-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RVqx2FJqsctS9KYwR8YfDFAwM2xO1BpX+LCOlfnJLZL4kbTIsXOkVICjkHRoFfGm yJJilM2UNL33xCm0MKrGEA== 0000914749-97-000009.txt : 19970701 0000914749-97-000009.hdr.sgml : 19970701 ACCESSION NUMBER: 0000914749-97-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAI WIRELESS SYSTEMS INC CENTRAL INDEX KEY: 0000914749 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061324691 STATE OF INCORPORATION: CT FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22888 FILM NUMBER: 97633326 BUSINESS ADDRESS: STREET 1: 18 CORPORATE WOODS BLVD STREET 2: THIRD FLOOR CITY: ALBANY STATE: NY ZIP: 12211 BUSINESS PHONE: 5184622632 MAIL ADDRESS: STREET 1: 18 CORPORATE WOODS BLVD STREET 2: 3RD FLOOR CITY: ALBANY STATE: NY ZIP: 12211 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission file number 0-22888 CAI WIRELESS SYSTEMS, INC. (Exact name of registrant as specified in its charter)
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 25, 1997 was approximately $47,250,000. The number of shares of Registrant's Common Stock outstanding on June 25, 1997 was 40,540,539. PART I THE STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE EXHIBITS HERETO, RELATING TO CAI'S FUTURE OPERATIONS MAY CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AND MAY BE AFFECTED BY A NUMBER OF FACTORS INCLUDING THE AVAILABILITY OF NEW STRATEGIC PARTNERS AND THEIR WILLINGNESS TO ENTER INTO ARRANGEMENTS WITH CAI, THE TERMS OF SUCH ARRANGEMENTS, THE ABILITY OF CAI TO ACHIEVE THE OPERATING BENCHMARKS NECESSARY TO RECEIVE THE BALANCE OF THE FUNDS CONTEMPLATED BY CAI'S INTERIM CREDIT FACILITY, THE SUCCESSFUL LAUNCH OF A DIGITAL SUBSCRIPTION VIDEO BUSINESS, THE RECEIPT OF REGULATORY APPROVALS FOR ALTERNATIVE USES OF ITS MMDS SPECTRUM, THE SUCCESS OF CAI'S TRIALS IN VARIOUS OF ITS MARKETS, THE COMMERCIAL VIABILITY OF ANY ALTERNATIVE USE OF MMDS SPECTRUM, CONSUMER ACCEPTANCE OF ANY NEW PRODUCTS OFFERED OR TO BE OFFERED BY CAI, SUBSCRIBER EQUIPMENT AVAILABILITY, TOWER SPACE AVAILABILITY, ABSENCE OF INTERFERENCE AND THE ABILITY OF CAI TO REDEPLOY OR SELL EXCESS EQUIPMENT, THE ASSUMPTIONS, RISKS AND UNCERTAINTIES SET FORTH HEREIN, INCLUDING IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AS WELL AS OTHER FACTORS CONTAINED HEREIN AND IN CAI'S SECURITIES FILINGS. ITEM 1. BUSINESS OVERVIEW CAI Wireless Systems, Inc. ("CAI" or the "Company") is a leading developer, owner and operator of wireless telecommunications transport systems utilizing Multichannel Multipoint Distribution Services ("MMDS") spectrum, in terms of number of subscription television subscribers and number of Estimated Total Service Area households. In CAI's 14 primary markets, there are a total of 16,135,174 Estimated Total Service Area households, of which the Company estimates they have the ability to serve between 70% and 90% of such homes. Initially, the Company focused on the development of MMDS subscription television systems in major metropolitan markets, primarily in the Northeast and Mid-Atlantic regions of the United States. More recently, the Company has begun to explore alternative uses of its MMDS spectrum and has pursued development of other lines of business, including high speed Internet and intranet access, as well as digital video and fixed wireless telephony services. CAI had approximately 66,500 subscribers as of June 21, 1997. MMDS subscription television programming, and other MMDS-based telecommunications transport services, are transmitted through the air via microwave frequencies from a central transmission facility to a small receiving antenna at each subscriber's location, and requires a line-of-sight ("LOS") path between the transmit point to the receive antenna. Therefore, in communities with tall trees, hilly terrain, tall buildings or other obstructions in the transmission path, MMDS transmission can be difficult or impossible to receive at certain locations without the use of low power signal repeaters (known as "beambenders") or signal boosters, which retransmit an otherwise blocked signal over a limited area. The use of beambenders and/or signal boosters increases the costs per subscriber. MMDS spectrum is regulated by the Federal Communications Commission ("FCC"), which governs, among other things, the issuance, renewal, assignment, transfer and modification of licenses necessary for MMDS systems to operate. "MMDS" is the vernacular term used to describe CAI's business and includes both MMDS and Multichannel Distribution Service ("MDS") channels, as well as Instructional Television Fixed Service ("ITFS") channels. To date, the MMDS spectrum has been licensed by the FCC for one-way video and data transmission on an industry-wide basis. In addition, CAI has applied for and received a variety of authorizations from the FCC for fixed, flexible use of its MMDS spectrum in certain of CAI's markets. The Company has received from the FCC (i) authorization for a market trial of up to 500 customers for CAI's high speed one-way Internet access product (which uses a telephone line for the return path) in Rochester, New York, (ii) authorization for a market trial of up to 1,000 customers for CAI's high speed one-way Internet access product in New York City, (iii) permanent authorization for fixed, two-way flexible use of five channels for 16 customer sites located in and around the Boston market, and (iv) authorization from the FCC to utilize its MMDS spectrum in Pittsburgh, PA for a variety of tests, including the simulation of a commercial roll-out of fixed, two-way services to customers located within a 20-mile radius of CAI's main transmission facility in Pittsburgh. The Company has also received developmental authorization to test fixed, flexible two-way uses on two channels located in its Hartford, Connecticut market; however, the Company does not have any plans to conduct any testing in this market at this time. Item 1. Business (continued) CAI is a Connecticut corporation. Its principal executive offices are located at 18 Corporate Woods Boulevard, 3rd Floor, Albany, New York 12211. CAI's telephone number is (518) 462-2632. CAI also maintains offices at 101 Ponds Edge Drive, Suite 300, Chadds Ford, PA 19317, at which its operational headquarters, including the President and Chief Operating Officer and (beginning in July 1997) the Company's accounting department are located, and at 2101 Wilson Boulevard, Suite 100, Arlington, VA 22201, at which the Company's engineering and regulatory affairs departments are located. Unless the context indicates otherwise, all references to the "Company" or "CAI" refer collectively to CAI Wireless Systems, Inc. and its subsidiaries. RECENT FINANCIAL DEVELOPMENTS CAI's recurring losses, restrictions on its ability to obtain additional financing, and substantial commitments, raise substantial doubt about CAI continuing as a going concern. For the year ending March 31, 1998, the Company is obligated to pay approximately $8,500,000 in minimum license fees and operating lease payments, approximately $1,100,000 in MMDS license auction fees, in addition to funding operating losses. Management estimates that the present revenue stream and cash resources available to the Company, including amounts available to CAI under its recently-obtained credit facility (described below), are adequate to sustain the Company's needs through December 1997. A significant portion of CAI's current subscription television operations and MMDS spectrum rights were acquired from various third parties in a series of transactions consummated throughout 1995 and the first half of 1996, and, prior to being acquired by CAI, were not operated in conjunction with one another. Consequently, there is limited historical financial information regarding CAI's current operations. In addition, and subject to regulatory approval and successful completion of testing, the Company intends to expand its business to include not only subscription video delivery, but also one-way Internet access services and fixed, flexible two-way uses of its MMDS spectrum. Because these alternative uses of the MMDS spectrum are in the early stages of development, the Company has no operating history for any such alternative uses of the MMDS spectrum, and given CAI's limited operating history, there is no assurance that CAI can commercially deploy such alternative uses on a wide- spread basis, that it will be able to achieve positive cash flow from any operating activities and that it can compete successfully in the subscription television industry or in the data transmission or telephony delivery industries. CAI has incurred net losses since inception (1991) of approximately $147 million through March 31, 1997 and expects to realize additional net losses on a consolidated basis while it develops and expands its MMDS systems. Additionally, CAI has substantial indebtedness, and beginning in 1999, will have significant debt service requirements. As of March 31, 1997, CAI had outstanding consolidated long-term debt of approximately $312 million, and shareholders' equity of approximately $115 million. On June 6, 1997, the Company closed a $30 million interim credit facility provided by Foothill Capital Corporation and affiliates of Canyon Capital Management, L.P. (the "Interim Debt Lenders"). The credit facility is governed by the terms of a Loan and Security Agreement dated as of May 16, 1997 (the "LSA") and is comprised of $25 million of two-year term debt, of which $10 million was made available to CAI at the closing and is currently outstanding. The balance of the term debt will be made available to CAI upon the achievement of certain agreed-upon operational benchmarks. In addition to the term debt, there is a two-year $5 million revolving loan, of which $3 million was made available by the Interim Debt Lenders to CAI at the closing, with the balance of such revolving loan to be made available upon the achievement of certain other agreed-upon operational benchmarks. There can be no assurance that the Company will be able to achieve the operational benchmarks or, if achieved, such achievement will be timely, thus providing the Company with access to such loan proceeds. As of June 24, 1997, the Company had not yet borrowed any amount against the revolving loan. In addition to the foregoing indebtedness, CAI has $70 million of mandatorily redeemable preferred stock outstanding having a priority as to dividends and a liquidation preference over the Shares of Common Stock. Pursuant to CAI's debt instruments, CAI is restricted from incurring additional indebtedness (except in connection with purchases of goods and services in the ordinary course of business and other ordinary course indebtedness permitted thereunder, granting liens to secure repayment of indebtedness, making investments (other than investments specifically permitted thereunder), pay dividends, dispose of assets, enter into any merger, consolidation, reorganization, or recapitalization plan, retire long-term debt, or make any acquisitions without the prior consent of the lenders. Further, in accordance with the LSA, the Company is required to maintain minimal levels of net worth and number of subscribers, and is limited with respect to the amount of annual capital expenditures. Such debt instruments and preferred stock and the restrictions contained therein will have several important consequences on CAI's future operations, including, but not limited to the following: (i) CAI will incur significant interest expense and principal repayment obligations; (ii) CAI's ability to obtain additional financing, including the balance of proceeds Item 1. Business (continued) contemplated by the interim financing, in the future, as needed, may be limited; (iii) CAI's leveraged position and the covenants contained in such debt instruments and preferred stock could limit CAI's ability to compete as well as its ability to expand and make capital improvements; (iv) CAI's substantial leverage will make it more vulnerable to economic downturns, limit its ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic conditions; and (v) CAI's substantial leverage will affect the extent to which the Company can implement its plans to exploit its MMDS spectrum, including, without limitation, development of fixed, flexible two-way alternative uses of MMDS spectrum in any of CAI's markets. In addition, such debt instruments and the terms of such preferred stock contain provisions that obligate CAI to redeem or offer to purchase such securities for specified premiums in the event of a change of control of CAI and certain similar events. The Company is seeking longer term financing through arrangements with strategic partner(s) interested and willing to participate with the Company in the development of its operating systems and various alternative uses of its MMDS spectrum. Much of the Company's business plan relating to fixed, flexible use of the MMDS spectrum is dependent upon CAI securing a new strategic partner to provide to CAI the necessary capital resources, as well as engineering and other expertise, and subscribers for such flexible-use services. There can be no assurance that the Company will be able to secure any additional financings or strategic relationships on terms and conditions satisfactory to the Company, if at all. Failure to obtain such financings and relationships will have a material adverse effect on the Company. Further, there can be no assurance that, even with additional financing, new strategic partner(s) and receipt of all necessary regulatory authorizations, the Company will be able to launch fixed, flexible two-way uses of its MMDS spectrum in a commercially successful manner. AMENDED RELATIONSHIP WITH BELL ATLANTIC AND NYNEX Through a series of amendments to the investment and business relationship agreements among the Company and affiliates of Bell Atlantic Corporation ("Bell Atlantic") and NYNEX Corporation ("NYNEX"), the Company has been granted the right to purchase the $30 million of BANX Term Notes (as defined below), $70 million of Senior Preferred Stock (as defined below) and BANX Warrants (as defined below, and together with the BANX Term Notes and the Senior Preferred Stock, the "CAI Securities") for an aggregate purchase price of $40 million and the issuance of 100,000 shares of a series of CAI junior preferred stock having a liquidation value of $30 million. The right to purchase the CAI Securities has been granted to CAI through February 28, 1998 (the "Option Period"), and CAI must give notice to Bell Atlantic and NYNEX of its election to exercise this right no later than November 21, 1997. The amendments also relieve CAI from any of its obligations under the BR Agreement (as defined below) with respect to its Boston, MA, Pittsburgh, PA and Albany, Syracuse and Buffalo, NY markets with the same effect as such markets had never been subject to the BR Agreement, and suspend, through February 28, 1998, CAI's obligations under the BR Agreement with respect to the remaining markets contemplated by the BR Agreement. Upon consummation of the purchase of the CAI Securities, the BR Agreement will terminate as to such remaining markets. In addition, Bell Atlantic and NYNEX have granted to CAI an irrevocable proxy during the Option Period with respect to the approximately 10% interest held by Bell Atlantic and NYNEX in CS Wireless, and have agreed to transfer such interest to CAI upon consummation of a purchase of the CAI Securities held by Bell Atlantic and NYNEX. In the event that CAI does not deliver, on or before November 21, 1997, a notice of election to exercise its right to purchase the CAI Securities, Bell Atlantic and NYNEX have the right to sell the CAI Securities. If CAI does not purchase the CAI Securities on or before February 28, 1998, the BR Agreement will be reinstated with respect to each market contemplated thereby with the exception of Boston, MA, Pittsburgh, PA and Albany, Syracuse and Buffalo, NY. BUSINESS AND OPERATING STRATEGIES GENERAL. The Company, since its formation, has focused on the development and operation of MMDS subscription television systems concentrated in major metropolitan areas located in the northeast and mid-Atlantic regions of the United States. With the suspension of the BR Agreement with Bell Atlantic and NYNEX and the receipt of regulatory approvals not previously sought by MMDS operators or granted by the FCC, the Company has begun to explore the full capabilities of its MMDS spectrum in addition to, or in certain CAI markets, instead of, subscription television. The Company believes that its MMDS spectrum can be utilized as the transport system for fixed, flexible two-way uses that eventually could be combined into a wireless full service network-the Wireless Information Network ("BWN"). Although the Company recognizes that there are significant regulatory, technological and financial issues surrounding the development of such a system in any of CAI's markets, the Company believes that BWN systems can be deployed in a reasonable manner to develop a commercially-viable means of delivering video, voice and data transmission services. Item 1. Business (continued) The Company has assembled significant spectrum rights in the northeast and mid-Atlantic regions of the United States, and is continuing to acquire channel rights in anticipation of developing digital systems that will allow CAI to utilize higher output power and compression technologies to increase channel capacity. CAI originally began to acquire its spectrum capacity in preparation for its obligations under the BR Agreement, which required CAI to deliver a minimum number of channels in each of the markets subject to the BR Agreement. During the Option Period, the Company intends to utilize its significant spectrum capacity to develop systems that are capable of delivering video, voice and data, or various combinations thereof, subject to regulatory approval. Although the Company believes that it will be possible to offer all three services in any given market once regulatory approval for fixed, flexible two-way use is obtained for such market, the allocation of channels among the various services is expected to be driven by consumer demand for such services in the Company's markets and not all services may be offered in all markets. The Company's initial efforts with respect to the development of fixed, flexible two-way use of the MMDS spectrum have been limited primarily to its Boston market and have been limited to the conduct of tests, only. For most of its channel rights, CAI is dependent upon leases of transmission capacity with various third-party license holders. ITFS licenses generally are granted for a term of ten years and are subject to renewal by the FCC. MDS licenses generally will expire on May 1, 2001 unless renewed. FCC licenses also specify construction deadlines which, if not met, could result in the loss of the license. Requests for additional time to construct a channel may be filed and are subject to review pursuant to FCC rules. Certain of CAI's ITFS channel rights are subject to pending extension requests and it is anticipated that additional extensions will be required. There can be no assurance that the FCC will grant any particular extension request or license renewal request. CAI's channel leases typically cover four ITFS channels and/or one to four MDS channels each. Under the rules of the FCC, the term of leases for ITFS channels, which constitute up to 20 of the 33 available wireless channels within any major MMDS market, may not exceed ten years. There is no such restriction on MMDS leases. Following the expiration of the initial term of a lease for ITFS channels, the leases under which CAI operates generally provide that the ITFS license holders may negotiate for the lease of channel capacity for one or more additional renewal terms with only CAI or its sublessor. In addition, if a renewal agreement is not reached within a specified time frame during which only CAI or its sublessor has the use of the channel capacity, CAI will thereafter typically have a right of first refusal to match any competing offers from one or more third parties. Because the ITFS license holders have generally received their FCC licenses within the last ten years, CAI and other similarly situated entities in the industry have had little or no experience negotiating renewals of ITFS channel lease agreements. CAI anticipates, however, that it will be able to negotiate additional renewals with either the incumbent license holder, or with successor license holders, although there is no assurance that it will be successful in doing so. The MMDS channel leases held by CAI generally grant CAI the right to renew the channel lease. All ITFS and MMDS channel leases are dependent upon the continued validity of the corresponding FCC license. CAI anticipates that upon the expiration of the current license terms, all such FCC licenses will be renewed following completion of the FCC review process, although there is no assurance that such renewal applications will be granted. The termination of or failure to renew a channel license or lease (due to a breach by CAI, or its lessor, cancellation of the license held by a third party lessor for failure to timely construct and/or perfect the wireless cable facility or otherwise) or the failure to grant an application for an extension of time to construct an authorized station, would result in CAI being unable to deliver programming on such channel(s) unless it were able to lease excess capacity from a successor license holder. Such a termination or failure in a market which CAI actively serves could have a material adverse effect on CAI. The excess channel capacity leases with Boston Catholic Television Center and Northeastern University, involving a total of 14 ITFS channels in Boston, contain provisions that required the Company to have commenced offering a commercial subscription television service by a certain date that passed without a service being put into operation. Neither institution has invoked the termination provision, and negotiations are ongoing. The Company believes such negotiations will result in each of the lessors entering into amended agreements that will cover a variety of issues, including an extension of the date by which the Company must initiate subscriber services. There can be no assurance, however, that such negotiations will result in such amended agreements or that such amended agreements will be on terms favorable to the Company. ANALOG-BASED SUBSCRIPTION VIDEO. CAI operates six analog-based wireless cable systems in New York City, Rochester and Albany, NY, Philadelphia, PA, Washington, DC, and Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of wireless cable channel rights in eight additional markets, including Long Island, Buffalo and Syracuse, NY, Providence, RI, Hartford, CT, Boston, MA, Baltimore, MD, and Pittsburgh, PA. As of June 21, 1997, CAI provided subscription video services to approximately 66,500 subscribers. Item 1. Business (continued) The Company's principal subscription video competitors in each of its markets are the hard-wire cable companies, and include Comcast Corp., Tele- Communications, Inc., Cox Cable Communications, Time Warner Cable and Cablevision Systems Corp. The table below outlines as of March 31, 1997 (except as indicated in the footnotes) the characteristics of the markets in which the Company has an operational subscription television system or in which the Company holds significant spectrum rights: TABLE I
Estimated Number of New Total Service Analog/Digital Analog/Digital DMA Area Channels Channels MARKET RANK{(1)} HOUSEHOLDS{(2)} AVAILABLE{(3)} APPLIED FOR New York City 1 4,996,976 36 0 Long Island{(4)} N/A 1,083,780 20 13 Philadelphia 4 2,154,389 41 2 Boston 6 1,007,198 30 3 Washington, DC 7 1,479,278 24 4 Pittsburgh 19 1,011,310 23 9 Baltimore 23 1,053,959 32 1 Hartford 26 471,532 20 3 Buffalo 39 501,314 31 2 Norfolk 40 531,833 32 1 Providence 46 842,658 23 10 Albany 52 320,742 32 0 Syracuse 69 278,630 18 7 Rochester 73 401,575 27 6 SUB TOTAL 16,135,174 BTA MARKETS (SEE TABLE II BELOW) 3,354,615 GRAND TOTAL 19,489,789
{(1)} DMA is the Designated Market Area as determined by A.C. Nielsen Company as of December 1995. {(2)} The Estimated Total Service Area Households in the service area represents the approximate number of households within a 35 mile radius of the Company's Tower sites. These households may have been adjusted downward if any of the Company's markets overlapped with a newly acquired BTA (see table II). This information is based on estimates obtained using two EDX Engineering software programs, MSITE{TM} and POP90{TM}. Both of these programs use 1990 Census data to compile their information. Some of these households will be "shadowed" and therefore unable to receive the Company's service due to line-of-sight ("LOS") constraints. The percentage of Estimated Households in the Service Area that the Company estimates may be shadowed due to LOS constraints generally ranges from 10% to 60% depending upon the market. A certain amount of these LOS constraints may be overcome by the placement of beambenders and/or signal boosters. {(3)} The Number of Channels Available comprises wireless cable channels and local broadcast channels that can be received by subscribers. Wireless cable channels are either licensed to CAI or leased to CAI from other license holders. The Number of Channels Available includes 10 off-air channels in Philadelphia and 11 in New York City. The Number of Channels Available includes certain channels that are subject to FCC approvals or third party interference agreements. CAI has pending FCC applications concerning co-location of transmission sites and/or an increase in broadcast power with respect to 4 channels in Philadelphia, 5 channels in Hartford, 8 channels in New York City, 7 channels in Washington, D.C., 20 channels in Rochester, 17 channels in Providence, 3 channels in Buffalo, 16 channels in Syracuse, 20 channels in Norfolk, 22 channels in Boston and 16 channels in Long Island. The Number of Channels Available includes ITFS channels that may not be available for commercial programming by CAI. {(4)} The Long Island market includes Nassau and Suffolk counties in New York State. Item 1. Business (continued) The table below outlines as of March 31, 1997 the characteristics of the potential markets for which CAI was the successful bidder at the completion of the FCC Auction (defined below. See "-Regulation-Licensing Procedures" below. The Estimated Service Area households in the table above may have been adjusted if the 35-mile Protected Service Area (PSA) overlapped with any of the markets identified below. To the extent there was overlap between two PSAs, the number of Estimated Total Service Area households in such overlapping area was divided equally between the two affected markets. TABLE II
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 Portsmouth, NH N/A 232,477 4 0 Worcester, MA N/A 352,646 9 20 New Haven, CT N/A 541,263 3 6 New London, CT N/A 96,380 1 0 Springfield, MA 102 366,198 9 20 Poughkeepsie, NY N/A 258,221 2 4 Pittsfield, MA N/A 116,365 1 0 Glens Falls, NY N/A 141,702 4 9 Ithaca, NY N/A 183,496 1 8 Utica, NY 166 153,219 2 4 Summit, NJ N/A 227,655 9 6 TOTAL 3,354,615
{(1)} The number of channels currently owned or leased by CAI. The table below outlines as of June 21, 1997 the characteristics of the markets in which CAI operates subscription television systems. TABLE III
Number of Monthly Revenue MARKET SUBSCRIBERS PER SUBSCRIBER ($) PREMIUM PENETRATION{(1)} New York City 10,100 44.09 190% Philadelphia 40,000 35.61 136% Washington, DC 2,500 36.68 130% Norfolk 2,500 31.09 116% Albany 8,700 29.46 131% Rochester 2,100 27.22 58% Providence (SMATV) 600 24.96 72%
_________________________ {(1)} Premium penetration is the ratio of the total number of premium channels received by subscribers in a market divided by the number of subscribers in that market. In certain markets, the basic subscription service includes one premium channel. The Company has not actively sought to increase its television subscriber base in its existing analog operating systems. Originally, this decision was made in connection with the BR Agreement, which contemplated that CAI would be required to transfer all of its analog television subscribers to the appropriate BANX Affiliate (as defined below) at the time such BANX Affiliate became the provider of video programming in a particular market. CAI was not entitled to any compensation for subscribers so transferred, and there was no incentive for CAI to increase its subscriber base. With the suspension of the BR Agreement, the Company plans to explore the full capabilities of its MMDS spectrum, including uses for such spectrum other than subscription television delivery. Consequently, the Company has maintained its strategy of not pursuing television subscriber growth while it evaluates its business opportunities other than subscription television services. The policy of not pursuing subscriber growth has a negative impact on the Item 1. Business (continued) Company's revenues, which is only partially mitigated by the cost-savings associated with reduced marketing and other efforts ordinarily pursued in connection with increasing a subscriber base. The Company intends to commence digital subscription television service in the Boston market during the fall of 1997, pending the availability to the Company of the necessary subscriber equipment and access to pre-digitized compressed programming. Utilizing portions of the digital MMDS system built by the Company in Boston last year, CAI intends to launch the digital subscription television service in certain locations served by the Company's main transmitter located in downtown Boston and by selected booster sites throughout the greater Boston area. To replace programming that would have been provided by the BANX Affiliates under the BR Agreement, the Company is currently in the process of negotiating a joint venture with TelQuest Communications, Inc., an entity of which Jared E. Abbruzzese, Chairman of the Company, is the principal stockholder, and CS Wireless, to form an entity (hereinafter, "TelQuest Joint Venture") capable of providing pre-digitized compressed programming to CAI, CS Wireless and other MMDS and hard-wire cable operators. CAI intends to use such programming for Boston and any other markets in which it determines to roll-out a digital video product. See "Item 13. Certain Relationships and Related Transactions." In the event that the TelQuest Joint Venture is not formed, CAI would have to construct a compression facility capable of serving the Boston market to provide digital programming or make other arrangements to receive pre-digitized compressed programming via satellite. The Company estimates the cost of constructing a digital compression facility is approximately $5 million as of June 1997. There can be no assurance that the necessary subscriber equipment or access to pre-digitized compressed programming will be available to the Company in the Boston market, and if available, that the Company will be able to successfully launch and operate a digital subscription television business in this market. CAI has substantially completed construction of a second digital system in Hampton Roads, VA. The Company does not yet have a definitive timetable for the commercial deployment of digital subscription television service in this market; however, if and when CAI decides to launch a digital subscription television service in Hampton Roads or any other of CAI's markets, availability of necessary subscriber equipment and access to pre-digitized compressed programming must be secured in connection with any such service launch. In each of the principal analog-based subscription television markets served by CAI there is and, the Company believes there will continue to be significant competition for households that are presently subscribers of a hard-wire cable service. Additionally, the Company has experienced loss of subscribers to hard-wire cable providers in markets where the Company's channel offering is significantly less, as a result of channel capacity limitations inherent in an analog-based MMDS operation, than the hard-wire cable providers, such as in the Company's New York City market. In addition to the markets set forth above, CAI holds 48% of CS Wireless Systems, Inc., a Delaware corporation ("CS Wireless"), formed on February 23, 1996 by the Company and Heartland Wireless Communications, Inc., an MMDS subscription television operator of small- and medium-sized markets ("Heartland"). Pursuant to the terms of a Participation Agreement dated December 12, 1995 (as amended, the "Participation Agreement") among the Company, Heartland and CS Wireless, each of CAI and Heartland contributed MMDS assets and channel rights or the stock of subsidiaries owning such assets and channel rights to CS Wireless. As a result of the contributions and transactions effected by CS Wireless following its formation, CS Wireless currently has 18 markets, encompassing approximately 7.5 million television households. As of December 31, 1996, CS Wireless provided service to approximately 65,600 subscribers. ONE-WAY, HIGH-SPEED INTERNET ACCESS. The Company believes that MMDS technology presents a viable option to traditional telephony providers as a "pipeline" through which Internet and commercial on-line services can be carried, especially for small- to medium -sized businesses seeking a cost- effective means of accessing such on-line services. To date, the FCC has licensed the MMDS spectrum for one-way video and data transmission. CAI further believes that the MMDS industry's systems, which can currently reach more than 50% of the nation's households, are superior to traditional telephone lines in terms of speed. An MMDS system can transmit data at speeds of up to 27 Mbps, nearly 1,000 times faster than traditional telephony rates of 28.8 Kbps. Several MMDS operators, including CAI, have successfully tested one-way Internet access capabilities over their existing systems, using a traditional telephone line for the typically less data-intensive return path. CAI intends to enter the Internet access market as a retail Internet Access Provider ("IAP"), but is also expected to offer wholesale transmission services. The Company's wholesale service is expected to be offered to other IAPs. Item 1. Business (continued) CAI recently initiated a commercial one-way Internet access service in its Rochester and New York City, New York markets, where the FCC has granted CAI developmental authorization to conduct a market trial of up to 500 and 1,000 Internet subscribers, respectively. The Company's service consists of one-way wireless high-speed downstream data transmission at those market transmission rates of up to 10 Mbps in Rochester and 27 Mbps in New York City. The service utilizes the Company's existing MMDS network for the downstream transmission, while the return path is handled using a traditional telephone line. The Company is marketing its Internet access service principally to small- to medium-sized businesses and residential consumers, for which, the Company believes, there is a significant need for high speed Internet access, but not necessarily the financial resources to install costly advanced telephone circuits capable of providing comparable transmission speed. The Company is also conducting Internet trials in Washington, D.C. There has been no definitive agreement to pursue commercial authorization for an Internet access service in Washington, D.C. as of the date hereof. In both of the above markets, the Company has established an Internet Point of Presence ("PoP") at its existing transmission facilities. Equipment at each PoP includes modem banks for upstream traffic, routers, servers, Internet wireless transmission hubs and high speed connectivity to the Internet backbone. Internet access service is a new application for the MMDS platform. Although the Company has previously demonstrated the technology and equipment necessary to transmit data over its MMDS spectrum on several occasions and in various markets, there can be no assurance that the Company will be able to successfully deploy, in a commercial manner, an Internet access service over its MMDS spectrum in Rochester, New York City or any other market in which it may seek to initiate such a service. FIXED, FLEXIBLE TWO-WAY USE OF MMDS SPECTRUM. CAI has recently applied for, and has received from the FCC, additional authorizations permitting CAI to develop fixed, flexible two-way uses of its MMDS spectrum in specified CAI markets for specific customer locations. The Company believes that fixed, flexible two-way use of the MMDS spectrum offers a significantly enhanced service capability and would present new opportunities for CAI and other MMDS operators. Based upon policy statements in which the FCC has consistently recognized that MMDS spectrum may be employed for a variety of video, voice and data transmission services, including two-way transmission, the Company believes that FCC policy regarding the use of MMDS spectrum is moving toward flexible two-way use so long as favorable technical and interference studies can be demonstrated. The Company believes that fixed, flexible two-way uses include data transmission such as two-way Internet and intranet access (eliminating the use of a traditional telephone line return path currently utilized by CAI's Internet access service) and local loop bypass telephony. The Company, in anticipation of such FCC policy regarding flexible two- way use, has recently applied for, and received from the FCC, a permanent authorization for fixed, flexible two-way use of five of its MMDS channels for 16 sites located in and around CAI's Boston market. This authority represents the first of its kind awarded to an MMDS operator. CAI is actively seeking strategic partners interested in developing fixed, flexible two-way uses for its MMDS spectrum in Boston, and potentially, other CAI markets. The Company is engaged in discussions with potential strategic investors; however, such discussions are in the preliminary stages. There can be no assurance that CAI will be successful in attracting a strategic partner, or if successful, that a business arrangement between CAI and such strategic investor can be reached on satisfactory terms and conditions, if at all. Further, there can be no assurance that CAI, alone or in conjunction with a strategic partner, will be able to successfully develop fixed, flexible uses of its MMDS spectrum, or if successfully developed, that such uses can be deployed profitably in a commercial manner. Additionally, the permanent authorization granted to Boston is limited to five MMDS channels for 16 customer locations. There can be no assurance that such customer locations will enable CAI to successfully develop fixed, flexible uses of its MMDS spectrum in Boston in a commercial manner and, therefore, CAI will need to apply for authorization in Boston for additional channels and/or additional customer locations. Such applications have not been made as of the date hereof. There can be no assurance, however, if such applications are made, that CAI would receive authorization from the FCC for additional channels and/or additional customer locations in the Boston market. In connection with the Company's intention to develop fixed, flexible two-way uses of its MMDS spectrum, the Company entered into a memorandum of understanding in January 1997 with ADC Telecommunications, Inc., a telecommunications equipment manufacturer ("ADC"), to pursue the design and implementation of fixed two-way broadband wireless communications systems for the transmission of video, voice and data over the MMDS spectrum. Subject to receipt of the requisite regulatory authority, the Company and ADC expect to use certain of the channels in CAI's Pittsburgh market for the initial phase of the joint development project. If such phase is successful, the Company and ADC have agreed to deploy a demonstration system in Boston, which the Company believes will be conducted Item 1. Business (continued) pursuant to the permanent authority it has already received for fixed, flexible two-way use in that market. Further joint development would be the subject of a definitive agreement among CAI and ADC, however, there can be no assurance that the initial phase or demonstration system will be successful, or if successful, that a definitive agreement relating to additional joint development of fixed two-way broadband wireless communications systems with ADC will be reached on terms and conditions that are satisfactory to the Company, if at all. The Company also believes that fixed, flexible two-way use of its MMDS spectrum includes telephony delivery services. The Company believes that the combination of digital compression, fiber loop and cellular technologies can be integrated into the MMDS spectrum, resulting in a single wireless platform capable of delivering a wide range of services, including telephony delivery services. Adaptation of newly available, but as of yet commercially untested, technologies has been explored by the Company, with the intention of assessing Broadband MMDS spectrum's ability to simultaneously provide a combination of video, voice and data delivery services. See "--Wireless Network" below. CAI believes that an MMDS system having one main transmitter and multiple booster sites can be designed using standard cellular network design principles to produce a relatively low-cost telephony delivery platform. The Company has commenced preliminary testing and has taken initial steps in furtherance of developing a telephony application for its MMDS spectrum. Although the Company believes that an MMDS system can be designed to provide telephony delivery services, there can be no assurance that such a system could be designed, or that the Company would be capable of designing and constructing such a system. Furthermore, in the event that such a system could be designed, there can be no assurance that the Company would receive the requisite regulatory approval to offer a telephony delivery service, that the Company would have the financial resources, alone or in conjunction with a strategic partner, necessary to design and construct a telephony delivery service in one or more of its markets, or that such service, if it was designed and constructed by the Company in one or more markets, could be successfully deployed in a commercially successful manner. BROADBAND WIRELESS NETWORK. Subject to receipt of regulatory approval for fixed, flexible use of its MMDS spectrum and successful testing, the successful deployment of digital video, one- and two-way data transmission and telephony delivery services utilizing the MMDS platform and sufficient capital resources, the Company intends to launch a wireless version of the full service network, the Broadband Wireless Network ("BWN"). The Company believes that its BWN systems would be able to provide quick and relatively inexpensive household coverage on a broad scale. CAI believes that the BWN system concept will enhance the Company's ability to attract one or more strategic investors by giving such partners the ability to provide competitive access products over CAI's MMDS spectrum. The Company believes that its BWN systems will be capable of providing a combination of analog and/or digital video services for residential, as well as for corporate and institutional/instructional subscribers, bundled with high speed Internet and intranet access services, and ultimately, telephony delivery services. The Company expects to be able to alter the channel allocation among the various services depending on the needs of the strategic partner and consumer demand, thereby deriving multiple revenue streams from each BWN system. The Company has not yet implemented a BWN system in any of its markets. CAI believes that the various regulatory approvals it has received and the joint development projects with which it is involved will enable CAI to assess the viability of the BWN system and present it to potential strategic partners. The Company has not, however, tested a BWN system in any of its markets. There are a number of risk factors, including, without limitation, receipt of all requisite regulatory approvals, technology development and the availability of additional financing, that will affect the implementation of a BWN system in any of the Company's markets, some of which are outside the control of the Company. There can be no assurance that the Company will be able to develop a BWN system in any of its markets, or that if a BWN system is developed, that the Company will be able to deploy a variety of services in a commercially reasonable manner, if at all. MMDS subscription television is not a new technology; however, it is a new industry with a relatively short operating history. Fixed, flexible two-way uses of the MMDS spectrum have relatively no operating history. There are difficulties and uncertainties normally associated with new industries, such as lack of consumer acceptance, difficulty in obtaining financing, increasing competition, advances in technology and changes in laws and regulations. There can be no assurance that the MMDS industry will develop or continue as a viable or profitable industry. REGULATION General. The wireless cable industry is subject to regulation by the FCC pursuant to the Communications Act of 1934, as amended (the "Communications Act"). The Communications Act empowers the FCC, among other things, to issue, revoke, modify and renew licenses within the spectrum available to wireless cable; to approve the assignment Item 1. Business (continued) and/or transfer of control of such licenses; to approve the location of wireless cable system headends; to regulate the kind, configuration and operation of equipment used by wireless cable systems; and to impose certain equal employment opportunity and other obligations and reporting requirements on wireless cable channel license holders and operators. The FCC has determined that wireless cable systems are not "cable systems" for purposes of the Communications Act. Accordingly, a wireless cable system does not require a local franchise and is subject to fewer local regulations than a hard-wire cable system. Moreover, all transmission and reception equipment for a wireless cable system can be located on private property; hence, there is no need to make use of utility poles or dedicated easements or other public rights of way. Although wireless cable operators typically have to lease from third parties the right to use a certain portion of the channels utilized in any given system, unlike hard-wire cable operators they do not have to pay local franchise fees. Recently, legislation has been introduced in some states, including Illinois, Maryland, Pennsylvania and Virginia, to authorize state and local authorities to impose on all video program distributors (including wireless cable operators) a tax on the distributors' gross receipts comparable to the franchise fees cable operators pay. Similar legislation might be introduced in several other states. While the proposals vary among states, the bills all would require, if passed, as much as 5.0% of gross receipts to be paid by wireless distributors to local authorities. Efforts are underway by the industry trade association to preempt such state taxes through federal legislation. In addition, the industry is opposing the state bills as they are introduced, and, in Virginia and Maryland, it has succeeded in either blocking the legislation or being exempted from the video tax that was eventually enacted into law. However, it is not possible to predict whether new state laws will be enacted which impose new taxes on wireless cable operators. The FCC licenses and regulates the use of channels by license holders and system operators. In the 50 largest markets, 33 6-MHz channels are available for wireless cable delivery services (in addition to any local broadcast television channels that can be offered to subscribers via an off-air antenna). In each geographic service area of all other markets, 32 6-MHz channels are available for wireless cable (in addition to any local broadcast television channels that can be offered to subcribers via an off-air antenna). Except in limited circumstances, 20 wireless cable channels in each of these geographic service areas are generally licensed only to qualified non-profit educational organizations (commonly referred to as ITFS channels). In general, each of these channels must be used a minimum of 20 hours per week per channel for instructional programming. The remaining "excess air time" on an ITFS channel may be leased to wireless cable operators for commercial use, without further restrictions (other than the right of the ITFS license holder, at its option, to recapture up to an additional 20 hours of air time per week for educational programming). Lessees of ITFS' "excess air time," including the Company, generally have the right to transmit to their customers the educational programming provided by the lessor at no incremental cost. The FCC recently amended its rules to permit ITFS license holders to consolidate their educational programming on one or more of their ITFS channels, thereby providing wireless cable operators leasing such channels, including the Company, greater flexibility in their use of ITFS channels. The remaining 13 analog channels available in most of the Company's operating and targeted markets are made available by the FCC for full-time usage without programming restrictions. LICENSING PROCEDURES. The actual number of wireless cable channels available for licensing in any market is determined by the FCC's interference protection and channel allocation rules. The FCC awards ITFS and MMDS licenses based upon applications demonstrating that the applicant is legally, financially and technically qualified to hold the license and that the operation of the proposed station will not cause harmful interference to other stations or proposed stations entitled to interference protection. During the year ended March 31, 1996, CAI participated in the FCC's MMDS Spectrum auction (the "FCC Auction") for awarding available commercial wireless spectrum in 493 markets (the "Auction Markets") throughout the United States, identified as Basic Trading Areas( in accordance with material copyrighted by Rand McNally & Company. The winner of an Auction Market has the right to apply for the available MDS frequencies throughout the Auction Market, consistent with certain specified interference criteria that protect existing ITFS and MMDS channels. Existing ITFS and MMDS channel right holders also must protect the Auction Market winner's spectrum from power increases or tower relocations. CAI was the successful bidder for 32 Auction Markets costing CAI a total of $48.8 million. Pursuant to an agreement with CS Wireless, CAI has transferred five Auction Markets located in CS Wireless' operating regions and for which CAI was the successful bidder, costing an aggregate of $12.6 million, to CS Wireless at cost, and will transfer two additional Auction Markets located in CS Wireless' operating regions and for which CAI was the successful bidder upon the granting of such Auction Market awards by the FCC. For each of the Auction Markets in which CAI was the successful bidder, CAI was required to submit the requisite FCC applications and make a down-payment (20% of such successful bid) within five days of the announcement by Public Notice of the successful bid. When the authorization for an Auction Market is ready to be issued by the FCC, Item 1. Business (continued) the FCC will release a Public Notice to that effect. Within 5 days of such Public Notice, the successful bidder is required to remit the balance of its bid to the FCC, whereupon the Auction Market authorization will be issued by the FCC. As of March 31, 1997, authorizations for all but two Auction Markets for which CAI was the successful bidder (excluding those markets that are required to be conveyed at cost to CS Wireless) have been issued by the FCC and paid for by CAI. Authorizations for the remaining two Auction Markets are expected to be issued during the fiscal year ending March 31, 1998, and payment, in the aggregate amount of $1.1 million for such remaining Auction Markets will be due upon such issuance. In order to be eligible for the FCC Auction, CAI, prior to the start of the auctions, was required to file applications and make up-front payments in accordance with the rules of the FCC Auction. CAI, as the winning bidder, is in the process of fulfilling certain post-auction filing obligations, including, but not limited to, filing applications that propose new transmission facilities, exhibits concerning its involvement in bidding consortia, and descriptions of its plans to build-out two-thirds of each market over a five- year period. Due to the unique nature of the FCC Auction, there is no prior regulatory history regarding the scope and nature of the information the FCC will require, or how the FCC will treat the information. Under rules and policies for applications for new MDS facilities filed before the FCC Auction, the FCC would generally issue a conditional license that permits the conditional licensee to commence construction of its facilities upon the satisfaction of specified conditions. Construction of MDS stations generally must be completed within one year of grant of the conditional license. In February 1995, the FCC amended its rules and established "windows" for the filing of new ITFS applications or major modifications to authorized ITFS facilities. The first filing "window" was October 16-20, 1995. Where two or more ITFS applicants file applications for the same channels and the proposed facilities could not be operated without impermissible interference, the FCC employs a set of comparative criteria to select from among the competing applicants. Construction of ITFS stations generally must be completed within 18 months of the date of grant of the authorization. If construction of MDS or ITFS stations is not completed within the authorized construction period, the licensee must file an application with the FCC seeking additional time to construct the station and demonstrate therein compliance with certain FCC standards. If the extension application is not filed or is not granted, the license will be deemed forfeited. ITFS and MDS licenses generally have terms of 10 years. Licenses must be renewed thereafter, and may be revoked for cause in a manner similar to other FCC licenses. FCC rules prohibit the sale for profit of a conditional MDS license or a controlling interest in the conditional licensee prior to construction of the station or, in certain circumstances, prior to the completion of one year of operation. However, the FCC does permit the leasing of 100% of an MDS licensee's spectrum to a wireless cable operator and the granting of options to purchase a controlling interest in a license even before such holding period has lapsed. Wireless cable transmissions are subject to FCC regulations governing interference and reception quality. These regulations specify important signal characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or digital). Until recently, FCC regulations required wireless cable systems to transmit only analog signals and those regulations needed to be modified, either by rulemaking or by individual application, to permit the use of digital transmissions. CAI was a party to a petition for declaratory ruling filed in July 1995 seeking adoption of interim regulations authorizing digital transmission. This petition was granted on July 9, 1996, and allows wireless licenseholders to operate digitally under current FCC interference rules. The license holder is, however, required to file for digital authorization. It is likely that, in the longer term, the FCC will consider adopting both new technical and service rules tailored to digital operations. The service rules could modify the respective rights and obligations of the ITFS lessors and their commercial lessees of "excess air time" in light of the increased capacity that would result from digital compression. Even if the FCC does adopt new service rules governing the allocation of "excess air time" in a digital environment, it is anticipated that there would be a dramatic increase in the number of channels that will be available to the Company following the conversion to digital transmission. The Company demonstrated transmission of digital satellite television programming and digital local broadcast television signals in its Rochester, NY market in June 1996. The Company believes that the necessary FCC approvals will be obtained to permit use of digital compression by the time it becomes commercially available on a wide-spread basis; however, there can be no assurance that these approvals will be forthcoming or timely. In addition, such modifications filed with the FCC after the FCC Auction will be subject to the interference protection rights of adjacent FCC Auction winners. Item 1. Business (continued) The FCC also regulates transmitter locations and signal strength. The operation of a wireless cable television system requires the co-location of a commercially viable number of MMDS channels and operations with transmission characteristics (such as power and polarity). In order to commence the operations of certain of the Company's markets, applications have been or will be filed with the FCC to relocate and modify existing transmission facilities. Under current FCC regulations, a wireless cable operator generally may serve subscribers anywhere within the LOS of its transmission facility, provided that the signal complies with FCC interference standards. Under rules adopted by the FCC on June 15, 1995, an MMDS channel license holder generally has a protected service area of 35 miles around its transmitter site. The current rules became effective on September 15, 1995. An ITFS channel license holder has protection as to all of its receive sites, but the same protected service area during excess capacity use by a wireless cable operator as an MMDS license holder. In launching or upgrading a system, the Company may wish to relocate its transmission facility or increase its height or power. If such changes cause the Company's signal to violate interference standards with respect to the protected service area of other wireless license holders, the Company would be required to obtain the consent of such other license holders; however, there can be no assurance that such consents would be received. INTERFERENCE ISSUES. Interference from other wireless cable systems can limit the ability of a wireless cable system to serve any particular point. In licensing ITFS and MDS systems, a primary concern of the FCC is avoiding situations where proposed stations are predicted to cause interference with the reception of previously proposed stations. Pursuant to FCC rules, a wireless cable system is generally protected from interference within a radius of 35 miles of the transmission site. In addition, modification applications submitted after the FCC Auction will be required to protect FCC Auction winners from interference. The FCC's interference protection standards may make one or more of these proposed modifications or new grants unavailable. In such event, it may be necessary to negotiate interference agreements with the licensees of the systems which would otherwise block such modifications or grants. There can be no assurance that the Company will be able to negotiate all necessary interference agreements that are on terms acceptable to the Company. In the event the Company cannot obtain interference agreements required to implement the Company's plans for a market, the Company may have to curtail or modify operations in that market, utilize a less optimal tower location, or reduce the height or power of the transmission facility, any of which could have a material adverse effect on the growth of the Company in that market. In addition, while the Company's leases with ITFS and MDS licensees require their cooperation, it is possible that one or more of the Company's channel lessors may hinder or delay the Company's efforts to use the channels in accordance with the Company's plans for the particular market. THE 1992 CABLE ACT. On October 5, 1992, Congress enacted the 1992 Cable Act, which compels the FCC to, among other things, (i) adopt comprehensive federal standards for the local regulation of certain rates charged by hard- wire cable operators, (ii) impose customer service standards on hard-wire cable operators, (iii) govern carriage of certain broadcast signals by all multi- channel video providers, and (iv) compel non-discriminatory access to programming owned or controlled by vertically-integrated cable operators. The rate regulations adopted by the FCC do not regulate cable rates once other multi-channel video providers serve, in the aggregate, at least 15% of the households within the cable franchise area. The customer service rules adopted by the FCC establish certain minimum standards to be maintained by traditional hard-wire cable operators. These standards include prompt responses to customer telephone inquiries, reliable and timely installations and repairs, and readily understandable billing practices. These rules do not apply to wireless cable operators, although the Company believes that it provides and will continue to provide customer service superior to its hard-wire cable competitors. Under the retransmission consent provisions of the 1992 Cable Act and the FCC's implementing regulations, all multi-channel video providers (including both hard-wire and wireless cable) seeking to retransmit certain commercial broadcast signals must first obtain the permission of the broadcast station. Hard-wire cable systems, but not wireless cable systems, are required under the 1992 Cable Act and the FCC's "must carry" rules to retransmit a specified number of local commercial television or qualified low power television signals. See "Retransmission Consent." The 1992 Cable Act and the FCC's implementing regulations impose limits on exclusive programming contracts and prohibit programmers in which a cable operator has an attributable interest from discriminating against cable competitors with respect to the price, terms and conditions of programming. Certain provisions of the 1992 Item 1. Business (continued) Cable Act and the FCC's implementing regulations have been challenged in the courts and before the FCC. Under the Telecommunications Act of 1996 (the "1996 Act"), Congress has directed the FCC to eliminate cable rate regulations for "small systems," as defined in the 1996 Act, and for large systems under certain prescribed circumstances, and for all cable systems effective three years after enactment of the 1996 Act. While current FCC regulations are intended to promote the development of a competitive subscription television industry, the rules and regulations affecting the wireless cable industry may change, and any future changes in FCC rules, regulations, policies and procedures could have a material adverse effect on the Company. In addition, a number of legal challenges to the 1992 Cable Act and the regulations promulgated thereunder have been filed, both in the courts and before the FCC. These challenges, if successful, could result in increases in the Company's operating costs and otherwise have a material adverse effect on the Company. The Company's costs to acquire satellite- delivered programming may be affected by the outcome of those challenges. Other aspects of the 1992 Cable Act that have been challenged, the outcome of which could adversely affect the Company, including the 1992 Cable Act's provisions governing rate regulation to be met by traditional hard-wire cable companies. The 1992 Cable Act empowered the FCC to regulate the basic subscription rates charged by traditional hard-wire cable operators. The FCC recently issued rules requiring such cable operators, under certain circumstances, to reduce the rates charged for non-premium services by as much as 17%. Should these regulations withstand court and regulatory challenges, the extent to which wireless cable operators may continue to maintain a price advantage over traditional hard-wire cable operators could be diminished. On the other hand, continued strict rate regulation of cable rates would tend to impede the ability of hard-wire cable operators to upgrade their cable plant and gain a competitive advantage over wireless cable. THE 1996 ACT. The Telecommunications Act of 1996 (the "1996 Act"), enacted in February 1996, could have a material impact on the MMDS industry and the competitive environment in which the Company operates. The 1996 Act will result in comprehensive changes to the regulatory environment for the telecommunications industry as a whole. The legislation will, among other things, substantially reduce regulatory authority over cable rates. Another provision of the 1996 Act will afford hard-wire cable operators greater flexibility to offer lower rates to certain of its subscribers, and would thereby permit cable operators to offer discounts on hard-wire cable service to the Company's subscribers or prospective subscribers. The legislation will permit telephone companies to enter the video distribution business, subject to certain conditions. The entry of telephone companies into the video distribution business, with greater access to capital and other resources, could provide significant competition to the companies in the MMDS industry, including the Company. In addition, the legislation will afford relief to DBS providers by exempting such providers from local restrictions on reception antennas and preempting the authority of local governments to impose certain taxes. The Company cannot predict the substance of rules and policies to be adopted by the FCC in implementing the provisions of the legislation. COPYRIGHT. Under the federal copyright laws, permission from the copyright holder generally must be secured before a video program may be retransmitted. Under Section 111 of the Copyright Act, certain "cable systems" are entitled to engage in the secondary transmission of programming without the prior permission of the holders of copyrights in the programming. In order to do so, a cable system must secure a compulsory copyright license. Such a license may be obtained upon the filing of certain reports with and the payment of certain fees to the U.S. Copyright Office. In 1994, Congress enacted the Satellite Home Viewers Act of 1994 which enables operators of wireless cable television systems to rely on the cable compulsory license under Section 111 of the Copyright Act. RETRANSMISSION CONSENT. Under the retransmission consent provisions of the 1992 Cable Act, wireless and hard-wire cable operators seeking to retransmit certain commercial television broadcast signals must first obtain the permission of the broadcast station in order to cover their signal. However, wireless cable systems, unlike hard-wire cable systems, are not required under the FCC's "must carry" rules to retransmit a specified number of local commercial television or qualified low power television signals. Although there can be no assurances that the Company will be able to obtain requisite broadcaster consents, the Company believes in most cases it will be able to do so for little or no additional cost. In addition to regulation by the FCC, MMDS operators are subject to regulations by the Federal Aviation Administration ("FAA") with respect to construction of transmission towers and to certain local zoning regulations affecting construction of towers and other facilities. There also may be restrictions imposed by local authorities, neighborhood associations and other similar organizations limiting the use of certain types of reception equipment used by CAI. Future changes in the foregoing regulations or any other regulations applicable to CAI could have a material adverse effect on CAI's results of operations and financial condition. Item 1. Business (continued) Certain states have legislated that each resident of a Multiple Dwelling Unit ("MDU") should not be denied access to programming provided by franchised cable systems, notwithstanding the fact that the MDU entered into an exclusive agreement with a non-franchised video program distributor. States with such "mandatory access" laws where CAI provides MMDS service include Connecticut, Delaware, District of Columbia, New Jersey, New York, Pennsylvania and Rhode Island. In several district courts, mandatory access laws have been held unconstitutional. Such laws could increase the competition for subscribers in MDUs. There may also be restrictions imposed by local authorities. There can be no assurance that the Company will not be required to incur additional costs in complying with such regulations or restrictions. Due to the regulated nature of the subscription television industry, the Company's growth and operations may be adversely impacted by the adoption of new, or changes to existing, laws or regulations or the interpretations thereof. COMPETITION The subscription television industry is highly competitive. CAI's principal subscription television competitors in each market are traditional hard-wire cable, direct broadcast satellite ("DBS") and private cable operators. Hard-wire cable companies generally are well established and known to potential customers and have significantly greater financial and other resources than CAI. Premium movie services offered by the cable television systems have encountered significant competition from the home video cassette recorder industry. In areas where several local off-air VHF/UHF broadcast channels can be received without the benefit of subscription television, cable television systems also have faced competition from the availability of broadcast signals generally and have found market penetration to be more difficult. Legislative, regulatory and technological developments may result in additional and significant competition, including competition from local telephone companies and from a proposed new wireless service known as Local Multipoint Distribution Service ("LMDS"). A more detailed discussion follows: HARD-WIRE CABLE. CAI's principal subscription television competitors in each market are traditional hard-wire cable operators. Hard-wire cable companies are generally well established and known to potential customers and have significantly greater financial and other resources than CAI. The hard- wire cable companies competing in CAI's markets generally offer between 34 to 82 channels to their subscribers, compared to between 22 to 42 channels (consisting of between 17 and 33 wireless cable channels and between 5 and 10 local off-air VHF/UHF broadcast channels) generally offered by CAI in its markets. DIRECT-TO-HOME ("DTH"). DTH satellite television services originally were available via satellite receivers which generally were 7-to-12 foot dishes mounted in the yards of homes to receive television signals from orbiting satellites. Until the implementation of encryption, these dishes enabled reception of any and all signals without payment of fees. Having to purchase decoders and pay for programming has reduced their popularity, although CAI will to some degree compete with these systems in marketing its services. Another form of DTH service is Direct Broadcast Satellite ("DBS"). DBS involves the transmission of an encoded signal direct from a satellite to the customer's home. Because the signal is at a higher power level and frequency than most satellite-transmitted signals, its reception can be accomplished with a relatively small (18-inch) dish mounted on a rooftop or in the yard. DBS cannot, for technical and legal reasons, provide local VHF/UHF broadcast channels as part of its service, although many DBS subscribers receive such channels via standard over-the air receive antennas. Moreover, DBS may provide subscribers with access to broadcast network distant signals only when such subscribers reside in areas unserved by any broadcast station. The cost to a DBS subscriber for equipment and service is generally substantially higher than the cost to wireless cable subscribers. PRIVATE CABLE. Private cable is a multi-channel subscription television service where the programming is received by satellite receiver and then transmitted via coaxial cable throughout private property, often MDUs, without crossing public rights of way. Private cable operates under an agreement with a private landowner to service a specific MDU, commercial establishment or hotel. The FCC amended its rules to provide point-to-point delivery of video programming by private cable operators and other video delivery systems in the 18 GHz band. Private cable operators compete with CAI for exclusive rights of entry into larger MDUs. TELEPHONE COMPANIES. In July 1995, Pacific Telesis Group ("PacTel"), a local exchange carrier based in California, acquired Cross Country Wireless, Inc., a wireless cable system operator in southern California, for approximately $175 million. PacTel recently launched a 150-channel digital video system in Los Angeles, CA. Bell South Corp. has acquired wireless cable channel rights Miami, FL; Atlanta, GA, and New Orleans, LA, and has Item 1. Business (continued) announced plans to launch digital video systems in each of these markets over the course of the next 12 to 24 months. The competitive effect of the entry of telephone companies into the subscription television business, including wireless cable, is still uncertain. LOCAL OFF-AIR VHF/UHF BROADCASTS. Local off-air VHF/UHF broadcast television stations (such as ABC, NBC, CBS and Fox) provide free programming to the public. Previously, subscription television operators could retransmit these broadcast signals without permission. However, effective October 6, 1993, pursuant to the 1992 Cable Act, local broadcasters may require that subscription television operators obtain their consent before retransmitting local television broadcasts. The Company has obtained such consents for its operating systems. See "Risk Factors--Restrictions Imposed by Government and Community Regulation." The Company will be required to obtain such consents in certain of its markets to re-broadcast any such channels. The Company believes that it will be able to obtain such consents, but no assurance can be given that it will be able to obtain all such consents. The FCC also has recently permitted broadcast networks to acquire, subject to certain restriction, ownership interests in hard-wire cable systems. In some areas, several low power television ("LPTV") stations authorized by the FCC are used to provide multi-channel subscription television service to the public. LPTV transmits on conventional VHF/UHF broadcast channels, but is restricted to very low power levels, which limits the area where a high-quality signal can be received. LOCAL MULTI-POINT DISTRIBUTION SERVICE ("LMDS"). On March 11, 1997, the FCC established service and competitive bidding rules for LMDS, a new service that will use spectrum in the 27.5-28.35 GHz, 29.1-29.25 GHz, and 31.0-31.3 GHz bands. LMDS licensees will be able to use their spectrum for a wide variety of services, including voice, video and data. Two licenses will be awarded in each of 493 Auction Markets, one for 1150 MHz and one for 150 MHz. Incumbent local exchange carriers ("LECs") and cable companies will not be eligible to obtain in-region 1150 MHz licenses for three years. However, several LECs and cable companies have appealed this FCC restriction, and those appeals remain pending in several U.S. Courts of Appeals around the country. The FCC had intended to conduct the LMDS auction in the summer or fall of 1997, however, the pendency of the appeals will prevent the FCC from conducting the LMDS auction until one or more of the appeals are resolved. Depending on the outcome, the LMDS auction could be delayed beyond 1997. In addition, within each market, the Company initially must compete with others to acquire, from the limited number of MMDS channels issued or issuable, rights to a minimum number of MMDS channels needed to establish a commercially viable system. Digital capability is essential for MMDS to compete with hard- wire cable, which in its current analog state offers between 36 to 90 channel offerings depending on a given market. With the deployment of digital, hard- wire cable is expected to offer over 150 channels. The Company has lost television subscribers to hard-wire cable competitors in each of its markets due to the channel capacity limitations inherent in an analog-based MMDS operation. In addition, within each market, the Company initially must compete with others to acquire, from the limited number of MMDS channels issued or issuable, rights to a minimum number of MMDS channels needed to establish a commercially viable system. Aggressive price competition or the passing of a substantial number of presently unpassed households by any existing or new subscription television service could have a material adverse effect on the Company's results of operations and financial condition. New and advanced technologies for the subscription television industry, such as digital compression, fiber optic networks, DBS transmission, video dialtone and LMDS, are in various stages of development of commercial deployment. These technologies are being developed and supported by entities, such as hard-wire cable companies and regional telephone companies, that have significantly greater financial and other resources than CAI. These new technologies could have a material adverse effect on the demand for MMDS subscription television services. There can be no assurance that CAI will be able to compete successfully with existing competitors or new entrants in the market for subscription television services. The Company will also face intense competition from other providers of data and telephony transmission services if the Company implements, on a commercial basis, such services. Such competition is increased due to the fact that MMDS spectrum has not traditionally been utilized to deliver such alternative services, and consumer acceptance of such services delivered via MMDS technology is unknown at this time. Many of the existing providers of data transmission and telephony services, such as long distance and regional telephone companies have significantly greater financial and other resources than the Company. In addition, in recent months ASkyB, a satellite venture between News Corp. and MCI, and PRIMESTAR, Inc., a DBS provider, announced that the two companies would be combining their assets and resources into a single DBS unit. Also recently, Microsoft Corporation and Comcast Corporation announced that Microsoft will be investing $1 billion in Comcast, the nation's fourth largest Item 1. Business (continued) cable television operator. Both transactions will impact the competitive nature of the video, voice and data markets. In addition, both transactions may make it more difficult for wireless cable providers to obtain access to attractive video programming. News Corp. may be reluctant to permit its local Fox television affiliates to be retransmitted on the wireless cable system, and Microsoft may be more reluctant to make its MSNBC programming available to wireless cable systems. There can be no assurance that there will be consumer demand for alternative uses of the MMDS spectrum such as data transmission, including Internet access services, and telephony delivery services, that the Company will be able to compete successfully against other providers of such services or that the Company will be able to achieve profitability from such services in future years. BACKGROUND GENERAL. The Company was formed in 1991 to invest in and operate MMDS subscription television systems. Through a series of acquisitions culminating in the September 29, 1995 acquisition of ACS Enterprises, Inc., an MMDS operator based in Philadelphia, Pennsylvania with operating systems in Philadelphia, Cleveland, Ohio and Bakersfield, California, and Eastern Cable Networks of Washington, Inc. ("ECNW") that operated the Washington, D.C. MMDS system, the Company has grown to become the largest MMDS operator in the United States in terms of both television and LOS households. The Company enhanced its spectrum capacity during 1996 by being the top bidder in the FCC Auction with a bid of $36.2 million for the BTA rights for its existing markets as well as for its new markets. The rapid growth CAI has experienced in the number of employees, the scope of its operating and financial systems, the geographic area of its operations, and the exploration of alternative uses of its MMDS spectrum, has increased the operating complexity of CAI, as well as increased the level of responsibility for both existing and new management personnel. In managing this growth, CAI has been and will be required to continue to improve its operating and financial systems to expand, train and manage its employees. There can be no assurance that CAI will be able to attract and retain qualified employees. Any inability to attract and retain qualified employees may impede CAI's growth and its ability to compete with other subscription television providers. In addition, beginning in the fiscal year ended March 31, 1997, the Company has implemented a series of cost-cutting measures, including a reduction of its workforce, in an effort to manage the increased costs associated with this growth. The Company made its initial public offering in February 1994, and issued $275 million aggregate principal amount of its 12 1/4% Senior Notes due 2002 (the "Senior Notes") in September 1995. As of March 31, 1997, the Company had 40,540,539 shares of its common stock, without par value (the "CAI Common Stock"), issued and outstanding. BANX TRANSACTIONS. In addition to the consummation of several acquisitions and the offering of CAI's Senior Notes, the Company also completed a series of transactions with affiliates of Bell Atlantic and NYNEX in September 1995. In March 1995, CAI entered into a strategic business relationship with BANX Partnership, an affiliate of Bell Atlantic and NYNEX (the "BANX Partnership") and with other affiliates of Bell Atlantic and NYNEX (the "BANX Affiliates"). This relationship consisted of (i) the signing of the Business Relationship Agreement, as amended (the "BR Agreement") with the BANX Affiliates, (ii) the purchase by the BANX Partnership of $30 million of convertible Term Notes due May 9, 2005 ("BANX Term Notes") and Warrants (the "BANX Warrants") to purchase convertible preferred stock, no par value (the "Voting Preferred Stock") (the "Stage I Closing"), and (iii) the purchase by the BANX Partnership of $70 million of 14% Senior Convertible Preferred Stock, par value $10,000 per share ("Senior Preferred Stock" and additional Warrants; and together with the BANX Term Notes and BANX Warrants, the "CAI Securities") (the "Stage II Closing"). Upon issuance of the CAI Securities in September 1995, the full conversion or exercise of the CAI Securities would have resulted in the BANX Partnership having to make an additional investment, at that time, in CAI of approximately $202 million (subject to adjustment in accordance with the terms of the Modification Agreement (as defined below), and its pro forma ownership interest in CAI increasing to approximately 45%. Pursuant to the BR Agreement, which was intended to allow CAI to realize revenue in certain of its markets without incurring substantial capital expenditures required for subscriber equipment and installation as well as eliminate most operating costs, other than channel license fees and distribution system expenses, CAI granted to each BANX Affiliate the ability, on a market by market basis, to elect to become the marketer and provider of subscription television services using CAI's MMDS transmission systems in each market in their respective service Item 1. Business (continued) areas in exchange for monthly service revenues based on the number of serviceable households and subscribers in each market so optioned by a BANX Affiliate. In connection with the Company's obligations under the BR Agreement, CAI substantially completed the construction of digital video delivery systems in Boston, MA and Hampton Roads, VA. Through December 12, 1996, however, neither BANX Affiliate had exercised their respective options under the BR Agreement in these or any other markets contemplated by the BR Agreement. On December 12, 1996, the Company and the various BANX entities reached an agreement (the "Modification Agreement") modifying certain terms of the BR Agreement and providing CAI or its designee with the right to acquire the CAI Securities. In connection with the Modification Agreement, the average per share exercise/conversion price of the CAI Securities was reduced from $8.19 to $5.31, on full conversion and exercise. This reduction would result in the BANX Partnership having to make an additional investment in CAI of approximately $95.0 million to acquire an approximately 45% ownership interest in CAI. The Modification Agreement was subsequently amended on April 29, 1997, pursuant to Amendment No.1 to the Modification Agreement ( the "Amendment"). The Amendment represents the renegotiation of an option granted to CAI to repurchase the $100 million face amount of CAI securities held by the BANX Partnership. The repurchase consideration is $40 million in cash and 100,000 shares of convertible junior preferred stock. The junior preferred stock, which is non-voting, carries no coupon and has no maturity, is convertible into 2.5 million shares of CAI Common Stock. The repurchase option is exercisable through February 28, 1998. As part of the Amendment, the BANX Affiliates also immediately released CAI from its obligation under the BR Agreement to make CAI's wireless MMDS spectrum available to the BANX Affiliates at a future date in Boston, MA, Pittsburgh, PA and Albany, Syracuse and Buffalo, NY. Upon a repurchase of the CAI securities, as contemplated by the Amendment, the BR Agreement will lapse in its entirety, releasing a similar obligation in CAI's other markets. In connection with the execution of the Amendment, the BANX Partnership also suspended or released CAI from a number of covenant restrictions and governance rights and provided CAI with a blanket proxy on the approximately 10% interest in CS Wireless held by BANX entities. If the repurchase is consummated, the CS Wireless shares would be returned to CAI without additional consideration. The parties also exchanged mutual releases and reached an agreement to share certain patent and intellectual property rights related to their digital wireless venture. In addition to the $40 million in cash, Bell Atlantic and NYNEX will receive as consideration for the surrender of their CAI Securities, 100,000 shares of a series of non-voting junior preferred stock of CAI. The junior preferred stock carries a liquidation preference of $30 million in the aggregate, but carries no special dividends, covenants or governance rights, except as provided by the Connecticut Business Corporation Act, under which CAI is incorporated. Each of the 100,000 shares of junior preferred stock is convertible into 25 shares of CAI Common Stock in the hands of a subsequent purchaser unrelated to Bell Atlantic or NYNEX. If the junior preferred stock continues to be held by Bell Atlantic and NYNEX at the end of three years, and the value of the CAI common stock is not at least $14.00 per share, then Bell Atlantic and NYNEX would be entitled to a value floor representing the difference between the then-market value of the CAI common stock and $14.00 per share (the "Value Floor"). At CAI's election, the Value Floor would be payable either in the form of up to, but not more than, 1 million additional shares of CAI Common Stock or in the form of a ten-year subordinated note in a principal amount of up to $15 million, bearing interest at 8%, which is payable-in-kind for the first five years. INVESTMENT IN CS WIRELESS. Pursuant to the terms of a Participation Agreement dated December 12, 1995 between CAI, CS Wireless and Heartland, CAI and Heartland agreed to contribute to CS Wireless certain wireless cable assets, including related operating liabilities, or the stock of subsidiaries owning wireless cable assets for systems located principally in the Midwestern and Southwestern regions of the country. The combination of these assets into CS Wireless resulted in a company with approximately 7.5 million Estimated Total Service Area households and 56,500 subscribers, as of March 31, 1996, making it one of the largest wireless cable companies in the United States in terms of subscribers and Estimated Total Service Area households. The transaction closed on February 23, 1996 (the "CS Closing"). Immediately following the CS Closing, and after giving effect to the issuance of equity by CS Wireless in connection with the Unit Offering (defined below) and true-up adjustments contemplated by the Participation Agreement, CAI owned approximately 52% of the equity in CS Wireless, Heartland owned approximately 37% of the equity in CS Wireless, and affiliates of Bell Atlantic and NYNEX own approximately 10% of the equity in CS Wireless. The remaining 1% equity interest was sold to purchasers of an aggregate of 100,000 units ("the "Unit Offering"), each unit consisting of four $1,000 principal amount at maturity of 11 Item 1. Business (continued) 3/8% Senior Discount Notes due 2006 and 1.1 shares of common stock of CS Wireless in a private placement closing contemporaneously with the CS Closing. The notes will accrete in value for five years and cash interest will be paid beginning 2001. The gross proceeds to CS Wireless were approximately $230.0 million. The net proceeds of the Unit Offering were used in part to make the cash payment to Heartland at the CS Closing, as required under the Participation Agreement, and the remaining net proceeds will be used by CS Wireless for capital expenditures to build-out its systems and to add subscribers, for certain formation costs, working capital, and general corporate purposes. Prior to the contributions contemplated by the Participation Agreement, CS Wireless, a wholly-owned subsidiary of the Company, operated a wireless cable system in Cleveland, Ohio. Under the Participation Agreement, CS Wireless acquired, or had contributed to it, stock of subsidiaries of CAI owning wireless cable systems or channel rights, and operating wireless cable systems or wireless channel rights held by CAI in Bakersfield, CA, Charlotte, NC, and Stockton/Modesto, CA and held by Heartland in Dallas, Fort Worth, and San Antonio, TX, Dayton, OH, Maysville and Sweet Springs, MO, Minneapolis, MN, Grand Rapids, MI, and Salt Lake City, UT. The CAI assets contributed in the transactions consisted of the above-mentioned four properties located outside the operating territories of Bell Atlantic and NYNEX. The Heartland contribution was originally valued at approximately $138.7 million, the estimated fair value. Heartland received 3,578,834 shares of CS Wireless common stock, approximately $28.3 million of cash, and $40.0 million of notes from CS Wireless, before "true-up" adjustments. Pursuant to the terms of the Participation Agreement regarding a true-up of the amounts contributed by each of CAI and Heartland to CS Wireless (based on the value of MMDS assets or channel rights or stock of entities owning such assets or rights), and the consummation of the exchange of certain MMDS assets and channel rights relating to Portsmouth, New Hampshire owned by Heartland and certain of its affiliates for shares of CS Wireless owned by the Company, the Company's 52% interest in CS Wireless was reduced to approximately 48% and Heartland's interest in CS Wireless was increased to approximately 39% Although CAI's stock ownership in CS Wireless fell below 50%, CAI will continue to be the largest single stockholder of CS Wireless following the consummation of the Portsmouth transaction and the true-up adjustment. RECENT DEVELOPMENTS On June 6, 1997, the Company closed a $30 million interim credit facility provided by Foothill Capital Corporation and affiliates of Canyon Capital Management, L.P. (the "Interim Debt Lenders"). The credit facility is governed by the terms of the LSA, and is comprised of $25 million of term debt, of which $10 million was made available at the closing and is currently outstanding. The balance of the term debt will be made available to CAI upon the achievement of certain agreed-upon operational benchmarks. The term debt bears interest at the rate of 13% per annum. So long as the Company is not in default of its obligations under the credit facility, the Company can elect to have one-half of the interest on the term debt accrue and be added to the principal amount outstanding on the term debt. The remaining portion of the term debt interest is payable monthly in arrears. The term debt matures on March 1, 1999, at which time all accrued and unpaid interest on and principal of the outstanding amount of the term debt shall be due and payable in full. The Interim Debt Lenders have also made available to CAI a $5 million revolving loan, of which $3 million was made available to CAI at the June 6th closing. The remaining $2 million of the revolving loan will be made available to CAI upon the achievement by the Company of certain operational benchmarks. The revolving loan bears interest at four and three-quarters percent above the Reference Rate, as announced from time to time by Norwest Bank. Principal and interest on the revolving loan is payable monthly, and the revolving loan expires on March 1, 1999. As of June 24, 1997, the Company had not yet borrowed any amount against the revolving loan. The credit facility is collateralized by a pledge of the assets of CAI, including the stock of its wholly-owned subsidiaries, certain investments held by the Company and a pledge of the stock of CS Wireless held by CAI. In connection with the closing of the credit facility, the Company is required to effect certain corporate restructurings in an effort to enhance the Interim Debt Lender's collateral position. The proceeds from the credit facility will be used by the Company to continue to build-out its wireless cable business and for general working capital purposes. In addition to $1.5 million in cash fees payable to the Interim Debt Lenders at the closing of the credit facility and the fees and expenses, including fees and expenses of counsel and special FCC counsel to the Interim Debt Lenders, incurred in connection with the credit facility, CAI was also required to (i) pay an additional $1.5 million fee, evidenced by a two-year promissory note bearing interest at 14% per annum, which interest shall accrue and be payable in full at the maturity date of such note, and (ii) issue warrants to purchase CAI common stock at any time Item 1. Business (continued) between the closing and the fifth anniversary of such closing. The warrants entitle the holders thereof to purchase, in the aggregate that number of shares of CAI Common Stock equal to the quotient of (i) the maximum amount outstanding (including principal and accrued interest) on the above-mentioned promissory note, DIVIDED BY (ii) the lowest of (A) $1.90 per share, (B) the lowest effective net price for the Common Stock (or its equivalent) which CAI receives in connection with any new capital investment, merger, strategic partnership, joint venture or other significant corporate transaction, which makes available to CAI in excess of $50 million, (C) the lowest 20-day fair market value of the Common Stock following the consummation of a transaction identified in clause (B) above, and (D) the 20-day fair market value of the Common Stock immediately following confirmation of a plan of reorganization under Chapter 11 of the United States Bankruptcy Code. The warrants contain certain anti-dilution provisions and registration rights, and have been allocated among the Interim Debt Lenders. The Company and its subsidiaries are subject to several restrictions that are contained in the LSA, including, without limitation, restrictions on the Company's ability to (i) incur additional indebtedness, contingent or otherwise (ii) grant liens, (iii) dispose of assets or make certain investments other than in accordance with the terms of the LSA, and (iv) the use of the proceeds from the credit facility. The indebtedness under the credit facility is permitted under the Company's Indenture governing its 12 1/4 % Senior Notes, and under the terms of the various investment and business relationship agreements among the Company and affiliates of Bell Atlantic and NYNEX, as amended. OTHER. It is likely that CAI will consider acquisitions of wireless cable companies or licenses from time to time, subject to the covenants and restrictions imposed by the various CAI Securities, Senior Notes and LSA. These acquisitions, if any, would be financed by the sale or exchange of securities of CAI, borrowings from existing lenders or others, or a combination thereof. It is CAI's policy not to discuss or comment upon negotiations regarding such acquisitions until a definitive agreement is signed, unless the law otherwise requires. There can be no assurance that CAI will be successful in identifying, negotiating and completing such transactions. INDUSTRY OVERVIEW SUBSCRIPTION TELEVISION INDUSTRY. The subscription television industry began in the late 1940s to serve the needs of residents in predominantly rural areas with limited access to local broadcast television stations. The industry expanded to metropolitan areas due to, among other things, the fact that it offered better reception and more programming. Currently, such systems offer various types of programming, which generally include basic service, enhanced basic, premium service and, in some instances, pay-per-view service. A subscription television customer generally pays an initial connection charge and a fixed monthly fee for basic service. The amount of the monthly basic service fee varies from one area to another and is a function, in part, of the number of channels and services included in the basic service package and the cost of such services to the television system operator. In most instances, a separate monthly fee for each premium service and certain other specific programming is charged to customers, with discounts generally available to customers receiving multiple premium services. Monthly service fees for basic, enhanced basic and premium services constitute the major source of revenue for subscription television systems. Converter rentals, remote control rentals, installation charges and reconnect charges for customers who were previously disconnected are also included in a subscription television system's revenues, but generally are not a major component of such revenues. Traditional cable systems, as defined in Section 602 of the Communications Act of 1934 (the "Communications Act"), are subject to both federal and local regulation. In addition, the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed strict federal and local rules governing aspects of cable prices for programming and equipment. See "Business 3/4 Regulation." WIRELESS CABLE INDUSTRY BACKGROUND. In 1983, the FCC reallocated a portion of the electromagnetic radio spectrum located between 2.5 and 2.7 GHz, permitted this spectrum to be used for commercial purposes, and modified its rules on the usage of the remaining portion of such spectrum. Regulatory and other obstacles nevertheless impeded the growth of the wireless cable industry through the remainder of the 1980s. In addition, before the 1992 Cable Act became effective, wireless cable operators' ability to obtain programming from cable-controlled, hard-wire cable owned programmers was not assured. The factors contributing to the increasing growth of wireless cable systems since that time include (i) regulatory reforms by the FCC to facilitate competition with hard-wire cable, (ii) federal legislation that increased the availability of programming for wireless cable systems, (iii) consumer demand for alternatives to traditional hard-wire cable service, (iv) enhanced ability of wireless cable operators to aggregate a sufficient number of channels in each market to create a competitive product, and (v) increased availability of capital to wireless cable operators in the public and private markets. According to Paul >PAGE> Item 1. Business (continued) Kagan Associates, Inc. ("Kagan"), there were approximately 200 wireless cable systems currently operating in the United States, serving approximately 850,000 subscribers at the end of 1995. Wireless cable systems can provide subscribers with the same or superior video television signal as that of traditional hard-wire systems. Both hard- wire cable systems and wireless cable systems receive programming at a headend. Wireless cable programming, however, is then retransmitted by microwave transmitters from an antenna located on a tower associated with the headend to a small receiving antenna located on a subscriber's rooftop. At the customer's location, the signals are converted to frequencies that can pass through conventional coaxial cable into a descrambling converter located on top of a television set. Wireless cable requires a clear LOS, because the microwave frequencies used will not pass through dense foliage, hills, buildings or other obstructions. To ensure the clearest line-of-sight possible in CAI's markets, CAI has placed, and plans to place, such towers on top of tall buildings or accessible mountain tops located in such markets. There exists, in each of CAI's operating and targeted markets, a number of acceptable locations for the placement of its towers, and CAI does not believe that the failure to secure any one location for such placement in any single market will materially affect CAI's operations in such market. Additionally, some LOS obstructions can be overcome with the use of signal boosters and beam benders which retransmit an otherwise blocked signal over a limited area. CAI believes that its coverage will be further enhanced upon the implementation of digital technology and/or cellularization. Since wireless cable systems do not require an extensive cable plant, wireless cable operators can provide customers with a high quality picture resulting in a reliable signal with few transmission disruptions at a significantly lower system capital cost per installed customer than traditional hard-wire cable systems. Wireless cable programming is transmitted through the air via microwave frequencies from a transmission facility to a small receiving antenna at each subscriber's location, which generally requires an unobstructed LOS from the transmission facility to the subscriber's receiving antenna. Traditional hard- wire cable television systems also transmit signals from a central transmission facility, but deliver the signal to a subscriber's location through an extensive network of fiber optic and/or coaxial cable and amplifiers. Since wireless cable systems do not require a network of fiber optic and coaxial cable, wireless cable operators such as CAI can provide subscribers with a high quality picture with fewer transmission disruptions at a significantly lower capital cost per installed subscriber than traditional hard-wire cable systems. In addition, not having to maintain a hard-wire transmission system results in lower ongoing maintenance costs for wireless cable systems. As a result of the generally low capital expenditure requirements and low maintenance costs, CAI believes it should be able to achieve positive cash flow at lower levels of subscriber penetration than hard-wire cable companies. CAI provides its subscribers with a variety of programming choices, including local television broadcast stations; cable television networks such as CNN, ESPN, A&E, MTV, Nickelodeon, Discovery, HBO, Showtime and Disney; pay- per-view programming services; and various feature films and sporting events. CAI currently offers variations of such programming packages in its six operating markets. The majority of CAI's subscribers are equipped with fully addressable converter boxes which enables CAI to offer pay-per-view and other pay video services to such subscribers. The channels that CAI offers vary in each market depending upon subscribers' viewing preferences. EMPLOYEES As of June 24, 1997, CAI had a total of 204 employees, of which none were subject to collective bargaining agreements. CAI has never experienced a work stoppage and believes that employee relations are good. ITEM 2. PROPERTIES CAI leases various office sites in Albany, New York; Arlington, Virginia; Chadds Ford, Pennsylvania (as of April 1, 1997); and in each region in which an operating system exists or is being constructed. CAI also leases transmission tower sites in the regions of its operating systems. CAI believes adequate office space and tower sites are readily available in all markets. CAI owns substantially all of the equipment which is necessary to conduct its operations, except certain vehicles, test equipment, and office equipment. A significant portion of CAI's investment in plant and equipment consists of subscriber equipment, which includes antennas, block downs, converters and remotes, and related installation costs, principally located at the subscribers' premises, and the reception and transmitter equipment located at the transmitter sites. ITEM 3. LEGAL PROCEEDINGS CAI has been named in six class action lawsuits alleging various violations of the federal securities laws filed in the United States District Court for the Northern District of New York. The actions were consolidated into one lawsuit entitled IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES LITIGATION (96-CV-1857) (the "Securities Lawsuit"), which is currently pending in the Northern District of New York. The amended, consolidated complaint, which names the Company, Jared E. Abbruzzese, Chairman and Chief Executive Officer of the Company, John J. Prisco, President, Chief Operating Officer and a Director of the Company, and Alan Sonnenberg, the former President of the Company and currently a member of its Board of Directors, as defendants, alleges a variety of violations of the anti-fraud provisions of the Federal securities laws by CAI arising out of its alleged disclosure (or alleged omission from disclosure) regarding its Internet and other flexible use of MMDS spectrum, as well as its business relationship with Bell Atlantic and NYNEX. Specifically, the complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b-5 promulgated under the Exchange Act during the specified Class Period (May 23, 1996 through December 6, 1996). The Company has notified the carrier of its Directors' and Officers' Liability insurance policy, which is intended to cover not only the Company's officers and directors, but also the Company, itself, against claims such as those made in the Securities Lawsuit. The policy covers up to $5 million of any covered liability, subject to a retention amount of $500,000. The Securities Lawsuit is in its preliminary stages. A scheduling conference was held on June 3, 1997, at which the briefing schedule for defendants' motion to dismiss was agreed upon among the parties. Based on such schedule, the Company believes that such motion will not be ruled upon until the fall of 1997. While the motion is pending, all other deadlines affecting motions and discovery have been postponed. The Company and individual defendants are contesting the Securities Lawsuit vigorously and believe it is entirely without merit at this time. Accordingly, management believes the Securities Lawsuit will not have a material adverse effect on the Company's earnings, financial condition or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to stockholders during the last three months of the fiscal year ended March 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The principal market in which CAI Common Stock is traded is the NASDAQ National Market System under the ticker symbol "CAWS." The approximate number of stockholders of record on June 17, 1997 was 775. The high and low sales prices for the Common Stock on the NASDAQ are as follows:
HIGH LOW FISCAL YEAR ENDED MARCH 31, 1996 First Quarter $13.75 $ 9.75 Second Quarter 13.00 8.38 Third Quarter 10.50 7.25 Fourth Quarter 10.38 7.25 FISCAL YEAR ENDED MARCH 31, 1997 First Quarter 17.50 6.25 Second Quarter 9.38 6.63 Third Quarter 7.38 0.84 Fourth Quarter 4.00 0.97 FISCAL YEAR ENDING MARCH 31, 1998 First Quarter (through June 25, 1997) 2.00 1.03
DIVIDENDS The Company has never paid cash dividends on the CAI Common Stock and does not currently intend to pay cash dividends on the CAI Common Stock in the foreseeable future. Since the Company generally conducts, and in the future intends to conduct, operations through subsidiaries, the Company's ability to declare or pay cash dividends will depend in part on the ability of the Company's present and future subsidiaries to declare or pay cash dividends to the Company. Any future determination by the Company to pay cash dividends on the CAI Common Stock will be within the discretion of the Company's Board of Directors and will depend upon the earnings of the Company, the Company's financial condition and capital requirements and other financial factors which are considered relevant by the Company's Board of Directors. The Company has accrued dividends of $18,660,734 on its outstanding Senior Preferred Stock as of March 31, 1997. The Company is not required to pay dividends on the Senior Preferred Stock until December 1, 1998. The Company began paying quarterly dividends on the 8% Redeemable Convertible Series A Preferred Stock, no par value (the "Series A Preferred Stock"), of CAI in March 1996. All of the Series A Preferred Stock was converted into common stock by March 31, 1997. Pursuant to certain restrictive covenants contained in the BANX Term Notes and the Senior Notes and the Loan and Security Agreement, the Company cannot declare or pay any dividends or make any distributions on shares of the Company except for dividends required to be paid on the Senior Preferred Stock. Also, the Company may not purchase or redeem any of its shares, including warrants and options. 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 Year Ended Year Ended Year Ended Ended Ended Ended March 31, March 31, March 31, March 31, August 31, Dec. 31, 1997 1996{(2)} 1995{(3)} 1994 1993 1992 Summary of Operations: Revenue $ 36,327 $ 30,682 $ 5,148 $ 918 $ - $ - Net loss (82,298) (40,986) (14,107) (7,521) (1,378) (189) Preferred dividend requirement 13,011 5,879 328 - - - Ratio of earnings to fixed charges{(1)} - - - - - - Per Share Data: Loss per common share (2.38) (1.73) (.93) (.61) (.12) (.02) Weighted average number of shares outstanding 40,069 27,076 15,457 12,278 11,777 11,777
March 31, March 31, March 31, March 31, August 31, Dec. 31, 1997 1996 1995 1994 1993 1992 Financial Condition: Wireless channel rights $ 207,681 $ 205,974 $ 46,192 $ 10,791 $ 1,350 $ - Investment in CS Wireless 88,535 113,054 - - - - Property and equipment 69,767 52,569 21,840 2,434 763 - Total assets 542,340 698,795 78,461 41,047 2,499 395 Debt 311,787 318,435 29,532 3,130 3,511 312 Redeemable preferred stock 87,821 92,883 18,378 - - - Shareholders' equity 114,690 192,611 22,115 34,346 (1,597) 75
{(1)} In calculating the ratio of earnings to fixed charges, earnings consists of losses prior to income tax benefit, minority interest in loss, and fixed charges. Fixed charges consists of interest expense, amortization of debt issuance costs and one-third of rental payments on operating leases (such amount having been deemed by CAI to represent the interest portion of such payments). Earnings were inadequate to cover fixed charges by the amount of $97,298, $53,307, $15,004, $7,552, $1,378, and $189 for the periods ended in 1997, 1996, 1995, 1994, 1993, and 1992, respectively. {(2)} The Company acquired ACS and ECNW on September 29, 1995. Also, the Company closed a series of transactions with Heartland wherein CS Wireless received certain assets from Heartland in exchange for CS Wireless common stock and cash (see Notes 2 and 5 to the Financial Statements). {(3)} The Company acquired the New York System on January 9, 1995 (see Note 2 to the Financial Statements). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Annual Report on Form 10-K, including the exhibits hereto, relating to CAI's future operations may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results of the Company may differ materially from those in the forward-looking statements and may be affected by a number of factors including the availability of new strategic partners and their willingness to enter into arrangements with CAI, the terms of such arrangements, the ability of CAI to achieve the operating benchmarks necessary to receive the balance of the funds contemplated by CAI's interim credit facility, the successful launch of a digital subscription video business, the receipt of regulatory approvals for alternative uses of its MMDS Spectrum, the success of CAI's trials in various of its markets, the commercial viability of any alternative use of MMDS Spectrum, consumer acceptance of any new products offered or to be offered by CAI, subscriber equipment availability, tower space availability, absence of interference and the ability of CAI to redeploy or sell excess equipment, the assumptions, risks and uncertainties set forth herein, including in the following section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as other factors contained herein and in CAI's securities filings. LIQUIDITY AND CAPITAL RESOURCES The wireless cable industry requires significant capital. CAI's plan for continued expansion requires substantial capital investment on a continuing basis and availability of sufficient financing is essential to that plan. Funds are required for the lease or acquisition of channel rights, the acquisition of wireless cable systems, the construction of system head-end and transmission equipment, start-up costs related to the commencement of operations and subscriber installation costs. CAI has financed its capital requirements since inception through a combination of the issuance of debt and equity securities, the incurrence of loans and the assumption of debt and other liabilities in connection with acquisitions. CAI has incurred operating losses since inception and its cash flow from operating activities has to date been insufficient to cover its operating expenses. CAI has incurred net losses since inception in 1991 of approximately $147 million through March 31, 1997 and expects to realize additional net losses on a consolidated basis while it develops and expands its MMDS systems. Additionally, CAI has substantial indebtedness and, beginning in fiscal year 1999, will have significant debt service requirements. As of March 31, 1997, CAI had outstanding consolidated long-term debt of approximately $312 million, mandatorily redeemable preferred stock and accrued dividends of approximately $88 million, and shareholders' equity of approximately $115 million. Pursuant to CAI's debt instruments, CAI is restricted from incurring additional indebtedness (except in connection with purchases of goods and services in the ordinary course of business, and other ordinary course indebtedness permitted thereunder), granting liens to secure repayment of indebtedness, making investments (other than investments specifically permitted thereunder), pay dividends, dispose of assets, enter into any merger, consolidation, reorganization, or recapitalization plan, retire long- term debt, or make any acquisitions without the prior consent of the lenders. Further, in accordance with the LSA, the Company is required to maintain minimal levels of net worth and number of subscribers, and is limited with respect to the amount of annual capital expenditures. CAI's recurring losses, substantial commitments, and ongoing cash requirements in the development of alternate uses of its MMDS Spectrum raise substantial doubt about CAI continuing as a going concern. The Company has outstanding purchase orders of approximately $3.2 million as of March 31, 1997, with approximately $5.0 million in additional purchase orders as of June 17, 1997 (relating primarily to the Boston project), is obligated to pay approximately $8.5 million in minimum license fees and operating lease payments, approximately $1.1 million in MMDS license auction fees, and to fund operating costs. Management of CAI plans to mitigate the uncertainties related to the Company's continued existence as a going concern by securing interim financing, exploring alternative uses of its MMDS spectrum in addition to subscription television and pursuing longer term financing through obtaining strategic partner(s) interested and willing to participate with the Company in the development of its operating systems and various alternative uses of its MMDS spectrum. Although certain qualified parties have expressed interest in entering into a strategic alliance with the Company, CAI has not yet reached a definitive agreement with any such qualified party. Much of the Company's business plan relating to fixed, flexible use of the MMDS spectrum is dependent upon CAI securing a new strategic partner to provide the necessary capital resources, as well as engineering and other expertise, and subscribers for such flexible-use services, to CAI as it develops these business segments. There can be no assurance that the ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Company will be able to secure any additional financings or strategic relationships on terms and conditions satisfactory to the Company, if at all. Failure to obtain such financings and relationships will have a material adverse effect on the Company. Further, there can be no assurance that, even with additional financing, new strategic partner(s) and receipt of all necessary regulatory authorizations, the Company will be able to launch fixed, flexible two-way uses of its MMDS spectrum in a commercially successful manner. On June 6, 1997, CAI completed a $30 million interim financing arrangement with Foothill Capital Corporation and Canyon Capital Management, L.P. to fund the Company's current working capital requirements. This credit facility consists of $25 million in term loans and a $5 million revolving loan, both of which mature on March 1, 1999. Management estimates that the present revenue stream and cash resources available to the Company, including this interim financing in June 1997, are adequate to sustain the Company's needs through December 1997, subject to meeting the terms of the financing agreement. The LSA permits four drawdowns on the term loan, of which the first for $10 million took place in June 1997. The other drawdowns are predicated on meeting certain operational benchmarks. There is no assurance that these benchmarks can be met. Additional funding may take the form of debt or equity securities issuances, borrowings under loan arrangements or sales of assets including channel rights or wireless cable systems. CAI's ability to engage in financings, asset sales or acquisition transactions is limited by the contractual arrangements entered into with BANX, and restrictions imposed by the Senior Notes and the interim financing arrangement and significant transactions likely will require their prior consents. The Senior Notes impose similar restrictions on the incurrence of additional debt and on the ability to effect asset sales. There is no assurance that any additional financings will be available to the Company on satisfactory terms and conditions, if at all, especially in light of the BANX and Senior Note restrictions. The Company's business strategy has shifted away from analog to digital wireless cable systems for its MMDS subscription television services and to alternative uses of its MMDS spectrum for a variety of applications including video, voice and data transmission. In management's opinion, the new strategy will help meet the current and perceived future competition and in relation to obtaining a new strategic partner, demonstrate the flexibility and increased value of the Company's MMDS spectrum. The Company's operating plans include digital video, two-way voice and data, Internet and Intranet access services and testing. Additionally, CAI has received FCC approval in selected markets to test and/or provide wireless services in addition to subscription video, using the MMDS spectrum. These services include Internet and intranet access and two-way voice and data transmission. The design and full implementation of these systems capable of delivering these services will require additional financing from a strategic partner. Additionally, pursuant to the terms of the Modification Agreement, CAI has been granted the right to purchase the CAI Securities. Upon the consummation of such purchase, the BR Agreement would terminate, eliminating CAI's strategic relationship with the BANX Affiliates including all restrictions relating thereto. The amended Modification Agreement allows CAI or its designee to buy out the BANX investment for $40 million plus 100,000 shares of CAI junior preferred stock. The Company intends to commence digital subscription television service in the Boston market during the fall of 1997, pending the availability to the Company of the necessary subscriber equipment and access to pre-digitized compressed programming. Utilizing portions of the digital MMDS system built by the Company in Boston last year, CAI intends to launch the digital subscription television service in certain locations served by the Company's main transmitter located in downtown Boston and by selected booster sites throughout the greater Boston area. The Company plans on using an internal marketing staff to obtain subscribers costing an estimated $45 to $50 per potential subscriber. Subscriber equipment cost, assuming one converter per subscriber, is estimated at $610 per subscriber including installation. To replace programming that would have been provided by the BANX Affiliate under the BR Agreement, the Company is currently in the process of negotiating a joint venture with TelQuest Communications, Inc., an entity of which Jared E. Abbruzzese, Chairman of the Company, is the principal stockholder, and CS Wireless, to form an entity (hereinafter, "TelQuest Joint Venture") capable of providing pre-digitized compressed programming to CAI, CS Wireless and other MMDS and hard-wire cable operators. CAI intends to use such programming for Boston and any other markets in which it determines to roll-out a digital video product. See "Item 13. Certain Relationships and Related Transactions." In the event that the TelQuest Joint Venture is not formed, CAI would have to construct a compression facility in the Boston area to provide digital programming, or make other arrangements to receive pre- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) digitized compressed programming via satellite. The Company estimates the cost of such construction of a digital compression facility to be approximately $5 million as of June 1997. There can be no assurance that the necessary subscriber equipment or access to pre-digitized compressed programming will be available to the Company in the Boston market, and if available, that the Company will be able to successfully launch and operate a digital subscription television business in this market. EQUIPMENT REPLACEMENT. Due to interference caused by the new PCS telephone frequencies, the Company intends to replace approximately 24,000 subscriber downconverters in the Philadelphia market at a rate of approximately 500 replacements per month plus all of the new installations receiving the new equipment. Replacements will cost approximately $84 per unit, while new installations will incur a $62 per unit additional cash outflow by not reusing currently owned equipment. The total cost of this replacement in Philadelphia is approximately $1.7 million. Replacement costs in other CAI markets, if deemed necessary, are not expected to be material. CASH FLOW INFORMATION During the year ended March 31, 1997, CAI expended approximately $37.1 million to purchase equipment, $34.8 million to fund operating activities, $3.7 million to acquire wireless channel rights and $45.3 million to pay senior and other debt, including $34.0 million due to the FCC for the purchase of MMDS licenses at the 1996 auction. During this period, CAI funded its cash requirements out of existing cash balances. At March 31, 1997, CAI had cash and cash equivalents of approximately $10.5 million. During the year ended March 31, 1996, CAI expended approximately $14.5 million to purchase equipment, $34.6 million to fund operating activities and $24.5 million to acquire wireless channel rights. During fiscal 1996, CAI funded its cash requirements out of existing cash balances and the financings more fully described above. At March 31, 1996, CAI had cash and cash equivalents of approximately $103.3 million. On September 29, 1995, the Company received $265.9 million from the Senior Notes Offering, net of $9.1 million in underwriting costs and interest, of which $90.6 million was placed in escrow to cover three years of interest, plus $70 million from the sale of 7,000 shares of Senior Preferred Stock and the Stage II Warrants to BANX. These funds were used in part to pay the cash portions of the following acquisitions: ACS ($41.1 million), ECNW ($8.9 million), the Baltimore Assets ($11.3 million) and the Pittsburgh Assets ($6.4 million). The non-cash portion of the purchase prices was satisfied with CAI Common Stock or debt, primarily notes. Additionally, the Company loaned ACS $22.3 million to repay certain ACS bank debt and another $11.3 million to pay other costs incurred by ACS relating to the ACS acquisition and for other corporate purposes. CAI also used $12.4 million to repay the interim financing it received from Smith Barney Holdings, Inc. in June 1995, including interest, and another $2.1 million to pay legal and other fees relating to the acquisition, Stage II Closing and the offering of the Senior Notes. In April 1995, CAI raised an additional $1.5 million of equity capital through the issuance of 179,765 shares of common stock. On May 9, 1995, at the Stage I Closing CAI received $30.0 million from Bell Atlantic and NYNEX, the proceeds of which were used to retire $21.3 million of short-term notes issued in connection with the purchase of the New York System, provide a required $4.0 million cash deposit under the ACS Merger Agreement, and to pay $3.0 million of cost associated with the short-term debt issued for the acquisition of the New York System and for transaction expenses and working capital. In June 1995, CAI received $12.0 million from Smith Barney Holdings, Inc. for working capital purposes. During the year ended March 31, 1995, CAI expended approximately $15.0 million to purchase equipment, $8.1 million to fund operating activities, $9.9 million to acquire the New York System, and $1.3 million to acquire wireless channel rights. During this period CAI funded its cash requirements out of existing cash balances, an issuance of equity securities generating net proceeds of approximately $7.1 million, debt proceeds of $9.8 million, and the disposition of equipment generating net proceeds of approximately $0.6 million. At March 31, 1995, CAI had unrestricted cash and cash equivalents of approximately $1.2 million. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATIONS As of March 31, 1997, the Company had approximately 70,800 wireless systems subscribers compared to 82,900 subscribers as of March 31, 1996. The 12,100 net decline in subscribers is due primarily to the New York System decline of approximately 5,100 subscribers, the Philadelphia System decrease of approximately 6,400 subscribers and other system net decreases of approximately 600 subscribers for the comparable periods. The New York System is losing subscribers to hardwire cable operators primarily due to the system's limited channel capacity. This trend in New York is likely to continue. The Company has implemented a program to increase retention of subscribers in Philadelphia and other systems through an increase in installation fees, which the Company believes will increase subscriber commitment, and thus, retention. This retention policy has slowed subscriber additions. The decrease in subscribers experienced in the other systems was primarily due to a curtailment of marketing efforts in the first half of the year ended March 31, 1997, in anticipation of the then expected implementation of the BR Agreement. The decline in subscribers in Philadelphia and New York has continued through June 21, 1997 at which time the total subscribers were approximately 66,500. The net result of disconnects minus reconnects divided by the number of subscribers at the beginning of the period is considered the churn rate in the subscription television industry. The churn rate is calculated monthly and year to date for an average monthly rate over a year. CAI's average monthly churn rate for the year ended March 31, 1997 was 4.6% overall with individual operating systems ranging from 2.5% to 5.5%. CAI's average monthly churn rate for the year ended March 31, 1996 was 4.0% overall with individual operating systems ranging from 2.8% to 5.4%. Churn rates within the 2% to 5% range are common in this industry, with 2% being excellent, 3% the standard norm, and 5% or above being unfavorable. The cost of disconnecting and/or reconnecting customers is generally expensed. Subscriber equipment includes the capitalized labor to install, but depreciation rates are different based on recoverability or lack thereof. Subscriber equipment that is recoverable (i.e. antennas and converters) is generally depreciated over five years based on the life of the equipment. The non-recoverable portion, consisting of installation labor, wire, small parts and supplies, is generally depreciated over two or three years based on the applicable churn rate of each operating system, which approximates subscriber lives. Long-lived assets and certain identifiable intangibles are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company periodically reviews wireless channel rights and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such circumstances occur, the Company evaluates the possible effects on the carrying amount of such assets. The Modification Agreement with BANX did not result in an impairment of the Company's long-lived assets. The Company's estimates of future gross revenues and operating cash flows, the remaining estimated lives of long-lived assets, or both could be reduced in the future due to changes in, among other things, technology, the Company's ability to obtain permission for flexible use of the wireless channel rights, government regulation, available financing or competition. As a result, the carrying amounts of long-lived assets, including goodwill, could be reduced by amounts which would be material to the financial statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) COMPARISON OF OPERATING RESULTS YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996 The following tables illustrate the changes discussed below in management's discussion of the results of operations.
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 97 and into the future. CAI's television subscription revenue was $33.1 million for the year ended March 31, 1997 as compared to $28.1 million for the year ended March 31, 1996 generated by the following systems: Albany ($3.2 vs. $3.1 million), Rochester ($0.7 vs. $0.7 million), New York City ($7.3 vs. $9.2 million), Hampton Roads ($1.1 vs. $0.8 million), Philadelphia ($19.4 vs. $10.8 million) , Cleveland ($0 vs. $2.1 million), Bakersfield ($0 vs. $0.9 million), Washington ($1.2 vs. $0.2 million), Hartford VDT ($0 vs. $0.1 million), and Providence SMATV ($0.2 vs. $0.2 million). The systems with zero for the current year were either Disposed Systems or systems in which service was discontinued (Hartford VDT) in the prior year. Operating expenses were $81.6 million and $65.5 million for the years ended March 31, 1997 and 1996, respectively. The $21.2 million increase, excluding the Disposed Systems, is attributable primarily to increases in (a) operations of acquired systems (ACS and ECNW) of $10.3 million ($20.3 million FY 1997; $10.0 million FY 1996), excluding depreciation and amortization, due to a year of operations of the Philadelphia and Washington systems in FY 1997 versus only six months in FY 1996; (b) general and administrative corporate operations of $3.2 million ($9.4 million FY 1997; $6.2 million FY 1996), excluding depreciation and amortization, primarily due to increased staffing ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) and effort to maintain a larger operation, developing digital markets, and developing other potential uses of the wireless channel rights; (c) depreciation and amortization of $9.4 million ($32.3 million FY 1997; $22.9 million FY 1996) primarily due to the acquisition of ACS and ECNW fixed assets, wireless channel rights, and goodwill; and (d) abandoned project costs of $2.1 million in FY 97; offset by a decrease in marketing costs of the Same Systems of $1.1 million ($2.0 million FY 1997; $3.1 million FY 1996) due to a concentrated effort to reduce marketing costs and limit subscriber growth in light of the then anticipated implementation of the BR Agreement with BANX. CAI has a $17.6 million equity in net loss of affiliate for the year ended March 31, 1997, relating to its 48% investment in CS Wireless. In the prior year, CAI's operating systems contributed to CS Wireless on February 23, 1996 were consolidated in the operating results of CAI from October 1, 1995 to December 31, 1995. Interest income increased $0.4 million ($6.4 million FY 1997; $6.0 million FY 1996) for the year ended March 31, 1997. The increase is primarily due to interest earned on the Debt Service Escrow established in connection with the Company's offering of 12.25% Senior Notes Due 2002 and the investment of the cash remaining from the net proceeds of the Senior Notes offering. In future periods, interest income is anticipated to steadily decrease as the Debt Service Escrow and investments are used to fund debt service, project costs, capital purchases, and operations of the Company. Interest expense increased $16.2 million ($40.8 million FY 1997; $24.6 million FY 1996) for the year ended March 31, 1997. The increase is primarily due to interest expense incurred on the Senior Notes issued on September 29, 1995. Interest expense is expected to increase in FY 1998 with the addition of the $30 million of interim financing (see Note 19 to the Financial Statements). YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995 CAI's total revenue was $30.7 million for the year ended March 31, 1996 as compared to $5.1 million for the year ended March 31, 1995 primarily due to the ACS acquisition on September 29, 1995 and a full year of operations for the New York System. ACS contributed $15.0 million to the overall increase of $25.6 million for its six months of operations included since the date of acquisition. The New York System contributed $7.5 million of the increased revenue. The remaining increase of $3.1 million is attributable to the growth of subscribers in the other systems. CAI's television subscription revenue was $28.1 million for the year ended March 31, 1996 as compared to $4.9 million for the year ended March 31, 1995 resulted from the following systems: Albany ($3.1 vs. $1.9 million), Rochester ($0.7 vs. $0.1 million), New York City ($9.2 vs. $2.6 million), Hampton Roads ($0.8 vs. $0.1 million), Philadelphia ($10.8 vs. $0 million), Cleveland ($2.1 vs. $0 million), Bakersfield ($0.9 vs. $0 million), Washington ($0.2 vs. $0 million), Hartford VDT ($.01 vs. $0.1 million), and Providence SMATV ($0.2 vs. $0.1 million). The systems with zero for the prior year were acquired in the current year. The increase in the New York City television subscription revenue is due to a full year of operations for the year ended March 31, 1996 as compared to only three months of operations included in the year ended March 31, 1995. The television subscription revenue for Cleveland and Bakersfield totaling $3.0 million is for the period that these two systems were part of CAI. Cleveland and Bakersfield were acquired as part of the ACS acquisition and subsequently contributed to CS Wireless. CS Wireless was consolidated with CAI until the CS Closing (February 23, 1996). CS Wireless' revenue and expenses are not included in CAI's consolidated financial statements after that date. CAI accounts for CS Wireless on a three-month lag that corresponds with CS Wireless' December 31 fiscal year end. CAI's net loss of $41.0 million for the year ended March 31, 1996 is higher than the net loss of $14.1 million for the year ended March 31, 1995 by $26.9 million due primarily to substantial increases in depreciation and amortization ($21.1 million) and interest expense ($22.9 million) offset by a deferred income tax benefit of $12.0 million and increased interest income of $5.4 million. The operating loss increased to $34.8 million for the year ended March 31, 1996 from $14.2 million for the year ended March 31, 1995, a change of $20.6 million, which approximated the depreciation and amortization increase of $21.1 million. The increase is primarily due to the depreciation and amortization associated with property and equipment, wireless channel rights, and goodwill acquired in connection with the ACS and ECNW acquisitions and to a lesser extent on additional investment in property and equipment. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Programming and license fees were up six times from $2.0 million for the year ended March 31, 1995 to $12.6 million for the year ended March 31, 1996 in line with television subscription revenue also up almost six times. Marketing expenses were up slightly from $2.5 million for the year ended March 31, 1995 to $3.5 million for the year ended March 31, 1996 reflecting less emphasis on marketing and more on acquisitions during the year. General and administrative expenses increased from $11.1 million for the year ended March 31, 1995 to $24.7 million for the year ended March 31, 1996, primarily due to the general and administrative expenses of then-newly acquired ACS and ECNW ($6.3 million) and a full year of the New York System (net increase of $5.2 million). General and administrative expenses, other than those associated with new acquisitions and the New York System, increased $2.1 million over the prior year primarily due to increased salaries, personnel and professional fees incurred to develop, acquire, integrate and manage new systems. Interest expense increased to $24.6 million for the year ended March 31, 1996 from $1.7 million for the year ended March 31, 1995, a change of $22.9 million, primarily due to interest expense incurred on the Senior Notes issued on September 29, 1995 and the Term Notes issued on May 9, 1995. Interest income was $6.0 million for the year ended March 31, 1996 as compared to $0.6 million for the year ended March 31, 1995. The increase is primarily due to income earned on the debt service escrow for the Senior Notes and on funds remaining from the issuance of the Senior Notes which are invested until used. The operating loss of $34.8 million for the year ended March 31, 1996 includes $1.8 million for the Disposed Systems which are now part of CS Wireless. While CAI will no longer include Disposed Systems' revenue and expenses in its Statements of Operations, CAI will include its share of CS Wireless's net loss to the extent of its ownership. CAI has not guaranteed any debt or commitments of CS Wireless. INFLATION Management does not believe that inflation has had or will have a material impact on the Company's results of operations. SEASONALITY OF INSTALLATION ACTIVITIES The rate at which new subscriber installations occur can be affected by severe winter or other weather conditions and limited daylight hours in the winter months in certain markets. Therefore, CAI may experience lower than average subscriber growth and capital expenditures primarily during the winter season. NEW ACCOUNTING STANDARDS Financial Accounting Standards Board No. 125 - "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement which would be effective for all transfers after December 31, 1997, addresses several matters that have a significant impact on certain industries. It addresses how and when to record transferred assets, transfers of partial interests, servicing of financial assets, securitizations, transfers of sales-type and direct financing lease receivables, securities lending transactions, repurchase agreements including "dollar rolls," "wash sales," loan syndications and participations, risk participations in banker's acceptances, factoring arrangements, transfers of receivables with recourse, and extinguishments of liabilities, collateral, repurchase agreements and how to amortize servicing assets and liabilities. CAI believes this statement will not have a material effect on CAI's financial position or results of operations. Financial Accounting Standards No. 128 - "Earnings Per Share." This statement which is effective for financial statements issued for periods ending after December 15, 1997, simplifies the computation of earnings per share (EPS) by replacing the "primary" EPS requirements with a "basic" EPS computation based upon weighted- average shares outstanding. This new standard requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. CAI this statement will not have a material effect on loss per share. Financial Accounting Standards Board No. 129 - "Disclosure of Information About Capital Structure." Effective for financial statement periods ending after December 15, 1997, this statement requires disclosure about (a) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) the liquidation preference of preferred stock, (b) redeemable stock, and (c) descriptive information of other securities previously omitted since they were not part of the computation of earnings per share. CAI generally provides the aforementioned disclosures, but will augment such disclosures when and if necessary. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page No. IN FORM 10-K FINANCIAL STATEMENTS Reports of Independent Accountants 34 Consolidated Balance Sheets - March 31, 1997 and 1996 36 Consolidated Statements of Operations - Years Ended March 31,1997, 1996, and 1995 37 Consolidated Statements of Shareholders' Equity - Years Ended March 31, 1997, 1996, and 1995 38 Consolidated Statements of Cash Flows - Years Ended March 31,1997, 1996, and 1995 39 Notes to Consolidated Financial Statements 42 REPORT OF INDEPENDENT ACCOUNTANTS Shareholders and Board of Directors CAI Wireless Systems, Inc. and Subsidiaries Albany, New York We have audited the accompanying consolidated balance sheets of CAI Wireless Systems, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of CS Wireless Systems, Inc., the Company's investment in which is accounted for by use of the equity method. The Company's investment of $88,534,526 in CS Wireless Systems, Inc. as of March 31, 1997 and its share of losses of $17,600,000 in CS Wireless Systems, Inc.'s operation for the year ended March 31, 1997 are included in the accompanying financial statements. The financial statements of CS Wireless Systems, Inc. were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for CS Wireless Systems, Inc., is based on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CAI Wireless Systems, Inc. and Subsidiaries as of March 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and has incurred substantial debt to finance the acquisition of assets and sustain operations. The Company's operating plans require additional funds which may take the form of debt or equity security issuances, borrowings or asset sales. Recoverability of the Company's intangible and other long-lived assets is dependent on the Company's ability to implement its operating plans. There can be no assurance that additional financings will be available. The uncertainty over the Company's ability to obtain such additional financings raises substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are described in Note 18. The financial statements do not include any adjustments that might result from the outcome of the uncertainty. COOPERS & LYBRAND LLP Albany, New York June 26, 1997 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CS Wireless Systems, Inc.: We have audited the accompanying consolidated balance sheet of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit{ }in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year{ }then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Dallas, Texas March 21, 1997 CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 1997 AND 1996
1997 1996 ASSETS Cash and cash equivalents $ 10,471,918 $103,263,094 Accounts receivable, less allowance for bad debts 1997 $751,000; 1996 $1,296,000 695,707 1,432,674 Prepaid expenses 1,034,106 698,482 Property and equipment, net 69,767,017 52,568,619 Wireless channel rights, net 207,680,551 205,973,840 Investment in CS Wireless Systems, Inc. 88,534,526 113,054,069 Debt service escrow 47,865,389 77,621,088 Goodwill, net 104,204,716 131,282,996 Loan acquisition costs, net 9,249,934 10,631,263 Other assets 2,835,651 2,268,847 Total Assets $542,339,515 $698,794,972 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable $ 6,600,584 $ 8,244,577 Accrued expenses 16,138,811 10,186,374 Wireless channel rights obligations 5,302,600 41,025,866 Senior debt 275,000,000 275,000,000 Notes payable 36,786,596 43,434,667 Deferred income taxes - 35,410,000 339,828,591 413,301,484 Commitments and contingencies Mandatorily redeemable preferred stock 14% Senior convertible preferred stock (liquidation value $70,000,000) 69,160,000 69,020,002 Series A 8% redeemable convertible preferred stock (liquidation value $18,050,000) - 18,050,000 Accrued preferred stock dividends 18,660,734 5,812,562 87,820,734 92,882,564 Shareholders' Equity Preferred stock - - Common stock, shares issued and outstanding March 31, 1997 - 40,540,539 March 31, 1996 - 37,829,482 275,769,414 257,701,130 Accumulated deficit (161,079,224) (65,090,206) 114,690,190 192,610,924 Total Liabilities and Shareholders' Equity $542,339,515 $698,794,972
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 1997, 1996, AND 1995
1997 1996 1995 Revenues $36,326,816 $ 30,682,486 $ 5,147,510 Costs and expenses Programming and license fees 16,051,094 12,582,750 2,024,943 Marketing 2,033,107 3,525,396 2,529,623 General and administrative 31,196,446 24,689,572 11,139,693 Depreciation and amortization 32,345,327 24,718,341 3,639,643 81,625,974 65,516,059 19,333,902 Operating loss (45,299,158) (34,833,573) (14,186,392) Other income (expense) Equity in net loss of affiliate (17,600,000) - - Interest income 6,435,188 6,047,081 641,021 Other income (expense) (28,446) 87,268 275,579 Interest expense (40,805,791) (24,608,258) (1,733,745) (51,999,049) (18,473,909) (817,145) Loss before provision for income tax benefit and minority interest (97,298,207) (53,307,482) (15,003,537) Provision for income tax benefit 15,000,000 12,000,000 - Loss before minority interest (82,298,207) (41,307,482) (15,003,537) Minority interest in loss - 321,910 896,700 Net loss (82,298,207) (40,985,572) (14,106,837) Preferred stock dividends (13,011,270) (5,878,960) (328,011) Loss applicable to common stock shareholders $(95,309,477) $ (46,864,532) $(14,434,848) Loss per common share $ (2.38) $ (1.73) $ (0.93)
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 1997, 1996, AND 1995
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL BALANCE AT APRIL 1, 1994 15,410,000 $ 38,422,543 $ 5,084,716 $ (9,161,496) $ 34,345,763 Value assigned to warrants exercised 72,279 18,500 (18,500) - - Preferred stock converted to common stock 271,739 1,900,000 - - 1,900,000 Value assigned to detachable warrants - - 304,438 - 304,438 Preferred stock dividends - - (328,011) - (328,011) Net loss for the year - - - (14,106,837) (14,106,837) Balance at March 31, 1995 15,754,018 40,341,043 5,042,643 (23,268,333) 22,115,353 Net proceeds from sale of common stock 179,765 1,470,329 - - 1,470,329 Value assigned to detachable warrants - - 1,350,000 - 1,350,000 Common stock issued to acquire 49% minority interest in Hampton Roads Wireless, Inc. 652,523 8,000,000 - - 8,000,000 Less issuance cost - (47,058) - - (47,058) Common stock issued in ACS Merger 19,362,611 190,600,700 - - 190,600,700 Less registry costs - (1,316,743) - - (1,316,743) Common stock issued in ECNW Merger 1,880,565 18,652,859 - - 18,652,859 Senior preferred stock issuance costs - - (1,349,984) - (1,349,984) Preferred stock dividends - - (5,042,659) (836,301) (5,878,960) Net loss for the year - - (40,985,572) (40,985,572) Balance at March 31, 1996 37,829,482 257,701,130 - (65,090,206) 192,610,924 Series A 8% preferred stock converted to common stock 2,637,742 18,049,955 - - 18,049,955 Value assigned to warrants exercised 73,315 18,329 - (18,329) - Senior preferred stock issuance costs - - - (661,212) (661,212) Preferred stock dividends - - - (13,011,270) (13,011,270) Net loss for the year - - - (82,298,207) (82,298,207) Balance at March 31, 1997 40,540,539 $275,769,414 $ - $(161,079,224) $ 114,690,190
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 1997, 1996, AND 1995
1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(82,298,207) $ (40,985,572) $ (14,106,837) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 32,345,327 24,718,341 3,639,643 Equity in net loss of CS Wireless 17,600,000 - - Deferred income tax benefit (15,000,000) (12,000,000) - Investment and debt costs and discount 3,336,483 1,778,893 415,460 amortization Write-off projects and other costs 2,087,144 - - Minority interest in loss - (321,910) (896,700) Other 260,969 (193,890) (282,343) Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable 690,092 (111,677) 185,689 Other assets (382,798) (128,117) (173,370) Accounts payable and accrued expenses 6,608,567 (7,404,356) 3,146,463 Net cash used in operating activities (34,752,423) (34,648,288) (8,071,995) Cash flows from investing activities Cash paid for businesses acquired, net of cash - (77,407,837) (9,916,889) Purchase of wireless channel rights (3,686,989) (24,489,840) (1,308,678) Purchase of property and equipment (37,109,164) (14,498,395) (14,961,633) Purchase of investments (15,087,990) (250,000) (6,004,297) Proceeds from sale of investments 43,495,837 13,461,558 6,000,000 Other (278,810) (1,025,793) (1,174,374) Net cash used in investing activities (12,667,116) (104,210,307) (27,365,871) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes, other debt and warrants - 308,062,500 9,769,863 Payment of senior and other debt (45,263,492) (42,369,042) (2,309,130) Cash paid for debt service escrow - (90,638,756) - Proceeds from issuance of senior preferred stock and warrants - 70,000,000 - Debt financing costs paid - (2,581,183) - Proceeds from issuance of common stock - 1,545,979 7,114,300 Registry and other stock issuance costs paid - (2,775,336) (351,350) Other (108,145) (324,405) - Net cash provided by (used in) financing (45,371,637) 240,919,757 14,223,683 activities Net increase (decrease) in cash and cash equivalents (92,791,176) 102,061,162 (21,214,183) Cash and cash equivalents, beginning 103,263,094 1,201,932 22,416,115 Cash and cash equivalents, ending $ 10,471,918 $103,263,094 $ 1,201,932
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, 1997, 1996, and 1995, in connection with property and equipment acquisitions, the Company accrued obligations of $1,213,335, $3,673,925, and $394,275, respectively. 2. During the years ended March 31, 1997, 1996, and 1995, in connection with certain wireless channel rights acquisitions, the Company accrued obligations of $2,380,234, $47,256,113, and $2,942,258, respectively. 3. During the fiscal years ended March 31, 1997 and 1996, dividends on preferred stock were accrued totaling $13,011,270 and $5,812,562, respectively. 4. During the year ended March 31, 1997, all of the Series A Preferred Stock, with a basis of $18,050,000, was converted into 2,637,742 shares of common stock, less $45 representing cash paid in lieu of fractional shares. 5. During August 1996, the Company transferred 314,267 shares of CS Wireless, valued at $6,000,000, to Heartland Wireless Communications, Inc. in exchange for wireless channel rights in the Portsmouth, NH market. 6. The Company acquired two corporations with assets (principally wireless channel rights), approximating $2,480,000, for a cash payment of $1,050,000 and seller financed long-term debt obligations of $1,430,000 on January 12, 1996. 7. The underwriter's discount of $8,937,500 was deducted from the proceeds of the senior notes issued on September 29, 1995. 8. On September 29, 1995, the Company issued CAI common stock in two acquisitions as follows:
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
In addition, as part of the ACS acquisition, the Company paid ACS bank debt of $22,334,298 and also advanced ACS $11,345,095 which is reflected in ACS's cash balance of $8,250,488 at the date of acquisition. In connection with the ECNW acquisition, the Company paid $500,000 for non-compete agreements. 9. On July 13, 1995, the Company purchased the 49% minority interest in Hampton Roads Wireless, Inc. for $8,000,000 in CAI common stock. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES 10. In January 1995, the Company acquired the New York System. In conjunction with the acquisition, the Company issued $18,050,000 of Series A preferred stock and $11,000,000 of short-term notes as follows:
Fair value of assets acquired, net of cash acquired $ 40,691,463 Liabilities assumed (1,724,574) Preferred stock issued (18,050,000) Short term notes issued (11,000,000) Cash paid $ 9,916,889
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
1997 1996 1995 Cash payments for interest $34,341,025 $18,541,227 $271,427
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS. CAI Wireless Systems, Inc. (the "Company" or "CAI") was incorporated in August 1991, to invest in, lease, and purchase wireless channel rights (including multi-channel, multi-point distribution services ("MMDS") licenses and instructional television fixed services ("ITFS") licenses) and develop wireless cable systems. As of June 25, 1997, CAI had 40,540,539 shares of common stock, without par value (the "CAI Common Stock"), issued and outstanding. The Company operates six analog-based wireless cable systems providing service to approximately 70,800 subscribers in New York City, Rochester, and Albany, NY, Philadelphia, PA, Washington, DC, and Norfolk/Virginia Beach, VA. In addition, CAI has a portfolio of wireless cable channel rights in eight additional markets, including Long Island, Buffalo and Syracuse, NY, Providence, RI, Hartford, CT, Boston, MA, Baltimore, MD, and Pittsburgh, PA. For the fiscal year ended March 31, 1997, approximately 59% of total revenue was derived from the Philadelphia System and approximately 22% from the New York City System. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and CS Wireless Systems, Inc. ("CS Wireless") until February 23, 1996, when, as a result of the CAI-Heartland closing, it became 52% owned. Subsequent transactions have reduced the Company's interest to 47.7%. Since the closing date, CS Wireless has been accounted for on the equity method of accounting. All material inter-company accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions. CASH EQUIVALENTS. For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market type funds. The Company has a concentration of credit risk with regard to its cash in excess of the amount subject to federal insurance and money market type funds. The Company does not require collateral on cash equivalents. The Company has mitigated its risk by depositing its cash in high credit quality financial institutions and by investing in low risk, high grade money market type funds which invest in U.S. government securities or high grade commercial paper. ACCOUNTS RECEIVABLE. The Company has a geographic concentration of credit risk with respect to accounts receivable since all of its subscribers are located in the northeastern section of the United States. However, this risk is mitigated based on subscribers being primarily residential with diverse economic backgrounds. PROPERTY AND EQUIPMENT. Property and equipment are carried at cost. Depreciation and amortization is calculated by the straight-line and accelerated methods over the estimated useful lives of the related assets. The Company capitalizes subcontractor and direct employee labor costs incurred in connection with the installation of its television reception equipment on subscriber premises. Amortization of such costs is based on the estimated subscriber turnover rate for each system. These turnover rates range from 2 to 5 years. In addition, projects in process are carried at cost, including capitalized interest amounting to $953,300 and $144,900 for the years ended March 31, 1997 and 1996, respectively. ACQUISITIONS. All acquisitions of companies have been accounted for on the purchase method of accounting and the purchase prices have been "pushed down" to the acquired companies, primarily to wireless channel rights and goodwill, including provisions for deferred income taxes where applicable. Some acquisitions required issuance of CAI common stock which was recorded at the average market price per share as defined in the purchase agreements, usually over a ten day period. Also, direct acquisition costs were included as part of the purchase price. Costs to register CAI common stock in connection with an acquisition were treated as a reduction of the fair market value of shares issued for that acquisition. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INVESTMENT IN CS WIRELESS SYSTEMS, INC. The investment in CS Wireless is recorded at cost and the difference between CAI's cost and the pro-rata ownership of the underlying equity of approximately $34,000,000 is being amortized over 15 years, commensurate with goodwill and wireless channel rights amortization periods to which the investment primarily relates. CAI records its share of CS Wireless' net loss, adjusted for the amortization of its investment, under the equity method because the Company does not control day to day operations. CS Wireless was a wholly-owned subsidiary until February 23, 1996. CS Wireless has adopted a December 31 fiscal year and accordingly the Company records its proportionate share of the results of CS Wireless' operations based on their fiscal period ending three months earlier than that of the Company. INTANGIBLES. WIRELESS CHANNEL RIGHTS. Wireless channel rights are carried at cost and amortized over their estimated useful lives, generally 15 years, when the related market is placed in service or available for service. GOODWILL. Goodwill, consisting of acquisition costs in excess of the amounts allocated to assets and liabilities of the companies acquired, is amortized over 15 years. Accumulated amortization was $11,578,300 and $4,336,158 as of March 31, 1997 and 1996, respectively. LOAN ACQUISITION COSTS. Costs incurred to obtain financing for the acquisitions and for general corporate purposes are amortized over the respective terms of the debt, primarily seven years. LONG-LIVED ASSETS. The Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," on April 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Pursuant to SFAS No. 121, the Company periodically reviews wireless channel rights and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such circumstances occur, the Company evaluates the possible effects on the carrying amount of such assets. The adoption of this Statement did not have a significant effect on the Company's financial position, results of operations, or liquidity. The Company's estimates of future gross revenues and operating cash flows, the remaining estimated lives of long-lived assets, or both could be reduced in the future due to changes in, among other things, technology, the Company's ability to obtain permission for flexible use of the wireless channel rights, government regulation, available financing or competition. The Company's estimate of future gross revenues and operating cash flows assumes that the Company will successfully develop and provide digital wireless cable systems as well as video, voice and data transmission such as Internet access and telephony. Because these alternative uses of the MMDS spectrum are in the early stages of development, there is no assurance that the Company can commercially deploy such alternatives or that it will be able to achieve positive cash flow from any operating activities. As a result, the carrying amounts of long-lived assets, including goodwill, could be reduced by amounts which would be material to the financial statements. INVESTMENTS IN DEBT SERVICE ESCROW. Investments in the debt service escrow, consisting of debt instruments maturing through September 1998 to coincide with the interest payment dates of the senior notes, are carried at cost since they will be held to maturity. Each investment is adjusted for accretion of discounts and amortization of premiums which are reflected in interest income. REVENUE RECOGNITION. Revenues from subscribers are recognized in the period that service is rendered. Installation fees are recognized as revenues upon subscriber hook-up to the extent of costs to obtain subscribers. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) STOCK OPTIONS. On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which requires entities to recognize as expense over the vesting period, the fair value of all stock- based awards on the date of grant or alternatively, to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures of SFAS No. 123. Under APB Opinion No. 25, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. INCOME TAXES. The Company files a consolidated federal income tax return with its subsidiaries in which it owns 80% or more of the outstanding common stock. Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to the difference between the financial statement and tax basis of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax asset will not be realized. LOSS PER SHARE. Loss per share has been calculated on the basis of weighted average number of shares outstanding during each period presented. The weighted average number of shares outstanding were 40,069,258 shares, 27,075,578 shares, and 15,456,540 shares for the years ended March 31, 1997, 1996, and 1995, respectively. Outstanding options, warrants, and other convertible securities were not considered for the purposes of calculating the weighted average shares of common stock outstanding, since these securities were determined to be anti-dilutive. RECLASSIFICATION. The Company has reclassified certain items in prior years' financial statements to make them comparative to the current year presentation. The reclassification had no effect on results from operations. OTHER DEVELOPMENTS. Financial Accounting Standards Board No. 125 - "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement which would be effective for all transfers after December 31, 1997, addresses several matters that have a significant impact on certain industries. It addresses how and when to record transferred assets, transfers of partial interests, servicing of financial assets, securitizations, transfers of sales-type and direct financing lease receivables, securities lending transactions, repurchase agreements including "dollar rolls," "wash sales," loan syndications and participations, risk participations in banker's acceptances, factoring arrangements, transfers of receivables with recourse, and extinguishments of liabilities, collateral, repurchase agreements and how to amortize servicing assets and liabilities. CAI believes this statement will not have a material effect on CAI's financial position or results of operations. Financial Accounting Standards No. 128 - "Earnings Per Share." This statement which is effective for financial statements issued for periods ending after December 15, 1997, simplifies the computation of earnings per share ("EPS") by replacing the "primary" EPS requirements with a "basic" EPS computation based upon weighted-average shares outstanding. This new standard requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. CAI believes statement will not have a material effect on loss per share. Financial Accounting Standards Board No. 129 - "Disclosure of Information About Capital Structure." Effective for financial statement periods ending after December 15, 1997, this statement requires disclosure about (a) the liquidation preference of preferred stock, (b) redeemable stock, and (c) descriptive information of other securities previously omitted since they were not part of the computation of earnings per share. CAI generally provides the aforementioned disclosures, but will augment such disclosures when and if necessary. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2-ACQUISITIONS HAMPTON ROADS WIRELESS, INC. On July 13, 1995, the Company acquired the remaining 49% minority interest in the Hampton Roads Wireless, Inc. for $8,000,000 in CAI Common Stock. In accordance with the purchase method of accounting, the excess (approximately $7,890,000) over the book value of the minority interest acquired has been allocated to the wireless channel rights acquired. TWO BOTT CORPORATIONS. On January 12, 1996, the Company acquired two corporations (Chenango Associates, Inc. and Onondaga Wireless, Inc.) from George Bott and a related Bott trust. The two corporations had no revenues, or operations and hold wireless channel rights in Buffalo and Syracuse, NY, respectively. The purchase price for the two corporations was $2,480,000 of which $1,430,000 is payable without interest over six years with a balloon payment of $1,029,500. This six year note has been recorded at a present value of $757,000 using a 12.25% imputed interest rate. In accordance with the purchase method of accounting, the excess (approximately $1,439,000) of the purchase price over the carrying value (approximately $368,000) of the net assets acquired has been allocated to the wireless channel rights. NEW YORK SYSTEM. As of January 9, 1995, the Company, through its wholly- owned subsidiary, New York Choice Television, Inc., acquired assets, and assumed certain liabilities of the New York City wireless cable system of The Microband Companies, Inc., an unaffiliated entity under protection of Chapter 11 of the Bankruptcy Code at that date. The Company funded the acquisition price of $39,050,000 with $18,050,000 of Series A preferred stock, $11,000,000 of short-term notes, and $10,000,000 in cash. In accordance with the purchase method of accounting, the excess (approximately $31,700,000) of the acquisition cost over the fair value of the tangible assets and liabilities has been allocated to wireless channel rights. ACS ENTERPRISES, INC. On September 29, 1995, the Company acquired ACS Enterprises, Inc. and Subsidiaries ("ACS"), a public company with operating wireless cable systems in Philadelphia, PA, Cleveland, OH and Bakersfield, CA and wireless channel rights in Stockton/Modesto, CA, for $3.50 per ACS common share and 1.65 CAI common shares for each ACS common share. This acquisition required $41,072,206 in cash and 19,362,611 shares of CAI common stock valued at $190,600,700. The purchase price, including direct acquisition costs, in excess of ACS's book value was allocated to wireless channel rights and the remainder to goodwill. (See Note 5). ACS has been included in the Company's operations since September 29, 1995. EASTERN CABLE NETWORKS OF WASHINGTON, INC. On September 29, 1995, the Company acquired Eastern Cable Networks of Washington, Inc. ("ECNW") which operates a wireless cable system in the Washington, DC area for approximately $8,366,000 in cash and 1,880,565 shares of CAI common stock valued at $18,653,000. ECNW was merged into a subsidiary of CAI which was renamed Washington Choice Television, Inc. The purchase price, including direct acquisition costs, in excess of book value was allocated to wireless channel rights. ECNW has been included in the Company's operations since September 29, 1995. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following:
Useful LIFE 1997 1996 Transmission equipment 3-7 years $10,529,180 $ 9,542,449 Subscriber equipment 2-5 years 46,982,451 41,950,370 Leasehold improvements 5-20 years 1,124,354 939,090 Office furniture and equipment 5-7 years 3,508,961 3,056,631 Vehicles 3 years 529,656 584,761 62,674,602 56,073,301 Less accumulated depreciation and amortization 28,767,392 14,063,102 33,907,210 42,010,199 Projects in process 35,859,807 10,558,420 $69,767,017 $52,568,619
Subscriber equipment includes recoverable equipment (antennas, downconverters, set-top converters, and remote controls); non-recoverable equipment (wiring, connectors, and miscellaneous small parts); and installation costs (outside subcontractor charges, internal direct labor, and other related installation costs are capitalized). The Company generally does not capitalize the cost of disconnecting or reconnecting subscribers. The projects in process primarily represent costs incurred to date relative to establishing digital systems in Norfolk/Virginia Beach, VA and Boston, MA. In connection with building the Boston digital system (the "Boston Project") in accordance with the BR Agreement, CAI abandoned certain improvements with a cost of approximately $2 million. Depreciation and amortization of property and equipment for the years ended March 31, 1997, 1996, and 1995 was $14,920,000, $12,922,000, and $2,518,000, respectively. NOTE 4 - WIRELESS CHANNEL RIGHTS The Company has acquired wireless channel rights through direct negotiation with licenseholders and with sub-lessors of certain licenses and through business combinations. The Company's wireless channel rights are predominately lease arrangements, however, the Company is the direct licensee of certain licenses and has purchase options with respect to others. The Company's wireless channel rights are principally located in the New York City, Albany, Long Island, Buffalo, and Rochester, New York; Hartford, Connecticut; Norfolk/Virginia Beach, Virginia; Boston, Massachusetts; Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C., and Baltimore, Maryland markets. The lease and sub-lease agreements frequently require initial fees followed by monthly fees based on subscriber volume, subject to certain minimum fees. Some agreements require profit sharing with the licenseholders. The lease and sub-lease periods generally follow the periods corresponding to the actual FCC license dates with provisions for extensions upon license renewal from the FCC. The FCC licenses are typically granted for a ten-year period and there is no automatic renewal of such licenses. The use of such channels by the lessors is subject to regulation by the FCC and, therefore, the Company's ability to continue to enjoy the benefits of these leases is dependent upon the lessors' continuing compliance with applicable regulations. Most of the Company's leases provide that the lessor may negotiate lease renewals with only the Company and, if a renewal agreement is not reached within a specified time, grant the Company a right of first refusal to match any competing offers. Although the Company does not believe that the termination of or failure to renew a single channel lease would adversely affect the Company, several of such terminations or failures in one or more markets that the Company actively serves could have a material adverse effect on the Company. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - WIRELESS CHANNEL RIGHTS (CONTINUED) The Company is obligated to pay, as of March 31, 1997, minimum fees to licenseholders or sub-lessors in future years as follows:
Years ending MARCH 31, 1998 $ 5,032,000 1999 5,345,000 2000 5,602,000 2001 5,751,000 2002 5,780,000 Thereafter 12,792,000 Total $40,302,000
Lease expense for the years ended March 31, 1997 and 1996 was approximately $3,654,000 and $1,700,000, respectively. The Company capitalizes the wireless channel rights acquisition costs and initial fees and amortizes such costs when operations commence in the market to which they relate. The non-operating wireless channel rights, totaling approximately $52,000,000 as of March 31, 1997, and $89,000,000 as of March 31, 1996, will be amortized when the related market is either available for service or placed in service, whichever occurs first. The following is a summary of wireless channel rights:
1997 1996 Cost of wireless channel rights $224,259,175 $212,691,464 Less accumulated amortization 16,578,624 6,717,624 $207,680,551 $205,973,840
Amortization of the wireless channel rights for the years ended March 31, 1997, 1996, and 1995 was $9,861,000, $6,468,000, and $1,112,000, respectively. Wireless channel rights obligations are generally due within one year without interest. The amount due as of March 31, 1996 includes $35,101,033 due from the March 1996 FCC Auction, and was net of $12,600,000 due from CS Wireless for rights acquired by CAI on behalf of CS Wireless which was substantially paid to CAI during the year ended March 31, 1997. FCC Auction obligations of $1,089,600 are anticipated to become due in fiscal 1998. NOTE 5 - INVESTMENT IN CS WIRELESS SYSTEMS, INC. CAI closed a series of transactions on February 23, 1996 with Heartland Wireless Communications, Inc. ("Heartland") and CS Wireless pursuant to a participation agreement between CAI and Heartland dated December 12, 1995 (the "Participation Agreement"). Concurrently, CS Wireless also closed an offering of $400,000,000 face amount of units with gross proceeds approximating $230,000,000 which were used in part to make the cash payment to Heartland on February 23, 1996. Each unit consisted of four $1,000 face amount 11.375% senior discount notes, due March 1, 2006 and 1.1 shares of CS Wireless common stock. CAI has not guaranteed this or any other CS Wireless debt. Immediately following the closing of such transactions, CAI owned approximately 52% of CS Wireless, Heartland approximately 37%, an affiliate of Bell Atlantic Corporation and NYNEX Corporation (the "BANX Partnership") approximately 10%, and the unit holders approximately 1%, taking into account certain true-up provisions. CS Wireless, which had been a wholly-owned subsidiary of CAI and the operator of a wireless cable system in Cleveland, OH, acquired or had contributed to it, under the Participation Agreement, operating wireless cable systems or wireless channel rights held by CAI in Bakersfield, CA, Charlotte, NC, and Stockton/Modesto, CA and held by Heartland in Dallas, Fort Worth, and San Antonio, TX, Dayton, OH, Maysville and Sweet Springs, MO, Minneapolis, CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - INVESTMENT IN CS WIRELESS SYSTEMS, INC. (CONTINUED) MN, Grand Rapids, MI and Salt Lake City, UT. The Heartland contribution was valued at approximately $138,663,000, the estimated fair value. Heartland originally received 3,578,834 shares of CS Wireless common stock, approximately $28,300,000 of cash, and $40,000,000 of notes from CS Wireless. Heartland received another $5,000,000 and 257,201 shares of CS Wireless pursuant to the "true-up" provisions of the Participation Agreement. Subsequently, CAI transferred 314,267 shares of its CS Wireless common stock to acquire wireless channel rights in Portsmouth, NH and CS Wireless issued additional shares in another transaction causing CAI's ownership in CS Wireless to decrease to 47.7% as of March 31, 1997. The following is a condensed version of the Consolidated Balance Sheet of CS Wireless Systems, Inc. and Subsidiaries as of December 31, 1996 as presented in its Form 10-K as of that date.
ASSETS Cash and cash equivalents $113,072,000 Other current assets 3,278,000 Systems and equipment, net 42,955,000 Wireless channel rights, net 172,953,000 Excess of cost over fair value of net assets acquired 52,011,000 (goodwill) Net assets held for sale 19,366,000 Loan acquisition costs, net 10,602,000 $414,237,000 LIABILITIES AND EQUITY Accounts payable and accrued expenses $ 6,655,000 Other current liabilities 1,043,000 BTA auction payable to affiliates 4,902,000 Long-term debt 4,737,000 Heartland long-term note 15,000,000 Senior discount notes 251,637,000 Deferred income taxes 5,429,000 Common stock and paid-in capital 154,568,000 Accumulated deficit (29,734,000) $414,237,000
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a condensed version of the Consolidated Statement of Operations for CS Wireless Systems, Inc. and Subsidiaries for the year ended December 31, 1996 as presented in its Form 10-K for that period.
Total revenues $ 22,738,000 Operating expenses: Systems operations 13,258,000 Selling, general and administrative 13,934,000 Depreciation and amortization 20,345,000 Total operating expenses 47,537,000 Operating loss (24,799,000) Interest expense (24,959,000) Interest income 6,600,000 Loss before income tax benefit (43,158,000) Income tax benefit 14,631,000 Net loss $(28,527,000) Loss per common share $ (3.06)
NOTE 6 - DEBT SERVICE ESCROW The debt service escrow relating to the $275,000,000 of 12.25% Senior Notes (the "Senior Notes") is being used to pay the first three years of interest on the Senior Notes. The escrow is held in trust and consists of marketable government debt instruments that mature as follows:
GROSS UNREALIZED AMORTIZED COST GAINS LOSSES MARKET VALUE Maturing in fiscal year ending: March 31, 1998 $31,276,518 $ 12,926 $ 48,038 $31,241,406 March 31, 1999 16,371,585 - 111,137 16,260,448 Total invested 47,648,103 $ 12,926 $159,175 47,501,854 Cash balance 23,532 23,532 Accrued interest 193,754 193,754 Total escrow balance $47,865,389 $47,719,140
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 :
1997 1996 Notes receivable $ 692,952 $ 501,815 Notes receivable-related parties 880,054 - Other intangible assets 209,505 522,812 Deposits 637,143 579,273 Other 415,997 664,947 $2,835,651 $2,268,847
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEBT Debt consists of the following:
1997 1996 SENIOR DEBT 12.25% senior notes due 2002{ (a)} $275,000,000 $275,000,000 NOTES PAYABLE Term notes due May 9, 2005{ (b)} 29,813,550 29,753,550 Acquisitions{ (c)} 6,799,029 12,138,186 Vehicles, equipment and other 174,017 1,542,931 $311,786,596 $318,434,667
Scheduled maturities of debt at March 31, 1997, are as follows:
YEARS ENDING MARCH 31, 1998 $ 536,680 1999 274,865 2000 232,560 2001 5,390,880 2002 538,060 Thereafter 304,813,550 $311,786,596
{(a)} CAI's offering of $275,000,000 of 12 1/4% Senior Notes due 2002 closed on September 29, 1995. The proceeds were used in part to pay the cash portions of certain acquisitions and to fund a debt service escrow account ("Escrow") with approximately three years of interest pursuant to the Indenture dated as of September 15, 1995 (the "Indenture") governing the Senior Notes. The Indenture requires semi- annual interest payments (March and September) from Escrow. The principal amount of the Senior Notes is due in full on September 15, 2002. The Senior Notes are general unsecured obligations of CAI except for a first priority security interest in the Escrow and would rank equal with any other senior debt of the Company to be issued and senior to the Company's other debt with respect to right of payment. The Senior Notes are effectively subordinated to all collateralized debt to the extent of the value of assets collateralizing such debt. The Indenture also imposes certain limitations and restrictions on CAI, including the ability to incur additional indebtedness, pay dividends, make investments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, engage in unrelated businesses, and enter into mergers and/or consolidations without express consent. (See Note 19 for subsequent financing). {(b)} Two $15,000,000 term notes issued to affiliates of NYNEX and Bell Atlantic are due on May 9, 2005 with interest at 16%, accruing semi-annually on both principal and unpaid accrued interest. Interest will be paid semi- annually on March 1 and September 1 of each year, commencing on March 1, 1999. The term notes contain maintenance and compliance covenants including compliance with the Business Relationship Agreement and the covenants mentioned in (a) above. The original discount of $300,000 represents the value of the Warrants issued with the term notes and is amortized over the term note period as interest expense. The term notes interest rate increased to 16% from 14% per annum pursuant to an adjunct agreement with certain other affiliates of Bell Atlantic and NYNEX regarding licensing issues. For the years ended March 31, 1997 and 1996, interest expense on the term notes approximated $5,700,000 and $4,000,000, respectively, both of which are included in accrued expenses at March 31, 1997. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEBT (CONTINUED) The term notes are convertible into 14% Senior Preferred Stock at the initial Conversion Price of $10,000 per Senior Preferred Share until September 29, 2000. The 14% Senior Preferred Shares are convertible into Voting Preferred Stock based on a formula prescribed in the terms of the Senior Preferred Stock. In addition to the term notes, the Company has issued to affiliates of Bell Atlantic and NYNEX 7,000 shares of Senior Preferred Stock and warrants to purchase Voting Preferred Shares from the Company from time to time based on formulas prescribed in the terms of the Stage I Warrants until September 29, 2000. The Voting Preferred Stock is convertible into common stock. Together, the terms and intent of the term notes, 14% Senior Preferred Stock, and the Stage I and Stage II Warrants allow NYNEX and Bell Atlantic through their affiliates to maintain a constant 45% common stock position in CAI, assuming exercising the Warrants and full conversion of all shares to common shares. (See Note 17 for defined terms and for updated information concerning CAI's relationship with Bell Atlantic and NYNEX). { (c)} The notes payable for acquisitions consist of (1) a series of notes in the amount of $2,793,000 relating to the Baltimore Asset purchase due on September 29, 2000 with interest payable quarterly at 8% per annum through September 1998 and 12% per annum thereafter to maturity, the notes are subordinated to all other CAI obligations for borrowed money unless, by its terms, such obligations are not Senior Indebtedness and all other obligations collateralized by liens or a security interest on CAI property; and (2) acquisition notes payable reflecting the notes issued to Mr. Bott and the Bott Family Trust in connection with the purchase of four corporations with wireless channel rights. Three Bott corporations were acquired on March 31, 1994 partly through the issuance of notes with a face value of $3,750,000, discounted to $2,910,000 based on an imputed interest rate of 8.5%. Another Bott corporation was acquired in January 1996 partly through the issuance of a note with a face value of $1,430,000, discounted to $757,000 based on an imputed interest rate of 12.25%. Each of the Bott notes is collateralized by the common stock of the company acquired and mature through January 2002. Pursuant to CAI's debt instruments, CAI is restricted from incurring additional indebtedness (except in connection with purchases of goods and services in the ordinary course of business, and other ordinary course indebtedness permitted thereunder, granting liens to secure repayment of indebtedness, making investments (other than investments specifically permitted thereunder), pay dividends, dispose of assets, enter into any merger, consolidation, reorganization, or recapitalization plan, retire long-term debt, or make any acquisitions without the prior consent of the lenders. Further, in accordance with the loan agreement governing the subsequent financing (see Note 19), the Company is required to maintain minimal levels of net worth and number of subscribers, and is limited with respect to the amount of annual capital expenditures. The components of the consolidated income tax benefit for the years ended March 31, 1997, 1996, and 1995 are as follows:
1997 1996 1995 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, 1995 and 1997. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - DEBT (CONTINUED) The significant components of deferred tax assets (liabilities) are as follows:
1997 1996 1995 Net operating loss carryovers $ 72,100,000 $ 24,915,000 $ 7,630,000 Intangibles (32,635,000) (34,841,000) (1,580,000) Investment in CS Wireless (18,726,000) (24,000,000) - Property and equipment (2,352,000) (1,434,000) (462,000) Other, net 513,000 (50,000) 402,000 Total net deferred tax asset (liability) 18,900,000 (35,410,000) 5,990,000 Less: Valuation allowance (18,900,000) - (5,990,000) Net deferred tax asset (liability) $ - $(35,410,000) $ -
NOTE 9 - INCOME TAXES Approximately $47,410,000 of the change in deferred taxes from March 31, 1995 to March 31, 1996 was recorded as a net increase in goodwill incident to the purchase accounting of certain acquisitions. Subsequently, that amount was reduced by $20,410,000 due to available net operating losses not taken into account until a determination was made of their allowability. A valuation allowance is provided to reduce deferred tax assets to a level which, more likely than not, will be realized. The deferred tax assets recorded reflects management's estimate of the amount which will be realized based upon current operating results and contingencies. During the year ended March 31, 1996 the valuation allowance of $5,990,000 as of March 31, 1995, was eliminated. During the year ended March 31, 1997, a valuation allowance in the amount of $18,900,000 was established. The Company has available as of March 31, 1997 approximately $180,000,000 of net operating loss carryforwards which begin to expire in 1998. The use of these carryforwards are limited on an annual basis pursuant to the Internal Revenue Code due to certain changes in ownership and equity transactions. NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS. The carrying amount approximates fair value because of the short maturity of those instruments. DEBT SERVICE ESCROW. The fair values of the investments in the debt service escrow are estimated based on market values. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) DEBT. The fair value of the Company's debt is primarily based on quoted market prices for its publicly traded Senior Notes and for the remaining debt, estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt with similar remaining maturities. The fair value of debt maturing within twelve months is estimated to be its carrying value.
CARRYING AMOUNT FAIR VALUE 1997 1996 1997 1996 Cash and cash equivalents $10,471,918 $103,263,094 $ 10,471,918 $103,263,094 Debt service escrow 47,865,389 77,621,088 47,719,140 77,654,796 Debt Senior Notes 275,000,000 275,000,000 129,250,000 292,187,500 Term notes and other 36,786,596 43,434,667 21,073,046 45,556,117
NOTE 11 - COMMITMENTS AND CONTINGENCIES PROGRAMMING CONTRACTS. In connection with its distribution of television programming, the Company has fixed-term contracts with various program suppliers, such as HBO, Showtime, CNN, MTV, USA, and A&E. Contract terms range in length from one year to ten years and expire at various dates through 2003. Most contracts are subject to automatic renewal upon expiration unless notice is given, by either party, of intent not to renew. These contracts require the Company to pay fees to programmers based on the number of subscribers. Equipment Replacement. Due to interference caused by the new PCS telephone frequencies, the Company intends to replace approximately 24,000 subscriber downconverters in the Philadelphia market at a rate of approximately 500 replacements per month plus all of the new installations receiving the new equipment. Replacements will cost approximately $84 per unit, while new installations will incur a $62 per unit additional cash outflow by not reusing currently owned equipment. The total cost of this replacement in Philadelphia is approximately $1.7 million. Replace costs in other CAI markets, if deemed necessary, are not expected to be material. PURCHASE COMMITMENTS. As of March 31, 1997, the Company had approximately $3,200,000 of outstanding purchase orders, primarily relating to equipment and technical work for the digital projects. RETIREMENT PLAN. Effective April 1, 1996, the Company sponsored a defined contribution pension plan pursuant to Internal Revenue Code section 401(k), covering substantially all of its employees. Contributions are withheld from participating employees with the Company matching 50% of the first 5% of covered employees wages withheld and contributed to the plan, which amounted to $114,000 for the year ended March 31, 1997. Legal Proceedings. SHAREHOLDERS' CLASS ACTION LAWSUIT. CAI has been named in six class action lawsuits alleging various violations of the federal securities laws filed in the United States District Court for the Northern District of New York. The actions were consolidated into one lawsuit entitled IN RE CAI WIRELESS SYSTEMS, INC. SECURITIES LITIGATION (96-CV- 1857) (the "Securities Lawsuit"), which is currently pending in the Northern District of New York. The amended, consolidated complaint, which names the Company, Jared E. Abbruzzese, Chairman and Chief Executive Officer of the Company, John J. Prisco, President, Chief Operating Officer and a Director of the Company, and Alan Sonnenberg, the CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED) former President of the Company and a member of the its Board of Directors, as defendants, alleges a variety of violations of the anti-fraud provisions of the Federal securities laws by CAI arising out of its alleged disclosure (or alleged omission from disclosure) regarding its Internet and other flexible use of MMDS spectrum, as well as its business relationship with Bell Atlantic and NYNEX. Specifically, the complaint alleges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 10b- 5 promulgated under the Exchange Act during the specified Class Period (May 23, 1996 through December 6, 1996). The Company has notified the carrier of its Directors' and Officers' Liability insurance policy, which is intended to cover not only the Company's officers and directors, but also the Company itself, against claims such as those made in the Securities Lawsuit. The policy covers up to $5 million of any covered liability, subject to a retention amount of $500,000. The Securities Lawsuit is in its preliminary stages. A scheduling conference was held on June 3, 1997, at which the briefing schedule for defendants' motion to dismiss was agreed upon among the parties. Based on such schedule, the Company believes that such motion will not be ruled upon until the fall of 1997. While the motion is pending, all other deadlines affecting motions and discovery have been postponed. The Company and individual defendants are contesting the Securities Lawsuit vigorously and believe it is entirely without merit. Accordingly, management believes that the Securities Lawsuit will not have a material adverse effect on the Company's earnings, financial condition or liquidity. OTHER LITIGATION. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's earnings, financial condition or liquidity. REGULATORY MATTERS. Due to the regulated nature of the subscription television industry, the Company's growth and operations may be adversely impacted by the adoption of new, or changes to existing, laws or regulations or the interpretations thereof. NOTE 12 - REDEEMABLE PREFERRED STOCKS As part of the BANX Transactions (see Note 17) the BANX Partnership purchased 7,000 shares of Senior Convertible Preferred Stock, par value $10,000 ("Senior Preferred") and Stage II Warrants to purchase Voting Preferred Stock, without par value, of CAI. The Senior Preferred has a 14% cumulative dividend, payable quarterly (optionally before December 1, 1998 and mandatorily after December 1, 1998). The dividend is increased by an amount calculated at a rate of 14% per annum, compounded semi-annually, on any accrued dividends remaining unpaid. In addition, the Company is subject to an additional dividend at the rate of 0.5% per quarter on the par value plus unpaid accrued dividends pursuant to an adjunct agreement with affiliates of Bell Atlantic and NYNEX regarding licensing issues. The Senior Preferred is convertible into Voting Preferred Stock, based on a formula prescribed in the terms of the Senior Preferred for a period of five years commencing on September 29, 1995, the date of issue. In turn, the Voting Preferred Stock is convertible into common stock, initially at the rate of 100 shares of common stock for one share of Voting Preferred Stock. The terms and intent of the Senior Preferred and the Term Notes, together with the Stage I and Stage II Warrants held by affiliates of NYNEX and Bell Atlantic, are to allow them the ability to maintain a 45% common stock ownership position at all times, assuming exercise and conversion of all warrants and preferred shares. The Senior Preferred Stock also provides for mandatory redemption at par plus any accrued dividends on September 29, 2005, absent any conversion. In conjunction with the January 9, 1995 acquisition of the New York System, the Company issued 180,500 shares of Series A 8% Redeemable Convertible Preferred Stock. During the year ended March 31, 1997, all of the Series A 8% Redeemable Convertible Preferred Stock had been converted into a total of 2,637,742 shares of CAI Common Stock. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - SHAREHOLDERS' EQUITY In May 1996, 75,000 warrants were exercised on a non-cash basis at $.25 by an officer of the Company for 73,315 shares of common stock. The value of the aggregate exercise price was $18,329. On September 29, 1995, the Company amended and restated its Certificate of Incorporation, with shareholder approval, to increase the authorized number of CAI no par Common Shares available for issuance from 45,000,000 to 100,000,000 and to authorize 15,000 shares of a new class of 14% Senior Preferred Stock, par value $10,000 per share and 2,000,000 shares of a new class of Voting Preferred Stock, no par value. The Senior Preferred Stock is convertible into Voting Preferred Stock and the Voting Preferred Stock is convertible into common stock. On March 8, 1995, the Company authorized and issued 20,000 shares of Series B preferred stock for $2,000,000 gross proceeds before a $100,000 placement fee. All 20,000 shares of Series B preferred stock were converted into 271,739 shares of common stock. The stock capitalization is as follows:
Shares Authorized Shares Issued and Outstanding CLASS OF STOCK AS OF MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1996 Preferred stock 14% Senior convertible preferred stock, par value $10,000 per share 15,000 7,000 7,000 Series preferred stock, no par value Series A 8% redeemable convertible preferred stock, no par value 350,000 - 180,500 Undesignated 4,650,000 - - Total series preferred stock 5,000,000 - 180,500 Voting preferred stock, no par value 2,000,000 - - Total preferred stock 7,015,000 7,000 187,500 Common stock, no par value 100,000,000 40,540,539 37,829,482
NOTE 14 - OPTIONS AND WARRANTS STOCK OPTION PLANS INCENTIVE AND NONQUALIFIED STOCK OPTION PLANS. The Company's 1995 Incentive Stock Plan (the "1995 Plan") provides for the grant of incentive stock options qualifying under Section 422 of the Internal Revenue Code ("ISO's"), non-qualified stock options ("NQSO's"), stock appreciation rights, performance shares and restricted stock or any combination of the foregoing, as the Compensation Committee of the Board of Directors (the "Committee") may determine. The 1995 Plan will expire on March 27, 2005. The number of shares available for grants is 1,200,000 shares and the 1995 Plan is administered by the Committee. Vesting and the per share exercise price for stock options granted under the 1995 Plan, which will not be less than 100% of the fair market value per share of common stock on the date the option is granted, is determined by the Committee at the time of grant. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - OPTIONS AND WARRANTS (CONTINUED) In November 1993, the Company adopted its 1993 Stock Option and Incentive Plan (the "1993 Plan"). Under the 1993 Plan, options to purchase an aggregate of not more than 1,000,000 shares of common stock may be granted, from time to time, to key employees (including officers), advisors and independent consultants to the Company or to any of its subsidiaries. Options granted to officers and employees may be designated as incentive stock options ISO's or NQSO's. Options granted to independent consultants and other nonemployees may only be designated NQSO's. The 1993 Plan is administered by the Committee. Vesting and the per share exercise price for stock options granted under this Plan, which will not be less than 100% of the fair market value per share of common stock on the date the option is granted, is determined by the Committee at the time of grant. OUTSIDE DIRECTORS' OPTION PLAN. In October 1996, the Company adopted the 1996 Outside Directors' Stock Option Plan (the "1996 Directors' Plan"). Under the 1996 Directors' Plan, options to purchase an aggregate of not more than 45,000 shares of common stock will be granted from time to time to nonemployee directors. Each qualifying director shall be granted an option to purchase 7,500 shares at a price not be less than 100% of fair market value on the date of the grant. Such option shall vest: 25% on the date of grant, and 25% on each of the second, third, and fourth anniversaries of the grant. These options are exercisable for a period of ten years, but not before an initial six-month period. As of March 31, 1997, the Company has granted options under this plan to purchase 30,000 shares of common stock at a weighted average price of $6.63 per share. In October 1993, the Company adopted the 1993 Outside Directors' Option Plan (the "1993 Directors' Plan"). Under the 1993 Directors' Plan, options to purchase an aggregate of not more than 30,000 shares of common stock may be granted from time to time to nonemployee directors. These options will vest at the rate of 20% a year over five years, beginning one year after date of grant and are exercisable for a period of seven years. The exercise price for stock options granted under the 1993 Directors' Plan will not be less than 100% of the fair market value of the common stock on the grant date. As of March 31, 1997, the Company has granted outstanding options under this plan to purchase 8,334 shares of common stock at $11 per share. VALUATION OF OPTIONS. The Company applies APB Opinion No. 25 in accounting for its Stock Option Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
YEARS ENDED MARCH 31, 1997 1996 Net loss: As reported $ (82,298,207) $(40,985,572) Pro forma (88,839,207) (42,942,572) Loss per common share: As reported (2.38) (1.73) Pro forma (2.54) (1.80)
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - OPTIONS AND WARRANTS (continued) The initial impact of SFAS No. 123 on pro forma earnings per share may not be representative of the effect on income in future years because options vest over several years and additional option grants may be made each year. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the years ended March 31, as follows:
1997 1996 Dividend yield 0% 0% Risk free interest rate 6.0% 6.0% Expected life (years) 9.2 3.6 Volatility 0.99 0.72
OPTION ACTIVITY. A summary of the status of the Company's stock option plans as of March 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 Weighted Weighted- Weighted- -Average Average Average Exercise Exercise Exercise SHARES PRICE SHARES PRICE SHARES PRICE Outstanding, beginning 1,274,134 $7.74 941,834 $12.29 452,667 $11.00 Granted 1,071,803 $2.20 1,756,800 $8.52 743,834 $12.53 Forfeited 150,000 $7.75 (1,424,500) $11.69 (254,667) $11.00 Outstanding, ending 2,195,937 $4.91 1,274,134 $7.74 941,834 $12.29 Fair value of options granted $1.57 $6.43
The total number of shares of common stock reserved for options is 2,275,000 as of March 31, 1997. The following table summarizes information about stock options outstanding at March 31, 1997:
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 $1.75 to $2.06 981,803 10 years $1.75 91,803 $1.75 $6.63 to $8.00 1,205,800 9 years $7.68 866,150 $7.72 $11.00 8,334 5 years $11.00 8,334 $11.00 2,195,937 966,287
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - OPTIONS AND WARRANTS (CONTINUED) WARRANTS THE BANX WARRANTS. The BANX Partnership holds warrants to purchase Voting Preferred Stock which are exercisable at an aggregate price of approximately $95,000,000 and which entitle the BANX Partnership to common stock aggregating 45% of the then total outstanding shares of the Company if exercised along with the conversion provisions of the term notes and senior preferred stock for which CAI has already received $100,000,000. See Note 17 for updated information concerning CAI's relationship with Bell Atlantic and NYNEX. COMMON STOCK WARRANTS. Outstanding warrants, except for those issued to the BANX Partnership, are as follows:
Weighted-Average Number of EXERCISE PRICE Warrants Outstanding, April 1, 1994 $9.56 1,214,000 Issued{(1)} $8.40 880,578 Exercised $0.25 (74,000) Outstanding, March 31, 1995 $9.40 2,020,578 Issued{(2)} - 289,963 Outstanding, March 31, 1996 $7.72 2,310,541 Issued{(2)} - 616,912 Exercised $0.25 (75,000) Outstanding, March 31, 1997 $6.24 2,852,453
{(1) }The warrants were issued to bridge lenders in connection with the acquisition of the New York System. {(2) }The warrants issued and certain warrant exercise prices revised during the years ended March 31, 1997 and 1996 were pursuant to anti-dilutive clauses in agreements relating to the warrants. The average purchase price of outstanding common stock warrants at March 31, 1997, 1996 and 1995 was $6.24, $7.72 and $9.40 per share, based on an aggregate purchase price of $17,811,114, $17,829,083, and $18,989,050, respectively. Outstanding warrants will expire over a period ending no later than January 2000. NOTE 15 - OPERATING LEASES The Company leases office space in each market it currently operates in under non-cancelable agreements which expire through March 2006, and requires various minimum monthly payments and payment of property taxes, certain maintenance, and insurance. The Company leases towers, land and/or building space in each of its operating markets and certain other markets for broadcasting purposes. The leases are non- cancelable agreements expiring through December 2012. Most of the leases have provisions for renewal periods. The leases require various minimum monthly payments and are subject to periodic fixed and inflationary increases. The Company leases vehicles for customer service and other corporate use. The agreements are non-cancelable, expire through April 1997 and require various monthly payments. The Company is responsible for normal maintenance and insurance. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - OPERATING LEASES (CONTINUED) Additionally, the Company leases certain office and broadcast test equipment under various lease agreements for periods up to thirty-six months. The Company pays various monthly payments and is required to maintain and insure such equipment. The approximate minimum rental commitments for operating leases as of March 31, 1997 due in future years is as follows:
YEARS ENDING MARCH 31, 1998 $ 3,505,000 1999 3,016,000 2000 2,370,000 2001 1,978,000 2002 998,000 Thereafter 5,583,000 Total $17,450,000
Total rent expense for the years ended March 31, 1997, 1996, and 1995 was approximately $3,258,000, $2511,000, and $1,080,000, respectively. NOTE 16 - RELATED PARTY TRANSACTIONS On May 8, 1995 CAI sold, subject to an option to repurchase exercisable at any time prior to January 1, 1996, all of the issued and outstanding stock of TelQuest, Inc. ("TelQuest") with a negative net book value of approximately $70,000, to Wave Holdings, L.L.C., a Delaware limited liability company controlled by Jared E. Abbruzzese, CAI's Chairman and Chief Executive Officer, for $25,000. The gain on this sale of approximately $23,000 was deferred and was not included in income. TelQuest's involvement in certain operations could have, at that time, violated the Modified Final Judgment, if engaged in by an RBOC or an affiliated enterprise. In May 1996, CAI relinquished its option to repurchase TelQuest for a 2% equity interest in TelQuest Systems, Inc., the operating successor of TelQuest's business. In consideration of Mr. Abbruzzese's guaranteeing the obligation of CAI to MMDS Holdings, an affiliate of Bell Atlantic, which permitted CAI to complete the Microband acquisition in January 1995, the CAI Board of Directors awarded options to acquire 150,000 CAI Common Shares at $11.00 per share to Mr. Abbruzzese. In October 1996, two of CAI's officers formed a company, Telecom Service Support LLC ("TSS"), to provide subscriber installation, service calls, and warehouse service to the subscription television industry. CAI incurred approximately $348,000 for such services during the year ended March 31, 1997. Additionally, CAI has advanced $80,000, provided leased vehicles, and provided certain facility space to TSS. CAI periodically charters an airplane from Wave Air, Inc., which is primarily owned by Mr. Abbruzzese, in order to carry out business when airline schedules are not compatible. Transactions with Wave Air, Inc. amounted to approximately $278,000 and $103,000 for the years ended March 31, 1997 and 1996, respectively (none for 1995). CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - RELATED PARTY TRANSACTIONS (CONTINUED) During the year ended March 31, 1997, CAI loaned $800,000 to Haig Capital L.L.C. and $200,000 to TelQuest Communications, Inc., entities in which Mr. Abbruzzese is a principal member and stockholder, respectively, of which approximately $175,000 was repaid by Haig Capital. In March 1997, Mr. Abbruzzese combined a $19,000 February 1997 loan from CAI, the remaining obligation of Haig Capital, accrued interest on both loans, and an additional $100,000 advance in April 1997 (subsequent to year-end) into one personal unsecured, demand obligation in the amount of $780,054, bearing interest at 14% per annum. In March 1997, CAI separately purchased certain used equipment for the Boston Project from Haig Capital L.L.C. for $107,000. The loan to TelQuest Communications, Inc. is evidenced by a promissory note in the principal amount of $200,000, bears interest at 14%, and matures in March 2000. The note is convertible into TelQuest Communications, Inc. common stock at the election of CAI. The Company is currently negotiating the terms of a joint venture with TelQuest Communications and CS Wireless, pursuant to which the Company will be obligated to invest $2.5 million in cash and purchase $2.5 million of equipment in exchange for an initial equity interest in the joint venture of 25%. The original $200,000 loan to TelQuest Communications will be contributed to the joint venture, and CAI will receive a credit for the principal and accrued interest on such amount against the cash portion of its joint venture investment obligation. Interest earned all related party loans approximated $63,400 for the year ended March 31, 1997. During April 1997, CAI sold approximately $2,112,000 of equipment at book value from the Boston Project that was not needed to CS Wireless for 20% down and the balance due in 30 days after delivery. Additionally, during April 1997, CAI placed purchase orders approximating $1,612,000 with CS Wireless for equipment needed for the Boston Project, taking advantage of CS Wireless' favorable pricing arrangements with its vendor. NOTE 17 - TRANSACTIONS AND AGREEMENTS WITH BELL ATLANTIC AND NYNEX In March 1995, CAI entered into a strategic business relationship with BANX Partnership, an affiliate of Bell Atlantic and NYNEX (the "BANX Partnership") and with other affiliates of Bell Atlantic and NYNEX (the "BANX Affiliates"). This relationship consisted of (i) the signing of the Business Relationship Agreement, as amended (the "BR Agreement") with the BANX Affiliates, (ii) the purchase by the BANX Partnership of $30 million of convertible Term Notes due May 9, 2005 ("BANX Term Notes") and Warrants (the "BANX Warrants") to purchase convertible preferred stock, no par value (the "Voting Preferred Stock"), and (iii) the purchase by the BANX Partnership of $70 million of 14% Senior Convertible Preferred Stock, par value $10,000 per share ("Senior Preferred Stock") and additional Warrants. Upon issuance of the CAI Securities in September 1995, the full conversion or exercise of the CAI Securities would have resulted in the BANX Partnership having to make an additional investment in CAI of approximately $202 million, and its pro forma ownership interest in CAI increasing to approximately 45%. Pursuant to the BR Agreement, which was intended to allow CAI to realize revenue in certain of its markets without incurring substantial capital expenditures required for subscriber equipment and installation as well as eliminate most operating costs, other than channel license fees and distribution system expenses, CAI granted to each BANX Affiliate the ability, on a market by market basis, to elect to become the marketer and provider of subscription television services using CAI's MMDS transmission systems in each market in their respective service areas in exchange for monthly service revenues based on the number of serviceable households and subscribers in each market so optioned by a BANX Affiliate. In connection with the Company's obligations under the BR Agreement, CAI substantially completed the construction of digital video delivery systems in Boston, MA and Hampton Roads, VA. Through December 12, 1996, however, neither BANX Affiliate had exercised their respective options under the BR Agreement in these or any other markets contemplated by the BR Agreement. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - TRANSACTIONS AND AGREEMENTS WITH BELL ATLANTIC AND NYNEX (CONTINUED) On December 12, 1996, the Company and the various BANX entities reached an agreement (the "Modification Agreement") modifying certain terms of the BR Agreement and providing CAI or its designee with the right to acquire the CAI Securities. The Modification Agreement was subsequently amended on April 29, 1997, pursuant to Amendment No. 1 to the Modification Agreement (the "Amendment"). The Amendment represents the renegotiation of an option granted to CAI to repurchase the $100 million face amount of CAI securities held by the BANX Partnership. The repurchase consideration is $40 million in cash and 100,000 shares of CAI convertible junior preferred stock. The junior preferred stock, which is non-voting, carries no coupon and has no maturity, is convertible into 2.5 million shares of CAI common stock. The repurchase option is exercisable through February 28, 1998 As part of the Amendment, the BANX Affiliates also immediately released CAI from its obligation under the BR Agreement to make CAI's wireless MMDS spectrum available to the BANX Affiliates at a future date in Boston, MA, Pittsburgh, PA, and Albany, Syracuse and Buffalo, NY. Upon a repurchase of the CAI securities, as contemplated by the Amendment, the BR Agreement will lapse in its entirety, releasing a similar obligation in CAI's other markets. In connection with the execution of the Amendment, the BANX Partnership also suspended or released CAI from a number of covenant restrictions and governance rights and provided CAI with a blanket proxy on the approximately 10% interest in CS Wireless held by BANX entities If the repurchase is consummated, the CS Wireless shares would be returned to CAI without additional consideration The parties also exchanged mutual releases and reached an agreement to share certain patent and intellectual property rights related to their digital wireless venture. In addition to the $40 million in cash, Bell Atlantic and NYNEX will receive as consideration for the surrender of their CAI securities, 100,000 shares of a series of non-voting junior preferred stock. The junior preferred stock carries a liquidation preference of $30 million in the aggregate, but carries no special dividends, covenants or governance rights, except as provided by the Connecticut Business Corporation Act, under which CAI is incorporated. Each of the 100,000 shares of junior preferred stock is convertible into 25 shares of CAI common stock in the hands of a subsequent purchaser unrelated to Bell Atlantic or NYNEX. If the junior preferred stock continues to be held by Bell Atlantic and NYNEX at the end of three years, and the value of the CAI common stock is not at least $14.00 per share, then Bell Atlantic and NYNEX would be entitled to a value floor representing the difference between the then-market value of the CAI common stock and $14.00 per share (the "Value Floor"). At CAI's election, the Value Floor would be payable either in the form of up to, but not more than, 1 million additional shares of CAI common stock or in the form of a ten-year subordinated note in a principal amount of up to $15 million, bearing interest at 8%, which is payable-in- kind for the first five years. NOTE 18 - GOING CONCERN CAI's recurring losses, restrictions to obtain additional financing, and substantial commitments, raise substantial doubt about CAI continuing as a going concern. For the year ending March 31, 1998, the Company is obligated to pay approximately $8,500,000 in minimum license fees and lease payments, approximately $1,100,000 in MMDS license auction fees and to fund operating costs. On June 6, 1997, CAI completed a $30,000,000 interim financing arrangement with Foothill Capital Corporation and affiliates of Canyon Capital Management, L.P. to fund the Company's near term working capital requirements. This credit facility consists of $25,000,000 in term loans and a $5,000,000 revolving loan, both of which mature on March 1, 1999. Management estimates that the present revenue stream and cash resources available to the Company, including this interim financing in June 1997 are adequate to sustain the Company's needs through December 1997. CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - GOING CONCERN (CONTINUED) On a long-term basis, CAI has substantial indebtedness which beginning in fiscal year 1999 will have significant debt service requirements and senior preferred stock dividend payments. As of March 31, 1997, CAI had outstanding consolidated long- term debt of $312,000,000 and 14% senior preferred stock of $70,000,000. Additionally, pursuant to the terms of the Amendment, CAI has been granted the right to purchase the CAI Securities. Upon the consummation of such purchase, the BR Agreement would terminate eliminating CAI's strategic relationship with the BANX Affiliates including all restrictions relating thereto. The Amendment allows CAI to buy out the BANX investment for $40 million plus 100,000 shares of junior preferred stock. The Company is actively seeking a new strategic partner to replace the BANX Partnership and to provide the necessary interim and long-term funding to carry out CAI's short and long term objectives. CAI's ability to locate such strategic partner(s) to replace BANX may be limited by the BANX Partnership's willingness to negotiate the terms and conditions of the purchase of the CAI Securities. The Company's business strategy has shifted away from analog to digital wireless cable systems for its MMDS subscription television services and to explore alternative uses of its MMDS spectrum for a variety of applications including video, voice and data transmission such as Internet access and telephony delivery services. In management's opinion, the new strategy will help meet the current and perceived future competition and in relation to obtaining a new strategic partner, show the flexibility and increased value of the Company's MMDS spectrum. In connection with achieving the objectives set forth, CAI is committed through additional open purchase orders as of June 17, 1997 to spend approximately $5,000,000 primarily for capital expenditures associated with additional development of the Boston digital transmission facilities. This commitment is in addition to the $3,200,000 of open purchase orders as of March 31, 1997. The increase in commitment is to be funded in part by the new interim financing and the balance through a new strategic partner. NOTE 19 - SUBSEQUENT EVENTS On June 6, 1997, the Company closed a $30 million interim credit facility provided by Foothill Capital Corporation and affiliates of Canyon Capital Management, L.P. (the "Interim Debt Lenders"). The credit facility is comprised of $25 million of term debt, of which $10 million was made available at the closing and is currently outstanding. The balance of the term debt will be made available to CAI upon the achievement of certain agreed-upon operational benchmarks. The term debt bears interest at the rate of 13% per annum. So long as the Company is not in default of its obligations under the credit facility, the Company can elect to have one-half of the interest on the term debt accrue and be added to the principal amount outstanding on the term debt. The remaining portion of the term debt interest is payable monthly in arrears. The term debt matures on March 1, 1999, at which time all accrued and unpaid interest on and principal of the outstanding amount of the term debt shall be due and payable in full. The Interim Debt Lenders have also made available to CAI a $5 million revolving loan, of which $3 million was made available to CAI at the June 6th closing. The remaining $2 million of the revolving loan will be made available to CAI upon the achievement by the Company of certain operational benchmarks. The revolving loan bears interest at four and three-quarters percent above the Reference Rate, as announced from time to time by Norwest Bank. Principal and interest on the revolving loan is payable monthly, and the revolving loan expires on March 1, 1999. As of June 17, 1997, the Company had not yet borrowed any amount against the revolving loan. 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 42 Chairman, Chief Executive Officer and Director (1) John J. Prisco 41 President, Chief Operating Officer and Director (1) George M. Williams 56 Chief Administrative Officer, Secretary, Treasurer and Director(1) Timothy J. Santora 42 Executive Vice President (1) James P. Ashman 43 Executive Vice President, Chief Financial Officer and Director Craig J. Kessler 40 Vice President and Controller Arthur C. Belanger 71 Director(2) Harold A. Bouton 53 Director(3) David M. Tallcott 51 Director(2)(3) Alan Sonnenberg 45 Director Robert D. Happ 56 Director(2)(3)
(1) Member of Executive Committee. The Executive Committee conducts the affairs and business of the Company between meetings of the Board of Directors. (2) Member of Audit Committee. The Audit Committee assists the Board of Directors in fulfilling its responsibilities with respect to the Company's accounting and financial reporting activities. (3) Member of Compensation Committee. The Compensation Committee determines the compensation to be paid by the Company to its officers and administers the 1995 and 1993 Stock Option Plans, the 1993 Outside Directors' Option Plan and the 1996 Outside Directors' Option Plan. The Certificate of Incorporation and the Bylaws of the Company, as amended, provide for a minimum of three and a maximum of eleven members of the Company's Board of Directors (the "Board") and permit the Board to specify the number of directors within that range by resolution. The Board has currently established the size of the Board at nine members. All directors hold office until their successors have been elected and qualified. The Company has agreed with Gerard Klauer Mattison & Co., LLC, the representative of the Underwriters of the Company's initial public offering of Common Stock (the "Representative"), that for the five-year period ending February 1999, the Company will use its best efforts to cause, if requested by the Representative, an individual selected by the Representative and reasonably acceptable to the Company to be elected to the Board who may be an officer, director or affiliate of the Representative. To date, the Representative has made no such request. JARED E. ABBRUZZESE has been the Chairman, Chief Executive Officer and a director of the Company since its formation in August 1991. From August 1992 until September 1993, Mr. Abbruzzese served in various capacities for the prior operator of a wireless cable system in Albany, NY, Mr. Abbruzzese served as President of The Diabetes Institute Foundation in Virginia Beach, Virginia from October 1988 until August 1991. Since February 1996, Mr. Abbruzzese has served as Chairman and Chief Executive Officer of CS Wireless. JOHN J. PRISCO has been President, Chief Operating Officer and a director of CAI as of March 1, 1996. Mr. Prisco came to CAI from Bell Atlantic Network Services, Inc., where he spent the last three years as a corporate officer, most recently as President of CellularVision of New York, the only LMDS (28 GHz) wireless cable operator in the U.S. In 1986, Mr. Prisco founded Penn Access Corporation , which operated a fiber optic network in the greater Pittsburgh, PA area. Mr. Prisco served as President and Chief Executive Officer of Penn Access until its sale in 1993 to Tele-Communications, Inc. Penn Access currently operates as part of the Teleport Communications Group. JAMES P. ASHMAN has been Executive Vice President and Chief Financial Officer of CAI since December 1995. Previously, he was Senior Vice President and Treasurer of the Company from September 1994 to December 1995. He has been a director since March 1994. From November 1992 to September 1994, he was a senior advisor of, and independent consultant affiliated with, Carolina Barnes Capital, Inc. ("CBC"), a registered broker dealer. CBC served as a financial advisor to the Company from January 1993 until September 1994. Mr. Ashman was Vice President of Richter & Co., Inc. from June 1990 to November 1992. Since February 1996, Mr. Ashman has served as a director of CS Wireless. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CAI WIRELESS SYSTEMS, INC. (CONTINUED) GEORGE M. WILLIAMS has been Chief Administrative Officer and Corporate Analyst, Treasurer and Secretary of the Company since December 1995, and served as Executive Vice President of Finance and Chief Financial Officer of the Company from August 1993 until December 1995. Mr. Williams has been a director of the Company since August 1993 and was Treasurer from March 1994 through September 1994. Mr. Williams was a financial consultant to the Company from September 1992 until his current appointment. From 1986 until August 1993 he was a partner in Cable Management Services providing management consultation to the hard-wire and wireless cable industries in both the domestic and international markets. He was involved in the start-up of Schomann Entertainment, Inc., a small hard-wire cable multiple systems operator, as a partner and controller with operational responsibilities from 1987 until August 1993. He also has been a consultant in the cable television industry since 1986. Mr. Williams is currently a 20% shareholder and officer of Hamilton County Cable TV, Inc., a hard-wire cable system operator. TIMOTHY J. SANTORA has been Executive Vice President of the Company since November 1995. From May 1993 until November 1995, Mr. Santora was Senior Vice President and Secretary of the Company, and from May 1993 until February 1994, Mr. Santora served as the Company's Treasurer. Mr. Santora served as a director of the Company from May 1993 until March 1996. From August 1991 to September 1992, Mr. Santora provided consulting services to the Company. CRAIG J. KESSLER was Vice President and Controller of CAI from March 1994 through June 1997. From June 1989 until joining CAI, he was a senior manager and assistant director of quality control at Urbach, Kahn, and Werlin, PC, a public accounting firm, responsible for the firm's continuing professional education, client service, and compliance with professional standards. Mr. Kessler is a certified public accountant and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants. ARTHUR C. BELANGER has been a director of the Company since March 1994. From December 1979 to 1984, Mr. Belanger served as Vice President and General Manager of GE Cablevision. GE Cablevision merged with United Artists Communications, Inc. ("UA") in 1979. In 1984, Mr. Belanger became UA's Executive Vice President and Chief Operating Officer and held that position until his retirement in January 1992. At that time, UA served approximately 3 million subscribers. Mr. Belanger is also a member of the Board of Directors of TCI Ventures Five, Inc. HAROLD A. BOUTON has been a director of the Company since September 1994. Mr. Bouton is the President and Chief Executive Officer of WTVI, Channel 42, the Public Broadcast Service ("PBS") affiliate in Charlotte, North Carolina, positions he has held since 1983. DAVID M. TALLCOTT has been a director of the Company since March 1995. Since 1990, Mr. Tallcott has been President of Lortech Corporation, a full service large mainframe commercial data center serving the insurance industry, labor unions and direct mailers. ALAN SONNENBERG has been a director of the Company since September 29, 1995. Mr. Sonnenberg served as President of CAI from September 29, 1995, when ACS was acquired by the Company, until February 23, 1996, when he became President of CS Wireless. Currently, Mr. Sonnenberg serves as Vice Chairman of CS Wireless. Previously, Mr. Sonnenberg served as Chairman of the Board of Directors of ACS and its Chief Executive Officer since 1988, and as its President since 1987. Since 1989, Mr. Sonnenberg has been a director of the Wireless Cable Association International, Inc. ROBERT D. HAPP has been a director of CAI since September 1995. Mr. Happ served as Senior Managing Partner of the New England area for KPMG Peat Marwick ("KPMG"), an accounting firm, from 1985 until his retirement in 1994. Prior to that, he served in various capacities with KPMG. Mr. Happ is also a member of the Board of Directors of Galileo Corporation. Since February 1996, Mr. Happ has served as a director of CS Wireless. SECTION 16 REPORTS. Under the securities laws of the United States, the Company's directors, its executive officers and any persons holding ten percent or more of the common stock are required to report their ownership of the Common Stock and any changes in that ownership to the Securities and Exchange Commission. Specific due dates for the reports have been established. A report for each of Messrs. Belanger, Bouton, Happ and Tallcott were not timely filed with respect to a grant of options pursuant to a Company stock option plan. In making these statements, the Company has relied on the written representations of its incumbent directors and officers and its ten percent holders and copies of the reports that they have filed with the Securities and Exchange Commission. The Company has implemented a Section 16 Reporting Compliance Program in an effort to assist the Company's directors and executive officers with their Section 16 reporting requirements. ITEM 11. EXECUTIVE COMPENSATION Executive Compensation The following table discloses three fiscal periods of compensation received by the Company's Executive Officers receiving compensation in excess of $100,000 for the year ended March 31, 1997. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION Securities NAME AND PRINCIPAL POSITION Fiscal Other Annual Underlying All Other PERIOD SALARY BONUS COMPENSATION OPTIONS COMPENSATION Jared E. Abbruzzese 1997 $350,000 $ 0 $ 0{(1)} 350,000 $ 0 Chief Executive Officer 1996 277,300 150,000 0{(1)} 0 0 1995 166,327 0 0{(1)} 525,000 0 John J. Prisco 1997 200,000 40,000 0{(1)} 150,000 0 President and Chief Operating 1996 12,308 0 0{(1)} 200,000 0 Officer(2) James P. Ashman 1997 183,000 0 0{(1)} 100,000 0 Chief Financial Officer 1996 140,100 0 0{(1)} 40,000 0 1995 54,400 0 0{(1)} 37,000 0 George M. Williams 1997 166,327 0 0{(1)} 65,000 0 Chief Administrative Officer 1996 144,000 0 0{(1)} 40,000 0 1995 124,900 0 0{(1)} 28,000 0 Timothy J. Santora 1997 170,000 0 0{(1)} 65,000 0 Executive Vice President 1996 144,500 0 0{(1)} 40,000 0 1995 112,600 0 0{(1)} 28,000 0
_____________________________ (1) Other annual compensation, including Company provided vehicle or allowances, life insurance, or membership dues, less than the lesser of 10% of total annual salary and bonus or $50,000 is not presented. (2) Mr. Prisco became President and Chief Operating Officer on March 1, 1996. COMPENSATION OF DIRECTORS Directors, other than those who are full-time employees of the Company, are paid an annual fee of $6,000 and a fee of $750 per Board meeting attended and $500 per committee meeting attended, expenses, $375 for each telephonic Board meeting attended, and $250 for each telephonic committee meeting attended, plus, in all such cases, out-of-pocket expenses. Directors who are full-time employees of the Company receive no remuneration for serving on the Board of Directors or committees. Mr. Sonnenberg receives compensation through a consulting arrangement with CAI whereby CAI will pay $75,000 per year through August 1998. CAI has entered into a deferred compensation agreement with David Tallcott, which provides that all compensation he would otherwise be paid as a director will instead be set aside in an account to be invested in such mutual funds offered by Smith Barney Inc. as Mr. Tallcott shall direct. The entire balance of the account will be paid to Mr. Tallcott when he attains age 59 1/2 , provided that CAI may elect to pay the balance in the account earlier in the event he terminates his service as director. In the event of Mr. Tallcott's death, any balance in the account will be paid to his beneficiary or estate. Upon payment of the balance in the account to Mr. Tallcott, Mr. Tallcott will recognize the amount paid as taxable income, and CAI will recognize a tax deduction in the same amount. In October 1996, the Company adopted the 1996 Outside Directors' Stock Option Plan (the "1996 Directors' Plan"). Under the 1996 Directors' Plan, options to purchase an aggregate of not more than 45,000 shares of CAI Common Stock will be granted from time to time to nonemployee directors. Each qualifying director shall be granted an option to purchase 7,500 shares at a price of fair market value on the date of the grant. Such option shall vest: 25% on the date of grant, and 25% on each of the second, third and fourth anniversaries of the grant. These options are exercisable for a period of ten years, but not before an initial six-month period. The exercise price for stock options granted under the 1996 Directors' Plan will not be less than 100% of the fair market value of the common {ITEM 11. EXECUTIVE COMPENSATION (continued) COMPENSATION OF DIRECTORS stock on the grant date. As of March 31, 1997, the Company has granted options under this plan to purchase 30,000 shares of common stock at a weighted average price of $6.63 per share. Under the Company's 1993 Outside Directors' Option Plan (the "1993 Directors' Plan") each new director who is not otherwise an employee will receive options to purchase 1,667 shares on the first anniversary of their election to the Board. Any director having received options will automatically receive an additional 1,667 options on the following two anniversaries of their initial receipt of options, provided there are sufficient shares remaining in the Directors' 1993 Plan and that they continue to be an eligible director. Options are exercisable for a period of seven years following the date of grant. The exercise price of options granted under the 1993 Directors' Plan may not be less than the greater of the fair market value on the grant date or the Company's initial public offering price of $11. During the year ended March 31, 1995, Mr. Belanger received options to purchase 1,667 shares of CAI Common Stock at an exercise price of $11 per share. During the year ended March 31, 1996, Messrs. Belanger, Bouton, and Tallcott were each granted options to purchase 1,667 shares of CAI Common Stock at an exercise price of $11 per share under the Directors' 1993 Plan. Options granted under both of the Directors' Plans are not transferable other than by will or the laws of descent and distribution. In the event the grantee ceases to be a director for any reason, each unexpired option may be exercised to the extent exercisable on the date of such cessation or at any time prior to the date specified in such option. Notwithstanding the foregoing, in the event of cessation by reason of death, each unexpired option shall become exercisable in full and may be exercised at any time during the following 12 months. If the director is terminated for cause, outstanding options shall be terminated. Options granted under both of the Directors' Plans become immediately exercisable upon the occurrence of certain events, including the death or disability of a director or certain business combinations. OPTION GRANTS IN LATEST FISCAL YEAR The following table provides information on options to purchase shares of CAI Common Stock granted during the fiscal year ended March 31, 1997 to the persons named in the Summary Compensation Table above.
Potential realizable value at % of Total assumed annual rates of Number of Options stock price appreciation Securities Granted Exercise FOR OPTION TERM Underlying to Employees Price Expiration NAME OPTIONS IN FISCAL YEAR Per SHARE DATE 5% 10% Jared E. Abbruzzese(1) 350,000 33.6% $1.75 12/17/06 $171,400 $635,700 John J. Prisco(1) 150,000 14.4% $1.75 12/17/06 73,500 272,500 James P. Ashman(1) 100,000 9.6% $1.75 12/17/06 49,000 181,600 George M. Williams(2) 65,000 6.2% $1.75 12/17/06 31,800 118,100 Timothy J. Santora(2) 65,000 6.2% $1.75 12/17/06 31,800 118,100
(1) Stock options granted to these individuals during the fiscal year ended March 31, 1997, were granted under the Company's 1993 Stock Option and Incentive Plan. These options vest in full on June 19, 1997 (six months following the date of grant), and expire and lapse on December 17, 2006. (2) Stock options granted to these individuals during the fiscal year ended March 31, 1997 were issued under the Company's 1995 Stock Option and Incentive Plan, upon the surrender of options to purchase a like number of shares of CAI Common Stock at an exercise price of $7.75 per share. These options vest in full on June 19, 1997 (six months following the date of grant), and expire and lapse on December 17, 2006. ITEM 11. EXECUTIVE COMPENSATION (continued) AGGREGATE OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information with regard to the outstanding options to purchase shares of CAI Common Stock as of the end of the fiscal year ended March 31, 1997 for the persons named in the Compensation Table above.
Number of Securities VALUE OF UNEXERCISED IN-THE- SHARES Underlying Unexercised MONEY OPTIONS AT ACQUIRED ON VALUE Options at March 31, 1997 MARCH 31, 1997(1) NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE Jared E. Abbruzzese --- $ --- 225,000 350,000 $ --- $ --- John J. Prisco --- --- 100,000 150,000 --- --- James P. Ashman --- --- 57,000 120,000 --- --- George M. Williams --- --- 51,000 65,000 --- --- Timothy J. Santora --- --- 39,000 65,000 --- ---
(1) The value of unexercised in-the- money options at March 31, 1997 is based on the difference between the March 31, 1997 closing price per share of CAI Common Stock on NASDAQ NM of $1.72 and the exercise prices of the in-the-money options. All unexercised options held by person identified above are out-of-the- money. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Messrs. Abbruzzese, Prisco, Ashman, Williams and Santora. Such agreements continue in effect until March 21, 1998, in the case of Mr. Abbruzzese; until January 3, 1998 in the case of Mr. Prisco; and until February 28, 1999 in the case of Mr. Ashman. The employment agreements are automatically renewed for successive one year terms, unless otherwise terminated. The initial term of the employment agreements for each of Mr. Santora and Mr. Williams expired on October 1, 1996. Each agreement has been renewed for a one-year term, pursuant to the provisions of each such agreement. Pursuant to his employment agreement, Mr. Abbruzzese serves as Chairman and Chief Executive Officer of the Company and is entitled to an annual base salary of $350,000. Pursuant to his employment agreement, Mr. Prisco serves as President and Chief Operating Officer of the Company and is entitled to a base salary of $200,000. Pursuant to his employment agreement, Mr. Ashman serves as Executive Vice President and Chief Financial Officer of the Company and is entitled to a base salary of $183,000. Mr. Santora serves as Executive Vice President and is entitled to an annual base salary of $170,000. Mr. Williams serves as Chief Administrative Officer and Corporate Analyst, Secretary and Treasurer and is entitled to an annual base salary of $165,000. Each of the foregoing executive officers will be entitled to an annual bonus to be determined by the Compensation Committee. Pursuant to their respective employment agreements, Messrs. Abbruzzese, Prisco, Ashman, Santora and Williams agree to devote substantially all of their working time to the business of the Company. Mr. Abbruzzese has agreed to devote not less than 75% of his working time to the Company. Mr. Williams, however, may continue to perform his duties as Treasurer of Hamilton County Cable TV, as long as such activities can be accomplished outside of his normal working time for the Company and do not otherwise interfere with his duties under his employment agreement. If their employment is terminated without cause, Messrs. Ashman, Williams and Santora will be entitled to their base salary and certain benefits for 12 months following termination of employment. Messrs. Abbruzzese and Prisco would be entitled to a severance amount equal to the greater of such executive's then- current base salary or the total base salary that would have been payable for the balance of the term of his employment in the event such executive's employment is terminated without cause. Messrs. Abbruzzese, Prisco, Ashman and Williams are subject to nondisclosure agreements with respect to the confidential information of CAI and are subject to a noncompetition provision in each of their employment agreements. Mr. Sonnenberg, President of CAI from September 29, 1995 until February 23, 1996, entered into a three-year Employment Agreement with CAI pursuant to which he became President of CAI and Chief Executive Officer of the Wireless Operating Group of CAI effective September 29, 1995. Mr. Sonnenberg also serves as a director of CAI. He served as Vice Chairman of the CAI Board of Directors from September 29, 1995 until February 23, 1996. Under Mr. Sonnenberg's employment agreement, Mr. Sonnenberg was entitled to receive a base salary of $275,000 per year, received options to purchase 300,000 shares of CAI Common Stock at an exercise price of $11.00 per share and received a signing bonus of $500,000 upon execution of such agreement. Upon the closing of the transactions contemplated by the Participation Agreement, Mr. Sonnenberg entered into a Termination Agreement with the Company pursuant to which his employment agreement was terminated, he surrendered options to purchase 300,000 shares of CAI Common Stock, and agreed to certain noncompetition provisions similar to those imposed upon Mr. Prisco. The Company also entered into a Consulting Agreement with Mr. Sonnenberg pursuant to which he agreed to provide CAI with certain consulting services for a thirty- month period beginning on February 23, 1996 for an annual fee of $75,000. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of May 21, 1997 (i) each stockholder who based on public filings, is known to the Company to be the beneficial owner of more than 5% of the outstanding shares of CAI Common Stock, (ii) each Director and Executive Officer and (iii) all Directors and Executive Officers of CAI as a group:
NEFICIAL OWNERSHIP Percentage of Outstanding NUMBER OF SHARES SHARES BANX Partnership 36,751,085(1) 47.9% 3900 Washington Street Wilmington, DE 19802 Jared E. Abbruzzese 1,757,552(2) 4.3% John J. Prisco 255,000(3) * James P. Ashman 281,094(4) * George M. Williams 231,000(5) * Timothy J. Santora 152,200(6) * Craig J. Kessler 67,000(7) * Arthur C. Belanger 6,875(8) * Harold A. Bouton 3,789(9) * Robert D. Happ 1,875(10) * Alan Sonnenberg 599,227(11) 1.5% David M. Tallcott 8,042(12) * All directors and officers as a group (11 persons) 3,363,654 8.0%
_______________________________ * less than 1% (1) Consists of 36,751,083 shares issuable upon the exercise of warrants to purchase Common Stock, the conversion of the Company's senior preferred stock, the exercise of warrants to purchase voting preferred stock and upon conversion of such voting preferred stock to Common Stock. The general partners of BANX Partnership are MMDS Holdings, Inc. and NYNEX MMDS Holding Company, which are subsidiaries of Bell Atlantic Corporation and NYNEX Corporation, respectively. The address of MMDS Holdings and Bell Atlantic Corporation is 1717 Arch Street, Philadelphia, PA 19103, and the address of NYNEX MMDS Holding and NYNEX Corporation is 1113 Westchester Avenue, White Plains, NY 10604. (2) Includes 176,000 shares held by relatives over which shares Jared E. Abbruzzese retains voting control, 575,000 shares issuable upon exercise of options exercisable currently or within 60 days of May 21, 1997, and 20,000 shares held by The Corotoman Foundation, Inc., of which Jared E. Abbruzzese is a director and over which shares he retains voting control. (3) Includes 250,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (4) Includes 157,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (5) Includes 116,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (6) Includes 104,000 shares issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997, and 1,500 shares given to relatives over which shares Mr. Santora retains voting control. (7) Shares are issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (8) Shares are issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (9) Includes 127 shares held by an immediate family member and 3,542 shares issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (10) Shares are issuable upon the exercise of options exercisable currently or within 60 days of May 21, 1997. (11) Includes 33,000 shares held by the Sonnenberg Foundation over which shares Mr. Sonnenberg retains voting control and 98 shares held by an immediate family member. (12) Includes 1,000 shares held by Lortech Corporation over which shares Mr. Tallcott retains voting control and 3,542 shares issuable upon exercise of options exercisable currently or within 60 days of May 21, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE BANX TRANSACTIONS. Reference is hereby made to Item 1. Business - Current Relationship with Bell Atlantic and NYNEX; and - Background - BANX TRANSACTIONS for a description of the relationship among the Company, and affiliates of Bell Atlantic and NYNEX. OTHER. On May 8, 1995 CAI sold, subject to an option to repurchase exercisable at any time prior to January 1, 1996, all of the issued and outstanding stock of TelQuest, Inc. ("TelQuest") (with a negative net book value of approximately $70,000) to Wave Holdings, L.L.C., a Delaware limited liability company controlled by Jared E. Abbruzzese, CAI's Chairman and Chief Executive Officer, for $25,000. The gain on this sale of approximately $23,000 was deferred and was not included in income. TelQuest's involvement in certain operations could have, at that time, violated the Modified Final Judgment, if engaged in by an RBOC or an affiliated enterprise. In May 1996, CAI relinquished its option to repurchase TelQuest for a 2% equity interest in TelQuest Systems, Inc., the operating successor of TelQuest's business. In consideration of Mr. Abbruzzese guaranteeing the obligation of CAI to MMDS Holdings, an affiliate of Bell Atlantic, which permitted CAI to complete the Microband acquisition in January 1995, the CAI Board of Directors awarded options to acquire 150,000 shares of CAI Common Stock at $11.00 per share to Mr. Abbruzzese. In October 1996, two of CAI's officers formed a company, Telecom Service Support LLC ("TSS"), to provide subscriber installation, service calls, and warehouse service to the subscription television industry. CAI incurred approximately $348,000 for such services during the year ended March 31, 1997. Additionally, CAI has advanced $80,000, provided leased vehicles, and provided certain facility space to TSS. Additionally, CAI periodically charters an airplane owned by Wave Air, Inc., which is primarily owned by Mr. Abbruzzese, in order to carry out business when airline schedules are not compatible. Transactions with Wave Air, Inc. amounted to approximately $278,000 for the year ended March 31, 1997. During the year ended March 31, 1997, CAI loaned $800,000 to Haig Capital LLC and $200,000 to TelQuest Communications, Inc., entities in which Mr. Abbruzzese is a principal member and stockholder, respectively, of which approximately $175,000 was repaid by Haig Capital. In March 1997, Mr. Abbruzzese combined a $19,000 February 1997 loan from CAI, the remaining obligation of Haig Capital, accrued interest on both loans, and an additional $100,000 advance in April 1997 (subsequent to year-end) into one personal unsecured, demand obligation in the amount of $780,054, bearing interest at 14% per annum. In March 1997, CAI separately purchased certain used equipment for the Boston Project from Haig Capital L.L.C. for $107,000. The loan to TelQuest Communications, Inc. is evidenced by a promissory note in the principal amount of $200,000, bears interest at 14%, and matures in March 2000. The note is convertible into TelQuest Communications, Inc. common stock at the election of CAI. The Company is currently negotiating the terms of a joint venture with TelQuest Communications and CS Wireless, pursuant to which the Company will be obligated to invest $2.5 million in cash and purchase $2.5 million of equipment in exchange for an initial equity interest in the joint venture of 25%. The original $200,000 loan to TelQuest Communications will be contributed to the joint venture, and CAI will receive a credit for the principal and accrued interest on such amount against the cash portion of its joint venture investment obligation. Interest earned on related party loans approximated $63,400 for the year ended March 31, 1997. During April 1997, CAI sold approximately $2,112,000 of equipment at book value from the Boston Project that was not needed to CS Wireless for 20% down and the balance due in 30 days after delivery. Additionally, during April 1997, CAI placed purchase orders approximating $1,612,000 with CS Wireless for equipment needed for the Boston Project, taking advantage of CS Wireless' favorable pricing arrangements with its vendor. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules The financial statements listed in the accompanying index to financial statements and schedules are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated November 25, 1996 (filed January 3, 1997), that reported the following events under Item 5: (A) "CAI" entered into a Modification Agreement dated December 12, 1996 with affiliates of Bell Atlantic Corporation and NYNEX Corporation. The Modification Agreement suspends the Business Relationship Agreement among the parties for one year and gives CAI or its designee an option to purchase the $100 million RBOC investment in CAI; (B) CAI has recently announced that it has retained J.P. Morgan Securities Inc. and Smith Barney Inc. to act as financial advisors to CAI in connection with exploring strategic alternatives for the Company; (C) The following news releases were issued by the Company: (i) CAI WIRELESS SYSTEMS, INC. RESPONDS TO CLASS ACTION LAWSUIT, issued on November 25, 1996 (See Exhibit 99.1), (ii) CAI WIRELESS SYSTEMS, INC. RESPONDS TO RECENT NEWS, issued on December 6, 1996 (See Exhibit 99.2), (iii) CAI WIRELESS SYSTEMS, INC. RECEIVES FIRST FCC MARKET TRIAL APPROVAL TO USE WIRELESS CABLE SPECTRUM FOR TWO-WAY SERVICES, issued on December 16, 1996 (See Exhibit 99.3); and (D) CAI has been named in a class action lawsuit alleging various violations of the federal securities laws filed in the United State District Court for the Northern District of New York. The Company filed a Current Report on Form 8-K dated January 31, 1997 (filed February 7, 1997), that reported under Item 5 that the following news releases were issued: CAI WIRELESS SYSTEMS AND ADC TELECOMMUNICATIONS ANNOUNCE PLANS TO JOINTLY DESIGN AND IMPLEMENT TWO-WAY WIRELESS SERVICES on February 3, 1997 (see Exhibit 99.1); CAI WIRELESS RECEIVES THE FIRST PERMANENT APPROVAL FROM THE FCC TO USE WIRELESS CABLE SPECTRUM FOR TWO-WAY SERVICES on January 31, 1997 (see Exhibit 99.2); CAI WIRELESS SYSTEMS TO RELOCATE FROM ALBANY TO PHILADELPHIA on January 31, 1997. The Company filed a Current Report on Form 8-K dated March 6, 1997 (filed March 12, 1997) that reported under Item 5 the following news release: CAI WIRELESS SYSTEMS, INC. SIGNS LETTER OF INTENT FOR INTERIM FINANCING (see Exhibit 99.1). The Company filed a Current Report on Form 8-K dated March 17, 1997 (filed June 27, 1997) that reported the following events under Item 5: (A) CAI Entered Into Amendement No. 1 To The Affiliates Of Bell Atlantic Corporation And NYNEX Corporation on April 29, 1997; (B) CAI Closed A $30 Million Interim Credit Facility Provided By The "Interim Debt Lenders" on June 6, 1997; (C) the following news releases were issued: (1) CAI WIRELESS FILES FOR FCC APPROVAL TO TEST TWO-WAY WIRELESS SERVICES IN PITTSBURGH on March 17, 1997 (see Exhibit 99.1); (2) CAI WIRELESS FILES FOR AUTHORITY TO PROVIDE TELEPHONE SERVICE IN NEW YORK STATE on March 19, 1997 (see Exhibit 99.2); (3) CAI WIRELESS RECEIVES FCC APPROVAL TO TEST FIXED TWO-WAY WIRELESS SERVICES IN PITTSBURGH on April 2, 1997 (see Exhibit 99.3); (4) CAI RENEGOTIATES TERMS WITH RBOCS ON SECURITIES REPURCHASE OPTION on April 30, 1997 (see exhibit 99.4); and (5) CAI WIRELESS CLOSES INTERIM FINANCING on June 6, 1997 (see Exhibit 99.5). (c) Exhibits See index to exhibits filed as part of this Annual Report on Form 10-K. (d) Schedules Schedules, specified under Regulation S-X, are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements submitted. In accordance with Rule 3-09(a), separate financial statements of CS Wireless are not required to be filed. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Page No. IN FORM 10-K FINANCIAL STATEMENTS Reports of Independent Accountants 33 Consolidated Balance Sheets - March 31, 1997 and 1996 35 Consolidated Statements of Operations - Years Ended March 31, 1997, 1996, and 1995 36 Consolidated Statements of Shareholders' Equity - Years Ended March 31, 1997, 1996, and 1995 37 Consolidated Statements of Cash Flows - Years Ended March 31, 1997, 1996, and 1995 38 Notes to Consolidated Financial Statements 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, CAI Wireless Systems, Inc. has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized. CAI WIRELESS SYSTEMS, INC. (Registrant) BY: /S/ JARED E. ABBRUZZESE Jared E. Abbruzzese,Chairman, Date: JUNE 30, 1997 Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of CAI Wireless Systems, Inc. and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /S/ JARED E. ABBRUZZESE Chairman, Chief Executive Officer June 30, 1997 Jared E. Abbruzzese and Director (Principal Executive Officer) /S/ JOHN J. PRISCO President, Chief Operating Officer June 30, 1997 John J. Prisco and Director /S/ JAMES P. ASHMAN Executive Vice President, Chief June 30, 1997 James P. Ashman Financial Officer and Director (Principal Financial Officer) /S/ GEORGE M. WILLIAMS Chief Administrative Officer, June 30, 1997 George M. Williams Secretary, Treasurer and Director /S/ CRAIG J. KESSLER Vice President and Controller June 30, 1997 Craig J. Kessler (Principal Accounting Officer) /S/ ARTHUR C. BELANGER Director June 30,1997 Arthur C. Belanger
SIGNATURES (continued)
SIGNATURE TITLE DATE /S/ HAROLD A. BOUTON Director June 30, 1997 Harold A. Bouton /S/ DAVID M. TALLCOTT Director June 30, 1997 David M. Tallcott /S/ ROBERT D. HAPP Director June 30, 1997 Robert D. Happ
Director June , 1997 Alan Sonnenberg
INDEX TO EXHIBITS
Incorporation by Reference (SEE PAGE EXHIBIT NO. DESCRIPTION LEGEND) NO. 2.1 Asset Purchase Agreement-New York System 5-Exhibit 2 2.2 Bott Acquisition Agreement 2-Exhibit 2 2.3 Agreement and Plan of Merger, as amended, by and among 7-Exhibit 2.1 CAI, CAI Merger Sub and ACS 2.4 Agreement and Plan of Merger by and among CAI, ECN 7-Exhibit 2.2 and ECNW dated as of March 28, 1995 2.5 Asset Purchase Agreement by and among CAI, ECN and 7-Exhibit 2.3 ECNMII dated as of March 28, 1995 2.6 Option Agreement dated March 28, 1996 7-Exhibit 2.4 2.7 Purchase Agreement by and between CAI and WCTV 7-Exhibit 2.5 dated as of March 28, 1995 2.8 Purchase Agreement by and between CAI and AWS dated 7-Exhibit 2.6 as of March 28, 1995 2.9 Agreement and Plan of Merger by and among CAI, HRW 7-Exhibit 2.7 and the Minority Shareholders named therein, dated as of March 28, 1995 2.10 Participation Agreement among Heartland Wireless 9-Exhibit 2.1 Communications, Inc., CAI Wireless Systems, Inc. and CS Wireless Systems, Inc. dated as of December 12, 1995. 2.11 Amendment No. 1 to Participation Agreement among 12-Exhibit 2.2 Heartland Wireless Communications, Inc., CAI Wireless Systems, Inc., and CS Wireless Systems, Inc. dated as of December 12, 1995. 3.1 Amended and Restated Certificate of Incorporation 9-Exhibit 3.1 of CAI 3.2 Amended and Restated Bylaws of CAI 9-Exhibit 3.2 4.1 Form of Indenture for Senior Notes 6-Exhibit 4.1 4.2 First Supplemental Indenture 11-Exhibit 4.1 4.3 Form of Escrow Agreement among CAI and Chemical Bank 6-Exhibit 4.30 4.4 Subordinated Unsecured Promissory Note dated August 1-Exhibit 4.7 31, 1993 by and between CAI and Hope E. Carter 4.5 Promissory Note-Bott Family Trust 2-Exhibit 4.1 4.6 Guaranty and Security Agreement-Bott Family Trust 2-Exhibit 4.2 4.7 Promissory Note-Bott 2-Exhibit 4.3 4.8 Guaranty and Security Agreement-Bott 2-Exhibit 4.4 4.9 Term Note due May 9, 2005 in the principal amount 16-Exhibit 4.9 of $15.0 million issued to MMDS Holdings II, Inc. 4.10 Term Note due May 9, 2005 in the principal amount 16-Exhibit 4.10 of $15.0 million issued to NYNEX Holding Company 10.1 1993 Stock Option and Incentive Plan 1-Exhibit 10.1, 3 10.2 Form of 1993 Incentive Stock Option Agreement 1-Exhibit 10.2, 3 10.3 Form of 1993 Non-Qualified Stock Option Agreement 1-Exhibit 10.3, 3 10.4 Outside Director's Stock Option Plan 1-Exhibit 10.4, 3 10.5 Form of Outside Director's Stock Option Agreement 1-Exhibit 10.5, 3 10.6 Employment Agreement dated March 21, 1996 by and 16-Exhibit 10.6 between Jared E. Abbruzzese and CAI 10.7 Letter Agreement dated October 13, 1993 by and 1-Exhibit 10.10 between Hampton Roads Wireless, Inc. and CAI 10.8 Employment Agreement dated October 1, 1993 by and 1-Exhibit 10.9, 3 between George M. Williams and CAI and Amendment to Employment Agreement dated December 15, 1993 10.9 Master Sublease dated June 19, 1993 by and between 1-Exhibit 10.11 Tri-Mark Communications, Ltd. and George Bott 10.10 Agreement between CAI and SNET 1-Exhibit 10.14 10.11 Consulting Agreement dated May 15, 1993 between 1-Exhibit 10.7 Jared E. Abbruzzese and CAI
INDEX TO EXHIBITS (CONTINUED) INCORPORATION Exhibit NO. by Reference (SEE PAGE DESCRIPTION LEGEND) NO. 10.12 Business Relationship Agreement among CAI, its Subsidiaries 7-Exhibit 10.13 and BANX Affiliate dated as of March 28, 1995, as amended by Amendment Agreement No. 1 10.13 Securities Purchase Agreement dated as of March 28, 1995 4-Exhibit 2 among CAI, its Subsidiaries and BANX Partnership, including forms of Stage I and Stage II Warrants 10.14 Stage I Warrant 8-Exhibit 4.19 10.15 Stage II Warrant 16-Exhibit 10.15 10.16 1995 Incentive Stock Plan 16-Exhibit 10.16 10.17 Consulting and Employment Agreement dated as of January 1, 16-Exhibit 10.17 1996 between the Company and John Prisco 10.18 Termination Agreement dated February 23, 1996 between CAI 16-Exhibit 10.18 and Alan Sonnenberg 10.19 Consulting Agreement dated February 23, 1996 between the 16-Exhibit 10.19 Company and Alan Sonnenberg 10.21 Form of Representative's Warrant Agreement with Form of 1-Exhibit 4.3 Warrant Certificate attached thereto 10.22 Warrant Agreement dated August 30, 1993 between CAI and 1-Exhibit 4.13 Richard McKenzie 10.23 Warrant Agreement dated August 30, 1993 between CAI and Phil 1-Exhibit 4.14 Hempleman 10.24 Warrant Agreement dated September 10, 1993 between CAI and 1-Exhibit 4.15 John Oppenheimer 10.25 Warrant Agreement dated August 30, 1993 between CAI and Marc 1-Exhibit 4.16 Howard 10.26 Warrant Agreement dated September 10, 1993 between CAI and 1-Exhibit 4.17 Les Alexander 10.27 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.26 Phil Hempleman 10.28 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.27 Marc Howard 10.29 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.28 Richard McKenzie 10.30 Warrant Agreement dated November 9, 1993 between CAI and 1-Exhibit 4.29 John Oppenheimer 10.31 Warrant Agreement dated November 9, 1993 between CAI and Les 1-Exhibit 4.30 Alexander 10.32 Modification Agreement dated December 12, 1996, among the 14-Exhibit 10. registrant and various affiliates of Bell Atlantic Corporation and NYNEX Corporation 10.33 1996 Outside Directors' Stock Option Plan 15-Appendix A 10.34 Amendment No.1 to the Modification Agreement dated April 17-Exhibit 99.7 29, 1997 among the registrant and various affiliates of Bell Atlantic Corporation and NYNEX Corporation 10.35 Employment Agreement dated as of February 29, 1997 between 17-Exhibit 99.6 the registrant and James P. Ashman 10.36 Loan and Security Agreement dated as of May 16, 1997 by and 17-Exhibit 99.9 among registrant and certain of its subsidiaries, Foothill Capital Corporation, as agent, and the financial institutions listed therein (confidential treatment of certain portions of this exhibit has been requested) 10.37 Release and Agreement dated as of April 29, 1997 among 17-Exhibit 99.8 registrant and various affiliates of Bell Atlantic Corporation and NYNEX Corporation 11.1 Schedule Regarding Computation of Loss Per Common Share 11.2 Schedule Regarding Computation of Fully Diluted Loss Per Common Share 12. Statements re Computation of Ratios 13 21. Subsidiaries of the Registrant 23.1 Consent of Coopers & Lybrand L.L.P. 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 Management contract or compensation plan or arrangement. 4 Incorporated by reference to the exhibits to the Schedule 13D of BANX Partnership dated March 29, 1995, filed with the Commission on April 10, 1995. 5 Incorporated by reference to the exhibit to the Current Report on Form 8-K dated January 9, 1995 (No. 0-22888). 6 Incorporated by reference to the exhibits to the Registration Statement on Form S- 1 (No. 33-93062). 7 Incorporated by reference to the exhibits to the Registration Statement on Form S- 4 (No. 33-94222). 8 Incorporated by reference to the exhibits to the Annual Report on Form 10-K for March 31, 1995 9 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for September 30, 1995. 10 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated December 12, 1995. 11 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for December 31, 1995 (No. 0-22888). 12 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated February 23, 1996 (No. 0-22888). 13 The information is not included because the ratio is less than 1 and the earnings deficiency is included in the Selected Financial Data of CAI. 14 Incorporated by reference to the exhibits to the Quarterly Report on Form 10-Q for December 31, 1996. 15 Incorporated by reference to the registrant's Proxy Statement dated September 18, 1996. 16 Incorporated by reference to the exhibits to the Annual Report on Form 10-K for March 31, 1996. 17 Incorporated by reference to the exhibits to the Current Report on Form 8-K dated June 27, 1997. Filed herewith.
EX-1 2 EXHIBIT 11.1 CAI WIRELESS SYSTEMS, INC. LOSS PER SHARE COMPUTATION
Year Ended Year Ended Year Ended March 31, March 31, March 31, 1997 1996 1995 Net loss $(82,298,207) $ (40,985,572) $(14,106,837) Preferred stock dividend (13,011,270) ( 5,878,960) (328,011) Loss applicable to common stock shareholders $(95,309,477) $ (46,864,532) $(14,434,848) Weighted average number of shares 40,069,258 27,075,578 15,456,540 outstanding Loss per share $ (2.38) $ (1.73) $ (0.93)
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Weighted Shares COMMON STOCK TRANSACTIONS SHARES OUTSTANDING For the year ended March 31, 1995 Beginning Balance 15,410,000 15,410,000 Warrants exercised 74,000 29,417 Series A Preferred Stock}(1)(2){ 1,640,909 0 Series B Preferred Stock}(3){ 271,739 17,123 Warrants}(1){ 2,020,578 0 Options}(1){ 956,500 0 15,456,540 For the year ended March 31, 1996 Beginning Balance 15,754,018 15,754,018 Common stock sold 179,765 174,824 Common stock issued to acquire 49% minority interest in Hampton Roads Wireless, Inc. 652,523 467,107 Common stock issued in ACS Merger 19,362,611 9,734,209 Common stock issued in ECNW Merger 1,880,565 945,420 Series A Preferred Stock}(1)(2){ 2,546,198 0 Warrants}(1){ 2,310,541 0 Options}(1){ 1,274,134 0 27,075,578 For the year ended March 31, 1997 Beginning Balance 37,829,482 37,829,482 Series A Preferred Stock converted to common stock 2,637,742 2,178,513 Warrants exercised 73,315 61,263 Warrants - BANX 36,751,085 0 Warrants-other 2,852,453 0 Options 2,195,937 0 40,069,258
EX-2 3 EXHIBIT 11.1 COMPUTATION OF WEIGHTED SHARES OUTSTANDING (CONTINUED) } (1) {For the periods subsequent to the public offering, outstanding convertible preferred stock, warrants and options are not considered for the purposes of calculating the weighted shares outstanding since these securities are anti- dilutive. }(2){ The Series A 8% Redeemable Convertible Preferred Stock of 180,500 shares would be converted at a minimum into 1,640,909 Common Shares assuming the maximum conversion price of $11 per share as of March 31, 1995. As of March 31, 1996, 2,546,198 shares are assumed based on actual shares issued upon conversion subsequent to March 31, 1996, and $9.00 per share for those preferred shares not converted. As of March 31, 1997, all of the Series A Preferred Stock was converted into a total of 2,637,742 shares of CAI Common Stock. }(3){ The Series B 6% Redeemable Convertible Preferred Stock of 20,000 shares was converted into 271,739 Common Shares in April 1995 which is reflected as being issued on March 8, 1995, the date of issuance of the Series B Preferred Stock. } { EXHIBIT 11.2 CAI WIRELESS SYSTEMS, INC. COMPUTATION OF FULLY DILUTED LOSS PER COMMON SHARE
Year ended Year ended MARCH 31, 1996 MARCH 31, 1997 Loss applicable to common stock shareholders $ (46,864,532) $ (95,309,477) Less: Preferred stock dividends 5,878,960 13,011,270 Net loss used to calculate fully diluted loss per common share, before adjustments (40,985,572) (82,298,207) LESS: ADJUSTMENTS: Interest expense on term notes assumed to be converted, net of deferred tax effect 2,432,557 3,431,000 Interest expense reduction resulting from the assumed proceeds from exercise of warrants and options in excess of the 20% buyback applied against short and long term debt, net of deferred tax effect. * 5,574,056 6,331,000 Adjusted net loss $(32,978,959) $(72,496,207) Weighted average common and equivalent shares outstanding as of March 31, 1996 and 1997 27,075,578 40,069,258 ADD SHARES ASSUMING CONVERSION OF:} Warrants ** 2,310,541 2,852,453 Options ** 1,274,134 2,195,937 Series A preferred stock (Converted as of March 2,546,158 0 31, 1997) Treasury stock repurchase with proceeds ** (3,075,454) (8,108,108) Total before BANX 30,130,957 37,009,540 Assumed conversion of Term Note and Senior Preferred Stock - BANX (collectively 45%)** 36,751,083 36,751,085 Less shares assumed repurchased, with proceeds applicable to above ** Treasury stock repurchase 20% limit 7,565,896 Less amount used above (3,075,454) (4,490,442) 0 BANX shares for a full year 32,260,641 0 BANX shares outstanding for 184/366 days 16,218,464 0 Weighted average number of shares used to 73,760,625 compute fully diluted loss per share 46,349,421 WEIGHTED AVERAGE FULLY DILUTED LOSS PER SHARE $ (0.71) $ (0.98)
* Interest expense reduction resulting from excess proceeds (over 20% treasury stock purchase) used to reduce debt is limited to interest calculated at 12 1/4 % per annum, of excess proceeds. ** Treasury stock method used on options and warrants to the extent of their proceeds and then to the 20% limit on BANX. This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti- dilutive result. EX-3 4 EXHIBIT 21 CAI WIRELESS SYSTEMS, INC. LIST OF SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME UNDER WHICH SUBSIDIARY STATE OF CONDUCTS BUSINESS INCORPORATION Greater Albany Wireless Systems, Inc. Capital Choice Television New York Rochester Choice Television, Inc. Delaware Hampton Roads Wireless, Inc. Delaware Eastern New England TV, Inc. Delaware Connecticut Choice Television, Inc. Connecticut Commonwealth Choice Television, Inc. Delaware Atlantic Microsystems, Inc. Delaware Housatonic Wireless, Inc. New York New York Choice Television, Inc. Wireless Cable of New York New York Niskayuna Associates, Inc. Delaware Onteo Associates, Inc. New York Washington Choice Television, Inc. Atlantic Wireless Delaware CAI CT Holdings Corp. Delaware CAI Developments, Inc. Delaware CAI/AMI Spectrum Management, Inc. Delaware Philadelphia Choice Television, Inc. Popvision Delaware ACS License, Inc. Pennsylvania Onondaga Wireless, Inc. New York Chenango Associates, Inc. New York AMI Boston, Inc. Delaware CAI Data Systems, Inc. Delaware CAI Wireless Internet, Inc. Delaware Springfield License, Inc. Delaware Springfield Choice Television, Inc. Delaware
_______________ EX-4 5 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of CAI Wireless Systems, Inc. on Form S-8 (File No. 0-22888) of our report, which includes an explanatory paragraph regarding substantial doubt about the ability of the Company to continue as a going concern, dated June 26, 1997, on our audits of the consolidated financial statements of CAI Wireless Systems, Inc. as of March 31, 1997 and 1996, and for the years ended March 31, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND LLP Albany, New York June 26, 1997 EX-5 6 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors CAI Wireless Systems, Inc. We consent to the incorporation by reference in the registration statement (No. 0-22888) on Form S-8 of CAI Wireless Systems, Inc. of our report dated March 21, 1997, relating to the consolidated balance sheet of CS Wireless Systems, Inc. and subsidiaries as of December 31, 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, which report appears in the March 31, 1997 Annual Report on Form 10-K of CAI Wireless Systems, Inc. KPMG Peat Marwick LLP Dallas, Texas June 26, 1997 EX-27 7
5 This schedule contains summary financial information extracted from the March 31, 1997 financial statements contained in this Form 10-K as is qualified in its entirety by reference to such financial statements. YEAR MAR-31-1997 MAR-31-1997 10,471,918 0 1,447,085 751,378 0 0 98,534,409 28,767,392 542,339,515 0 311,786,596 87,820,734 0 275,769,414 (161,079,224) 542,339,515 0 36,326,816 0 30,966,463 17,600,000 1,968,726 40,805,791 (97,298,207) (15,000,000) (82,298,207) 0 0 0 (82,298,207) (2.38) 0
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