-----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, Fdu4Ln7Jca28bQk6BzfaBI0eeduDkv2m3g6Nv1OOPre8hwNa0UgTnnJ4shFbECtV hjKjeLIFzyCuJFnVzZxmsw== 0000914749-99-000017.txt : 19990630 0000914749-99-000017.hdr.sgml : 19990630 ACCESSION NUMBER: 0000914749-99-000017 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990629 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-Q/A SEC ACT: SEC FILE NUMBER: 033-71662 FILM NUMBER: 99654620 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-Q/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended DECEMBER 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number: 0-22888 CAI WIRELESS SYSTEMS, INC. (Exact name of registrant as specified in its charter)
Connecticut 06-1324691 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
18 Corporate Woods Boulevard, Albany, New York 12211 (Address and zip code of principal executive offices) (518) 462-2632 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No _____ Number of shares outstanding of each of registrant's class of common stock at June 22, 1999: CLASS OUTSTANDING SHARES Common Stock, $.01 par value 17,241,379 PART I. FINANCIAL INFORMATION. THIS QUARTERLY REPORT ON FORM 10-Q/A AMENDS CAI WIRELESS SYSTEMS, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998. THE FINANCIALS AND NOTES THERETO HAVE BEEN ADJUSTED HEREIN FOR (A) THE COMPANY'S REVISION TO THE MARCH 31, 1998 FINANCIAL STATEMENTS TO REFLECT FINANCIAL RESTRUCTURING FEES WHICH RELATE TO A SUBSEQUENT PERIOD BUT WHICH ARE IMMATERIAL, (B) THE REVERSAL OF CONTRACTURAL INTEREST IN THE AMOUNT OF $4,956,347 FOR THE PERIOD FROM JULY 30, 1998, THE DATE OF THE COMPANY'S VOLUNTARY FILING OF A CHAPTER 11 BANKRUPTCY PETITION THROUGH OCTOBER 14, 1998, THE DATE OF THE BANKRUPTCY CONSUMMATION, IN ACCORDANCE WITH SOP 90-7 SINCE CONTRACTUAL INTEREST IS AN UNSECURED, UNALLOWED CLAIM IN THE BANKRUPTCY PROCEEDING, AND (C) THE APPLICATION OF FRESH-START ACCOUNTING IN ACCORDANCE WITH SOP 90-7. ACCORDINGLY, THROUGHOUT THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND THE FINANCIAL STATEMENTS TO WHICH THE NOTES ARE ATTACHED, USE OF THE TERM "PREDECESSOR ENTITY" REFERS TO CAI AND ITS SUBSIDIARIES PRIOR TO OCTOBER 15, 1998. A VERTICAL BLACK LINE HAS BEEN INSERTED IN THE CONSOLIDATED FINANCIAL STATEMENTS TO SEPARATE THE REORGANIZED COMPANY AND THE PREDECESSOR ENTITY SINCE THEY HAVE NOT BEEN PREPARED ON A CONSISTENT BASIS OF ACCOUNT. FURTHER, THE EMERGENCE FROM CHAPTER 11 PROCEEDING RESULTED IN THE ADJUSTMENTS TO REFLECT THE CREATION OF A NEW REPORTING ENTITY WITHOUT ANY ACCUMULATED DEFICIT AND WITH CAI'S ASSETS AND LIABILITIES RESTATED TO THEIR ESTIMATED FAIR VALUE. ITEM 1. FINANCIAL STATEMENTS. CAI WIRELESS SYSTEMS, INC. Consolidated Balance Sheets
Reorganized Company | Predecessor Entity DECEMBER 31, 1998(a) | MARCH 31, 1998 -------------------- | -------------- (Unaudited) | | | ASSETS | Cash and cash equivalents $ 1,785,185 | $ 1,275,020 Restricted cash and cash equivalents 19,293,330 | 9,134,651 Debt service escrow - | 16,418,922 Subscriber accounts receivable, net 456,768 | 387,144 Prepaid expenses 606,863 | 661,669 Property and equipment, net 38,505,017 | 49,898,337 Wireless channel rights, net 201,321,434 | 194,050,792 Investment in CS Wireless Systems, Inc. - | 43,337,527 Investment in TelQuest Satellite Services LLC 293,240 | 3,174,732 Goodwill, net of accumulated amortization - | 22,985,876 Debt financing costs, net 3,852,083 | 7,079,424 Reorganization value in excess of amounts allocable | to identifiable assets, net 37,161,629 | - Other assets 2,565,313 | 3,061,780 ------------ | ------------ Total Assets $ 305,840,862 | $ 351,465,874 ============= | ============= | LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | LIABILITIES | Accounts payable $ 2,148,548 | $ 4,852,091 Accrued expenses 10,094,731 | 8,094,763 Wireless channel rights obligations 2,825,225 | 4,832,971 Interim debt financing 63,780,761 | 45,000,000 Notes payable 106,456,285 | 312,088,506 ------------ | ----------- 185,305,550 | 374,868,331 ------------ | ----------- | COMMITMENTS AND CONTINGENCIES | | SHAREHOLDERS' EQUITY (DEFICIT) | Preferred stock, no shares outstanding - | - Common stock: | 40,543,039 no par value shares outstanding as of | March 31,1998; canceled as of October 14, 1998 - | 275,770,764 17,241,379 new $.01 par value shares issued and | outstanding as of December 31, 1998 172,414 | - Additional paid-in capital 137,718,131 | 101,711,759 Accumulated deficit (b) (17,355,233) | (400,884,980) ------------ | ------------ 120,535,312 | (23,402,457) ------------ | ----------- | Total Liabilities and Shareholders' Equity (Deficit) $305,840,862 | $351,465,874 ============ ============
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated financial statements. (b) Accumulated deficit of $415,434,847, net of a $85,355,624 extraordinary gain from the extinguishment of debt in the reorganization, was eliminated as of October 14, 1998. The accumulated deficit shown at December 31, 1998 is for the period from October 15, 1998 to December 31, 1998. See notes to consolidated financial statements.
CAI WIRELESS SYSTEMS, INC. Consolidated Statements of Operations (unaudited)
REORGANIZED COMPANY | PREDECESSOR ENTITY --------------------- | ------------------------------------------ Period from | Period from October 15, 1998 to | April 1, 1998 to Nine Months Ended December 31, 1998(a) | October 14, 1998(c) December 31, 1997 -------------------- | ------------------- ------------------ | Revenues $ 3,490,526 | $ 11,481,498 $ 21,977,384 ------------ | ----------- ------------ Costs and expenses: | Programming and licensing 2,761,446 | 8,099,445 10,973,934 General and administrative 3,905,633 | 11,660,357 23,115,093 Depreciation and amortization 6,943,667 | 14,663,560 26,152,839 ------------ | ------------ ------------ 13,610,746 | 34,423,362 60,241,866 ------------ | ------------ ------------ | Operating loss (10,120,220) | (22,941,864) (38,264,482) ------------ | ------------ ------------ | Other income (expense): | Interest expense (6,611,422) | (18,243,038) (40,128,505) Equity in losses of affiliates (735,053) | (45,483,966) (23,118,008) Reorganization expense - | (17,101,383) - Interest and other income 111,462 | 3,864,780 2,974,426 ----------- | ------------ ------------ (7,235,013) | (76,963,607) (60,272,087) ----------- | ------------ ------------ | Loss before extraordinary item (17,355,233) | (99,905,471) (98,536,569) | Extraordinary gain from early | extinguishment of debt - | 85,355,624 - ----------- | ------------ ------------ | Net loss (17,355,233) | (14,549,847) (98,536,569) | Preferred stock dividends - | - (11,125,453) ------------ | ------------ ------------ | Net loss applicable to | common shareholders $ (17,355,233) | $ (14,549,847) $(109,662,022) ============ | ============ ============ | Basic and diluted loss per new | common share(b) $ (1.01) | ======== | Weighted average new common | shares outstanding 17,241,379 | =========== |
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated financial statements. (b) Share data for the pre-reorganization periods are not presented as the amounts are not meaningful. (c) Contractual interest of $4,956,347 was not recorded for the period July 30, 1998, the date CAI voluntarily filed its Chapter 11 bankruptcy petition, through October 14, 1998, the date of the bankruptcy consummation, in accordance with SOP 90-7 since contractual interest was an unsecured unallowed claim in the bankruptcy proceeding. See notes to consolidated financial statements
CAI WIRELESS SYSTEMS, INC. Consolidated Statements of Operations (unaudited)
REORGANIZED COMPANY | PREDECESSOR ENTITY --------------------- | ------------------------------------------ Period from | Period from October 15, 1998 to | October 1, 1998 to Three Months Ended December 31, 1998(a) | October 14, 1998(c) December 31, 1997 -------------------- | ------------------- ------------------ | Revenues $ 3,490,526 | $ 629,342 $ 6,591,341 ------------ | ----------- ------------ Costs and expenses: | Programming and licensing 2,761,446 | 493,417 3,702,771 General and administrative 3,905,633 | 641,405 8,343,478 Depreciation and amortization 6,943,667 | 1,026,250 10,245,751 ------------ | ----------- ------------ 13,610,746 | 2,161,072 22,292,000 ------------ | ----------- ------------ | Operating loss (10,120,220) | (1,531,730) (15,700,659) ------------ | ------------ ------------ | Other income (expense): | Interest expense (6,611,422) | (184,256) (17,198,770) Equity in losses of affiliates (735,053) | (192,111) (9,378,008) Reorganization expense - | (13,146,175) - Interest and other income 111,462 | 8,164 1,351,399 ----------- | ------------ ------------ (7,235,013) | (13,514,378) (25,225,379) ----------- | ------------ ------------ | Loss before extraordinary item (17,355,233) | (15,046,108) (40,926,038) | Extraordinary gain from early | extinguishment of debt - | 85,355,624 - ----------- | ------------ ------------ | Net income (loss) (17,355,233) | 70,309,516 (40,926,038) | Preferred stock dividends - | - (3,850,594) ------------ | ------------ ------------ | Net income (loss) applicable to | common shareholders $ (17,355,233) | $ 70,309,516 $ (44,776,632) ============ | ============ ============ | Basic and diluted loss per new | common share(b) $ (1.01) | ======== | Weighted average new common | shares outstanding 17,241,379 | =========== |
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated financial statements. (b) Share data for the pre-reorganization periods are not presented as the amounts are not meaningful. (c) Contractual interest of $462,664 was not recorded for the period October 1, 1998, through October 14, 1998, in accordance with SOP 90-7 since contractual interest from the date CAI voluntarily filed its Chapter 11 bankruptcy petition, July 30, 1998, to the date of bankruptcy consummation, October 14, 1998, was an unsecured unallowed claim in the bankruptcy proceeding. See notes to consolidated financial statements
CAI WIRELESS SYSTEMS, INC. Consolidated Statements of Shareholders' Equity (Deficit) Periods Ended December 31, 1998 (unaudited) and October 14, 1998 (unaudited) and the Years Ended March 31, 1998 and 1997 ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ----------- ----------- ---------------- PREDECESSOR ENTITY: Balance at March 31, 1997 40,540,539 $275,769,414 $ - $(161,079,224) $114,690,190 Common stock issued in exchange for Bell Atlantic warrants 2,500 1,350 - - 1,350 Senior preferred stock and accumulated dividends contributed to capital pursuant to the Bell Atlantic termination agreement on March 3, 1998 - - 101,711,759 - 101,711,759 Preferred stock dividends - - - (13,891,025) (13,891,025) Net loss for the year - - - (225,914,731) (225,914,731) ---------- ----------- ----------- ------------ ----------- Balance at March 31, 1998 40,543,039 275,770,764 101,711,759 (400,884,980) (23,402,457) Net loss for the period from April 1, 1998 to October 14, 1998, including an extraordinary gain of $85,355,624 - - - (14,549,847) (14,549,847) Eliminate predecessor equity accounts and fair value assets in connection with fresh-start accounting: Cancel common shares (no par value) and restate the accumulated deficit (40,540,039) (275,770,764) (101,711,759) 377,482,523 - Issue new common shares, par value $.01 15,000,000 150,000 119,814,776 - 119,964,776 New shares issued in connection with the exit facility 2,241,379 22,414 17,903,355 - 17,925,769 Record excess of reorganization value over identifiable assets - - - 37,952,304 37,952,304 ---------- ----------- ----------- ----------- ----------- Balance at October 14, 1998 17,241,379 172,414 137,718,131 - 137,890,545 REORGANIZED COMPANY: Net loss for the period from October 15, 1998 to December 31, 1998 - - - (17,355,233) (17,355,233) ---------- ----------- ----------- ----------- ----------- Balance at December 31, 1998 17,241,379 $ 172,414 $137,718,131 $(17,355,233) $120,535,312 ========== =========== ============ ============ ============
See notes to consolidated financial statements. CAI WIRELESS SYSTEMS, INC. Consolidated Statements of Cash Flows (Unaudited)
REORGANIZED COMPANY | PREDECESSOR ENTITY ------------------- |-------------------------------------- Period from | Period from October 15, 1998 to | April 1, 1998 to Nine Months Ended December 31, 1998(a)| October 14, 1998 December 31, 1997 ------------------- | ---------------- ----------------- | CASH FLOWS FROM OPERATING ACTIVITIES | Net loss $ (17,355,233) | $ (14,549,847) $ (98,536,569) Adjustments to reconcile net loss to | net cash used in operating activities: | Extraordinary gain on early extinguishment of debt - | (85,355,624) - Depreciation and amortization 6,152,992 | 14,663,560 26,152,839 Reorganization expense - | 10,795,636 - Amortization of reorganization value in excess | of amounts allocable to identifiable assets 790,675 | - - Equity in losses of affiliates 735,053 | 45,483,966 23,118,008 Gain (loss) on sale of assets 1,999 | (2,543,327) (538,307) Debt financing costs and discount amortization | and accretion 4,536,684 | 1,407,539 8,263,013 Write-off of projects and other costs - | - 633,952 Changes in assets and liabilities: | Subscriber accounts receivable and other assets 635,424 | (413,230) (289,644) Accounts payable and accrued expenses (3,143,358) | 4,263,245 12,605,498 ----------- | ----------- ----------- Net cash used in operating activities (7,645,764) | (26,248,082) (28,591,210) ----------- | ----------- ----------- | CASH FLOWS FROM INVESTING ACTIVITIES | Purchase of wireless channel rights - | (110,000) (2,221,096) Purchase of property and equipment (24,961) | (991,649) (6,336,574) Proceeds from sale of equipment 135,718 | 4,810,018 178,759 Proceeds from sale of investments 103,744 | - 626,937 Proceeds from maturity of escrow investments - | 16,472,495 15,083,943 Payments received from CS Wireless Systems, Inc. 331,231 | - 3,529,689 Investment in affiliates - | (411,567) (3,138,797) Loan to related parties, net of collections - | - (297,440) Cash paid for investment - | - (356,025) Other (167,458) | (81,527) - ------------ | ----------- ----------- Net cash provided by investing activities 378,274 | 19,687,770 7,069,396 ------------ | ----------- ----------- | CASH FLOWS FROM FINANCING ACTIVITIES | Increase (decrease) in restricted cash account 7,864,252 | (18,022,931) - Proceeds from interim debt financing - | 26,847,439 20,793,979 Repayment of senior and other debt including | wireless channel rights obligations (150,644) | (2,073,704) (2,608,004) Debt financing costs paid - | (126,445) (4,965,643) ------------ | ----------- ------------ Net cash provided by financing activities 7,713,608 | 6,624,359 13,220,332 ------------ | ----------- ------------ Net increase (decrease) in cash and cash equivalents 446,118 | 64,047 (8,301,482) | Cash and cash equivalents, beginning of year 1,339,067 | 1,275,020 10,471,918 ------------ | ----------- ------------ Cash and cash equivalents, end of period $ 1,785,185 | $ 1,339,067 $ 2,170,436 ============ | ============ ============ Cash payments during the period for interest $ 11,869 | $ 17,028,872 $ 18,038,893 ======== | ============ ============
(a) Reorganized as of October 15, 1998. See Note 2 of the notes to consolidated financial statements. See notes to consolidated financial statements
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by generally accepted accounting principles for complete financial statements. The Company does not have comprehensive income pursuant to Statement of Financial Accounting Standards No. 130 for the periods presented and, accordingly, a comprehensive income disclosure has not been included. CAI Wireless Systems, Inc. and one of its subsidiaries emerged from a pre-packaged Chapter 11 bankruptcy on October 14, 1998. The consolidated financial statements include the accounts of CAI Wireless Systems, Inc. and its wholly-owned subsidiaries (the "Company" or "CAI"). All intercompany transactions have been eliminated in consolidation. CAI has a 94% investment (as of December 2, 1998) in CS Wireless Systems, Inc. ("CS"). CS has retained CIBC Oppenheimer Corp. ("CIBC") to serve as its financial advisor. CS and CIBC have begun to evaluate available options with respect to the capitalization of CS, including financial restructuring alternatives. As a consequence, CAI's investment in CS is accounted for on the equity method. CAI also has a 30% investment in TelQuest Satellite Services LLC ("TelQuest"), excluding the 30% interest in TelQuest held by CS. CAI's investment in TelQuest is accounted for on the equity method. Current summarized financial information regarding CS Wireless is presented in Note 5. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of results for interim periods have been included. Certain items in the prior period financial statements have been reclassified to conform with the current period's presentation. Operating results for the periods from October 15, 1998 to December 31, 1998 ("Reorganized Company") and from April 1, 1998 to October 14, 1998 ("Predecessor Entity") are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 1999. The unaudited financial statements presented herein should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 1998 which is on file with the Securities and Exchange Commission. FRESH-START REPORTING. Financial accounting during a Chapter 11 proceeding is prescribed in the American Institute of Certified Public Accountants' Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." The emergence from the Chapter 11 proceeding resulted in the creation of a new reporting entity without any accumulated deficit and with the Company's assets and liabilities restated to their estimated fair values (see note 2). Due to the application of fresh-start reporting, the financial statements for periods after the reorganization are not comparable in all respects to the financial statements for periods prior to the reorganization, primarily with respect to depreciation and amortization. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS. Reorganization value approximates the amount a willing buyer would pay for the assets of a company immediately after a restructuring. The reorganization value in excess of amounts allocable to identifiable assets (total assets after adjusting to fair value) is amortized over 10 years. Accumulated amortization at December 31, 1998 is $790,675. SEGMENT REPORTING. The Company adopted SFAS No. 131, "Disclosures about segments of an enterprise and related information." SFAS No. 131 requires that public companies report operating segments based upon how management allocates resources and assesses performance. Based on the criteria outlined in SFAS No. 131, the Company is comprised of a single reportable segment-distribution of wireless cable television subscription services. Accordingly, no additional disclosure is required by the Company to conform to the requirements of SFAS No. 131. RESTRUCTURING COSTS. The Company has revised its March 31, 1998 financial statements to reflect financial restructuring fees which relate to a subsequent period but which are immaterial. Note 2. GOING CONCERN AND CHAPTER 11 REORGANIZATION. Going Concern. Although the Company has emerged from bankruptcy, there continues to be substantial doubt as to the Company's ability to continue as a going concern. Reference is made to Item 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Report of Independent Public Accountants included in CAI's Annual Report on Form 10-K for the fiscal year ended March 31, 1998, filed with the Commission on June 30, 1998. The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the normal course of business. The appropriateness of reporting on a going concern basis is dependent upon, among other things, future operations and the ability to generate sufficient cash from operations and financing sources to meet obligations. On July 30, 1998, CAI and one of its wholly-owned subsidiaries filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The CAI reorganization plan, which provided for the restructuring of certain amounts of CAI's long-term indebtedness, was confirmed on September 30, 1998 and consummated on October 14, 1998. Under the confirmed reorganization plan, each holder of CAI's 12.25% senior notes due 2002 received, in full satisfaction of its claim against CAI as a holder of senior notes, a pro-rata portion of $212,909,624 aggregate principal amount at maturity ($100 million aggregate discounted principal amount at issuance) of 13% senior notes due 2004, 91% of the equity of reorganized CAI and approximately $16.5 million in cash. The 12.25% senior notes have been extinguished and certificates for such notes represent solely the right to receive the pro-rata share of the distribution contemplated by the CAI reorganization plan to be made on account of such previously-held senior notes. The reorganization plan also provided that each holder of subordinated indebtedness claims against CAI receive, in full satisfaction of its claim against CAI as a holder of a subordinated indebtedness claim, a pro-rata portion of the remaining 9% of the equity of reorganized CAI. The subordinated indebtedness claims against CAI have been extinguished and notes previously representing such claims represent solely the right to receive the pro-rata share of the distribution contemplated by the CAI reorganization plan to be made on account of such previously-held subordinated indebtedness claims. All equity received by the holders of 12.25% senior notes and subordinated indebtedness claims was diluted by equity reserved for issuance upon the exercise of options granted to members of CAI's senior management and for equity issued in connection with the exit facility. In connection with the reorganization, the Company recorded an extraordinary gain of $85.4 million reflecting the extinguishment of debt. Long-term notes totaling approximately $308 million, including the interest accrued thereon and associated issuance costs, were replaced with $100 million aggregate principal amount at issuance of 13% senior notes, equity of CAI, and cash from the debt escrow account. The consolidated balance sheet reflects the 13% senior notes, together with accreted interest thereon from October 15, 1998 to December 31, 1998. In determining the post-confirmation going concern enterprise value, CAI's financial advisors performed a variety of generally accepted valuation techniques. The three primary methodologies used were: (1) comparable public company analysis ("Comparables"), (2) discounted cash flow ("DCF") and (3) comparable mergers and acquisitions analysis ("M&A"). The Comparables approach included comparisons with five similar companies and detailed multi-year financial comparisons. Specifically, the total enterprise value for each company was compared to its respective estimated gross line-of-sight households. The DCF value represents the present value of unlevered, after-tax cash flows. The basis for the DCF was the Company's ten-year projections in the provision of fixed wireless video and two-way voice and data services on a wholesale basis to prospective strategic partners. An effective tax rate of 40% was estimated, and a discount rate of 25% was applied to the cash flows, reflective of the estimated high degree of risk associated with the business plan. In addition, a terminal value was determined by assuming the sale of the business at the end of the time period. The terminal value multiple of ten was used. The M&A approach included evaluation of a series of transactions involving companies in the wireless cable industry. Seven transactions between 1996 and 1997 were considered. Based upon the analyses, the assumptions made and matters considered, the post-confirmation going concern enterprise value of CAI was estimated to be $293 million. Reorganization expense recorded by CAI prior to consummation of the reorganization plan consisted of the following for the period from April 1, 1998 to October 14, 1998:
Professional fees and other expenses related to the Chapter 11 proceedings $ 6,305,747 Adjustment of assets and liabilities to fair value 10,795,636 ---------- 17,101,383 ==========
The effects of the CAI reorganization plan and the application of fresh- start reporting on CAI's Consolidated Balance Sheet at October 15, 1998 are as follows:
Predecessor Entity Debt Fresh-Start Reorganized CAI OCTOBER 14, 1998 EXIT FINANCING DISCHARGE ADJUSTMENTS OCTOBER 15, 1998 ------------------ -------------- ---------- ----------- ---------------- ASSETS Cash and cash equivalents $ 1,339,067 $ - $ - $ - $ 1,339,067 Restricted cash and cash equivalents 11,204,249 15,953,333 - - 27,157,582 Debt service escrow 16,971,807 - (16,971,807) - - Subscriber receivables, net 701,635 - - - 701,635 Prepaid expenses 549,100 - - - 549,100 Property and equipment, net 40,982,272 - - 263,526 41,245,798 Wireless channel rights, net 187,249,998 - - 17,112,933 204,362,931 Investment in CS Wireless Systems, Inc. - - - - - Investment in TelQuest Satellite Services LLC 1,220,404 - - - 1,220,404 Other investments - - - - - Goodwill, net 21,997,237 - - (21,997,237) - Reorganization value in excess of amounts allocable to identifiable assets - - - 37,952,304 37,952,304 Debt financing costs, net 5,781,300 4,300,000 - (5,781,300) 4,300,000 Other assets 3,059,931 - - (393,558) 2,666,373 ------------ ----------- ------------ ----------- ----------- Total Assets $ 291,057,000 $ 20,253,333 $(16,971,807) $ 27,156,668 $321,495,194 ============= ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities Accounts payable $ 3,125,495 $ (600,000) $ - $ - $ 2,525,495 Accrued expenses 9,170,546 2,500,000 - 647,224 12,317,770 Accrued interest 16,145,874 (1,646,667) (14,499,207) - - Wireless channel rights obligations 2,922,100 - - - 2,922,100 Interim debt financing 60,000,000 2,074,231 - - 62,074,231 Senior notes 311,558,053 - (207,793,000) - 103,765,053 ------------ ----------- ------------ ----------- ----------- Total Liabilities 402,922,068 2,327,564 (222,292,207) 647,224 183,604,649 ============= ============ ============ ============ ============ Shareholders' Equity (Deficit) Preferred stock - - - - - Common stock 275,770,764 22,414 150,000 (275,770,764) 172,414 Additional paid-in capital 101,711,759 17,903,355 119,814,776 (101,711,759) 137,718,131 Accumulated deficit (489,347,591) - 85,355,624 403,991,967 - ------------ ----------- ------------ ----------- ----------- Total Shareholders' Equity (Deficit) (111,865,068) 17,925,769 205,320,400 26,509,444 137,890,545 ------------ ----------- ------------ ----------- ----------- Total Liabilities and Shareholders' Equity (Deficit) $291,057,000 $ 20,253,333 $ (16,971,807) $ 27,156,668 $321,495,194 ============= ============ ============ ============ ============
CAI WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3. INTERIM FINANCING. EXIT FACILITY. On October 14, 1998, in connection with consummating CAI's Reorganization Plan, the Company obtained an $80,000,000 credit facility (the "exit facility") from Merrill Lynch Global Allocation Fund, Inc. ("MLGAF"). The Company received net proceeds from the exit facility of $15,953,000, after repaying all outstanding amounts under the debtor-in-possession credit facility (the "DIP facility") provided to the Company by MLGAF during the Company's Chapter 11 case, and certain commitment fees associated with the exit facility. The exit facility is governed by the terms of a note purchase agreement dated October 14, 1998 (the "NPA"), a copy of which was filed by the Company with the Commission as an exhibit to the Company's Current Report on 8-K dated October 15, 1998. The exit facility consists of two tranches: Tranche A and Tranche B. Tranche A is a $30,000,000 senior secured loan bearing interest at 10.5% compounded semi-annually and evidenced by a Senior Secured A Note. The Company has granted a first priority lien on and security interest in all of its assets to secure performance of the Company's obligations with respect to Tranche A. Tranche B is a $50,000,000 senior secured loan bearing interest at 13% per annum and evidenced by a Senior Secured B Note. The Company has granted a second priority lien on and security interest in and to all of its assets to secure performance of its obligations with respect to Tranche B. In addition to the liens granted by the Company, substantially all of the Company's wholly-owned subsidiaries have guaranteed the obligations of the Company with respect to the exit facility. The subsidiaries have granted a lien on and security interest in all of their respective assets to secure their performance under such subsidiary guaranties. The exit facility is a two-year credit facility, maturing on October 14, 2000. The Company paid a 1% facility fee equal to $300,000 on the Tranche A amount at the closing of the exit facility. In addition, the Company is required to pay an 8% facility fee equal to $4,000,000 on the Tranche B amount, of which the Company paid $1,500,000 at the closing of the exit facility. The remaining $2,500,000 balance of the Tranche B facility fee is payable at maturity of the exit facility (by its term, acceleration or otherwise). All interest on amounts outstanding under the exit facility accrues at the stated rates and is payable at maturity of the exit facility. The Company issued 2,241,379 shares of its common stock, par value $.01 per share (the "new common stock") to MLGAF as additional consideration to MLGAF for providing the exit facility. The shares issued to MLGAF represent 13% of the total new common stock issued and outstanding on October 14, 1998. The value of the new stock is reflected as an unamortized discount to the exit facility and accreted over the life of the exit facility. The foregoing is a summary of certain terms of the exit facility and is qualified in its entirety by reference to the NPA. NOTE 4. LITIGATION. In Re CAI Wireless Systems Inc. Securities Litigation. CAI and certain individuals had 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 against Jared E. Abbruzzese, chairman and chief executive officer of the Company, John J. Prisco, a former president, chief operating officer and director of the Company, and Alan Sonnenberg, a former president and director of the Company. The amended, consolidated complaint 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 $5,000,000 of any covered liability, subject to a retention amount of $500,000. The Securities Lawsuit is in its preliminary stages. A scheduling conference was held on June 3, 1997, at which the briefing schedule for defendants' motion to dismiss was agreed upon among the parties. The defendants' motion to dismiss was heard by the Northern District of New York on October 17, 1997 and is still pending. While the motion is pending, all other deadlines affecting motions and discovery have been postponed. The Plan provided no recovery to any holder of the Company's equity or to any holder of an equity-based claim, such as the claims made against the Company in the Securities Lawsuit. Upon the confirmation of the Plan on September 30, 1998 and the October 14, 1998 consummation of the Plan, plaintiffs' claims against the Company in the Securities Lawsuit were discharged and released by order of the Bankruptcy Court. Furthermore, the Securities Lawsuit plaintiffs were enjoined from continuing their action against the Company. The individual defendants are continuing to contest 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. OTHER LITIGATION.The Company is also named as a defendant in JOE HAND PROMOTIONS, INC. V. CAI WIRELESS SYSTEMS, INC. D/B/A POPVISION WIRELESS CABLE and as a third party defendant in JOE HAND PROMOTIONS, INC. V. 601 L & P BAR, INC. in the U.S. District Court for the Eastern District of Pennsylvania. These actions arise out of the alleged improper broadcasts of certain sporting events in commercial establishments in violation of the alleged distributor's exclusive broadcast rights. The Complaints seek actual compensatory damages in unspecified amounts, together with statutory penalties claimed for alleged violations of federal statutes. The Plaintiff, Joe Hand Promotions, has alleged itself to be the exclusive distributor of certain televised sporting events in the greater Philadelphia area for commercial establishments, and has alleged the improper broadcast of such events in approximately five instances. The lawsuits were in the preliminary stages when the Company commenced its Chapter 11 case. Action against CAI in these lawsuits has been suspended by the Court. The Company believes that in the event of an adverse outcome, the amount would not be material given the nature of the claims. NOTE 5. EQUITY INVESTMENTS. CS WIRELESS SYSTEMS, INC. The elimination of the Company's investment in CS reflects equity losses limited to the extent of its investment since CAI does not guarantee any CS debt. CS' net loss of $100,762,000 for the nine-month period ended September 30, 1998 included a $46,378,000 writedown of goodwill. CAI's ownership interest in CS increased to approximately 94% as a result of the December 2, 1998 purchase by the Company of 3,836,035 shares of CS common stock held by Nucentrix Broadband Networks, Inc. ("Nucentrix," formerly known as Heartland Wireless Communications, Inc.). Subsequent to the purchase, CS redeemed the shares of CS common stock purchased by the Company from Nucentrix. At December 31, 1998, CAI held 6,421,166 shares of CS common stock, representing approximately 94% of the issued and outstanding common stock of CS. CS has retained CIBC to serve as its financial advisor. CS and CIBC have begun to evaluate available options with respect to the capitalization of CS, including financial restructuring alternatives. As a consequence, CAI's investment in CS is accounted for on the equity method. The following is an unaudited condensed consolidated balance sheet of CS derived from its September 30, 1998 Form 10-Q:
ASSETS Cash and cash equivalents $ 45,394,000 Restricted cash 4,222,000 Other current assets 2,224,000 Systems and equipment, net 54,905,000 Wireless channel rights, net 168,247,000 Investment in and loans to equity affiliates 6,983,000 Debt issuance costs and other assets, net 8,609,000 ----------- Total Assets $290,584,000 ============ LIABILITIES AND EQUITY Accounts payable and accrued expenses $ 6,042,000 FCC auction payable 3,942,000 Other liabilities 914,000 Debt 308,219,000 Equity (28,533,000) ----------- Total Liabilities and Equity $290,584,000 ============
The following are unaudited condensed consolidated statements of operations of CS derived from its September 30, 1998 Form 10-Q for the periods presented:
Quarter Ended Nine Months Ended SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------ Revenues $ 6,448,000 $ 20,076,000 ---------- ----------- Operating expenses: Systems operations 4,094,000 12,019,000 Selling, general and administrative 4,500,000 13,602,000 Impairment of goodwill - 46,378,000 Depreciation and amortization 7,062,000 22,003,000 ---------- ----------- Total operating expenses 15,656,000 94,002,000 ---------- ----------- Operating loss (9,208,000) (73,926,000) Interest income 803,000 2,746,000 Interest expense (8,765,000) (25,657,000) Equity in losses of affiliates (292,000) (2,057,000) Cumulative effect of change in accounting principle for organizational costs - (1,868,000) ---------- ----------- Net loss $(17,462,000) $(100,762,000) =========== ============
TELQUEST SATELLITE SERVICES LLC. The Company's investment in TelQuest reflects an equity loss of $2,194,000 based on CAI's pro-rata share of TelQuest's net losses approximating $6,040,000 for the nine months ended December 31, 1998 plus an adjustment for CAI's ownership which increased as of December 8, 1997 to 30% based on a non-exclusivity agreement signed as of that date. Additionally, the investment has been reduced by $625,000 in depreciation on the equipment leased to TelQuest. As of December 31, 1998, TelQuest has negative net worth of $7,504,000. The Company's investment in TelQuest excludes a 30% ownership interest in TelQuest held by CS. NOTE 6. RESIGNATION OF AUDITORS. On July 30, 1998, the Company was informed by PricewaterhouseCoopers LLP ("PWC") that PWC had resigned from its engagement as the Company's independent accountant. The Company was informed by PWC that it had resigned from the engagement due to a conflict of interest arising as the result of the July 1, 1998 merger of Price Waterhouse, LLP and Coopers & Lybrand L.L.P. Prior to the merger, Coopers & Lybrand L.L.P. acted as the Company's independent accountant. Price Waterhouse, LLP, acted as collateral agent and administrative agent for MLGAF under a Note Purchase Agreement dated as of November 24, 1997, as amended from time to time. PWC currently acts as collateral agent and administrative agent for MLGAF under the Note Purchase Agreement dated as of October 14, 1998 between the Company and MLGAF. The Company is currently seeking independent accountants to replace PWC. Except as discussed below, the reports of Coopers & Lybrand L.L.P. on the Company's financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. The report of Coopers & Lybrand L.L.P. delivered in connection with the Company's audited financial statements for the years ended March 31, 1998 and 1997 contained an explanatory paragraph which indicated that there was substantial doubt regarding the Company's ability to continue as a going concern. In connection with its audits for the two most recent fiscal years and through July 30, 1998, there have been no disagreements with Coopers & Lybrand L.L.P. or PWC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Coopers & Lybrand L.L.P. would have caused them to make reference thereto in their report on the financial statements for such years. During the two most recent fiscal years and through July 30, 1998, there have been no reportable events (as defined in Regulation S-K item 304(a)(1)(v)) involving the Company. The Company requested that PWC furnish it with a letter addressed to the SEC stating whether or not PWC agrees with the above statements. A copy of such letter, dated August 6, 1998, was filed as Exhibit 16 to the Company's Current Report on Form 8-K dated August 6, 1998. NOTE 7. DEBT OF REORGANIZED COMPANY. Reference is made to Notes 2 and 3 above for a description of the October 14, 1998 consummation of CAI's Chapter 11 case and the exit facility that CAI entered into in connection therewith. The following debt is outstanding as of December 31, 1998:
INTERIM DEBT FINANCING (EXIT FACILITY) Senior Secured A Note at 10.5% interest, compounded semi-annually with a first priority lien on Company assets $ 30,000,000 Senior Secured B Note at 13.0% interest per annum with a second priority lien on Company assets 50,000,000 Less unamortized discount (16,219,239) ----------- Total interim debt financing $ 63,780,761 ===========
LONG-TERM NOTES Senior debt of $100,000,000 accreting at 13% per annum, due October 14, 2004: Amount due at maturity $ 212,909,624 Less unearned discount (110,165,180) ----------- Principal and earned interest outstanding as of December 31, 1998 102,744,444 Note: Principal and interest are payable at maturity. The senior debt is unsecured. Acquisition-related notes 3,708,264 Other 3,577 ----------- Total long-term notes $ 106,456,285 =============
The pre and post-reorganization capital structures of the Company are as follows:
Shares Authorized Shares Issued and Outstanding --------------------------------------- ------------------------------------ Reorganized PREDECESSOR Reorganized Predecessor COMPANY ENTITY COMPANY ENTITY CLASS OF STOCK DECEMBER 31, 1998 March 31, 1998 DECEMBER 31, 1998 MARCH 31, 1998 --------------- ----------------- -------------- ----------------- -------------- PREDECESSOR ENTITY: Preferred stock - 14% Senior convertible preferred stock, par value $10,000 per share 15,000 - ---------- -------- Series preferred stock, no par value Series A 8% redeemable convertible preferred stock, no par value 350,000 - Undesignated 4,650,000 - ---------- -------- Total series preferred stock 5,000,000 - ---------- -------- Voting preferred stock, no par value 2,000,000 - ---------- -------- Total preferred stock 7,015,000 - ========== ======== Common stock, no par value 100,000,000 40,543,039 =========== ========== REORGANIZED COMPANY: Preferred stock, par value $0.01 5,000,000 - ========== ========== Common stock, par value $0.01 (a) 25,000,000 17,241,379 ========== ==========
(a) CAI's post-reorganization common stock, par value $0.01, entitles the holder thereof to one vote per share held. Holders of CAI common stock are entitled to dividends if, as, or when declared out of funds legally available therefore, which consists of current or accumulated earnings. In the event of a liquidation or dissolution, any preferred stock outstanding including accumulated dividends thereon would be satisfied before holders of common stock would receive any distribution. As of December 31, 1998, there were 17,241,379 shares of common stock issued and outstanding. PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING THE EXHIBITS HERETO, RELATING TO THE COMPANY'S FUTURE OPERATIONS MAY CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AND MAY BE AFFECTED BY A NUMBER OF FACTORS INCLUDING THE COMPANY'S ABILITY TO DESIGN AND IMPLEMENT COMPETITIVE, COST EFFECTIVE TWO-WAY OPERATING PLANS, THE COMPANY'S ABILITY TO ATTRACT ONE OR MORE STRATEGIC PARTNERS AND SUCH STRATEGIC PARTNER'S WILLINGNESS TO ENTER INTO ARRANGEMENTS WITH CAI ON A TIMELY BASIS, THE TERMS OF SUCH ARRANGEMENTS, THE RECEIPT OF REGULATORY APPROVALS FOR ALTERNATIVE USES OF ITS MMDS SPECTRUM, THE SUCCESS OF CAI'S TRIALS IN VARIOUS OF ITS MARKETS, THE COMMERCIAL VIABILITY OF ANY ALTERNATIVE USE OF MMDS SPECTRUM, CONSUMER ACCEPTANCE OF ANY NEW PRODUCTS OFFERED OR TO BE OFFERED BY CAI, THE COMPANY'S ABILITY TO FUND ITS BUSINESS PLANS, EQUIPMENT AVAILABILITY FOR ALTERNATIVE USES OF MMDS SPECTRUM, SUBSCRIBER EQUIPMENT AVAILABILITY, PRACTICAL SUCCESS OF CAI'S ENGINEERED TECHNOLOGY, TOWER SPACE AVAILABILITY, ABSENCE OF INTERFERENCE AND THE ABILITY OF THE COMPANY TO REDEPLOY OR SELL EXCESS EQUIPMENT, THE ASSUMPTIONS, RISKS AND UNCERTAINTIES SET FORTH BELOW IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE HEREIN, AS WELL AS OTHER FACTORS CONTAINED HEREIN AND IN THE COMPANY'S OTHER SECURITIES FILINGS. FURTHERMORE, THERE CAN BE NO ASSURANCE THAT THE FINANCING OBTAINED BY THE COMPANY TO DATE WILL ENABLE IT TO MEET ITS FUTURE CASH NEEDS OR THAT THE COMPANY CAN OBTAIN FINANCING IN THE FUTURE. REORGANIZATION. On July 30, 1998 (the "Petition Date"), CAI Wireless Systems, Inc., a Connecticut Corporation ("CAI Wireless"), and one of its wholly-owned subsidiaries, Philadelphia Choice Television, Inc., a Delaware Corporation ("PCT"; and together with CAI Wireless, the "Debtors"), filed voluntary petitions for relief under Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), Wilmington, Delaware. The bankruptcy cases (the "Cases") of CAI Wireless and PCT are being jointly administered, for procedural purposes only, before the Bankruptcy Court under Case No. 98-1765 (JJF). Pursuant to Section 1107 and 1108 of the Bankruptcy Code, the Debtors, as debtors and debtors-in-possession, managed and operated their assets and businesses pending the September 30, 1998 confirmation of a joint reorganization plan (the "Plan") under the supervision and orders of the Bankruptcy Court. The Plan was filed with the Bankruptcy Court on the Petition Date and filed by the Company with the Securities and Exchange Commission (the "Commission") on a Current Report on Form 8-K on July 1, 1998. Prior to the Petition Date, the Company solicited and received the requisite approvals from those classes of creditors that would be impaired under the Plan. Specifically, the Company solicited and received the requisite approval of the holders of the Company's 12.25% Senior Notes due 2002 (the "Old Senior Notes") and the holders of certain subordinated indebtedness of the Company. The Company did not solicit the vote of its shareholders, for whom the Plan provided no right to receive or retain any property of the Company post-reorganization. Section 1126(g) of the Bankruptcy Code specifically deems such shareholders not to have accepted the Plan. A confirmation hearing was held in the Bankruptcy Court on September 9, 1998. The Plan was confirmed on September 30, 1998 and consummated on October 14, 1998. Under the confirmed Plan, each holder of the Old Senior Notes received a pro rata portion of $212,909,624 aggregate principal amount at maturity ($100,000,000 aggregate principal amount at issuance) of 13% Senior Notes due 2004 (the "New Senior Notes"), 91% of the equity of reorganized CAI and approximately $16,500,000 in cash. Holders of subordinated indebtedness claims against CAI received a pro rata portion of 9% of the equity of reorganized CAI. CAI recorded an extraordinary gain of $85,355,624 reflecting the extinguishment of debt. The New Senior Notes are governed by that certain Indenture dated as of October 14, 1998 (the "New Senior Notes Indenture") between the Company and State Street Bank and Trust Company, as trustee, a copy of which was filed as an exhibit to the Company's Current Report on Form 8-K filed with the Commission on October 15, 1998. All equity received by the holders of Old Senior Notes and subordinated indebtedness claims was subsequently diluted by equity reserved for issuance upon the exercise of options granted to members of CAI's senior management and for equity of reorganized CAI issued in connection with the exit facility (defined below). The CAI reorganization plan did not provide any recovery for the holders of CAI equity, or holders of claims against CAI based upon or arising out of the purchase or sale of CAI equity securities. Consequently, 40,543,039 shares of CAI common stock, without par value, together with all options and warrants to purchase such common stock, were cancelled on October 14, 1998. CAI issued 15,000,000 shares of CAI common stock, par value $.01 per share, to the holders of the 12.25% senior notes, the 12% subordinated note and the acquisition- related notes. CAI also issued 2,241,379 shares of CAI common stock on October 14, 1998 to Merrill Lynch Global Allocation Fund, Inc. ("MLGAF"), in connection with an $80 million credit facility provided by MLGAF to CAI. Although the Company has emerged from bankruptcy, there continues to be substantial doubt as to the Company's ability to continue as a going concern. Reference is made to Item 7 - "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the Report of Independent Public Accountants included in CAI's Annual Report on Form 10-K for the fiscal year ended March 31, 1998, filed with the Commission on June 30, 1998. The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the normal course of business. The appropriateness of reporting on a going concern basis is dependent upon, among other things, future operations and the ability to generate sufficient cash from operations and financing sources to meet obligations. DIP FINANCING. In connection with the Cases, CAI consummated a $60,000,000 Debtor-in-Possession financing arrangement (the "DIP Facility") provided by Merrill Lynch Global Allocation Fund, Inc. ("MLGAF"). The DIP financing was governed by an Amended and Restated Note Purchase Agreement dated as of July 30, 1998 (the "DIP Agreement") between CAI and MLGAF, a copy of which was filed as an exhibit to CAI's Current Report on Form 8-K dated August 3, 1998. Indebtedness under the DIP Facility was evidenced by certain promissory notes, accrued interest at 13% per annum and had a maturity date of January 29, 1999. Of the $60,000,000 provided to CAI under the DIP Facility, $49,105,894 represented the outstanding principal, interest and fees due to the MLGAF pursuant to that certain Note Purchase Agreement dated as of November 24, 1997 (the "Existing Note Purchase Agreement") among CAI, certain of its subsidiaries and MLGAF. All such amounts outstanding under the Existing Note Purchase Agreement were converted into DIP Notes as if there had been a purchase thereof under the DIP Agreement in the amount of $49,105,894. The remaining $10,894,106 was made available to CAI for its use during the Chapter 11 case, in accordance with the terms of an approved budget. On October 14, 1998, in connection with consummating the Plan, all outstanding amounts under the DIP Facility, including the $60,000,000 aggregate principal amount, accrued and unpaid interest in the amount of $1,646,667 and a $600,000 commitment fee, were repaid out of the proceeds of the exit facility (defined below). EXIT FACILITY. On October 14, 1998, in connection with consummating the Plan, the Company obtained an $80,000,000 credit facility (the "exit facility"), also from MLGAF. The Company realized net proceeds from the exit facility of $15,953,000, after repaying all outstanding amounts under the DIP Facility and certain commitment fees associated with the exit facility. The exit facility is governed by the terms of a Note Purchase Agreement dated October 14, 1998 (the "NPA"), a copy of which was filed by the Company with the Commission as an exhibit to the Company's Current Report on 8-K dated October 15, 1998. The exit facility consists of two tranches: Tranche A and Tranche B. Tranche A is a $30,000,000 senior secured loan bearing interest at 10.5% compounded semi-annually and evidenced by a Senior Secured A Note. The Company has granted a first priority lien on and security interest in and to all of its assets to secure performance of the Company's obligations with respect to Tranche A. Tranche B is a $50,000,000 senior secured loan bearing interest at 13% per annum and evidenced by a Senior Secured B Note. The Company has granted a second priority lien on and security interest in and to all of its assets to secure performance of its obligations with respect to Tranche B. In addition to the liens granted by the Company, substantially all of the Company's wholly-owned subsidiaries have guaranteed the obligations of the Company with respect to the exit facility. The subsidiaries have granted a lien on and security interest in and to all of their respective assets to secure their performance under such subsidiary guaranties. The exit facility is a two-year credit facility, maturing on October 14, 2000. The Company was required to pay a 1% facility fee equal to $300,000 on the Tranche A amount at the closing of the exit facility. In addition, the Company is required to pay an 8% facility fee equal to $4,000,000 on the Tranche B Amount of which the Company paid $1,500,000 at the closing of the exit facility. The remaining $2,500,000 balance of the Tranche B facility fee is payable at maturity of the exit facility (by its term, acceleration or otherwise). All interest on amounts outstanding under the exit facility accrues at the stated rates and is payable at maturity of the exit facility. The Company issued 2,241,379 shares of its common stock, par value $.01 per share (the "new common stock") to MLGAF as additional consideration to MLGAF for providing the exit facility. The shares of new common stock issued to MLGAF represent 13% of the total New Common Stock issued and outstanding on October 14, 1998. The value of the new stock is reflected as an unamortized discount to the exit facility and accreted over the life of the exit facility. The foregoing is a summary of certain terms of the exit facility and is qualified in its entirety by reference to the NPA. LIQUIDITY AND CAPITAL RESOURCES CAI's primary sources of liquidity are cash flows from operations, trade credit and borrowings under the existing credit facility for the period prior to July 30, 1998, subsequently under the DIP facility and after reorganization on October 14, 1998, the exit facility. Funds provided under these interim financing facilities totalling $26,847,000 were invested in a restricted account controlled by MLGAF and made available to the Company for its operating requirements in accordance with an approved budget. During the nine months ended December 31, 1998 which consists of the period October 15, 1998 to December 31, 1998 and the period from April 1, 1998 to October 14, 1998, CAI expended $33,894,000 on operating activities. In conjunction with the reorganization, the final escrow payment of $16,376,000 was made to holders of the Old Senior Notes. CAI also expended $2,224,000 in debt payments, $856,000 for equipment, and paid $412,000 to TelQuest in fulfillment of its investment obligation. The cash requirements were primarily funded by existing cash balances maintained in the restricted account. At December 31, 1998, CAI had available funds of $21,079,000, of which $19,293,000 was held in the restricted account. CAI is committed through additional open purchase orders as of December 31, 1998 to spend approximately $500,000, primarily for capital expenditures associated with additional development of its two-way and Internet facilities. The Company's operating plans, including digital video, voice and two-way data, Internet and intranet access services and testing, will require additional funding. The Company's ability to raise additional funds through borrowings or the issuance of certain types of equity instruments is currently limited by the terms of the New Senior Notes Indenture and/or the terms of the exit facility. There can be no assurance that the funds obtained by the Company in connection with the exit facility will enable CAI to meet its future cash needs. RESULTS OF OPERATIONS IMPACT OF FRESH-START REPORTING ON RESULTS OF OPERATIONS. In connection with its emergence from Chapter 11, CAI adopted fresh-start reporting in accordance with Statement of Position ("SOP") 90-7 of the American Institute of Certified Public Accountants. Under fresh-start reporting, the reorganization value of CAI has been allocated to its assets and liabilities on a basis substantially consistent with purchase accounting. The portion of reorganization value not attributable to specific tangible assets has been recorded on the balance sheet as "Reorganization Value in Excess of Amounts Allocable to Identifiable Assets." Certain fresh-start reporting adjustments, primarily related to the adjustment of CAI's assets and liabilities to fair market values as of October 14, 1998, the date CAI consummated its Chapter 11 bankruptcy, will have a significant effect on future statements of operations. The more significant adjustments relate to increased amortization expense of the reorganization value in excess of amounts allocable to identifiable assets and of wireless channel rights. DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997 For the purpose of this discussion, the nine months ended December 31, 1998 refers to the periods October 15, 1998 to December 31, 1998 and April 1, 1998 to October 14, 1998 and the quarter ended December 31, 1998 refers to the periods October 15, 1998 to December 31, 1998 and October 1, 1998 to October 14, 1998. The Company currently operates six analog subscription video systems. The Company has experienced a decline in analog-based video subscribers, which decline has had and will continue to have an adverse effect on the Company's revenues. During the last several quarters, the Company has operated its analog video systems within the confines of a cash conservation strategy, while pursuing a strategic alliance with one or more strategic partners interested in using the Company's spectrum for fixed, one- and two-way transmission services. The Company's cash conservation strategy includes the recovery of out-of-pocket expenses associated with adding a new analog video subscriber by charging such subscriber an up-front installation fee. The cash conservation strategy also includes the continued implementation of cost-cutting measures and the periodic sales of non-core assets in an effort to maximize the value of assets that are no longer used or useful to the Company's long-term operating strategy, which is to be a wholesale provider of two-way transmission services to one or more strategic partners. Accordingly, the Company has sold assets relating to the provision of analog subscription video services to multiple dwelling units ("MDUs"), such as apartment and condominium complexes, in certain of its markets. Assets typically involved in providing analog subscription video services to residents of MDUs include the tangible assets necessary to transmit and receive the video programming signal, customer premises equipment and a right of entry agreement with the property owner or manager, pursuant to which the Company's operating subsidiary is granted the right to provide subscription video services to residents of the MDU. In March 1998, the Company sold assets relating to MDUs located in its Washington, DC operating market. Most recently, in September 1998 the Company completed the sale of assets relating to approximately 60 MDUs located in CAI's Philadelphia system (the "Philadelphia MDU Sale") to Mid-Atlantic Telcom Plus, LLC d/b/a OnePoint Communications, a leading operator of satellite master antenna television (SMATV) systems. Consummated under the auspices of the Bankruptcy Court, the Philadelphia MDU Sale generated net proceeds to the Company of approximately $5,000,000, of which $646,000 is currently being held in escrow pending certain post-closing adjustments. The Company expects to use the proceeds from the Philadelphia MDU Sale, as well as proceeds from subsequent sales of non-core assets, for working capital purposes. The Company's analog video subscriber base has declined over the last several quarters. As of December 31, 1998, the Company's subscriber base had decreased to 33,800 analog video subscribers compared to 57,500 at December 31, 1997. The 23,700 subscriber decrease includes the loss of approximately 10,400 subscribers as a result of the Philadelphia MDU Sale. The decrease in analog video subscribers has resulted in subscriber revenue decreases of $2,471,000 and $7,005,000 for the quarter and nine months ended December 31, 1998, respectively, compared to the corresponding periods last year. Operating expenses were $48,034,000 and $60,242,000 for the nine months ended December 31, 1998 and 1997, respectively. The $12,208,000 reduction in operating expenses for the nine months versus last year's corresponding nine- month period reflects lower technical, customer service and marketing costs and general and administrative approximating $7,549,000 which were in proportion with the decline in subscribers. Programming costs decreased by $754,000 and $2,045,000 for the quarter and nine months ended December 31, 1998, respectively, in proportion with decreased revenues. However, licensing costs were $306,500 and $1,932,000 higher for the quarter and nine months ended December 31, 1998, respectively, due to certain channel payments which had been previously capitalized being currently expensed. The remaining decrease of $4,546,000 reflects lower goodwill amortization relative to the write-down at March 31, 1998, offset in part by greater expense recorded on the Boston digital project, and $791,000 amortization of reorganization value in excess of amounts allocable to identifiable assets. Interest expense was $24,854,000 and $40,129,000 for the nine months ended December 31, 1998 and 1997, respectively. The decrease of $10,403,000 in the quarter ended December 31, 1998 compared to the same period last year was due to the consummation of the Company's Chapter 11 case on October 14, 1998 that resulted in a debt reduction of $207,793,000, offset in part by a $20,000,000 increase in interim debt under the exit facility including $1,707,000 of interest expense resulting from the accretion on the exit facility discount. The remaining decrease of $4,872,000 resulted from the cessation of interest on the $307,793,000 debt which was subject to compromise as of July 30, 1998. Interest and other income increased by $1,009,000 for the nine months ended December 31, 1998 compared to the same period last year. The $2,642,000 net gain from the Philadelphia MDU Sale was partially offset by the declining interest income on the debt escrow and money market investments. Other expense includes reorganization expense of $13,146,175 for the quarter and $17,101,383 for the nine months ended December 31, 1998 relative to the bankruptcy and resulting fresh-start accounting. The elimination of the Company's investment in CS reflects equity losses recorded to the extent of its investment (CAI does not guarantee any CS debt). CS' net loss of $100,762,000 for the nine-month period ended September 30, 1998 includes a $46,378,000 write down of goodwill. CAI's ownership interest in CS increased to approximately 94% as a result of the December 2, 1998 purchase by the Company of 3,836,035 shares of CS common stock held by Nucentrix. Subsequent to the purchase, CS redeemed the shares of CS common stock purchased by the Company from Nucentrix. At December 31, 1998, CAI held 6,421,166 shares of CS common stock, representing approximately 94% of the issued and outstanding common stock of CS. The extraordinary gain from early extinguishment of debt of $85,355,624 represents the excess of debt forgiven over the amount of debt attributable to issuance of new common stock resulting from consummation of the bankruptcy. THE YEAR 2000 ISSUE OVERVIEW. The Company is continuing to evaluate and address the impact of the Year 2000 date transition on its operations. The Company is in the process of taking steps to (a) inventory and assess for Year 2000 compliance its equipment, software and systems, (b) determine which items will be remediated, replaced or retired, and establish a plan to accomplish these steps, (c) remediate, replace or retire the items, (d) test the items, where required, and (e) provide senior management with a reporting system to support a seamless transition to the Year 2000. STATE OF READINESS. The Company's Year 2000 compliance program focuses on the Company's analog video operations, limited internet operations, and internal business processes, such as accounting. As of December 31, 1998, the inventory, assessment and compliance planning phases for these areas have been materially completed, and remediation, replacement or retirement and testing activities are beginning. The inventory items that were not assessed as Year 2000 compliant and that require action to avoid service impact are to be fixed, replaced, or retired. CAI's goal for its accounting services is to have its accounting software and any other mission critical systems relating directly to the accounting function Year 2000 compliant by April 1, 1999, the beginning of its fiscal year. For all other areas, CAI's goal is to have all mission critical systems Year 2000 compliant by July 1, 1999. VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that its vendors and service providers provide CAI with information as to the compliance status of products and/or services used by CAI and its operating subsidiaries, which information is subject to Company testing and verification. Although the Company has received information from some of its vendors and service providers, it has not yet received information from each of the vendors and service providers it has identified. The Company will continue to pursue its vendors and service providers in order to obtain the necessary information regarding Year 2000 compliance of such vendors and service providers. COSTS. The Company has estimated that it will cost approximately $375,000 to effect its Year 2000 compliance program, based on information it has received as of December 31, 1998 from vendors and service providers. The Company anticipates that most of the cost associated with its Year 2000 compliance program will be the result of remediation or replacement of non- compliant equipment necessary for the Company's analog video operations and internal business processes. RISKS. The failure to correct a material Year 2000 problem could cause an interruption or failure of certain of the Company's normal business functions or operations, which could have a material adverse effect on its results of operations, liquidity or financial condition. Due to the uncertainty inherent in other Year 2000 issues that are ultimately beyond CAI's control, including, for example, the final Year 2000 readiness of its mission critical vendors and service providers, the Company is unable to determine at this time the likelihood of a material impact on its results of operations, liquidity or financial condition, due to such Year 2000 issues. The costs of the Company's Year 2000 program and the timetable for completing its Year 2000 preparations are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third-party remediation plans and other factors. The Company can give no assurance that these estimates will be achieved, and actual results could differ materially from those currently anticipated. In addition, there can be no assurance that the Company's Year 2000 program will be effective or that its contingency plans will be sufficient. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer software codes and embedded technology, the results of internal and external testing and the timeliness and effectiveness of remediation efforts of third parties. CONTINGENCY PLAN. At December 31, 1998, the Company is not aware of any mission critical aspect of its operations or internal business processes that can not be made Year 2000 compliant, however, its inventory and assessment of Year 2000 compliance is not yet completed. Due to the uncertainties presented by third party Year 2000 problems, and the possibility that, despite its efforts, the Company is unsuccessful in preparing its internal systems and equipment for the Year 2000, the Company expects to develop contingency plans for dealing with the most reasonably likely worst case scenario. The Company's assessment of its most reasonably likely worst case scenario and the exact nature and scope of its contingency plans will be affected by the Company's continued Year 2000 assessment and testing. The Company expects to complete such assessment by July 1, 1999 and to have all contingency systems in place and fully tested by the fourth quarter of 1999. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS. The following exhibits are filed herewith or incorporated by reference as indicated:
Incorporation by Reference Page EXHIBIT NO. DESCRIPTION (SEE LEGEND) REFERENCE 2.1 Joint Reorganization Plan of CAI Wireless Systems, Inc. [3] Exhibit 2.1 and Philadelphia Choice Television, Inc. 3.1 Amended and Restated Certificate of Incorporation of [1] Exhibit 3.1 CAI 3.2 Amended and Restated Bylaws of CAI [1] Exhibit 3.2 3.3 Certificate Amending the Amended and Restated [7] Exhibit 3.1 Certificate of Incorporation of CAI 4.1 Amended and Restated Note Purchase Agreement dated as [2] Exhibit 4.1 of July 30, 1998 between Registrant and Merrill Lynch Global Allocation Fund, Inc. 4.2 Indenture dated as of October 14, 1998 between CAI [3] Exhibit 4.1 and State Street Bank and Trust Company governing CAI's 13% Senior Notes due 2004 4.3 Note Purchase Agreement dated as of October 14, 1998 [3] Exhibit 4.2 by and between CAI and Merrill Lynch Global Allocation Fund, Inc. 4.4 Senior Secured A Note in the principal amount of $30 [3] Exhibit 4.3 million due October 14, 2000 4.5 Senior Secured B Note in the principal amount of $50 [3] Exhibit 4.4 million due October 14 2000 4.6 Registration Rights Agreement dated as of October 14, [7] Exhibit 4.1 1998 by and among CAI, Merrill Lynch Global Allocation Fund, Inc. and Merrill Lynch Equity/Convertible Series Fund (Global Allocation Portfolio) 10.1 1998 Outside Directors' Stock Option Plan [9] Exhibit 10.1 10.2 1998 Stock Option Plan [9] Exhibit 10.2 10.3 Amended and Restated Employment Agreement dated as of [9] Exhibit 10.3 October 14, 1998 between CAI and Jared E. Abbruzzese 10.4 Amended and Restated Employment Agreement dated as of [9] Exhibit 10.4 October 14, 1998 between CAI and James P. Ashman 10.5 Amended and Restated Employment Agreement dated as of [9] Exhibit 10.5 October 14, 1998 between CAI and Gerald Stevens- Kittner 10.6 Amended and Restated Employment Agreement dated as of [9] Exhibit 10.6 October 14, 1998 between CAI and Bruce Kostreski 10.7 Amended and Restated Employment Agreement dated as of [9] Exhibit 10.7 October 14, 1998 between CAI and Derwood Edge 16. Letter by PricewaterhouseCoopers to Securities and [4] Exhibit 16. Exchange Commission dated August 6, 1998 27. Financial Data Schedule 99.1 Disclosure Statement dated as of June 30, 1998 [5] Exhibit 99.1 99.2 Disclosure Statement Supplement dated as of July 15, [6] Exhibit 99.1 1998 99.3 Interim Order Authorizing Postpetition Financing [2] Exhibit 99.1 99.4 Press Release dated July 30, 1998 [2] Exhibit 99.2 99.5 Pro Forma Balance Sheet Giving Effect to the [7] Exhibit 99.1 Company's Reorganization Plan as if it had occurred on September 30, 1998 99.6 Revised Pro Forma Balance Sheet Giving Effect to the [8] Exhibit 99.1 Company's Reorganization Plan as if it had occurred on September 30, 1998
LEGEND [1] Incorporated by reference to the exhibits to the Company's Quarterly Report on Form 10-Q for September 30, 1995. [2] Incorporated by reference to the exhibit to the Company's Current Report on Form 8-K dated August 3, 1998. [3] Incorporated by reference to the exhibit to the Company's Current Report on Form 8-K dated October 15, 1998. [4] Incorporated by reference to the exhibit to the Company's Current Report on Form 8-K dated August 6, 1998. [5] Incorporated by reference to the exhibit to the Company's Current Report on Form 8-K dated July 1, 1998. [6] Incorporated by reference to the exhibit to the Company's Current Report on Form 8-K dated July 16, 1998. [7] Incorporated by reference to the exhibit to the Company's Quarterly Report on Form 10-Q for September 30, 1998. [8] Incorporated by reference to the exhibit to the Company's Quarterly Report on Form 10-Q/A for September 30,1998, filed with the Commission on June 29, 1999. [9] Incorporated by reference to the exhibit to the Company's Quarterly Report on Form 10-Q for December 31, 1998. Filed herewith. b) REPORTS ON FORM 8-K. (1) Form 8-K filed October 15, 1998, reporting the following: Item 3. Bankruptcy or Receivership. CAI and one of its subsidiaries filed a petition for reorganization relief under Chapter 11 of the United States Bankruptcy Code on July 30, 1998. The Plan was confirmed on September 30, 1998 and consummated on October 14, 1998. Item 5. Other Events. Simultaneously with the consummation of the Plan, CAI consummates an $80 million senior secured credit facility (Exit Facility) of which $64 million was used to repay principal, interest and fees on the $60 million interim debtor-in-possession financing. Item 7. Financial Statements and Exhibits. (c) Exhibits 2.1 Joint Reorganization Plan of CAI Wireless Systems, Inc. and Philadelphia Choice Television, Inc. dated June 30, 1998. 4.1 Indenture dated as of October 14, 1998 governing the terms of registrant's 13% Senior Notes due 2004. 4.2 Note Purchase Agreement dated as of October 14, 1998 by and between registrant and Merrill Lynch Global Allocation Fund, Inc. 4.3 Senior Secured A Note in the principal amount of $30 million due October 14, 2000. 4.4 Senior Secured B Note in the principal amount of $50 million due October 14, 2000. (2) Form 8-K filed October 30, 1998, reporting the following: Item 1. Changes in Control of Registrant. In connection with the consummation of its previously- announced reorganization under Chapter 11 of the U.S. Bankruptcy Code, the Company issued its voting common stock to holders of its 12.25% Senior Notes due 2002 (the "Old Senior Notes"). As a result of this issuance, certain holders of Old Senior Notes acquired more than 10% of the voting securities of CAI. In response to Item 1, CAI disclosed the identity and certain other information regarding these 10% holders. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURE TITLE DATE /S/ Vice President and Controller June 29, 1999 ARTHUR J. MILLER (Principal Accounting Officer)
EX-27 2
5 CAI Wireless Systems, Inc. and Subsidiaries Financial Data Schedule As Of and For the Nine Months Ended December 31, 1998 (Presented below are the operating results for the Reorganized Company (2.5 months ended December 31, 1998) and the predecessor entity (6.5 months ended October 14, 1998). 2-MOS 6-MOS MAR-31-1999 MAR-31-1999 OCT-15-1998 APR-01-1998 DEC-31-1998 OCT-14-1998 21,078,515 0 0 0 741,722 0 281,954 0 0 0 0 0 41,327,333 0 2,822,316 0 305,840,862 0 0 0 106,456,285 0 0 0 0 0 172,414 0 120,362,898 0 305,840,862 0 0 0 3,490,526 11,481,498 0 0 13,610,746 34,423,362 735,053 62,585,349 44,250 115,050 6,611,422 18,243,038 (17,355,233) (99,905,471) 0 0 (17,355,233) (99,905,471) 0 0 0 85,355,624 0 0 (17,355,233) (14,549,847) (1.01) 0 (1.01) 0
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