<PAGE>
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 March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 333-3288
CS Wireless Systems, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 23-2751747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Chisholm Place, Suite 202, Plano, Texas 75075
(Address of principal executive offices) (Zip Code)
(972) 633-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ x ] No [ ]
Number of shares outstanding of each of the Registrant's classes of common
stock, as of the latest practicable date:
<TABLE>
Shares Outstanding
Class as of May 14, 1998
----- ------------------
<S> <C>
Common Stock, $.001 par value 10,700,506
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 65,010 $ 74,564
Restricted cash 5,030 5,030
Subscriber receivables, net 1,028 1,026
Accounts receivable from affiliates 67 --
Prepaid expenses and other 1,008 939
-------- --------
Total current assets 72,143 81,559
Plant and equipment, net 52,625 50,519
License and leased license investment, net 169,228 170,689
Goodwill, net 47,310 48,243
Investment in and loans to equity affiliates 7,732 8,503
Debt issuance costs and other assets, net 10,975 11,190
-------- --------
$360,013 $370,703
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,300 $ 8,370
Accounts payable to affiliates -- 282
Current portion of long-term debt 217 217
Current portion of BTA auction payable 561 1,122
Other current liabilities 676 1,523
-------- --------
Total current liabilities 9,754 11,514
Long-term debt, less current portion 291,502 283,686
BTA auction payable, less current portion 3,196 3,274
-------- --------
Total liabilities 304,452 298,474
-------- --------
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 10,702,609 shares in 1998 and 1997 11 11
Treasury stock, at cost; 2,103 shares in 1998 and 1997 (40) (40)
Additional paid-in capital 154,557 154,557
Accumulated deficit (98,967) (82,299)
-------- --------
Total stockholders' equity 55,561 72,229
-------- --------
$360,013 $370,703
-------- --------
-------- --------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue $ 6,823 $ 6,678
---------- ----------
Operating expenses:
Systems operations 3,908 3,695
Selling, general and administrative 4,119 3,815
Depreciation and amortization 7,224 6,585
---------- ----------
Total operating expenses 15,251 14,095
---------- ----------
Operating loss (8,428) (7,417)
Other income (expense):
Interest income 1,017 1,450
Equity in losses of affiliates (986) --
Interest expense (8,271) (7,996)
---------- ----------
Total other expense, net (8,240) (6,546)
---------- ----------
Loss before income taxes (16,668) (13,963)
Income tax benefit -- 1,357
---------- ----------
Net loss $(16,668) $(12,606)
---------- ----------
---------- ----------
Weighted average basic and diluted loss
per common share $ (1.56) $ (1.21)
---------- ----------
---------- ----------
Basic and diluted weighted average shares outstanding 10,700,506 10,448,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,668) $(12,606)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,224 6,585
Deferred income taxes -- (1,357)
Accretion on discount notes and amortization of debt
issuance costs 8,100 7,250
Non-cash interest expense on other long-term debt 164 699
Equity in losses of affiliates 986 --
Changes in assets and liabilities, net of effects of
contributions:
Subscriber receivables (2) 81
Prepaid expenses and other (246) (116)
Accounts payable, accrued expenses and other liabilities (305) 263
-------- ---------
Net cash provided by (used in) operating activities (747) 799
-------- ---------
Cash flows from investing activities:
Purchases of plant and equipment (5,964) (1,737)
Additions to license and leased license investment (956) (1,669)
Investment in equity affiliates (998) --
Investment in assets held for sale -- (1,002)
Other -- (175)
-------- ---------
Net cash used in investing activities (7,918) (4,583)
-------- ---------
Cash flows from financing activities:
Payments on notes payable (156) (2,103)
Payments on BTA auction payable (733) --
-------- ---------
Net cash used in financing activities (889) (2,103)
-------- ---------
Net decrease in cash and cash equivalents $ (9,554) $ (5,887)
Cash and cash equivalents at beginning of period 74,564 113,072
-------- ---------
Cash and cash equivalents at end of period $ 65,010 $ 107,185
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Unaudited)
(1) GENERAL
(a) DESCRIPTION OF BUSINESS
THE COMPANY. CS Wireless Systems, Inc. (together with its subsidiaries,
"CS" or the "Company") 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 21 markets encompass approximately 7.7
million television households, approximately 6.4 million of which are LOS
households, as estimated by the Company. The Company has commenced a limited
commercial offering of Internet access service in its Dallas, Texas market.
Further, the Company is offering certain telephony products through
interconnection agreements with Southwestern Bell Telephone Company and GTE
Southwest Incorporated and a long distance reseller agreement with WorldCom,
Inc.
At May 14, 1998, CAI Wireless Systems, Inc. ("CAI") and Heartland
Wireless Communications, Inc. ("Heartland") owned 60% and 36%, respectively,
of the outstanding Common Stock of the Company. CAI is one of the largest
developers, owners and operators of wireless cable television systems in the
United States. Heartland is a leading developer, owner and operator of
wireless cable systems in small to mid-size markets located in the central
United States.
PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange for
approximately 60% of the Company's Common Stock, CAI, directly or indirectly,
contributed to the Company the wireless cable television assets and all
related liabilities, or the stock of subsidiaries owning wireless cable
television assets associated with the wireless cable television markets of
Bakersfield and Stockton/Modesto, California; Charlotte, North Carolina; and
Cleveland, Ohio. Simultaneously, in exchange for approximately 40% of the
Company's Common Stock, cash, a short-term note and a long-term note (the
"Heartland Long-Term Note"), Heartland, directly or indirectly, contributed
or sold to the Company the wireless cable television assets and all related
liabilities associated with the wireless cable television markets of Grand
Rapids, Michigan; Minneapolis, Minnesota; Kansas City (suburbs), Missouri;
Dayton, Ohio; Dallas, Fort Worth and San Antonio, Texas; and Salt Lake City,
Utah. The Company subsequently acquired wireless cable television rights and
related assets in certain Midwest markets, including but not limited to, the
Effingham and Wellsville, Kansas; Story City, Iowa; Scottsbluff, Nebraska;
Kalispell, Montana and Rochester, Minnesota markets in connection with the
Company's merger acquisition of USA Wireless Cable, Inc. on October 11, 1996
("USA Wireless Acquisition"). The Company consummated on September 3, 1997 an
exchange of its wireless cable rights and related assets in Salt Lake City,
Utah for wireless cable rights and related assets in Kansas City, Missouri
pursuant to an agreement dated as of November 6, 1996 with People's Choice TV
Corp.
(b) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of March 31, 1998, and the results
of operations and cash flows for the three months ended March 31, 1998 and
1997. These results are not necessarily indicative of the results to be
expected for the full fiscal year.
(d) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, in the fourth
quarter of 1997, which requires companies to present basic earnings per share
and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock. The Company has restated its March 31, 1997 earnings per share
calculation to reflect the adoption of SFAS 128.
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1998
(Unaudited)
(2) CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
A discussion of certain of these legal proceedings is contained in Part II,
Item 1 "Legal Proceedings" of this Form 10-Q. The Company believes that the
ultimate resolution of the legal proceedings will not have a material adverse
effect on the Company's consolidated financial position, operating results or
liquidity.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, in the first
quarter of 1998, which requires companies to disclose comprehensive income
separately of net income from operations. Comprehensive income is defined as
the change in equity during a period from transactions and other events and
circumstances from non-ownership sources. It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The adoption of this statement had no effect on the
Company for the quarters ended March 31, 1998 or 1997.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
CS Wireless Systems, Inc. and its subsidiaries develop, own and operate
a network of wireless cable television systems providing subscription
television services. The Company intends to use a portion of its wireless
spectrum for high-speed Internet access and has commenced a limited
commercial offering of such services in Dallas, Texas. Additionally, the
Company offers certain telephony services through agreements with certain
local exchange carriers and a long distance carrier. The Company had systems
in operation in eleven markets at March 31, 1998 compared to ten systems in
the corresponding prior year period. Effective December 30, 1997, the
Company assumed operational control over the Story City (also known as
Radcliffe), Iowa market. Prior to December 30, 1997, Heartland Wireless
Communications, Inc. operated the Story City system under a Management
Agreement. Systems in other markets are currently under construction and
development by the Company.
RESULTS OF OPERATIONS
REVENUE. The Company's revenue primarily consists of monthly fees paid
by subscribers for basic programming, premium programming and equipment
rental. Revenue for the three months ended March 31, 1998 was $6.8 million,
compared to $6.7 million for the corresponding prior year period, an increase
of 1.5%. The increase in revenue is primarily due to average subscribers
increasing to 67,650 for the three months ended March 31, 1998 compared to
approximately 65,350 for the prior year period. The increase in subscriber
levels is primarily attributed to the Company assuming operational control of
the Story City, Iowa market on December 30, 1997.
SYSTEMS OPERATIONS. Systems operations expenses primarily include
programming costs, channel lease payments, transmitter site and tower
rentals, and other costs of providing service. Programming costs (with the
exception of minimum payments) and channel lease payments (with the exception
of certain fixed payments) are variable expenses which generally increase as
the number of subscribers increases. Systems operations expenses were $3.9
million for the three months ended March 31, 1998, compared to $3.7 million
for the corresponding prior year period, an increase of 5.4%. The increase in
systems operations expenses is primarily due to (i) increasing programming
rates, (ii) incremental costs associated with the Company assuming
operational control of the Story City, Iowa system on December 30, 1997 and
(iii) additional costs associated with the preparations for the launch of
digital video and high speed Internet access service in Dallas, Texas.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") were $4.1 million for the three months ended
March 31, 1998, compared to $3.8 million for the corresponding prior year
period, an increase of 7.9%. The increase in SG&A is principally due to (i)
incremental costs associated with the Company assuming operational control of
the Story City system on December 30, 1997 and (ii) additional costs
associated with the preparations for the launch of digital video and high
speed Internet access service in Dallas, Texas.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment and goodwill. Depreciation and amortization
expenses were $7.2 million for the three months ended March 31, 1998,
compared to $6.6 million for the corresponding prior year period. The
increase in depreciation and amortization expense is attributed to a
corresponding increase in the underlying capital assets.
OPERATING LOSS. The Company incurred operating losses of $8.4 million
for the three months ended March 31, 1998, compared to $7.4 million for the
corresponding prior year period. Consolidated earnings before interest,
taxes, depreciation and amortization ("EBITDA") were a negative $1.2 million
for the three months ended March 31, 1998, compared to a negative $0.8
million for the prior year period. EBITDA is a financial measure commonly
used in the industry but is not intended to represent cash flows, as
determined in accordance with Generally Accepted Accounting Principles
("GAAP"), or as an indicator of operating performance. EBITDA should not be
considered a substitute for measures of performance prepared in accordance
with GAAP. The increase in the Company's operating loss is due to increasing
system operations expenses, SG&A and depreciation and amortization expense as
described above. The decrease in EBITDA is primarily due to costs
associated with the preparations for the launch of digital video and high
speed Internet access service in Dallas, Texas. EBITDA at the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
analog system level improved to approximately $1.6 million for the three
months ended March 31, 1998 compared to approximately $1.2 million for the
corresponding prior year period.
INTEREST INCOME. Interest income was $1.0 million for the three months
ended March 31, 1998, compared to $1.5 million for the corresponding prior
year period. The decrease in interest income is primarily due to a decrease
in the average invested balance. The average invested balance is comprised
mainly of the proceeds remaining from the private placement of $400.0 million
of 11 3/8% Senior Discount Notes (the "Senior Discount Notes") on February
23, 1996, which resulted in net proceeds of $162.9 million (net of debt
issuance, payments on notes and certain distributions to Heartland and CAI).
INTEREST EXPENSE. The Company incurred interest expense of $8.3 million
for the three months ended March 31, 1998, compared to $8.0 million for the
corresponding prior year period. Interest expense during the three months
ended March 31, 1998 included (i) non-cash interest and accretion of deferred
debt issuance costs of $8.1 million related to the Senior Discount Notes,
(ii) interest expense of $72,000 related to the Heartland Long-Term Note and
(iii) interest relating to other notes payable totaling $128,000. Interest
expense during the three months ended March 31, 1997 included (i) non-cash
interest and accretion of deferred debt issuance costs of $7.3 million
related to the Senior Discount Notes, (ii) interest expense of approximately
$449,000 related to the Heartland Long-Term Note and (iii) interest relating
to other notes payable totaling $251,000.
NET LOSS. The Company has recorded net losses since inception. The
Company incurred net losses of $16.7 million during the first quarter of 1998
compared to $12.6 million during the corresponding prior year period.
Although the Company's total revenue increased during the quarter ended March
31, 1998, the Company's net losses have increased due to increased SG&A,
system operations, depreciation and amortization and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital-intensive business.
Funds are required for the lease or acquisition of channel rights, the
acquisition of wireless cable systems, the construction of system headend and
transmission equipment, the conversion of analog systems to digital
technology, and start-up costs related to the commencement of operations and
subscriber installation costs. To date, the primary source of capital of the
Company has been from the net proceeds from the sale of the Senior Discount
Notes. The Company intends to finance its future 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.
During 1997, the Company's strategy had been to conserve capital pending
(i) the implementation of digital video compression technology and (ii) the
launch of the Company's high speed Internet access product. The Company
intended to launch digital television services in its Dallas market in 1997.
Towards that goal, the Company signed an agreement in 1997 with General
Instrument Corp. ("General Instrument") for the purchase of equipment
necessary to deliver digital signals to subscribers; the timely delivery of
commercially viable equipment was an integral component of the Company's
plans to offer digital video service. General Instruments experienced
certain system integration problems with respect to the digital headend
equipment and converter boxes. Due to the delay in delivery of the required
product, the Company and General Instrument agreed in February 1998 to amend
certain contractual obligations relating to delivery dates, performance
requirements, penalties and responsibilities in consideration for certain
pricing concessions. In connection with the amendment, the Company released
General Instrument from any claims it may have had with respect to the
failure of General Instrument to perform certain obligations prior to the
deadlines prescribed in the original agreement. The Company anticipates that
General Instrument will commence shipment of equipment required for the
launch of digital services in Dallas during the second quarter of 1998,
provided General Instrument successfully resolves certain outstanding
integration problems. In the event such problems are not successfully
resolved, the intended commercial launch of digital video services could be
delayed. Based on its own analysis and advice from its equipment vendors, the
Company believes that these system integration issues will be resolved. The
Company expects the launch of a compressed digital video product to occur
during the second quarter of 1998.
For 1998, the Company has budgeted approximately $45.2 million in
capital expenditures, including approximately $13.1 million for digital
subscriber installations, $9.3 million for analog subscriber installations,
$2.6 million for headend and transmission equipment, $0.9 million relating to
the build-out of markets to accommodate a new line of business, Internet
access, $3.7 million to begin conversion of the Company's San Antonio analog
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
markets to a hybrid digital format, and $15.6 for strategic investments in
items such as channel capacity. The level of capital expenditures incurred
for customer installations is primarily variable and dependent on the
customer installation activities of the Company. Therefore, actual customer
installation expenditures may be more or less than the Company's estimates.
Further significant capital expenditures for customer installations are
expected to be incurred by the Company in 1999 and subsequent years. Based
upon the Company's current operating plans, the Company believes that its
available cash will provide sufficient funds to meet its needs for at least
the next 12 months.
The Company expects to launch its first digital video market in the
second quarter of 1998 in Dallas, depending on the availability of digital
equipment and the successful integration and construction of the necessary
infrastructure. The Company will commit additional resources to its marketing
efforts with respect to its Internet access business. In addition, the
Company has begun to convert its analog system in San Antonio, Texas to a
hybrid digital format. The Company is evaluating its other markets to
determine where and when to convert existing analog markets to digital or
offer hybrid digital services in conjunction with existing or planned analog
services. However, in the interim, the Company intends to minimize capital
expenditures in its analog markets.
The key components of a new digital headend system are (i) the
compression center, (ii) the transmitter site and, (iii) repeater sites and
microwave or other links, as necessary. The Company estimates that the
launch of a new digital wireless cable system in a typical market will
require capital expenditures for the compression center of approximately $1.3
million and approximately $1.3 million for the transmitter site, based on
utilizing satellite services such as offered by TelQuest Satellite Services,
LLC ("TelQuest"), in which the Company is a member. TelQuest's other members
include CAI Wireless Systems, Inc. ("CAI") and TelQuest Communications, Inc.,
an affiliate of CAI. The capital expenditures associated with facilities
vary significantly by market as do capital expenditures associated with
microwave and other links. The capital associated with a typical high power
repeater site is estimated at approximately $800,000. Without a satellite
services solution, a new digital system is estimated to cost approximately
$6.0 million. In total, with a satellite services solution, a new digital
system is estimated to cost approximately $3.3 million. The capital
expenditures associated with acquiring and installing each digital subscriber
are estimated at approximately $750, based on a one terminal configuration.
Also, the capital expenditures required to modify an existing analog headend
to offer a hybrid digital service are estimated to range from $100,000 to
$800,000 depending upon the number of local digitized channels required. The
Company has estimated that the launch of a new analog wireless cable system
in a typical market requires aggregate capital expenditures of less than
$750,000. The incremental capital associated with acquiring and installing
each analog subscriber is estimated at $350, based on a one terminal
configuration.
The Company's Dallas/Fort Worth system is ultimately expected to require
additional repeater sites and the construction of an additional transmitter
site in Fort Worth. In total, the capital expenditures estimated for the
buildout of the Dallas/Fort Worth market are $7.5 million, inclusive of the
compression center, transmitter site costs, repeater sites, microwave links,
building and towers and warehouse and lab equipment. Approximately $1.6
million of the remaining total headend cost is budgeted for 1998.
Although each of the Company's analog operating systems has incurred
operating losses since inception, eight of the eleven operating systems
achieved positive EBITDA in the three months ended March 31, 1998 compared to
six of the ten operating systems in the corresponding prior year period. The
combined cash flow from operating activities of the Company's analog
operating systems has to date been insufficient to cover the combined
operating expenses of such systems. Until sufficient cash flow is generated
from operations, the Company will utilize its current capital resources and
may seek external sources of funding to satisfy its capital needs. There can
be no assurance that the Company will be able to secure its capital
requirements on terms and conditions satisfactory to the Company.
Accordingly, in the event the Company is unable to secure funding for capital
requirements on satisfactory terms and conditions, the ability of the Company
to develop and expand operations and satisfy its indebtedness would be
materially adversely affected.
Net cash used in operating activities during the three months ended
March 31, 1998 was $0.7 million versus cash provided by operating activities
of $0.8 million during the corresponding prior year period. The decrease was
primarily due to (i) timing of payments to vendors, (ii) increased SG&A and
system operating expense and (iii) to a lesser extent, increasing costs
associated with the activities preparing for the launch of digital video and
high speed Internet access services in Dallas, Texas.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Net cash used in investing activities was $7.9 million during the three
months ended March 31, 1998 compared to $4.6 million during the corresponding
prior year period. Cash used in investing activities primarily relates to
the acquisition and installation of subscriber receive-site equipment, the
acquisition of certain wireless cable channel rights, the investments in
assets held for sale and the investment in equity affiliates. The increase
in cash used in investing activities in the three months ended March 31, 1998
is primarily due to investments in equity affiliates with no comparable
amount in the prior year period. Additionally, cash invested in plant and
equipment increased to $6.0 million for the three months ended March 31, 1998
from $1.7 million in the corresponding prior year period. The increase in
cash invested in plant and equipment is principally due to (i) capital
expenditures of approximately $1.4 million relating to the preparation for
the launch of digital video in Dallas, Texas, (ii) capital expenditures of
approximately $1.0 million relating to the launch of high-speed Internet
access service in Dallas, Texas and (iii) capital expenditures of
approximately $2.5 million related to the conversion of the Company's San
Antonio analog system to a hybrid digital format, all with no corresponding
amounts in the prior year period.
Net cash used in financing activities was $0.9 million during the three
months ended March 31, 1998 compared to $2.1 million during the corresponding
prior year period. Cash used in financing activities during the three months
ended March 31, 1998 is attributed to the repayment of the payable relating
to the Basic Trading Areas totaling approximately $0.7 million and the
repayment of other notes payable totaling approximately $0.2 million. Cash
used in financing activities during the three months ended March 31, 1997 is
attributed to the repayment of $2.1 million of indebtedness related to the
USA Wireless Acquisition.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
In June 1997, Statement of Financial Accounting Standards (SFAS) NO.
131, DISCLOSURE ABOUT SEGMENTS OF ENTERPRISE AND RELATED INFORMATION was
issued. This statement establishes standards for reporting information about
operating segments in annual and interim financial statements, although this
statement need not be applied to interim financial statements in the initial
year of its application. This statement is effective for fiscal years
beginning after December 15, 1997.
FUTURE LOOKING INFORMATION AND RISK FACTORS
The Company or its representatives may make forward looking statements,
oral or written, including statements in this Report's Management's
Discussion and Analysis of Financial Condition and Results of Operations,
press releases and filings with the Commission, regarding estimated future
operating results, planned capital expenditures (including the amount and
nature thereof) and the Company's financing plans, if any, related thereto,
increases in subscribers and the Company's financial position and other plans
and objectives for future operations. There can be no assurance that the
actual results or developments anticipated by the Company will be realized
or, even if substantially realized, that they will have the expected effects
on its business or operations. Among the factors that could cause actual
results to differ materially from the Company's expectations are general
economic conditions, competition, government regulations and other factors
set forth among the risk factors noted in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
Generally, forward looking statements include words or phrases such as
"management believes," the "Company anticipates," the "Company expects" and
words and phrases of similar import. Forward looking statements are made
pursuant to the Private Securities Litigation Reform Act of 1995.
All subsequent oral and written forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in
their entirety by these factors. The Company assumes no obligation to update
any of these 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 costs and
level of consumer acceptance associated with the launch of systems in new
markets, (iii) the availability and performance of digital compression
equipment, (iv) the Company's existing indebtedness and the need for
additional financing to fund subscriber growth and system development, (v)
government regulation, including FCC regulations, and receipt of regulatory
approvals for alternative uses of spectrum, (vi) the Company's dependence on
channel leases, (vii) the
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
successful integration of potential future acquisitions and (viii) numerous
competitive factors, including alternative methods of distributing and
receiving video transmissions.
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 Senior Discount Notes.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the fourth quarter of 1996, the Company was named as a defendant in a
state court action commenced by San Antonio Wireless Cable Company ("SAW") in
San Antonio, Texas for the purpose of terminating the Company's rights to
utilize eight Instructional Television Fixed Services ("ITFS") channels in
the San Antonio market. The Company recently entered into an agreement with
SAW to settle the claims between the Company and SAW and acquire SAW's rights
to the ITFS channels. The litigation has not been terminated as of the date
of this Report.
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material
adverse effect on the Company's consolidated financial position, operating
results or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
*27 Financial Data Schedule
*Filed herewith.
<PAGE>
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: May 14, 1998 CS WIRELESS SYSTEMS, INC.
By: /s/John M. Lund
-----------------------------
John M. Lund
Vice President - Finance
and Controller
(Principal Financial Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 65,010
<SECURITIES> 0
<RECEIVABLES> 1,028
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 72,143
<PP&E> 79,777
<DEPRECIATION> 27,152
<TOTAL-ASSETS> 360,013
<CURRENT-LIABILITIES> 9,754
<BONDS> 289,168
0
0
<COMMON> 11
<OTHER-SE> 55,550
<TOTAL-LIABILITY-AND-EQUITY> 360,013
<SALES> 6,823
<TOTAL-REVENUES> 6,823
<CGS> 0
<TOTAL-COSTS> 15,251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,271
<INCOME-PRETAX> (16,668)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,668)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
