System, the Company issued 180,500 shares of Series A 8% Redeemable Convertible
Preferred Stock. During the year ended March 31, 1997, all of the Series A 8%
Redeemable Convertible Preferred Stock had been converted into a total of
2,637,742 shares of CAI Common Stock.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The stock capitalization of the Company is as follows:
Shares Authorized Shares Issued and Outstanding
CLASS OF STOCK AS OF MARCH 31, 1998 MARCH 31, 1998 MARCH 31, 1997
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% redeemable convertible
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 40,543,039 40,540,539
=========== ========== ==========
A summary description of the Company's equity instruments follows:
14% SENIOR CONVERTIBLE PREFERRED STOCK. The Senior Preferred Stock has a
14% cumulative dividend, payable quarterly and 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.
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
March 31, 1998, there were no shares of Senior Preferred Stock issued and
outstanding.
VOTING PREFERRED STOCK. 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 a 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 March 31, 1998, there were no shares of Voting
Preferred Stock issued and outstanding.
WARRANTS. Warrants entitle the holder thereof to purchase Common Stock
pursuant to the terms and conditions contained in the warrant agreements.
OPTIONS. Options entitle the holder thereof to purchase Common Stock
pursuant to terms and conditions contained in the Option Agreements or Option
Plans.
COMMON STOCK. The Company's Common Stock is without par value and
carries one vote per share. Holders of CAI 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 March 31, 1998, there were
40,543,039 shares of Common Stock issued and outstanding.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - OPTIONS AND WARRANTS
STOCK OPTION PLANS
INCENTIVE AND NONQUALIFIED STOCK OPTION PLANS. The Company's 1995
Incentive Stock Plan (the "1995 Plan") provides for the grant of incentive
stock options qualifying under Section 422 of the Internal Revenue Code
("ISO's"), non-qualified stock options ("NQSO's"), stock appreciation rights,
performance shares and restricted stock or any combination of the foregoing, as
the Compensation Committee of the Board of Directors (the "Committee") may
determine. The 1995 Plan will expire on March 27, 2005. The number of shares
available for grants is 1.2 million 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. As of March 31, 1998, the
Company had granted options under this plan to purchase approximately 1.2
million shares of common stock at a weighted average price of $1.58 per share.
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 million 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 ISO's or NQSO's. Options granted to
independent consultants and other nonemployees may only be designated as
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. As of March 31, 1998, the Company had granted options under this plan to
purchase 996,500 shares of common stock at a weighted average price of $1.74
per share.
OUTSIDE DIRECTORS' OPTION PLAN. In October 1996, the Company adopted the
1996 Outside Directors' Stock Option Plan (the "1996 Directors' Plan"). Under
the 1996 Directors' Plan, options to purchase an aggregate of not more than
45,000 shares of common stock will be granted from time to time to nonemployee
directors. Each qualifying director shall be granted an option to purchase
7,500 shares at a price not less than 100% of fair market value on the date of
the grant. Such option shall vest: 25% on the date of grant, and 25% on each
of the second, third, and fourth anniversaries of the grant. These options are
exercisable for a period of ten years, but not before an initial six-month
period. As of March 31, 1998, the Company had granted options under this plan
to purchase 30,000 shares of common stock at a weighted average price of $1 per
share.
In October 1993, the Company adopted the 1993 Outside Directors' Option
Plan (the "1993 Directors' Plan"). Under the 1993 Directors' Plan, options to
purchase an aggregate of not more than 30,000 shares of common stock may be
granted from time to time to nonemployee directors. These options will vest at
the rate of 20% a year over five years, beginning one year after date of grant
and are exercisable for a period of seven years. The exercise price for stock
options granted under the 1993 Directors' Plan will not be less than 100% of the
fair market value of the common stock on the grant date. As of March 31,
1998, the Company had granted outstanding options under this plan to purchase
8,334 shares of common stock at $1 per share.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - OPTIONS AND WARRANTS (CONTINUED)
VALUATION OF OPTIONS. The Company applies APB Opinion No. 25 in
accounting for its Stock Option Plans and, accordingly, no compensation cost
has been recognized for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, the Company's net loss would have
been increased to the pro forma amounts indicated below:
Years Ended March 31,
-----------------------------------------------------------
1998 1997 1996
Net loss:
As reported $ (230,073,254) $ (82,298,207) $(40,985,572)
Pro forma (236,615,254) (88,839,207) (42,942,572)
Loss per common share:
As reported (6.02) (2.38) (1.73)
Pro forma (6.18) (2.54) (1.80)
The initial impact of SFAS No. 123 on pro forma earnings per share may not be
representative of the effect on income in future years because options vest
over several years and additional option grants may be made each year. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants issued in the years ended March 31, as follows:
1998 1997 1996
Dividend yield 0.0% 0.0% 0.0%
Risk free interest rate 5.8% 6.0% 6.0%
Expected life (years) 2.6 3.6 9.2
Volatility 1.0 0.99 0.72
OPTION ACTIVITY. A summary of the status of the Company's stock option
plans as of March 31, 1998, 1997 and 1996, and changes during the years ending
on those dates is presented below:
1998 1997 1996
------------------------- ----------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding, beginning 2,195,937 $4.91 1,274,134 $7.74 941,834 $12.29
Granted 1,986,062 $1.01 1,071,803 $2.20 1,756,800 $8.52
Forfeited (1,961,062) $4.82 (150,000) $7.75 (1,424,500) $11.69
---------- --------- ----------
Outstanding, ending(a) 2,220,937 $1.64 2,195,937 $4.91 1,274,134 $7.74
========== ========= ==========
Fair value of options
- - granted $0.72 $1.57 $6.43
(a) Reflects the repricing of all outstanding options granted to optionees
employed by the Company as of March 9, 1998 to $1 per share. The repricing
was recorded as a forfeiture of the original options granted and the
simultaneous grant of new options on the same terms but at the revised
exercise price $1 per share.
The total number of shares of common stock reserved for options is 2,275,000 as
of March 31, 1998.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock options
outstanding at March 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------- -------------------------------
Weighted-
Average Weighted- Weighted-
RANGE OF Number Remaining Average NUMBER Average
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
$1.00 to $2.13 2,015,337 8.13 years $1.02 1,764,137 $1.03
$6.63 to $8.00 205,600 8.09 years $7.72 205,600 $7.72
--------- ---------
2,220,937 1,969,737
========= =========
WARRANTS
THE BANX WARRANTS. The BANX Warrants to purchase Voting Preferred Stock
were canceled in the March 3, 1998 BANX termination transactions (reference is
made to Note 12).
COMMON STOCK WARRANTS. Outstanding warrants, except for those issued to
the BANX Partnership, are as follows:
Weighted-Average Number of
EXERCISE PRICE Warrants
Outstanding, March 31, 1995 $9.40 2,020,578
Issued(1) - 289,963
---------
Outstanding, March 31, 1996 $7.72 2,310,541
Issued(1) - 616,912
Exercised $0.25 (75,000)
---------
Outstanding, March 31, 1997 and 1998 $6.24 2,852,453
=========
(1) The warrants issued and certain warrant exercise prices revised
during the years ended March 31, 1997 and 1996 were pursuant to anti-
dilutive clauses in agreements relating to the warrants.
The average purchase price of outstanding common stock warrants at March
31, 1998, 1997 and 1996 was $6.24, $6.24, and $7.72 per share, based on an
aggregate purchase price of $17,811,114, $17,811,114, and $17,829,083,
respectively. Outstanding warrants will expire over a period ending no later
than January 2000.
NOTE 14 - OPERATING LEASES
The Company leases office space in each market it currently operates in
under non-cancelable agreements which expire through March 2006, and requires
various minimum monthly payments and payment of property taxes, certain
maintenance, and insurance.
The Company leases towers, land and/or building space in each of its
operating markets and certain other markets for broadcasting purposes. The
leases are non-cancelable agreements expiring through December 2012. Most of
the leases have provisions for renewal periods. The leases require various
minimum monthly payments and are subject to periodic fixed and inflationary
increases.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - OPERATING LEASES (CONTINUED)
The Company leases vehicles for customer service and other corporate use.
The agreements are non-cancelable, expire through October 2001 and require
various monthly payments. The Company is responsible for normal maintenance and
insurance.
Additionally, the Company leases certain office and broadcast test
equipment under various lease agreements for periods up to thirty-six months.
The Company pays various monthly payments and is required to maintain and
insure such equipment.
The approximate minimum rental commitments for operating leases as of
March 31, 1998 due in future years are as follows:
YEARS ENDING MARCH 31,
1999 $ 3,674,000
2000 2,980,000
2001 2,604,000
2002 1,573,000
2003 1,180,000
Thereafter 5,749,000
----------
Total $17,760,000
==========
Total rent expense for the years ended March 31, 1998, 1997, and 1996 was
approximately $3.8 million, $3.3 million, and $2.5 million, respectively.
NOTE 15 - RELATED PARTY TRANSACTIONS
INSTALLATION SERVICES. In October 1996, two of CAI's employees formed
Telecom Service Support LLC ("Telecom"), to provide subscriber installation,
service calls, and warehouse service to the subscription television industry.
CAI incurred approximately $452,000 and $348,000 for such services during the
years ended March 31, 1998 and 1997, respectively. Additionally, CAI has
advanced $20,000 and $80,000, provided leased vehicles, and provided certain
facility space to Telecom for the years ended March 31, 1998 and 1997,
respectively.
FLIGHT SERVICES. CAI periodically charters an airplane from Wave Air,
Inc., which is primarily owned by Jared E. Abbruzzese, chairman and chief
executive officer of the Company, in order to carry out business when airline
schedules are not compatible. Wave Air charges CAI for this service on an
hourly basis at or below market rates. Transactions with Wave Air, Inc.
amounted to approximately $154,000, $278,000, and $103,000 for the years ended
March 31, 1998, 1997, and 1996, respectively.
RELATED PARTY LOANS. During the year ended March 31, 1997, CAI loaned
$800,000 to Haig Capital L.L.C. ("Haig Capital") and $200,000 to TelQuest
Communications, Inc., entities in which Mr. Abbruzzese is a principal member
and stockholder, respectively, of which approximately $175,000 was repaid by
Haig Capital. In March 1997, Mr. Abbruzzese combined a $19,000 February 1997
loan from CAI, the remaining obligation of Haig Capital, accrued interest on
both loans, and an additional $100,000 advance in April 1997 into one personal
demand obligation, collateralized by equity in Haig Capital, bearing interest
at 14% per annum. The balance was $695,009 as of March 31, 1998 after an
October 1, 1997 repayment of $85,045. Additionally in June 1998, Mr.
Abbruzzese made a $45,000 payment on the obligation, reducing the principal
balance to $650,009.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS (CONTINUED)
TELQUEST SATELLITE SERVICES. TSS is a joint venture between the Company,
CS Wireless and TelQuest Communications, Inc., a company controlled by Mr.
Abbruzzese, formed on August 4, 1997 for the purpose of developing and
operating satellite systems providing digital services. In connection with the
Company's $5 million investment in TSS, the Company made four cash payments to
satisfy the $2.5 million cash portion of its investment in TSS. A $200,000
loan to TelQuest Communications was contributed to TSS for which CAI received a
credit (including accrued interest) against the cash portion of its investment
obligation. The Company has also contributed a combination of equipment (made
available to TSS under the terms of a five-year renewable lease) and cash (in
lieu of equipment) in an amount equal to approximately $2.1 million as part of
the $2.5 million equipment portion of the Company's $5 million investment in
TSS. A final payment of $411,567 was made on April 1, 1998. In return for
CAI's $5 million investment in TSS, CAI received a 25% interest in TSS, which
interest is subject to dilution upon the occurrence of certain events.
INTEREST INCOME. Interest earned on all related party loans approximated
$112,700 and $63,400 for the years ended March 31, 1998 and 1997, respectively.
EQUIPMENT SALES AND PURCHASES. During the year ended March 31, 1998, CAI
sold to CS Wireless approximately $3,706,000 of excess equipment at a gain of
$116,000 primarily from the Boston Project that was not needed for the Boston
operation. Additionally, during April 1997, CAI placed purchase orders
approximating $1,612,000 with CS Wireless for equipment needed for the Boston
Project, taking advantage of CS Wireless' favorable pricing arrangements with
its vendor. In March 1997, CAI purchased certain used equipment for $107,000
for the Boston Project from Haig Capital. All equipment purchased from Haig by
CAI was sold by Haig to CAI at or below fair market value for such items.
SATELLITE PROJECTS. The Company has pursued three satellite ventures in
addition to its investment in TelQuest Satellite Services LLC (described more
fully below). These ventures have been pursued by the Company through the
following wholly-owned subsidiaries (collectively, the "Satellite
Subsidiaries"): (i) MMDS Satellite Ventures, Inc., which was formed for the
purpose of pursuing Ku-band satellite opportunities; (ii) CAI Data Systems,
Inc., an entity formed for the purpose of pursuing Ka-band satellite
opportunities, and (iii) CAI Satellite Communications, Inc., an entity formed
for the purpose of pursuing V-band satellite opportunities.
MMDS Satellite Ventures, Inc. has been inactive since the summer of 1997
as a result of a lack of interest on the part of any potential joint venture
partner in pursuing a Ku-band satellite strategy. CAI Data Systems, Inc.
announced on July 23, 1997 that it had filed an application with the 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 $292.5 million, 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. CAI Satellite Communications, Inc. filed a V-band application
with the FCC on September 25, 1997 for the same orbital slots that were
identified in CAI Data's Ka-band application. The application is currently
pending FCC review. The identical orbital slots were applied for in the V-band
application in an effort to permit CAI to co-locate satellites in the same
orbit, possibly saving enormous launch costs at the appropriate time. Before
the FCC can grant any orbital position in the V-band, it must first file a
request with the World Radio Conference for the United States to be allocated
the particular V-band frequency. CAI has expended approximately $344,000 on
these entities to date, including approximately $87,500 for FCC filing fees.
The Satellite Projects Committee (the "Satellite Committee") of the Board
of Directors of the Company has authorized the sale of up to one-half of the
equity interests in these entities to Haig Capital, LLC ("Haig Capital"), an
entity in which Jared E. Abbruzzese, chairman and chief executive officer of
the Company, is a majority member. Under the terms of the transaction approved
by the Satellite Committee, the Company would transfer one-half of the equity
in the Satellite Subsidiaries to Haig Capital in exchange for Haig Capital's
agreement to fund the future capital and other expenditures, including salaries
and benefits of certain employees, of the Satellite Subsidiaries up to the
amount expended to the date of transfer of such equity interest by CAI. From
and after the date that Haig Capital has matched the capital investment made by
the Company, Haig Capital and the Company would bear the on-going costs on a
pro rata basis. The consummation of this transfer is subject to approval by
MLGAF, the Company senior secured lender.
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - RELATED PARTY TRANSACTIONS (CONTINUED)
ENGINEERING AND SPECTRUM MANAGEMENT SERVICES. The Company has
arrangements with CS Wireless for the provision of engineering and spectrum
management services by CAI personnel to CS Wireless. CAI provides engineering
consulting services to CS Wireless in connection with digital build-out by CS
Wireless of its Dallas market. CAI is paid $10,000 per month for such
consulting services, and is to be reimbursed for all reasonable expenses
incurred by CAI personnel in the performance of the consulting services.
CAI also provides spectrum management services and subleases office space
in CAI's Arlington, Virginia office to CS Wireless. Up to 20% of the
professional time of Mr. Gerald Stevens-Kittner, CAI's Senior Vice President -
Spectrum Management, is devoted to CS Wireless spectrum management matters,
including regulatory issues before the FCC, for which CS Wireless pays Mr.
Stevens-Kittner directly. CAI charges CS Wireless a pro rata portion of the
monthly rent payment for CAI's Arlington office space, reflecting the office
space used by one full-time CS Wireless employee resident in the Arlington
office.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CAI WIRELESS SYSTEMS, INC.
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
NAME Age Position with Company
Jared E. Abbruzzese 43 Chairman, Chief Executive Officer and Director (1)
John J. Prisco 42 President, Chief Operating Officer and Director (1)
James P. Ashman 44 Executive Vice President, Chief Financial Officer and Director(1)
Gerald Stevens-Kittner 45 Senior Vice President - Spectrum Management
Bruce W. Kostreski 47 Senior Vice President - Engineering; Chief Technical Officer
Arthur J. Miller 39 Vice President and Controller
George M. Williams 57 Secretary, Treasurer and Director
Arthur C. Belanger 72 Director(2)(4)
Harold A. Bouton 54 Director(3)(4)
David M. Tallcott 52 Director(2)(3)
Robert D. Happ 57 Director(2)(3)(4)
(1) Member of Executive Committee. The Executive Committee conducts the
affairs and business of the Company between meetings of the Board of
Directors.
(2) Member of Audit Committee. The Audit Committee assists the Board of
Directors in fulfilling its responsibilities with respect to the Company's
accounting and financial reporting activities.
(3) Member of Compensation Committee. The Compensation Committee determines
the compensation to be paid by the Company to its officers and administers
the 1995 and 1993 Stock Option Plans, the 1993 Outside Directors' Option
Plan, the 1996 Outside Directors' Option Plan and the Executive Severance
Pay Plan.
(4) Member of the Satellite Projects Committee. The Satellite Projects
Committee evaluates the participation by the Company in any and all
satellite projects presented to the Company.
The Certificate of Incorporation and the Bylaws of the Company, as
amended, provide for a minimum of three and a maximum of eleven members of the
Company's Board of Directors (the "Board") and permit the Board to specify the
number of directors within that range by resolution. The Board has currently
established the size of the Board at nine members. One vacancy currently
exists on the Board, arising out of the resignation in November 1997 of Alan
Sonnenberg. All directors hold office until their successors have been elected
and qualified. The Company has agreed with Gerard Klauer Mattison & Co., LLC,
the representative of the Underwriters of the Company's initial public offering
of Common Stock (the "Representative"), that for the five-year period ending
February 1999, the Company will use its best efforts to cause, if requested by
the Representative, an individual selected by the Representative and reasonably
acceptable to the Company to be elected to the Board who may be an officer,
director or affiliate of the Representative. To date, the Representative has
made no such request.
JARED E. ABBRUZZESE has been the Chairman, Chief Executive Officer and a
director of the Company since its formation in August 1991. From August 1992
until September 1993, Mr. Abbruzzese served in various capacities for the
prior operator of a wireless cable system in Albany, NY. Mr. Abbruzzese served
as President of The Diabetes Institute Foundation in Virginia Beach, Virginia
from October 1988 until August 1991. Since February 1996, Mr. Abbruzzese has
served as Chairman and Chief Executive Officer of CS Wireless.
JOHN J. PRISCO has been President, Chief Operating Officer and a director
of CAI since March 1, 1996. Mr. Prisco came to CAI from Bell Atlantic Network
Services, Inc., where he spent the last three years there as a corporate
officer, most recently as President of CellularVision of New York, the only
LMDS (28 GHz) wireless cable operator in the U.S. In 1986, Mr. Prisco founded
Penn Access Corporation, which operated a fiber optic network in the greater
Pittsburgh, PA area. Mr. Prisco served as President and Chief Executive
Officer of Penn Access until its sale in 1993 to Tele-Communications, Inc.
Penn Access currently operates as part of the Teleport Communications Group.
JAMES P. ASHMAN has been Executive Vice President and Chief Financial
Officer of CAI since December 1995. Previously, he was Senior Vice President
and Treasurer of the Company from September 1994 to December 1995. He has been
a director since March 1994. From November 1992 to September 1994, he was a
senior advisor of, and independent consultant affiliated with, Carolina Barnes
Capital, Inc. ("CBC"), a registered broker dealer. CBC served as a financial
advisor to the Company from January 1993 until September 1994. Mr. Ashman was
Vice President of Richter & Co., Inc. from June 1990 to November 1992. Since
February 1996, Mr. Ashman has served as a director of CS Wireless.
GERALD STEVENS-KITTNER joined the Company as Senior Vice President -
Regulatory and Governmental Affairs in March 1996, and currently serves as
Senior Vice President - Spectrum Management overseeing the Company's portfolio
of owned and leased MMDS and ITFS spectrum. Prior to joining the Company, Mr.
Stevens-Kittner was a partner in the national law firm of Arter & Hadden, where
he practiced extensively in the area of telecommunications law. He holds a
JURIS DOCTOR from George Washington University National Law Center.
BRUCE W. KOSTRESKI joined the Company as Senior Vice President -
Engineering in March 1996, and became the Company's Chief Technical Officer in
March 11, 1997. Prior to joining CAI, Mr. Kostreski was employed by Bell
Atlantic Corporation in a variety of capacities since 1980. Mr. Kostreski's
last position with Bell Atlantic was that of Executive Director-Corporate
Development. Mr. Kostreski is the primary or sole inventor of 13 patents
relating to fiber optics, digital subscriber line (DSL), video and wireless
networks.
ARTHUR J. MILLER has been Vice President, Controller and Chief Accounting
Officer since May 1997. Prior to joining CAI, Mr. Miller was employed by Tyco
Toys, Inc., an international toy manufacturer, since June 1986, most recently
as Vice President of Finance. Mr. Miller is a certified public accountant and
a member of the American Institute of Certified Public Accountants and the
Pennsylvania Institute of Certified Public Accountants.
GEORGE M. WILLIAMS has been Treasurer and Secretary
of the Company since December 1995. Mr. Williams served as the Company's Chief
Administrative Officer from December 1995 until January 1998, when he became
general manager of the Company's Albany and Rochester, NY operating systems.
Mr. Williams previously served as Executive Vice President of Finance and Chief
Financial Officer of the Company from August 1993 until December 1995. Mr.
Williams has been a director of the Company since August 1993 and was
Treasurer from March 1994 through September 1994. Mr. Williams was a financial
consultant to the Company from September 1992 until joining the Company in
August 1993. From 1986 until August 1993 he was a partner in Cable Management
Services providing management consultation to the hard-wire and wireless cable
industries in both the domestic and international markets. He was involved in
the start-up of Schomann Entertainment, Inc., a small hard-wire cable multiple
systems operator, as a partner and controller with operational responsibilities
from 1987 until August 1993. He also has been a consultant in the cable
television industry since 1986. Mr. Williams is currently a 20% shareholder
and officer of Hamilton County Cable TV, Inc., a hard-wire cable system
operator.
ARTHUR C. BELANGER has been a director of the Company since March 1994.
From December 1979 to 1984, Mr. Belanger served as Vice President and General
Manager of GE Cablevision. GE Cablevision merged with United Artists
Communications, Inc. ("UA") in 1979. In 1984, Mr. Belanger became UA's
Executive Vice President and Chief Operating Officer and held that position
until his retirement in January 1992. At that time, UA served approximately 3
million subscribers. Mr. Belanger is also a member of the Board of Directors
of TCI Ventures Five, Inc.
HAROLD A. BOUTON has been a director of the Company since September 1994.
Mr. Bouton is the President and Chief Executive Officer of WTVI, Channel 42,
the Public Broadcast Service ("PBS") affiliate in Charlotte, North Carolina,
positions he has held since 1983.
DAVID M. TALLCOTT has been a director of the Company since March 1995.
Since 1990, Mr. Tallcott has been President of Lortech Corporation, a full
service large mainframe commercial data center serving the insurance industry,
labor unions and direct mailers.
ROBERT D. HAPP has been a director of CAI since September 1995. Mr. Happ
served as Senior Managing Partner of the Boston, Massachusetts office of KPMG
Peat Marwick LLP from 1985 until his retirement in 1994. Mr. Happ is also a
director of Galileo Corporation and Cambridgeport Bank. Since February 1996,
Mr. Happ has served as a director of CS Wireless.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.Under the
securities laws of the United States, the Company's directors, its executive
officers and any persons holding ten percent or more of the CAI Common Stock
are required to report their ownership of the Common Stock and any changes in
that ownership to the Securities and Exchange Commission. Specific due dates
for the reports have been established. Annual reports for each of Messrs.
Belanger, Bouton, Happ and Tallcott were not timely filed with respect to each
outside directors' ownership of CAI Common Stock and options to purchase shares
thereof. In making these statements, the Company has relied on the written
representations of its incumbent directors and officers and its ten percent
holders and copies of the reports that they have filed with the Securities and
Exchange Commission. The Company has implemented a Section 16 Reporting
Compliance Program in an effort to assist the Company's directors and executive
officers with their Section 16 reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table discloses three fiscal periods of compensation
received by the Company's Executive Officers receiving compensation in excess
of $100,000 for the year ended March 31, 1998.
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION
COMPENSATION(1)
Fiscal Number of Securities
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS UNDERLYING OPTIONS(2)
Jared E. Abbruzzese 1998 $350,000 $154,575 575,000
Chief Executive Officer 1997 350,000 - 350,000
1996 277,300 150,000 -
John J. Prisco(3) 1998 200,000 64,575 350,000
President and Chief Operating Officer 1997 200,000 40,000 150,000
1996 12,308 - 200,000
James P. Ashman 1998 183,000 61,763 177,000
Chief Financial Officer 1997 183,000 - 100,000
1996 140,100 - 40,000
Gerald Stevens-Kittner(4) 1998 180,000 53,775 140,000
Senior Vice President - Spectrum 1997 170,343 - 20,000
Management 1996 3,558 - 120,000
Bruce Kostreski(5) 1998 144,399 70,281 45,000
Senior Vice President - Engineering 1997 125,000 - 15,000
1996 4,808 - 30,000
(1) Other annual compensation, including Company provided vehicle or
allowances, life insurance, or membership dues, less than the lesser of
10% of total annual salary and bonus or $50,000 is not presented.
(2) On March 9, 1998, the Compensation Committee approved the repricing of
outstanding stock options granted under the Company's plans and held by
those employees that were still employed by the Company on such date. In
accordance with the instructions to Item 402(b)(2)(iv) of Regulation S-K
(17 CFR <section> 229.402(b)(2)(iv)), the Company is required to include
the number of options so repriced in this table. There were no
additional options granted to the named executive officers during the
fiscal year ended March 31, 1998.
(3) Mr. Prisco became President and Chief Operating Officer on March 1, 1996.
(4) Mr. Stevens-Kittner became a Senior Vice President on March 18, 1996.
(5) Mr. Kostreski became a Senior Vice President on March 8, 1996.
COMPENSATION OF DIRECTORS
Directors, other than those who are full-time employees of the Company,
are paid an annual fee of $6,000 and a fee of $750 per Board meeting attended
and $500 per committee meeting attended, $375 for each telephonic Board meeting
attended, and $250 for each telephonic committee meeting attended, plus, in
each such case, out-of-pocket expenses. Directors who are full-time employees
of the Company receive no remuneration for serving on the Board of Directors or
committees.
In connection with David Tallcott's election to the Company's Board of
Directors, CAI entered into a deferred compensation agreement with David
Tallcott providing that all compensation paid by the Company to Mr. Tallcott as
a director would be set aside in an account to be invested in such mutual funds
offered by Smith Barney Inc. as Mr.
Tallcott shall direct. On January 2, 1998, by mutual agreement of the Company
and Mr. Tallcott, this deferred compensation arrangement was terminated and all
assets contained in the investment account were distributed to Mr. Tallcott.
Such distribution will cause Mr. Tallcott to recognize the amount paid as
taxable income in calendar 1998, and entitle CAI to recognize a tax deduction
in the same amount.
In October 1996, the Company adopted the 1996 Outside Directors' Stock Option
Plan (the "1996 Directors' Plan"). Under the 1996 Directors' Plan, options to
purchase an aggregate of not more than 45,000 shares of CAI Common Stock will
be granted from time to time to nonemployee directors. Each qualifying
director shall be granted an option to purchase 7,500 shares at a price of fair
market value on the date of the grant. Such option shall vest: 25% on the
date of grant, and 25% on each of the second, third and fourth anniversaries of
the grant. These options are exercisable for a period of ten years, but not
before an initial six-month period. The exercise price for stock options
granted under the 1996 Directors' Plan will not be less than 100% of the fair
market value of the CAI Common Stock on the grant date. On March 9, 1998, all
options granted under the 1996 Directors' Plan were repriced to $1.00 per
share. As of March 31, 1998, the Company has granted options under this plan
to purchase 30,000 shares of common stock at a weighted average price of $1.00
per share, based upon the March 9, 1998 repricing event.
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. On March 9,
1998, all options granted under the 1993 Directors' Plan were repriced to $1.00
per share. As of March 31, 1998, the Company has granted outstanding options
under this plan to purchase 8,334 shares of common stock with a weighted
average price of $1.00 per share, based upon the March 9, 1998 repricing event.
Options granted under both of the Directors' Plans are not transferable
other than by will or the laws of descent and distribution. In the event the
grantee ceases to be a director for any reason, each unexpired option may be
exercised to the extent exercisable on the date of such cessation or at any
time prior to the date specified in such option. Notwithstanding the
foregoing, in the event of cessation by reason of death, each unexpired option
shall become exercisable in full and may be exercised at any time during the
following 12 months. If the director is terminated for cause, outstanding
options shall be terminated. Options granted under both of the Directors'
Plans become immediately exercisable upon the occurrence of certain events,
including the death or disability of a director or certain business
combinations.
OPTION GRANTS IN LATEST FISCAL YEAR
The following table provides information on options to purchase shares of
CAI Common Stock which were granted in prior fiscal years, but repriced during
the fiscal year ended March 31, 1998 to the persons named in the Summary
Compensation Table above. No additional options were granted to the persons
named in the Summary Compensation Table during the fiscal year ended March 31,
1998.
% of Total Potential realizable value at
Number of Options assumed annual rates of
Securities Granted to EXERCISE stock price appreciation
Underlying Employees in PRICE PER Expiration FOR OPTION TERM
NAME OPTIONS FISCAL YEAR(1) SHARE DATE 5% 10%
Jared E. Abbruzzese 350,000 18.0% $1.00 12/17/06 $ - $ -
225,000 11.5% $1.00 03/07/06 $ - $ -
John J. Prisco 150,000 7.7% $1.00 12/17/06 $ - $ -
200,000 10.3% $1.00 03/07/06 $ - $ -
James P. Ashman 100,000 5.1% $1.00 12/17/06 $ - $ -
77,000 4.0% $1.00 03/07/06 $ - $ -
Gerald Stevens-Kittner 20,000 1.0% $1.00 12/17/06 $ - $ -
120,000 6.2% $1.00 03/17/06 $ - $ -
Bruce Kostreski 15,000 0.8% $1.00 12/17/06 $ - $ -
30,000 1.5% $1.00 03/08/06 $ - $ -
(1) Represents the percentage of those options that were repriced during
the fiscal year ended March 31, 1998, as approved by the
Compensation Committee.
AGGREGATE OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information with regard to the
outstanding options to purchase shares of CAI Common Stock as of the end of the
fiscal year ended March 31, 1998 for the persons named in the Compensation
Table above.
Number of Securities VALUE OF UNEXERCISED IN-THE-
SHARES Underlying Unexercised MONEY OPTIONS AT
ACQUIRED ON VALUE Options at March 31, 1998 MARCH 31, 1998(1)
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Jared E. Abbruzzese --- $ --- 575,000 - $ --- $ ---
John J. Prisco --- --- 311,300 38,700 --- ---
James P. Ashman --- --- 177,000 - --- ---
Gerald Stevens-Kittner --- --- 120,000 20,000 --- ---
Bruce Kostreski --- --- 45,000 - --- ---
(1) All unexercised options held by persons identified above are out-of-the-
money.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs.
Abbruzzese, Prisco, Ashman, Stevens-Kittner and Kostreski. Such agreements
continue in effect until March 21, 1999, in the case of Mr. Abbruzzese; until
January 3, 1999 in the case of Mr. Prisco; until February 28, 1999 in the case
of Mr. Ashman; until March 18, 1999 in the case of Mr. Stevens-Kittner; and
until March 8, 1999 in the case of Mr. Kostreski. The employment agreements
are automatically renewed for successive one-year terms, unless otherwise
terminated.
Under the terms of their respective employment agreements: Mr. Abbruzzese
serves as Chairman and Chief Executive Officer of the Company and is entitled
to an annual base salary of $350,000; Mr. Prisco serves as President and Chief
Operating Officer of the Company and is entitled to a base salary of $200,000;
Mr. Ashman serves as Executive Vice President and Chief Financial Officer of
the Company and is entitled to a base salary of $183,000; Mr. Stevens-Kittner
serves as Senior Vice President - Spectrum Management and is entitled to a base
salary of $180,000, and Mr. Kostreski serves as Senior Vice President -
Engineering and is entitled to a base salary of $143,750. Each of the
foregoing executive officers will be entitled to an annual bonus to be
determined by the Compensation Committee.
Pursuant to their respective employment agreements, Messrs. Prisco,
Ashman, Stevens-Kittner and Kostreski agree to devote substantially all of
their working time to the business of the Company. Mr. Abbruzzese has agreed
to devote not less than 75% of his working time to the Company. Mr. Stevens-
Kittner, however, may devote up to 20% of his working time to the business of
CS Wireless. Each of the employment agreements entitles the executive to his
base salary and certain benefits for 12 months following termination of such
executive's employment without cause (as defined in the employment agreement).
All of the named executives are subject to nondisclosure agreements with
respect to the confidential information of CAI and are subject to a
noncompetition provision in each of their employment agreements.
In February 1998, the Company implemented a deferred bonus plan for
certain employees. Under the terms of the plan, bonuses in amounts determined
by the Compensation Committee would be paid to plan participants upon the
earlier of (a) the completion by the Company of a major financial
restructuring, or (b) the completion of investments by, and/or contractual
relationships with, one or more strategic investors valued at not less than $75
million in the aggregate (each a "Bonus Event"). Under the plan, a total of
approximately $1.2 million would be paid within 60 days of a Bonus Event. In
approving the deferred bonus plan, the Compensation Committee, while
recognizing the Company's financial status, was concerned that the Company
honor its contractual obligations to those individual employees with whom the
Company employment agreements that made such employees eligible for an annual
bonus. The Compensation Committee was also guided by the need to provide
certain employees with an appropriate incentive as the Company sought to
implement its long-term plans.
In recognition of the consummation of a series of transactions during the
Company's fourth quarter that resulted in a complete termination of all rights
and interests in the Company's principal assets previously held by BANX, the
March 3, 1998 exchange of the BANX Securities for the Subordinated Note, and
the importance of the termination of such rights and interests in the Company's
search for one or more strategic partners (see "Item 1. - Business -
Termination of BANX Rights" and " - Background - BANX TRANSACTIONS"), the
Compensation Committee waived the Bonus Event requirement and approved the
payment of 45% of the bonus amount to members of the Company's senior
management and 90% of the bonus amount to other plan participants at the end of
February 1998. Simultaneously, the Compensation Committee approved the payment
of an additional 45% of the bonus amount on June 15, 1998 to those plan
participants that received 45% of the bonus amount at the end of February 1998
in the form of a retention bonus, subject to the condition that such
participant continue to be an active employee of the Company through June 15,
1998. This portion of the bonus was paid to plan participants on June 15,
1998, except for bonuses payable to Messrs. Abbruzzese, Prisco and Ashman,
which were paid to such individuals on June 22, 1998. The remaining 10% of the
bonus amount is still subject to the originally-approved Bonus Events.
EXECUTIVE SEVERANCE PAY PLAN
The Company maintains an Executive Severance Pay Plan (the "Severance
Plan") pursuant to which executive employees of the Company identified and
designated by the Compensation Committee as eligible participants are entitled
to certain severance benefits upon a Qualifying Termination of Employment in
the event of a change in control (as defined under the Severance Plan).
Individuals designated by the Compensation Committee as Tier I or Tier II
participants are eligible for a lump sum payment equal to 30 months or 18
months, respectively, of such individual's base salary, as well as the
maintenance of certain other benefits (or a reasonable equivalent thereof) for
a prescribed period following the Qualifying Termination of Employment. The
Compensation Committee has reserved the right, in its sole discretion, to add
or remove participants from the Severance Plan from time to time prior to a
Change in Control of the Company. The executive officers named in the summary
compensation table above are currently Tier I participants in the Severance
Plan.
Under the Severance Plan, a "Qualifying Termination of Employment" occurs
if, within two years of a change in control of the Company, (a) a participant
terminates his or her employment as a result of (i) the assignment to such
participant of any duties inconsistent in any respect with participant's
position (including status, offices, titles, and reporting requirements),
authority, duties or responsibilities immediately before the change in control,
or any other action by the Company that results in a significant diminution in
such position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in bad
faith and which is remedied by the Company promptly after receipt of notice
thereof given by participant; (ii) any material reduction in participant's base
pay, opportunity to earn annual bonuses or other compensation or employee
benefits, other than as a result of an isolated and inadvertent action not
taken in bad faith and that is remedied by the Company promptly after receipt
of notice thereof given by participant; (iii) the Company's requiring a
participant to relocate his or her principal place of business to a place which
is more than thirty-five miles from his or her previous principal place of
business; (iv) any purported termination of the Plan otherwise than as
expressly permitted by the Severance Plan; or (v) termination of the
participant's employment as a result of participant's death or disability
within 24 months following a change in control, or (b) the Company terminates a
participant's employment. A participant is not entitled to separation benefits
under the Severance Plan in the event that such participant's employment is
terminated for cause or the participant voluntarily resigns from the Company.
For purposes of the Severance Plan, each of the following events
constitutes a "Change in Control": (i) a report on Schedule 13D shall be filed
with the Securities and Exchange Commission pursuant to Section 13(d) of the
Securities Exchange Act of 1934 (the "Act") disclosing that any person other
than the Company, or any employee benefit plan sponsored by the Company, is the
beneficial owner (as the term is defined in Rule 13d-3 under the Act), directly
or indirectly, of thirty-five percent or more of the total voting power
represented by the Company's then outstanding Voting Securities (calculated as
provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to
acquire Voting Securities); or (ii) any person, other than the Company or any
employee benefit plan sponsored by the Company, shall purchase shares pursuant
to a tender offer or exchange offer to acquire any Voting Securities of the
Company (or securities convertible into such Voting Securities) for cash,
securities or any other consideration, provided that after consummation of the
offer, the person in question is the beneficial owner, directly or indirectly,
of thirty-five percent or more of the total voting power represented by the
Company's then outstanding Voting Securities (all as calculated under clause
(i)); or (iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation (other than a merger of the Company in
which holders of Common Shares of the Company immediately prior to the merger
have the same proportionate ownership of Common Shares of the surviving
corporation immediately after the merger as immediately before), or pursuant to
which Common Shares of the Company would be converted into cash, securities or
other property, or (B) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all
the assets of the Company; or (iv) the Company shall have filed, or an
involuntary filing shall have been made in respect of the Company, for
protection from creditors under the Federal Bankruptcy Code, or (v) there shall
have been a change in the composition of the Board of Directors of the Company
at any time during any consecutive twenty-four-month period such that
"continuing directors" cease for any reason to constitute at least a fifty
percent majority of the Board. For purposes of this clause, "continuing
directors" means those members of the Board who either were directors at the
beginning of such consecutive twenty-four-month period or were elected by or on
the nomination or recommendation of at least a fifty percent majority of the
then existing "continuing directors", and "Voting Securities" means any
securities of the Company that vote generally in the election of directors. So
long as there has not been a "change of control" within the meaning of clause
(iv), the Board of Directors may adopt by a seventy percent majority vote of
the "continuing directors" a resolution to the effect that an event described
in clauses (i) or (ii) shall not constitute a "change of control."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of May 26, 1998 (i) each stockholder
who based on public filings, is known to the Company to be the beneficial owner
of more than 5% of the outstanding shares of CAI Common Stock, (ii) each
Director and Executive Officer and (iii) all Directors and Executive Officers
of CAI as a group:
BENEFICIAL OWNERSHIP
Percentage of Outstanding
NUMBER OF SHARES SHARES
Jared E. Abbruzzese 1,687,552(1) 4.1%
John J. Prisco 316,300(2) *
James P. Ashman 269,990(3) *
Gerald Stevens-Kittner 120,000(4) *
Bruce W. Kostreski 45,000(5) *
George M. Williams 231,000(6) *
Arthur J. Miller 2,500(7) *
Arthur C. Belanger 8,750(8) *
Harold A. Bouton 5,664(9) *
Robert D. Happ 3,750(10) *
David M. Tallcott 5,417(11) *
All directors and officers as a group (9 persons) 2,695,923 6.4%
* less than 1%
(1) Includes 186,000 shares held by relatives of Mr. Abbruzzese and a limited
liability company in which Mr. Abbruzzese is a member over which shares
Jared E. Abbruzzese retains voting control, 575,000 shares issuable upon
exercise of options exercisable currently or within 60 days of June 1,
1998.
(2) Includes 311,300 shares issuable upon the exercise of options exercisable
currently or within 60 days of June 1, 1998.
(3) Includes 177,000 shares issuable upon the exercise of options exercisable
currently or within 60 days of June 1, 1998.
(4) Shares are issuable upon the exercise of options exercisable currently or
within 60 days of June 1, 1998.
(5) Shares are issuable upon the exercise of options exercisable currently or
within 60 days of June 1, 1998.
(6) Includes 116,000 shares issuable upon the exercise of options exercisable
currently or within 60 days of June 1, 1998.
(7) Shares are issuable upon the exercise of options exercisable currently or
within 60 days of June 1, 1998.
(8) Shares are issuable upon the exercise of options exercisable currently or
within 60 days of June 1, 1998.
(9) Includes 127 shares held by an immediate family member and 5,417 shares
issuable upon the exercise of options exercisable currently or within 60
days of June 1, 1998.
(10) Shares are issuable upon the exercise of options exercisable
currently or within 60 days of June 1, 1998.
(11) Shares are issuable upon the exercise of options exercisable
currently or within 60 days of June 1, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE BANX TRANSACTIONS.
Reference is hereby made to Item 1. Business - Termination of BANX
Rights; and - Background - BANX TRANSACTIONS for a description of the
relationship among the Company, and affiliates of Bell Atlantic and NYNEX,
including the termination of all rights formerly held by BANX in a series of
transactions effected by the Company during its last fiscal quarter.
OTHER.
SATELLITE SERVICES. The Company has pursued three satellite ventures in
addition to its investment in TelQuest Satellite Services LLC (described more
fully below). These ventures have been pursued by the Company through the
following wholly-owned subsidiaries (collectively, the "Satellite
Subsidiaries"): (i) MMDS Satellite Ventures, Inc., which was formed for the
purpose of pursuing Ku-band satellite opportunities; (ii) CAI Data Systems,
Inc., an entity formed for the purpose of pursuing Ka-band satellite
opportunities, and (iii) CAI Satellite Communications, Inc., an entity formed
for the purpose of pursuing V-band satellite opportunities.
MMDS Satellite Ventures, Inc. has been inactive since the summer of 1997
as a result of a lack of interest on the part of any potential joint venture
partner in pursuing a Ku-band satellite strategy. CAI Data Systems, Inc.
announced on July 23, 1997 that it had filed an application with the 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 $292.5 million, 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. CAI Satellite Communications, Inc. filed a V-band application
with the FCC on September 25, 1997 for the same orbital slots that were
identified in CAI Data's Ka-band application. The application is currently
pending FCC review. The identical orbital slots were applied for in the V-band
application in an effort to permit CAI to co-locate satellites in the same
orbit, possibly saving enormous launch costs at the appropriate time. Before
the FCC can grant any orbital position in the V-band, it must first file a
request with the World Radio Conference for the United States to be allocated
the particular V-band frequency. CAI has expended approximately $344,000 on
these entities to date, including approximately $87,500 for FCC filing fees.
The Satellite Projects Committee (the "Satellite Committee") of the Board
of Directors of the Company has authorized the sale of up to one-half of the
equity interests in these entities to Haig Capital, LLC ("Haig Capital"), an
entity in which Jared E. Abbruzzese, chairman and chief executive officer of
the Company, is a majority member. Under the terms of the transaction approved
by the Satellite Committee, the Company would transfer one-half of the equity
in the Satellite Subsidiaries to Haig Capital in exchange for Haig Capital's
agreement to fund the future capital and other expenditures, including salaries
and benefits of certain employees, of the Satellite Subsidiaries up to the
amount expended to the date of transfer of such equity interest by CAI. From
and after the date that Haig Capital has matched the capital investment made by
the Company, Haig Capital and the Company would bear the on-going costs on a
pro rata basis. The consummation of this transfer is subject to approval by
MLGAF, the Company senior secured lender.
TELQUEST SATELLITE SERVICES. TelQuest Satellite Services LLC ("TSS") is a
joint venture between the Company, CS Wireless and TelQuest Communications,
Inc., a company controlled by Mr. Abbruzzese, formed on August 4, 1997 for the
purpose of developing and operating satellite systems providing digital
services. In connection with the Company's $5 million investment in TSS, the
Company made four cash payments to satisfy the $2.5 million cash portion of its
investment in TSS. The Company has also contributed a combination of equipment
(made available to TSS under the terms of a five-year renewable lease) and cash
(in lieu of equipment) in an amount equal to approximately $2.1 million as part
of the $2.5 million equipment portion of the Company's $5 million investment in
TSS. The final installment payment for the investment was made on April 1,
1998. In return for CAI's $5 million 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. In conjunction with its investment in TSS, the Company has also
entered into an affiliation agreement with TSS that will enable the Company to
purchase pre-digitized video programming from TSS for those markets, if any, in
which the Company launches a commercial digital subscription video product.
The Company continues to believe that the affiliation agreement 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, that the Company will be able to expand its video offerings beyond
its current subscription video product, or that the Company will launch a
digital subscription video product in a commercial manner in any of its
markets.
WAVE AIR, INC. CAI periodically charters an airplane owned by Wave Air,
Inc., which is primarily owned by Mr. Abbruzzese, in order to carry out
business when airline schedules are not compatible. Wave Air charges CAI for
this service on an hourly basis at or below market rates. Transactions with
Wave Air, Inc. amounted to approximately $154,000 for the year ended March 31,
1998.
LOANS TO OFFICERS. On March 31, 1997, Mr. Abbruzzese executed and
delivered a demand promissory note in the principal amount of $780,054 in favor
of the Company. The note evidences various indebtedness owed by Mr. Abbruzzese
and affiliated entities, which Mr. Abbruzzese has agreed to assume, including
the outstanding balance on an $800,000 loan made by the Company to Haig
Capital. The obligation bears interest at 14% per annum and is secured by a
pledge of Mr. Abbruzzese's interest in Haig Capital. Mr. Abbruzzese repaid
$86,045 of such obligation during the fiscal year ended March 31, 1998. In
addition, in June 1998, Mr. Abbruzzese made a $45,000 payment on the
obligation, reducing the principal outstanding balance to approximately
$650,000.
INSTALLATION SERVICES. In October 1996, two CAI employees formed Telecom
Service Support LLC ("Telecom Support") to provide subscriber installation,
service calls and warehouse services to the subscription television industry.
CAI incurred $452,000 for such services during the year ended March 31, 1998.
Services provided by Telecom Support to CAI were on terms at least as favorable
to those available to CAI from unrelated parties. Additionally, CAI advanced
$20,000, provided leased vehicles and certain facilities to Telecom Support for
the year ended March 31, 1998.
EQUIPMENT SALES AND PURCHASES. During the year ended March 31, 1998, CAI
sold to CS Wireless approximately $3.7 million of equipment at $116,000 over
book value primarily from the Boston Project that was not needed for the Boston
project for 20% down and the balance due in 30 days after delivery.
Additionally, during April 1997, CAI placed purchase orders approximating $1.6
million with CS Wireless for equipment needed for the Boston Project, taking
advantage of CS Wireless' favorable pricing arrangements with its vendor. In
March 1997, CAI purchased certain used equipment for $107,000 for the Boston
Project from Haig Capital. All equipment purchased from Haig by CAI was sold
by Haig to CAI at or below fair market value for such items.
CONSULTING ARRANGEMENT. The Company was a party to a consulting
agreement with Alan Sonnenberg, pursuant to which Mr. Sonnenberg agreed to
provide CAI with certain consulting services for an annual fee of $75,000.
Under the agreement, Mr. Sonnenberg received $62,500 during the year ended
March 31, 1998. The agreement was terminated in February 1998. Mr. Sonnenberg
served as president and vice chairman of CAI from September 29, 1995 until
February 23, 1996, when he became president and chief executive officer of CS
Wireless.
ENGINEERING AND SPECTRUM MANAGEMENT SERVICES. The Company has
arrangements with CS Wireless for the provision of engineering and spectrum
management services by CAI personnel to CS Wireless. CAI provides engineering
consulting services to CS Wireless in connection with digital build-out by CS
Wireless of its Dallas market. CAI is paid $10,000 per month for such
consulting services, and is to be reimbursed for all reasonable expenses
incurred by CAI personnel in the performance of the consulting services.
CAI also provides spectrum management services and subleases office space
in CAI's Arlington, Virginia office to CS Wireless. Up to 20% of the
professional time of Mr. Gerald Stevens-Kittner, CAI's Senior Vice President -
Spectrum Management, is devoted to CS Wireless spectrum management matters,
including regulatory issues before the FCC, for which CS Wireless pays Mr.
Stevens-Kittner directly. CAI charges CS Wireless a pro rata portion of the
monthly rent payment for CAI's Arlington office space, reflecting the office
space used by one full-time CS Wireless employee resident in the Arlington
office.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements listed in the accompanying index to financial
statements and schedules are filed as part of this Annual Report on Form
10-K.
(b) Reports on Form 8-K
(1) Current Report on Form 8-K dated March 5, 1998, reporting the
following events under Item 5: On March 3, 1998, CAI exchanged all securities
previously held by BANX and acquired by Merrill Lynch Global Allocation Fund,
Inc. on February 17, 1998 for a $30 million subordinated note of CAI, and filed
pro forma consolidated financial statements under Item 7 to reflect such
exchange.
(2) Current Report on Form 8-K dated January 22, 1998, reporting the
following event under Item 5: On January 14, 1998, management representatives
of CAI held a conference call for financial analysts concerning public comments
received by the FCC on the Notice of Proposed Rulemaking for 2-way use of MDS
and ITFS frequencies. Excerpts from the conference call were filed on the Form
8-K.
(c) Exhibits
See index to exhibits filed as part of this Annual Report on Form 10-K.
(d) Schedules
Schedules, specified under Regulation S-X, are omitted because of the
absence of conditions under which they are required or because the
required information is included in the financial statements submitted.
In accordance with Rule 3-09(a), separate financial statements of CS
Wireless are not required to be filed.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page No.
IN FORM 10-K
FINANCIAL STATEMENTS
Reports of Independent Accountants 35
Consolidated Balance Sheets - March 31, 1998 and 1997 39
Consolidated Statements of Operations - Years Ended March 31, 1998, 1997, and 1996 40
Consolidated Statements of Shareholders' Equity(Deficit) - Years Ended
March 31, 1998, 1997, and 1996....................... 41
Consolidated Statements of Cash Flows - Years Ended March 31, 1998, 1997, and 1996 42
Notes to Consolidated Financial Statements 45
</TABLE)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, CAI Wireless Systems, Inc. has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned thereunto
duly authorized.
CAI WIRELESS SYSTEMS, INC.
(Registrant)
BY: /s/
Jared E. Abbruzzese, Chairman,
Date: June 29, 1998 Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of CAI Wireless
Systems, Inc. and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Chairman, Chief Executive Officer June 29, 1998
Jared E. Abbruzzese and Director
(Principal Executive Officer)
/s/ President, Chief Operating Officer June 29, 1998
John J. Prisco and Director
/s/ Executive Vice President, Chief June 29, 1998
James P. Ashman Financial Officer and Director
(Principal Financial Officer)
/s/ Vice President and Controller June 29, 1998
Arthur J. Miller (Principal Accounting Officer)
/s/ Director June 29, 1998
Arthur C. Belanger
/s/ Director, Secretary and Treasurer June 29, 1998
George M. Williams
SIGNATURES (continued)
SIGNATURE TITLE DATE
/s/ Director June 29,1998
Harold A. Bouton
/s/ Director June 29, 1998
David M. Tallcott
/s/ Director June 29, 1998
Robert D. Happ
INDEX TO EXHIBITS
Incorporation by
Reference (SEE PAGE
EXHIBIT NO. DESCRIPTION LEGEND) NO.
2.1 Participation Agreement among Heartland Wireless 6-Exhibit 2.1
Communications, Inc., CAI Wireless Systems, Inc. and CS
Wireless Systems, Inc. dated as of December 12, 1995.
2.2 Amendment No. 1 to Participation Agreement among 8-Exhibit 2.2
Heartland Wireless Communications, Inc., CAI Wireless
Systems, Inc., and CS Wireless Systems, Inc. dated as of
December 12, 1995.
3.1 Amended and Restated Certificate of Incorporation of CAI 6-Exhibit 3.1
3.2 Amended and Restated Bylaws of CAI 6-Exhibit 3.2
4.1 Form of Indenture for Senior Notes 4-Exhibit 4.1
4.2 First Supplemental Indenture 7-Exhibit 4.1
4.3 Form of Escrow Agreement among CAI and Chemical Bank 4-Exhibit 4.30
4.4 Subordinated Unsecured Promissory Note dated August 31, 1-Exhibit 4.7
1993 by and between CAI and Hope E. Carter
4.5 Promissory Note-Bott Family Trust 2-Exhibit 4.1
4.6 Guaranty and Security Agreement-Bott Family Trust 2-Exhibit 4.2
4.7 Promissory Note-Bott 2-Exhibit 4.3
4.8 Guaranty and Security Agreement-Bott 2-Exhibit 4.4
4.9 Note Purchase Agreement dated as of November 24, 1997 by 16-Exhibit 4.1
and among CAI, certain of its subsidiaries and the purchaser
named therein
<dagger>4.10 Amendment No. 1 to the Note Purchase Agreement, together 16-Exhibit 4.1
with a schedule identifying subsequent amendments omitted and
setting forth material changes
10.1 1993 Stock Option and Incentive Plan 1-Exhibit 10.1, 3
10.2 Form of 1993 Incentive Stock Option Agreement 1-Exhibit 10.2, 3
10.3 Form of 1993 Non-Qualified Stock Option Agreement 1-Exhibit 10.3, 3
10.4 Outside Director's Stock Option Plan 1-Exhibit 10.4, 3
10.5 Form of Outside Director's Stock Option Agreement 1-Exhibit 10.5, 3
10.6 Employment Agreement dated March 21, 1996 by and between 12-Exhibit 10.6
Jared E. Abbruzzese and CAI
10.7 Letter Agreement dated October 13, 1993 by and between 1-Exhibit 10.10
Hampton Roads Wireless, Inc. and CAI
10.8 Employment Agreement dated October 1, 1993 by and 1-Exhibit 10.9, 3
between George M. Williams and CAI and Amendment to
Employment Agreement dated December 15, 1993
10.9 Master Sublease dated June 19, 1993 by and between Tri- 1-Exhibit 10.11
Mark Communications, Ltd. and George Bott
10.10 Agreement between CAI and SNET 1-Exhibit 10.14
10.11 Consulting Agreement dated May 15, 1993 between Jared E. 1-Exhibit 10.7
Abbruzzese and CAI
10.12 Business Relationship Agreement among CAI, its 5-Exhibit 10.13
Subsidiaries and BANX Affiliate dated as of March 28, 1995, as
amended by Amendment Agreement No. 1
10.13 Securities Purchase Agreement dated as of March 28, 1995 3-Exhibit 2
among CAI, its Subsidiaries and BANX Partnership, including
forms of Stage I and Stage II Warrants
10.14 1995 Incentive Stock Plan 12-Exhibit 10.16
10.15 Consulting and Employment Agreement dated as of January 1, 1996 12-Exhibit 10.17
between the Company and John Prisco
10.16 Termination Agreement dated February 23, 1996 between CAI 12-Exhibit 10.18
and Alan Sonnenberg
INDEX TO EXHIBITS (CONTINUED)
INCORPORATION
. by Reference (SEE PAGE
Exhibit NO DESCRIPTION LEGEND) NO.
10.17 Consulting Agreement dated February 23, 1996 between the 12-Exhibit 10.19
Company and Alan Sonnenberg
10.18 Form of Representative's Warrant Agreement with Form of 1-Exhibit 4.3
Warrant Certificate attached thereto
10.19 Warrant Agreement dated August 30, 1993 between CAI and 1-Exhibit 4.13
Richard McKenzie
10.20 Warrant Agreement dated August 30, 1993 between CAI and 1-Exhibit 4.14
Phil Hempleman
10.21 Warrant Agreement dated September 10, 1993 between CAI 1-Exhibit 4.15
and John Oppenheimer
10.22 Warrant Agreement dated August 30, 1993 between CAI and 1-Exhibit 4.16
Marc Howard
10.23 Warrant Agreement dated September 10, 1993 between CAI 1-Exhibit 4.17
and Les Alexander
10.24 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.26
Phil Hempleman
10.25 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.27
Marc Howard
10.26 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.28
Richard McKenzie
10.27 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.29
John Oppenheimer
10.28 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.30
Les Alexander
10.29 Modification Agreement dated December 12, 1996, among the 10-Exhibit 10.
registrant and various affiliates of Bell Atlantic Corporation
and NYNEX Corporation
10.30 1996 Outside Directors' Stock Option Plan 11-Appendix A
10.31 Amendment No.1 to the Modification Agreement dated April 13-Exhibit 99.7
29, 1997 among the registrant and various affiliates of Bell
Atlantic Corporation and NYNEX Corporation
10.32 Employment Agreement dated as of February 29, 1997 13-Exhibit 99.6
between the registrant and James P. Ashman
10.33 Loan and Security Agreement dated as of May 16, 1997 by 13-Exhibit 99.9
and among registrant and certain of its subsidiaries, Foothill
Capital Corporation, as agent, and the financial institutions
listed therein (confidential treatment of certain portions of
this exhibit has been requested)
10.34 Release and Agreement dated as of April 29, 1997 among 13-Exhibit 99.8
registrant and various affiliates of Bell Atlantic Corporation
and NYNEX Corporation
10.35 MMDS Affiliation Agreement dated as of August 4, 1997 14-Exhibit 99.1
between TelQuest Satellite Services LLC and CAI (confidential
treatment of certain portions of this exhibit has been
requested)
12. Statements re Computation of Ratios 9
21. Subsidiaries of the Registrant 15-Exhibit 21
<dagger>23.1 Consent of Coopers & Lybrand L.L.P.
<dagger>23.2 Consent of KPMG Peat Marwick, LLP
27. Financial Data Schedule
INDEX TO EXHIBITS (CONTINUED)
LEGEND
1 Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (No.
33-71662).
2 Incorporated by reference to exhibits to the Current Report on Form 8-K dated March 23, 1994
(No. 0-22888).
3 Incorporated by reference to the exhibits to the Schedule 13D of BANX Partnership dated
March 29, 1995, filed with the Commission on April 10, 1995.
4 Incorporated by reference to the exhibits to the Registration Statement on Form S-1 (No. 33-
93062).
5 Incorporated by reference to the exhibits to the Registration Statement on Form S-4 (No. 33-
94222).
6 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for September
30, 1995.
7 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for December
31, 1995 (No. 0-22888).
8 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated February
23, 1996 (No. 0-22888).
9 The information is not included because the ratio is less than 1 and the earnings deficiency
is included in the Selected Financial Data of CAI.
10 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for December
31, 1996.
11 Incorporated by reference to the registrant's Proxy Statement dated September 18, 1996.
12 Incorporated by reference to the exhibits to the Annual Report on Form 10-K for March 31,
1996.
13 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated June 27,
1997.
14 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated August 4, 1997
(No. 0-22888).
15 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated December 29,
1997 (No. 0-22888).
16 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for December 31,
1997.
<dagger> Filed herewith.