<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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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 333-03288
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CS Wireless Systems, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 23-2751747
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
200 Chisholm Place, Suite 202, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 509-2634
-----------------------------
N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report.
Indicate by check X 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 No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Shares Outstanding
Class as of December 12, 1996
----- -----------------------
<S> <C>
Common Stock, $.001 par value 10,445,408
</TABLE>
1
<PAGE> 2
Part I - Financial Information
Item 1. - Financial Statements
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $136,844 $ 184
Subscriber receivables, net 2,232 370
Prepaid expenses and other 442 35
-------- --------
Total current assets 139,518 589
Plant and equipment, net 41,076 12,220
License and leased license investment, net 172,668 29,500
Goodwill, net 51,746 33,379
Debt issuance costs and other assets, net 10,302 --
-------- --------
$415,310 $ 75,688
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,773 $ 2,286
Current portion of long-term debt 186 52
Current portion of BTA auction payable (note 4) 4,469 --
Other current liabilities 644 398
-------- --------
Total current liabilities 12,072 2,736
Long-term debt, less current portion (notes 2 and 3) 259,862 60
BTA auction payable, less current portion (note 4) 4,259 --
Due to CAI Wireless Systems, Inc. -- 1,831
Deferred income taxes 8,668 10,745
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares, -- --
no shares issued and outstanding
Common stock, $.001 par value; authorized 40,000,000 shares,
issued and outstanding: 10,110,000 shares in 1996 and
3,254,326 shares in 1995 10 3
Additional paid-in capital 150,980 61,520
Accumulated deficit (20,541) (1,207)
-------- --------
Total stockholders' equity 130,449 60,316
======== ========
$415,310 $ 75,688
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
<PAGE> 3
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
-------------------- -----------------------
Three Nine Three Months Nine
Months Months Ended Months
Ended Ended Ended
-------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 6,274 $ 15,994 $ 2,325 $ 6,170
Operating expenses:
Systems operations 3,731 9,400 827 2,107
Marketing 1,057 2,165 125 471
General and administrative 2,927 7,561 825 2,863
Depreciation and amortization 6,074 13,853 1,658 3,020
-------- -------- ------- -------
Total operating expenses 13,789 32,979 3,435 8,461
-------- -------- ------- -------
Operating loss (7,515) (16,985) (1,110) (2,291)
Other income (expense):
Interest income 1,929 4,907 -- -
-
Interest expense (7,245) (17,490) (221) (233)
-------- -------- ------- -------
Total other income (expense), net (5,316) (12,583) (221) (233)
-------- -------- ------- -------
Loss before income taxes (12,831) (29,568) (1,331) (2,524)
Income tax benefit 4,345 10,234 343 649
-------- -------- ------- -------
Net loss $ (8,486) $(19,334) $ (988) $(1,875)
======== ======== ======= ======
Net loss per common share $ (0.84) $ (2.21) $ (0.30) $ (0.58)
======== ======== ======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(19,334) $ (1,875)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization 13,853 3,020
Deferred income taxes (10,235) (649)
Accretion on discount notes and amortization of debt issuance 16,390 --
costs
Non-cash interest expense on other long term 1,036 --
Changes in assets and liabilities, net of effects of
contributions:
Subscriber receivables (1,317) (169)
Prepaid expenses and other (122) 7
Accounts payable, accrued expenses and other liabilities 386 2,533
-------- --------
Net cash provided by operating activities 657 2,867
Cash flows from investing activities:
Purchases of plant and equipment (9,817) (4,792)
Additions to license and leased license investment (11,230) --
Other 745 --
-------- --------
Net cash used in investing activities (20,302) (4,792)
Cash flows from financing activities:
Payments on notes and BTA auction payable (30,739) (20)
Advances from Parent -- 1,365
Proceeds from Unit Offering 229,484 --
Debt issuance and organizational costs (10,792) --
Cash distributed to stockholders (31,648) --
-------- --------
Net cash provided by financing activities 156,305 1,345
-------- --------
Net increase (decrease) in cash and cash equivalents 136,660 (580)
Cash at beginning of period 184 710
-------- --------
Cash and cash equivalents at end of period $136,844 $ 130
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
(1) GENERAL
(a) Description of Business
CS Wireless Systems, Inc. and subsidiaries (the "Company" or "CS
Wireless") develops, owns and operates a network of wireless cable television
systems providing subscription television services. The Company has a
portfolio of wireless cable channel rights in various markets in the United
States. As of September 30, 1996, the Company had systems in operation in
eight markets. Systems in other markets are currently under construction and
development by the Company.
(b) Basis of Presentation
The condensed consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial information
includes financial information of the Company and ACS Ohio, Inc. ("ASC Ohio").
Financial information for the three and nine months ended September 30, 1995
reflects the results of operations of ACS Ohio, the predecessor of the Company
and a wholly-owned subsidiary of ACS Enterprises, Inc. ("ACS Enterprises").
ACS Ohio owned and operated the wireless cable television system serving the
Cleveland, Ohio metropolitan area. Financial information as of December 31,
1995 and for the period January 1, 1996 through February 23, 1996 reflects the
combined financial position and results of operations for the Company's
wireless cable system serving the Cleveland, Ohio metropolitan area. The
combined financial information for the period through February 23, 1996
includes the accounts of the Company and certain assets of Atlantic
Microsystems, Inc. For the period subsequent to February 23, 1996, the
Company's consolidated financial statements include the results of operations
of the entities contributed to the Company on February 23, 1996 (see note 2).
On September 29, 1995, ACS Enterprises (including ACS Ohio) was acquired by CAI
Wireless Systems, Inc. ("CAI") in a business combination accounted for as a
purchase. As a result of the acquisition, financial information for periods
through September 29, 1995 and periods subsequent to September 29, 1995 is
presented on a different cost basis and therefore, such information is not
comparable.
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of September 30, 1996, and the
results of operations and cash flows for the three and nine months ended
September 30, 1995 and 1996. These results are not necessarily indicative of
the results to be expected for the full fiscal year.
(c) Common Shares Outstanding and Net Loss Per Common Share
Net loss per common share is based on the net loss applicable to the
weighted average number of common shares outstanding of 8,758,882 and 3,254,326
for the nine-month periods ended September 30, 1996 and 1995, respectively, and
10,110,000 and 3,254,326 for the three month periods ended September 30, 1996
and 1995, respectively. For purposes of the accompanying condensed
consolidated financial information, the Company has retroactively adjusted all
references to the number of outstanding shares prior to February 23, 1996 to
reflect the number of shares issued to CAI on February 23, 1996 (see note 2)
related to the wireless cable television system in Cleveland Ohio.
Fully-diluted loss per common share is not presented as it would not materially
differ from primary loss per common share.
(2) CONTRIBUTIONS TO COMPANY
On February 23, 1996, CAI and Heartland Wireless Communications, Inc.
("Heartland") contributed to the Company (the "Contributions") certain wireless
cable television assets comprising various markets in the United States. In
connection with the Contributions, CAI and Heartland received approximately 5.4
million and 3.6 million shares, respectively, of the Company's newly-issued
common stock. In addition, CAI received approximately $750,000 in cash and
Heartland received approximately $30.9 million in cash, a nine-month note for
$25 million (the "Heartland Short-Term Note") and a 10-year note for $15
million (the "Heartland Long-Term Note"). The Heartland Short-Term Note was
repaid on March 1, 1996 with a portion of the net proceeds from the Unit
Offering (see note 3). The interest rate on the Heartland Long-Term Note
increases from 10% to 15% if the Heartland Long-Term Note is not repaid within
one year of issuance, with interest accruing and added to the balance annually.
No cash interest will be paid on the Heartland Long-Term Note until after the
Senior Notes (see note 3) have been paid in full.
5
<PAGE> 6
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(2) CONTRIBUTIONS TO COMPANY--(CONTINUED)
Additionally, in connection with the Contributions, MMDS Holdings II,
Inc., an affiliate of Bell Atlantic, and NYNEX MMDS Holding Company, an
affiliate of NYNEX, each received 500,000 shares of common stock of the Company
for certain non-cash consideration.
The consummation of the Contributions has been accounted for at CAI's
and Heartland's historical cost basis, reduced by the amount of cash and notes
distributed to CAI and Heartland in connection with the Contributions. A
substantial portion of the net assets contributed by Heartland were purchased
by Heartland on February 23, 1996. Accordingly, Heartland's cost basis with
respect to such net assets was determined based on preliminary estimates of the
fair value of such net assets. In addition, subsequent to the Contributions,
the Company, CAI and Heartland will complete certain post-closing adjustments
that could result in an adjustment to the net assets contributed to the
Company. Subsequent to September 30, 1996 the Company distributed an
additional $5 million to Heartland as a part of the equity true-up per the
provisions of the agreement governing the Contributions. The net assets
contributed to the Company consist primarily of plant and equipment and various
wireless cable channel rights. The following is a summary of the net assets
contributed to the Company on February 23, 1996 (in thousands):
<TABLE>
<S> <C>
Working capital $ 911
Plant and equipment, net 25,755
License and leased license investment and 143,497
goodwill
Deferred income taxes (8,212)
Other liabilities (1,636)
--------
160,315
Cash and notes distributed to CAI and Heartland 71,648
--------
Net assets contributed $ 88,667
========
</TABLE>
The condensed consolidated financial statements of the Company for the
nine months ended September 30, 1996 include the results of operations from
February 23, 1996 of the net assets contributed to the company in the
Contributions. Summarized below is unaudited pro forma financial information
as if the Contributions and Unit Offering (see note 3) had been consummated as
of the beginning of 1996. The pro forma financial information does not purport
to represent what the Company's results of operations actually would have been
had such transactions occurred on January 1, 1996, or to project the Company's
results of operations for any future period.
<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
--------------
<S> <C>
Revenues $ 17,649
Net Loss 21,195
Net loss per common share (2.39)
</TABLE>
(3) UNIT OFFERING
On February 23, 1996, the Company consummated a private placement of
100,000 units (the "Units") consisting of $400 million aggregate principal
amount of 11 3/8% Senior Discount Notes due 2006 ("Senior Notes") and 110,000
shares of common stock of the Company. The Senior Notes will mature on March
1, 2006. The issue price of the Senior Notes represents a yield to maturity of
11 3/8% per annum computed on a semi-annual bond equivalent basis. Cash
interest on the Senior Notes will not be payable prior to March 1, 2001.
Commencing September 1, 2001, cash interest on the Senior Notes will be payable
on March 1 and September 1 of each year at a rate of 11 3/8% per annum. The
issuance of the Units resulted in net proceeds to the Company of
6
<PAGE> 7
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(3) UNIT OFFERING--(CONTINUED)
approximately $218.7 million, including amounts attributable to the common
stock and after underwriting discounts and other debt issuance costs
aggregating approximately $10.8 million. For financial reporting purposes, the
shares of common stock were valued at $800,000.
The Senior Notes were issued pursuant to an Indenture which contains
certain restrictive covenants and limitations. Among other things, the
Indenture limits the incurrence of additional indebtedness, limits the making
of restricted payments (as defined) including the declaration and/or payment of
dividends, places limitations on dividends and other payments by the Company's
subsidiaries, prohibits the Company and its subsidiaries from engaging in any
business other than the transmission of video, voice and data and related
businesses and services, and places limitations on liens, certain asset
dispositions and merger/sale of assets activity.
(4) BTA AUCTION
The Federal Communications Commission (the "FCC") recently concluded
auctions for the award of initial commercial wireless cable licenses for "Basic
Trading Areas" or "BTAs" (the "BTA Auction"). Pursuant to an agreement among
CAI, Heartland and the Company, CAI and Heartland are obligated to convey to
the Company, at their cost, and the Company has agreed to purchase any rights
acquired in the BTA Auction relating to the Company's markets, as well as
certain other BTAs. CAI and Heartland were the winning bidders in the amount
of approximately $18.9 million with respect to BTAs that will be conveyed to
the Company. As of September 30, 1996, the Company's condensed consolidated
balance sheet reflects a BTA Auction payable to CAI and Heartland of
approximately $8.7 million representing the remaining estimated unpaid balance
with respect to BTAs to be conveyed to the Company.
(5) ACQUISITIONS
On July 17, 1996, the Company acquired from Heartland all of the
outstanding stock of Heartland Wireless Georgia Properties, Inc., a Georgia
corporation ("Heartland Georgia") that was a wholly-owned subsidiary of
Heartland (the "Heartland Acquisition"). Heartland Georgia owns (i) leases and
licenses for wireless cable frequency rights for wireless cable channels
transmitting in Adairsville, Powers Crossroads and Rutledge, Georgia (the
"Atlanta (suburbs) markets") and (ii) leases for four tower sites. The
purchase price was $7.2 million in cash. The Company has agreed to sell to an
unrelated third party (i) certain assets of Heartland Georgia, such leases and
licenses for wireless cable frequency rights for wireless cable channels
transmitting in the Atlanta (suburbs) markets and leases to the four tower
sites in such markets for $7,300,000, subject to adjustment, plus reimbursement
of certain expenses and (ii) the BTA License relating to Atlanta, Georgia for
$6,000,000, subject to adjustment. The closing of such sale is subject to
various conditions precedent and there can be no assurance that such
transaction will be consummated.
(6) SUBSEQUENT EVENTS
The Company, USA Wireless Cable, Inc., a Nebraska corporation ("USA"),
and Christian M. Hilliard entered into an Agreement and Plan of Merger dated as
of July 23, 1996, pursuant to which the Company, on October 11, 1996, acquired
all of the issued and outstanding common stock of USA in a merger transaction
(the "USA Wireless Acquisition"). USA Wireless provided wireless cable service
in certain Midwest markets, including but not limited to the Effingham, Kansas,
Wellsville, Kansas, Radcliffe, Iowa, Scottsbluff, Nebraska, Kalispell, Montana
and Rochester, Minnesota markets and serviced approximately 3,600 subscribers.
7
<PAGE> 8
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(6) SUBSEQUENT EVENTS--(CONTINUED)
At the effective time of the USA Wireless Acquisition, the outstanding
shares of USA Common Stock were converted into rights to receive an aggregate
$17,012,000, of which approximately $6,000,000 was paid in the form of common
stock of the Company and approximately $11,000,000 consisted of approximately
$10 million of indebtedness assumed by the Company, and approximately $760,000
(the "Note Amount") in the form of two promissory notes, each payable on
demand.
The Company has entered into a letter of intent and signed a
definitive agreement with People's Choice TV Corp. ("PCTV") to exchange the
Company's Salt Lake City, Utah market for PCTV's Kansas City, Missouri market.
The Company has also entered into a letter of intent with American Telecasting,
Inc. ("ATI") to exchange the Company's Minneapolis, Minnesota, Bakersfield,
California and Stockton/Modesto, California markets for ATI's Little Rock,
Arkansas, Louisville, Kentucky, Oklahoma City, Oklahoma and Wichita, Kansas
markets. The Company will pay approximately $5.5 million in cash to ATI as
part of the exchange. There can be no assurance that the foregoing
transactions will be consummated.
8
<PAGE> 9
Part I - Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
CS Wireless Systems, Inc. (the "Company" or "CS Wireless") is one of
the largest wireless cable television companies in the United States in terms
of line-of-sight ("LOS") households and subscribers. The Company's 12 markets
encompass approximately 6.9 million television households, approximately 5.7
million of which are LOS households, as estimated by the Company. The Company
had approximately 61,400 subscribers as of September 30, 1996. The Company is
a majority-owned subsidiary of CAI Wireless Systems, Inc. ("CAI"), the largest
developer, owner and operator of wireless cable television systems in the
United States in terms of LOS households. The Company is also affiliated with
Heartland Wireless Communications, Inc. ("Heartland"), a leading developer,
owner and operator of wireless cable systems in small to mid-size markets.
On February 23, 1996, CAI contributed to the Company (the "CAI
Contributions") wireless cable television assets or stock of subsidiaries
owning wireless cable television assets comprising four markets located in
Bakersfield and Stockton / Modesto, California; Charlotte, North Carolina; and
Cleveland, Ohio (ACS Ohio, Inc.). CAI received from the Company shares of
Common Stock initially constituting approximately 60% of the Company's common
stock, $.001 par value per share (the "Common Stock"). Simultaneously,
Heartland contributed or sold to the Company (the "Heartland Contributions"
and, together with the CAI Contributions, the "Contributions") wireless cable
television assets comprising eight markets located in Grand Rapids, Michigan;
Minneapolis, Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas,
Fort Worth and San Antonio, Texas; and Salt Lake City, Utah. Heartland
received from the Company shares of Common Stock initially constituting
approximately 40% of the Common Stock, approximately $28.3 million in cash, a
nine-month note for $25 million (the "Heartland Short-Term Note") and a 10-year
note for $15 million (the "Heartland Long-Term Note," and together with the
Heartland Short-Term Note, the "Heartland Notes"). The Heartland Short-Term
Note was repaid on March 1, 1996 with a portion of the net proceeds from the
Unit Offering (as defined). The equity interests of CAI and Heartland in the
Company (i) have been diluted by the issuance of Common Stock to the purchasers
of the Units (as defined), the issuance of Common Stock in connection with the
USA Wireless acquisition and the issuance of a total of 1,000,000 shares (the
"BANX Shares") to MMDS Holdings II, Inc., an affiliate of Bell Atlantic, and
NYNEX MMDS Holding Company, an affiliate of NYNEX (collectively, the "BANX
Affiliates"), and (ii) are subject to further dilution for future issuance of
Common Stock. As of December 12, 1996, CAI owned approximately 52% of the
Common Stock, Heartland owned approximately 34% of the Common Stock, the BANX
Affiliates owned approximately 10% of the Common Stock, and certain other
stockholders of the Company owned approximately 4% of the Common Stock.
The Company's revenues are derived principally from the sale of
subscription video services using wireless technology. Its principal costs of
operations are programming, license fees, and general and administrative
expenses. Currently, the Company has been adding an average aggregate of 700
new subscribers per month.
The Company had revenues of $16.0 million and $6.3 million, for the
nine months and three months ended September 30, 1996, respectively. Net loss
was $19.3 million and $8.5 million for the nine months and three months ended
September 30, 1996, respectively. As of September 30, 1996, the Company had
approximately 61,400 subscribers.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
LIQUIDITY AND CAPITAL RESOURCES
Companies within the wireless cable industry require significant
capital. 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, the conversion of analog systems to digital
technology, start-up costs related to the commencement of operations and
subscriber installation costs. The Company intends to finance its capital
requirements through a combination of the issuance of debt and equity
securities, the disposition of wireless cable systems that are inconsistent
with the Company's business strategy, the incurrence of loans and the
assumption of debt and other liabilities in connection with acquisitions. Each
of the operating systems that has been contributed to the Company in connection
with the Contributions has incurred operating losses since inception. The
combined cash flow from operating activities of the Company's operating systems
has to date been insufficient to cover the combined operating expenses of such
systems.
The Company estimates that the launch of a new digital wireless cable
system in a typical market will require capital expenditures of approximately
$8.0 to $10.0 million of start-up expenses for headend and transmission
equipment and booster sites. The Company estimates that the conversion of an
existing analog wireless cable system in a typical market to a digital wireless
cable system will require the expenditure of approximately $6.0 to $8.0
million. These costs reflect the Company's good faith estimates; however, such
estimates are speculative because to date there are no operating digital
wireless cable systems, and the Company's estimates assume the efficacy and
ready availability of digital technology. The Company estimates that the
launch of a new analog wireless cable system in a typical market requires the
aggregate capital expenditure of approximately $2.2 million. Incremental
installation costs are estimated by the Company to be approximately $750 to
$1,000 per subscriber in the case of a digital wireless system and
approximately $350 to $700 per subscriber in the case of an analog or analog
converting to digital system. The head-end and transmission expenditures must
be made before programming can be delivered to subscribers and in certain
instances, booster sites will be required to increase LOS households. Labor
installation costs for a subscriber are incurred only after that subscriber
signs up for services.
The research and development of digital technology performed by the
Company to date has been de minimis. The Company, however, participated with
CAI and Heartland in a demonstration of digital satellite television
transmission using MMDS technology as a delivery platform and incorporating a
digital television set-top converter.
A portion of the net proceeds of the Unit Offering was used to pay
$28.3 million to Heartland in connection with the Contributions, to repay the
$25.0 million Heartland Short-Term Note, and to pay for certain formation costs
and expenses associated with the Unit Offering. The Company has budgeted
capital expenditures of approximately $15 million for the balance of 1996,
consisting of approximately $5 million for uncommitted channel acquisitions, $5
million for head-end transmitters and $5 million for subscriber installations.
The Company also anticipates cash uses of up to an additional $15 to $22
million in conjunction with several planned transactions ($10 million for the
USA Wireless acquisition, $5 million for the CAI and Heartland true-up on the
Contributions, and $5 to $7 million on other acquisition transactions). The
Company also anticipates a shortfall in cash from operating activities in the
foreseeable future which will require funding from a portion of the remaining
proceeds of the Unit Offering. For 1997, the Company has budgeted
approximately $65 million in capital expenditures, including approximately $45
million for subscriber installation costs relating to the digital technology,
approximately $5 million for build-out of several markets to accommodate a new
line of business, internet access. For 1998, the Company has budgeted
approximately $120 million of additional capital expenditures. Based upon the
Company's current operating plans, it believes that the net proceeds from the
Unit Offering will provide sufficient funds to meet its needs for at least the
next 12 months.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
LIQUIDITY AND CAPITAL RESOURCES--(CONTINUED)
On October 11, 1996, the Company acquired USA Wireless Cable, Inc.
(See Part II, Item 5, "Other Information"), a wireless cable service provider
pursuant to the USA merger agreement. The Company is required under the terms
of the USA merger agreement to retire certain indebtedness of USA, estimated at
approximately $10 million.
Capital expenditures in excess of the net proceeds from the Unit
Offering may be financed, in whole or in part, by the Company through debt or
equity financings, subscriber equipment lease financings, joint ventures or
other arrangements. In the event the Company is unable to arrange equity
financing or place debt in amounts and on terms satisfactory to the Company and
consistent with its budgeted financing requirements, the ability of the Company
to develop and expand its operations and to satisfy its fixed obligations,
including its debt service and principal payment obligations in respect of the
Senior Notes (as defined), would be materially adversely affected. The ability
of the Company to take any of the foregoing steps or enter into other
significant transactions will likely require the unanimous approval of CAI and
Heartland.
In 1996, net cash from financing activities of $156.3 million was partially
used by investing activities of $20.3 million and was increased by $.7 million
provided by operating activities. At September 30, 1996, the Company has cash
and cash equivalents of approximately $136.8 million
RESULTS OF OPERATIONS
With respect to the discussion of the results of operations, the
results presented are comprised of financial information of the Company and ACS
Ohio, Inc. ("ASC Ohio"). Financial information for the three and nine months
ended September 30, 1995 reflects the results of operations of ACS Ohio, the
predecessor of the Company and a wholly-owned subsidiary of ACS Enterprises,
Inc. ("ACS Enterprises"). ACS Ohio owned and operated the wireless cable
television system serving the Cleveland, Ohio metropolitan area. Financial
information for the period January 1, 1996 through February 23, 1996 reflects
the combined financial position and results of operations for the Company's
wireless cable system serving the Cleveland, Ohio metropolitan area. The
combined financial information for the period through February 23, 1996
includes the accounts of the Company and certain assets of Atlantic
Microsystems, Inc. For the period subsequent to February 23, 1996, the
Company's consolidated financial statements include the results of operations
of the entities contributed to the Company on February 23, 1996 as part of the
Contributions.
Peroid-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance
due to the Contributions on February 23, 1996. In addition, on September 29,
1995, ACS Enterprises (including ACS Ohio) was acquired by CAI in a business
combination accounted for as a purchase. As a result of the acquisition,
financial information for periods through September 29, 1995 and periods
subsequent to September 29, 1995 is presented on a different cost basis and,
therefore, such information is not comparable.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
Revenue for the three-month period ended September 30, 1996 was $6.3
million as compared to revenue for the three months ended September 30, 1995 of
$2.3 million, an increase of 174%. The increase resulted primarily from the
increase in subscribers brought about by the February 23, 1996 contribution of
markets by CAI and Heartland to CS Wireless.
Operating expenses were $13.8 million and $3.4 million for the
three-month periods ended September 30, 1996 and 1995, respectively. The $10.4
million increase was attributable to increases in system operations of $2.9
million (1996 - $3.7 million; 1995 - $0.8 million), marketing expense of $1.0
million (1996 - $1.1 million; 1995 - $0.1 million), general and administrative
costs of $2.1 million (1996 - $2.9 million; 1995 - $0.8 million) and
depreciation and amortization expense of $4.4 million (1996 - $6.1 million;
1995 - $1.7 million). These increases are primarily due to increases in the
subscriber base and subscriber equipment resulting from the February 23, 1996
contribution of markets by CAI and Heartland to CS Wireless.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
RESULTS OF OPERATIONS--(CONTINUED)
Other expense increased from $0.2 million in 1995 to $5.3 million in
1996, primarily due to the accretion on discount notes and amortization of debt
issuance costs related to the issuance of the Units as of February 23, 1996
totaling $6.8 million and other interest expense of $0.4 million, partially
offset by interest income in 1996 of $1.9 million with no comparable amount in
1995.
The $8.5 million net loss for the three months ended September 30,
1996 compares to a net loss of $1.0 million for the same period of 1995. The
$7.5 million increase in net loss resulted primarily from the increase in
operating expenses, offset by an increase in deferred income tax benefits from
$.3 million for the three months ended September 30, 1995 to $4.3 million for
the same three-month period of 1996.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenue for the nine-month period ended September 30, 1996 was $16.0
million as compared to revenue for the nine months ended September 30, 1995 of
$6.2 million, an increase of 158%. The increase resulted primarily from the
increase in subscribers brought about by the February 23, 1996 contribution of
markets by CAI and Heartland to CS Wireless.
Operating expenses were $33.0 million and $8.5 million for the
nine-month periods ended September 30, 1996 and 1995, respectively. The $24.5
million increase was attributable to increases in system operations of $7.3
million (1996 - $9.4 million; 1995 - $2.1 million), marketing expense of $1.7
million (1996 - $2.2 million; 1995 - $0.5 million) general and administrative
costs of $4.6 million (1996 - $7.5 million; 1995 - $2.9 million) and
depreciation and amortization expense of $10.9 million (1996 - $13.9 million;
1995 - $3.0 million). These increases are primarily due to increases in the
subscriber base and subscriber equipment resulting from the February 23, 1996
contribution of markets by CAI and Heartland to CS Wireless.
Other expense increased from $0.2 million in 1995 to $12.6 million in
1996, primarily due to the accretion on discount notes and amortization of debt
issuance costs related to the issuance of the Units as of February 23, 1996
totaling $16.7 million and other interest expense of $0.8 million, partially
offset by interest income in 1996 of $4.9 million with no comparable amount in
1995.
The $19.3 million net loss for the nine months ended September 30,
1996 compares to a net loss of $1.9 million for the same period of 1995. The
$17.4 million increase in net loss resulted primarily from the increase in
operating expenses, offset by an increase in deferred income tax benefits from
$.3 million for the nine months ended September 30, 1995 to $10.2 million for
the same nine-month period of 1996.
The FCC recently conducted an auction (the "BTA Auction") of available
commercial wireless cable spectrum in 487 basic trading areas ("BTAs") and six
additional BTA-like geographic areas around the country. The winner of a BTA
has the right to develop the vacant MMDS frequencies throughout the BTA,
consistent with certain specified interference criteria that protect existing
ITFS and MMDS channels. Existing ITFS and MMDS channel rights holders also
must protect the BTA winner's spectrum from interference caused by power
increases or tower relocations. CAI was the high bidder for 32 BTA
authorizations, for a total of $48.8 million. Heartland was the high bidder
for 93 BTA authorizations, for a total of $19.8 million. CAI and Heartland are
obligated to convey to the Company, at their cost, and the Company has agreed
to purchase, any rights acquired in the BTA Auction relating to the Company's
markets, as well as certain other BTAs. Rights to BTAs for the Company's
Bakersfield and Stockton/Modesto, California; Charlotte, North Carolina; and
Cleveland, Ohio markets were acquired by CAI for approximately $5.6 million.
In addition, CAI purchased BTAs relating to Atlanta, Georgia and Louisville,
Kentucky for approximately $7 million. Of the aggregate $12.6 million,
approximately $9.0 million has been paid by CAI to the FCC in accordance with
the rules of the BTA Auction for these BTAS. Heartland purchased BTAs
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--(Continued)
RESULTS OF OPERATIONS--(CONTINUED)
relating to Little Rock, Arkansas, Long View, Washington, Benton Harbor,
Kalamazoo, Muskegon and Grand Rapids, Michigan, Dallas and San Antonio, Texas,
Minneapolis, Minnesota, Salt Lake City, Utah, Dayton, Ohio and Oklahoma City,
Oklahoma for approximately $5.3 million. Of this amount, approximately $1.1
million has been paid by Heartland to the FCC for these BTAS. The Company has
reimbursed CAI and Heartland, using a portion of the proceeds from the Unit
Offering, in the amount of $4.0 million, and will continue to reimburse CAI and
Heartland for any and all costs incurred by CAI and Heartland, which costs are
estimated to be up to $15 million, in connection with these BTAs in accordance
with the terms of the Participation Agreement. The Company's ability to
increase power or relocate its transmission facilities in markets where it is
not the owner of the BTA may be limited, which could increase the cost to the
Company of, and extend the time for, developing a commercially viable system.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company's adoption of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," during 1996 did not have a significant effect on its
financial position or results of operations.
The Company does not plan to adopt the fair value-based measurement
methodology for employees stock options contemplated by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, this Standard is not expected to have a significant effect on the
Company's financial position or results of operations.
FUTURE OPERATING RESULTS; FORWARD LOOKING STATEMENTS
The Company's future revenues and profitability are difficult to
predict due to a variety of risks and uncertainties, including (i) business
conditions and growth in the Company's existing markets, (ii) the successful
launch of systems in new markets, (iii) the Company's existing indebtedness and
the need for additional financing to fund subscriber growth and system
development, (iv) government regulation, including FCC regulations, (v) the
Company's dependence on channel leases, (vi) the successful integration of
future acquisitions and (vii) numerous competitive factors, including
alternative methods of distributing and receiving video transmissions.
The Company expects to continue its subscriber growth and launch
additional systems. Moderate increases in revenues and subscribers are
anticipated for the remainder of 1996 and 1997; however, the rate of increase
cannot be estimated with precision or certainty. The Company believes that G&A
and depreciation and amortization expense will continue to increase to support
overall growth.
Because of the foregoing uncertainties affecting the Company's future
operating results, past performance should not be considered to be a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods. In addition, the Company's
participation in a highly dynamic industry often results in significant
volatility in the price of the Company's bonds.
In addition to the matters noted above, certain other statements made
in this report are forward looking. Such statements are based on an assessment
of a variety of factors, contingencies and uncertainties deemed relevant by
management, including technological changes, competitive products and services,
management issues as well as those matters discussed specifically elsewhere
herein. As a result, the actual results realized by the Company could differ
materially from the statements made herein. Readers of this report are
cautioned not to place undue reliance on the forward looking statements made in
this report.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. OTHER INFORMATION
An important part of the Company's growth strategy is to expand its
markets and subscriber base through the acquisition of wireless cable systems
and channel rights in targeted markets throughout the midwest and southwest
regions of the United States. Through selected acquisitions, divestitures,
asset swaps and joint ventures, the Company will seek to increase its regional
concentration of wireless cable television systems in order to realize
economies of scale and operating efficiencies. The Company believes that its
strategy of increasing regional concentration of wireless cable television
systems and channel rights will also enhance the Company's ability to attract
potential joint venture opportunities with large strategic partners. The
Company also believes that these partnerships will enable it to benefit from
the partners' capital, infrastructure and brand identity, thereby increasing
the Company' ability to penetrate its markets. Consistent with this strategy,
the Company continues to explore and pursue opportunities to acquire additional
wireless cable television assets in markets that meet the Company's selection
criteria, to divest itself of wireless cable television assets that are
inconsistent with the Company's regional market emphasis, and to continually
evaluate its current markets to ensure that its portfolio of operating systems
and channel interests reflect the Company's growth strategy. It is CS
Wireless's policy not to discuss or comment upon negotiations regarding such
transactions until a definitive agreement is signed or other circumstances
indicate a high degree of probability that a transaction will be consummated,
unless the law otherwise requires.
On July 17, 1996, CS Wireless acquired from Heartland all of the
outstanding stock of Heartland Wireless Georgia Properties, Inc., a Georgia
corporation ("Heartland Georgia") that was a wholly-owned subsidiary of
Heartland (the "Heartland Acquisition"). Heartland Georgia owns (i) leases and
licenses for wireless cable frequency rights for wireless cable channels
transmitting in Adairsville, Powers Crossroads and Rutledge, Georgia (the
"Atlanta (suburbs) markets") and (ii) leases for four tower sites. The
purchase price was $7.2 million. The Company has agreed to sell to an
unrelated third party (i) certain assets of Heartland Georgia, such leases and
licenses for wireless cable frequency rights for wireless cable channels
transmitting in the Atlanta (suburbs) markets and leases to the four tower
sites in such markets for $7,300,000, subject to adjustment, plus reimbursement
of certain expenses and (ii) the BTA License relating to Atlanta, Georgia for
$6,000,000, subject to adjustment. The closing of such sale is subject to
various conditions precedent and there can be no assurance that such
transaction will be consummated.
On October 11, 1996, CS Wireless acquired all of the issued and
outstanding common stock ("USA Common Stock") of USA Wireless Cable, Inc.
("USA") in a merger transaction (the "USA Wireless Acquisition") pursuant to an
Agreement and Plan of Merger, dated as of July 23, 1996 (the "USA Merger
Agreement"). USA currently provides wireless cable service in certain Midwest
markets, including but not limited to the Effingham, Kansas, Wellsville,
Kansas, Radcliffe, Iowa, Scottsbluff, Nebraska, Kalispell, Montana and
Rochester, Minnesota markets (the "USA Markets"). USA currently services
approximately 3,600 subscribers in the USA Markets.
At the time of the USA Wireless Acquisition, the outstanding shares of
USA Common Stock were converted into rights to receive an aggregate
$17,012,000, of which approximately $6,000,000 was paid in the form of CS
Wireless common stock and approximately $10,000,000 consisted of approximately
$9,000,000 of indebtedness assumed by CS Wireless and an amount of
approximately $760,000 (the "Note Amount") in the form of two promissory notes,
payable on demand. $5,000 of the Note Amount represents payment for Hilliard's
covenant not to compete, and $755,000 of the Note amount is in satisfaction of
an obligation from USA to Hilliard.
The Company has entered into a letter of intent and signed a
definitive purchase agreement with PCTV to exchange CS Wireless' Salt Lake
City, Utah market for PCTV's Kansas City, Missouri market. CS Wireless has
also entered into a letter of intent with American Telecasting, Inc. ("ATI") to
exchange CS Wireless' Minneapolis,
14
<PAGE> 15
PART II. OTHER INFORMATION--(CONTINUED)
Minnesota, Bakersfield, California and Stockton / Modesto, California markets
for ATI's Little Rock, Arkansas, Louisville, Kentucky, Oklahoma City, Oklahoma
and Wichita, Kansas markets. CS Wireless will pay approximately $5.5 million
in cash to ATI as part of the exchange. There can be no assurance that the
foregoing transactions will be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
Exhibit 27 - Financial Schedule
(b) Reports on Form 8 K
None
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 12, 1996 CS WIRELESS SYSTEMS, INC.
By: /s/A. Scott Letier
-------------------------------
A. Scott Letier
Senior Vice President-Finance and
Chief Financial Officer
(Principal Financial Officer)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CS WIRELESS
SYSTEMS, INC. AND SUBSIDIARIES 3RD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 136,844
<SECURITIES> 0
<RECEIVABLES> 3,032
<ALLOWANCES> 800
<INVENTORY> 4,517
<CURRENT-ASSETS> 139,518
<PP&E> 44,555
<DEPRECIATION> 7,996
<TOTAL-ASSETS> 415,310
<CURRENT-LIABILITIES> 12,072
<BONDS> 264,121
0
0
<COMMON> 10
<OTHER-SE> 130,439
<TOTAL-LIABILITY-AND-EQUITY> 415,310
<SALES> 15,994
<TOTAL-REVENUES> 15,994
<CGS> 6,923
<TOTAL-COSTS> 9,400
<OTHER-EXPENSES> 22,896
<LOSS-PROVISION> 683
<INTEREST-EXPENSE> 17,490
<INCOME-PRETAX> (29,568)
<INCOME-TAX> (10,234)
<INCOME-CONTINUING> (19,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,334)
<EPS-PRIMARY> (2.21)
<EPS-DILUTED> (2.21)
</TABLE>
