<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 June 30, 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 Identification No.)
incorporation or organization)
1101 Summit Avenue, Plano, Texas 75074
(Address of principal executive offices) (Zip Code)
(972) 398-5300
(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:
Shares Outstanding
Class as of August 17, 1998
----- ---------------------
Common Stock, $.001 par value 10,700,506
<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>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 54,144 $ 74,564
Restricted cash .............................................. 5,030 5,030
Subscriber receivables, net .................................. 1,105 1,026
Accounts receivable from affiliates .......................... 67 --
Prepaid expenses and other ................................... 795 939
--------- ---------
Total current assets .................................. 61,141 81,559
Plant and equipment, net ....................................... 52,939 50,519
License and leased license investment, net ..................... 170,051 170,689
Goodwill, net (Note 2) ......................................... -- 48,243
Investment in and loans to equity affiliates ................... 7,022 8,503
Debt issuance costs and other assets, net ...................... 8,859 11,190
--------- ---------
$ 300,012 $ 370,703
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................ $ 6,174 $ 8,370
Accounts payable to affiliates ............................... -- 282
Current portion of long-term debt ............................ 217 217
Current portion of BTA auction payable ....................... 300 1,122
Other current liabilities .................................... 778 1,523
--------- ---------
Total current liabilities ............................. 7,469 11,514
Long-term debt, less current portion ........................... 299,750 283,686
BTA auction payable, less current portion ...................... 3,864 3,274
--------- ---------
Total liabilities ..................................... 311,083 298,474
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares,
no shares issued and outstanding............................ -- --
Common stock, $.001 par value; authorized 40,000,000 shares,
issued and outstanding 10,702,609 shares in 1998 and 1997 11 11
Treasury stock, at cost; 2,103 shares in 1998 and 1997 ....... (40) (40)
Additional paid-in capital ................................... 154,557 154,557
Accumulated deficit .......................................... (165,599) (82,299)
--------- ---------
Total stockholders' (deficit) equity .................. (11,071) 72,229
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$ 300,012 $ 370,703
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</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue ...............................$ 6,805 $ 6,822 $ 13,628 $ 13,500
Operating expenses:
Systems operations .................. 4,017 3,657 7,925 7,352
Selling, general and administrative 4,983 3,959 9,102 7,774
Impairment of goodwill (Note 2)...... 46,378 -- 46,378 --
Depreciation and amortization ....... 7,717 6,705 14,941 13,290
---------- ---------- ---------- ----------
Total operating expenses ........ 63,095 14,321 78,346 28,416
---------- ---------- ---------- ----------
Operating loss ........................ (56,290) (7,499) (64,718) (14,916)
---------- ---------- ---------- ----------
Other income (expense):
Interest income ..................... 926 1,432 1,943 2,882
Interest expense .................... (8,621) (8,093) (16,892) (16,089)
Equity in losses of affiliates ...... (779) -- (1,765) --
Other ............................... -- 655 -- 655
---------- ---------- ---------- ----------
Total other expense, net ........ (8,474) (6,006) (16,714) (12,552)
---------- ---------- ---------- ----------
Loss before income taxes and
cumulative effect of change in
accounting principle ................ (64,764) (13,505) (81,432) (27,468)
Income tax benefit .................. -- 1,357 -- 2,714
---------- ---------- ---------- ----------
Loss before cumulative effect
of change in accounting principle....$ (64,764) $ (12,148) $ (81,432) $ (24,754)
Cumulative effect of change in
accounting principle for
organizational costs (Note 4)........ -- -- (1,868) --
---------- ---------- ---------- ----------
Net loss ..............................$ (64,764) $ (12,148) $ (83,300) $ (24,754)
---------- ---------- ---------- ----------
Basic and diluted loss per common
share before cumulative effect in
accounting principle ............... $ (6.05) $ (1.14) $ (7.62) $ (2.34)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and diluted loss per common
share ...............................$ (6.05) $ (1.14) $ (7.79) $ (2.34)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average basic and
diluted shares outstanding .......... 10,700,506 10,702,609 10,700,506 10,574,719
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (83,300) $ (24,754)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 14,941 13,291
Deferred income taxes .......................................... -- (2,714)
Accretion on discount notes and amortization of debt
issuance costs ............................................... 16,498 14,770
Non-cash interest expense on other long-term debt .............. 392 1,256
Equity in losses of affiliates ................................. 1,765 --
Impairment of goodwill (Note 2) ................................ 46,378 --
Cumulative effect of change in accounting principle for
organizational costs (Note 4) ................................ 1,868 --
Gain on sale ................................................... -- (655)
Other .......................................................... 250 --
Changes in assets and liabilities, net of effects of
contributions:
Subscriber receivables ....................................... (79) 240
Prepaid expenses and other ................................... (281) (126)
Accounts payable, accrued expenses and other liabilities ..... (2,329) (2,357)
---------- ----------
Net cash used in operating activities ................ (3,897) (1,049)
---------- ----------
Cash flows from investing activities:
Purchases of plant and equipment ................................. (10,557) (6,873)
Additions to license and leased license investment ............... (3,845) (2,063)
Investment and advances to equity affiliates...................... (931) --
Investment in assets held for sale ............................... -- (943)
Proceeds from sale of assets held for sale ....................... -- 16,350
Other ............................................................ (136) (220)
---------- ----------
Net cash provided by (used in) investing activities.. (15,469) 6,251
---------- ----------
Cash flows from financing activities:
Payments on notes payable ........................................ (125) (15,403)
Payment on capital leases and other .............................. (65) (27)
Payment on BTA auction payable ................................... (864) --
---------- ----------
Net cash used in financing activities ............... (1,054) (15,430)
---------- ----------
Net decrease in cash and cash equivalents .......................... $ (20,420) $ (10,228)
---------- ----------
Cash and cash equivalents at beginning of period ................... 74,564 113,072
---------- ----------
Cash and cash equivalents at end of period ......................... $ 54,144 $ 102,844
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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. Additionally,
the Company offers certain telephony services through agreements with certain
local exchange carriers and a long distance carrier.
At August 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. CAI and a wholly owned subsidiary filed voluntary petitions for
relief under Chapter 11 of Title 11 of the United States Code on July 30, 1998
(the "Petition Date"). CAI has filed a plan of reorganization (the "Plan") with
the United States Bankruptcy Court for the District of Delaware. CAI has
announced that the Plan was voted on and accepted by the requisite number of
creditors prior to the Petition Date. 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 (the "February 23, 1996 Contributions"). 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 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 June 30, 1998, and the results of
operations for the three and six months ended June 30, 1998 and 1997 and cash
flows for the six months ended June 30, 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 required 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 June
30, 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)
June 30, 1998
(Unaudited)
(2) LONG-LIVED ASSETS The Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," on January 1, 1996. This statement requires that long-lived assets and
certain identifiable intangibles be periodically reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
estimated future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Pursuant to SFAS No.
121, the Company periodically reviews wireless channel rights and other
long-lived assets whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. When such
circumstances occur, the Company evaluates the possible effects on the
carrying amount of such assets.
The Company believes that the commencement by CAI of a Chapter 11
proceeding, the announcement by Heartland of its intention not to pay
interest payments to the holders of certain Heartland bonds and the
annnouncements of other wireless cable companies to review financial
restructuring alternatives are circumstances that make it appropriate for the
Company to evaluate the impairment of long lived assets and certain
identifiable intangibles. Accordingly, the Company recorded a write-down of
$46.4 million (net of accumulated amortization of $9.6 million) of goodwill
at June 30, 1998. The Company intends to utilize the services of a third
party to assist in completing recoverability and valuation analysis.
Accordingly, the Company may record further reductions in the carrying value
of certain long-lived assets in subsequent reporting periods.
(3) 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.
(4) 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
required 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
three and six months ended June 30, 1998 or 1997.
The Company adopted the provisions of Statement of Position 98-5 ("SOP
98-5"), "Reporting on the Costs of Start-up Activity," in the second quarter of
1998, effective as of January 1, 1998. This pronouncement requires that costs of
start-up activities, including organizational costs, should be expensed as
incurred. As a result of adopting SOP 98-5, the Company recorded a charge of
$1.9 million as the cumulative effect of recording the change in accounting
principle as of January 1, 1998.
(5) SUBSEQUENT EVENTS In furtherance of the development of a contingency
plan designed to ensure uninterruptible delivery of digital video programming
services, the Company purchased in July 1998, the leasehold rights of
TelQuest Satellite Services LLC in certain headend equipment owned by CAI.
The purchase price was $1.9 million. The members of TelQuest Satellite
Services LLC include CAI, the Company and TelQuest Communications, Inc. Jared
E. Abbuzzese, the Company's Chairman, holds, through various affiliates, the
majority interest in TelQuest Communications, Inc.
<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
June 30, 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. ("Heartland") operated the Story City
system under a Management Agreement.
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 six months ended June 30, 1998 was $13.6 million, compared to
$13.5 million for the corresponding prior year period. Revenue for the three
months ended June 30, 1998 was $6.8 million, compared to $6.8 million for the
corresponding prior year period. Average subscribers were approximately 67,330
and 63,120 for the six and three months ended June 30, 1998 compared to
approximately 65,675 and 65,930 for the prior year periods. 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 $4.0 million and $7.9
million for the three and the six months ended June 30, 1998, compared to $3.7
million and $7.4 million for the corresponding prior year periods, an increase
of 8.1% and 6.8%, respectively. 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 $5.0 million and $9.1 million for the three and six
months ended June 30, 1998, compared to $4.0 million and $7.8 million for the
corresponding prior year periods, an increase of 25.0% and 16.7%, respectively.
The increase in SG&A in the aforementioned periods 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 ($0.6 million and $1.2 million for the three and
six months ended June 30, 1998 compared to $0.3 million and $0.6 million for the
corresponding prior year periods).
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 $7.7 million and $14.9 million for the three and six months ended June 30,
1998, compared to $6.7 million and $13.3 million for the prior year periods. 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 $56.3 million and
$64.7 million for the three and six months ended June 30, 1998, compared to $7.5
million and $14.9 million for the corresponding prior year periods. Consolidated
earnings before interest, taxes, depreciation and amortization ("EBITDA") were a
negative $2.2 million and $3.4 million for the three and six months ended June
30, 1998, compared to a negative $0.8 million and $1.6 for the prior year
periods. 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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
("GAAP"), or as an indicator of operating performance. EBITDA is exclusive of
the impairment of goodwill recorded in the three months ended June 30, 1998.
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 principally to the impairment of goodwill and to a lesser extent,
increasing system operations, 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.
INTEREST INCOME. Interest income was $0.9 million and $1.9 million for the
three and six months ended June 30, 1998, compared to $1.4 million and $2.9
million for the corresponding prior year periods. 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 to
the Company 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 $8.6 million
and $16.9 million for the three and six months ended June 30, 1998, compared
to $8.1 million and $16.1 million for the corresponding prior year periods.
Interest expense during the three months ended June 30, 1998 included (i)
non-cash interest and accretion of deferred debt issuance costs of $8.4
million related to the Senior Discount Notes, (ii) interest expense of
$72,000 related to a note payable to Heartland in the amount of $15,000,000
(the "Heartland Long Term Note") oversight and (iii) interest relating to
other payables totaling $150,000. Interest expense during the six months
ended June 30, 1998 included (i) non-cash interest and accretion of deferred
debt issuance costs of $16.5 million related to the Senior Discount Notes,
(ii) interest expense of $145,000 related to the Heartland Long-Term Note and
(iii) interest relating to other payables totaling $250,000. Interest expense
during the three months ended March 31, 1997 included (i) non-cash interest
and accretion of deferred debt issuance costs of $7.5 million related to the
Senior Discount Notes, (ii) interest expense of approximately $450,000
related to the Heartland Long-Term Note and (iii) interest relating to other
payables totaling $145,000. Interest expense during the six months ended June
30, 1997 included (i) non-cash interest and accretion of deferred debt
issuance costs of $14.8 million related to the Senior Discount Notes, (ii)
interest expense of approximately $900,000 related to the Heartland Long-Term
Note and (iii) interest relating to other payables totaling $400,000.
NET LOSS. The Company has recorded net losses since inception. The Company
incurred net losses of $64.8 million and $83.3 million for the three and six
months ended June 30, 1998 compared to $12.1 million and $24.8 million during
the corresponding prior year periods. The Company's net losses have increased
due to (i) impairment of goodwill totaling $46.4 million (See Note 2), (ii)
increased SG&A, system operations, depreciation and amortization, and interest
expense as detailed above and (iii) the cumulative effect of the change in
accounting principal for organizational costs totaling $1.9 million (See Note
4).
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 has approximately $54.1 million in cash and cash equivalents at June 30,
1998. The Company has used the proceeds from the Senior Discount Notes received
in February 1996 primarily to fund continued operating losses, capital
expenditures to launch digital wireless and high speed Internet access services
in the Dallas, Texas market, hybrid digital service in the San Antonio, Texas
market and limited build-out in the Company's analog markets, strategic
investments in items such as channel capacity and general debt service. 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.
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 had anticipated that General Instrument would commence shipment of
equipment required for the launch of digital services in Dallas during the
second quarter of 1998, provided General Instrument successfully resolved
certain outstanding integration problems. However such problems have not yet
been successfully resolved and thus, the intended full-scale commercial
launch of digital video services has been 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 commenced a controlled
roll-out of its digital video product to selected areas in its Dallas market
subsequent to the end of the second quarter.
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 convert the Company's San Antonio analog markets to a
hybrid digital format, and $15.6 million for strategic investments in items
such as channel capacity. Through June 30, 1998, the Company has incurred
$15.5 million in capital expenditures. 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. The Company will commit additional resources to its
marketing efforts with respect to its Internet access business. In addition,
the Company has converted much of its analog system in San Antonio, Texas to
a hybrid digital format and additional expenditures may be required with
respect to customer installation and/or conversion activities. 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
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.
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 six months ended June 30,
1998 was $3.9 million compared to $1.0 million during the comparable prior year
period. The increase in cash used is operations 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.
Net cash used in investing activities was $15.5 million during the six
months ended June 30, 1998 compared to cash provided by investing activities
of $6.3 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. Cash used in investing activities in the six months ended
June 30, 1998 is primarily due to the proceeds from the assets held for sale
totaling $16.4 million in 1997 with no corresponding amounts in the current
year period and, to a lesser extent, investments in equity affiliates
totaling $0.9 million in 1998 with no corresponding amount in the prior year
period. Cash invested in plant and equipment increased to $10.6 million for
the six months ended June 30, 1998 from $6.9 million in the corresponding
prior year period. The increase in cash invested in plant and equipment is
principally due to 1998 capital expenditures of (i) approximately $3.7
million relating to the preparation for the launch of digital video in
Dallas, Texas, (ii) approximately $1.6 million relating to the launch of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
high-speed Internet access service in Dallas, Texas and (iii) approximately
$3.1 million related to the conversion of the Company's San Antonio analog
system to a hybrid digital format.
Net cash used in financing activities was $1.1 million during the six
months ended June 30, 1998 compared to $15.4 million during the corresponding
prior year period. Cash used in financing activities during the six months ended
June 30, 1998 is attributed to the repayment of the payable relating to the
Basic Trading Areas totaling approximately $0.9 million and the repayment of
other notes payable totaling approximately $0.2 million. Cash used in financing
activities during the six months ended June 30, 1997 is attributed to the
repayment of $2.1 million of indebtedness related to the USA Wireless
Acquisition and the repayment of $13.3 million of the Heartland Long-Term Note.
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. The adoption of this statement is not
expected to have a material impact on the Company's financial statements and
related disclosures.
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 successful
integration of potential future acquisitions and (viii) numerous competitive
factors, including alternative methods of distributing and receiving video
transmissions.
Because the foregoing uncertainties could affect 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.
The Company's largest stockholder, CAI, filed a voluntary petition for
relief under Chapter 11 of Title 11 of the United States Code on July 30,
1998 (the "Petition Date"). CAI, together with a wholly owned subsidiary
which also filed a voluntary petition for relief on the Petition Date, filed
a plan of reorganization (the "Plan") with the United States Bankruptcy Court
for the District of Delaware. CAI has announced that the Plan was voted on
and accepted by the requisite number of creditors prior to the Petition Date.
Additionally, Heartland has announced its intention that it will not pay
certain interest payments due to the holders of certain Heartland bonds.
There can be no assurance that any of the foregoing will not affect the
Company.
<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 entered into an agreement effective May
1, 1998 with SAW to settle the claims between the Company and SAW and acquire
SAW's rights to the ITFS channels.
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
*10.1 Amendment to Employment Agreement of David Webb effective
as April 22, 1998.
*27 Financial Data Schedule
(b) Reports on Form 8-K
Current report dated June 1, 1998 filed on Form 8-K with respect
to Item 5 announcing the appointment of a Chief Financial Officer
and designation of Directors to Board of Directors.
*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.
CS WIRELESS SYSTEMS, INC.
By: /s/ John M. Lund
------------------------------------
Senior Vice President-Finance, Chief
Accounting Officer and Controller
(Principal Financial Officer)
By: /s/ David E. Webb
------------------------------------
Chief Executive Officer
(Principal Executive Officer)
Dated: August 19, 1998
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment (the "Amendment") to Employment Agreement is entered into as
of the 22nd day of April, 1998, by and between the undersigned employee
(hereinafter referred to as "Employee") residing at the address indicated
following the Employee's signature below and CS Wireless Systems, Inc., a
Delaware corporation having its principal place of business at 200 Chisholm
Place, Suite 202, Plano, Texas 75075 (the "Company").
WHEREAS, Employee executed an Employment Agreement ("Agreement") dated as
of April 2, 1997, which Agreement was amended pursuant to the Amendment to
Employment Contract effective as of September 4, 1997; and
WHEREAS, the Company has determined that it is in the best interests of the
Company to amend certain terms and conditions of the Agreement subject to
satisfaction of the conditions set forth herein.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises set forth below, the Company and the Employee hereby agree as follows:
1. EARLY TERMINATION. Paragraph 5.(a) of the Agreement is hereby amended
to delete the final sentence in its entirety and add the following at the end of
Paragraph 5.(a):
Upon the Company's termination of Employee for any reason other than Cause
or Employee's termination of this Agreement pursuant to Paragraph 5.(e),
the Company shall pay Employee: (i) severance in an amount (the "Severance
Amount") equal to the greater of (x) his then Base Salary under PARAGRAPH
2, payable in twelve equal monthly installments and (y) the Base Salary
that would have been payable for the balance of the Term, payable in equal
monthly installments; and (ii) any accrued and unpaid bonuses due Employee
in accordance with the Company's incentive program then in effect.
Additionally, the Company shall maintain for a period of time equal to the
balance of the Term otherwise remaining absent early termination
(regardless of cause, if any) in full force and effect, for the continued
benefit of Employee and his all employee welfare benefit plans and programs
in which Employee is entitled to participate immediately prior to the date
of termination or expiration of this Agreement, provided that Employee's
1
<PAGE>
continued participation is possible under the general terms and provisions
of such plans and programs. In the event that the Employee's participation
in any such plan or program is barred, the Company shall arrange to provide
Employee and his dependents with benefits substantially similar to those
which Employee and his dependents would otherwise have entitled to receive
under such plans and programs from which their continued participation is
barred.
Notwithstanding anything herein to the contrary, the occurrence of any of
the following within a period of twelve (12) months before or after a
"Change of Control", as defined hereinafter, shall constitute termination
of Employee without cause: (i) a termination of employment, (ii) a change
in office, title, or position from that reasonably associated with
Employee's present position, other than a promotion, (iii) a change of
reporting by Employee to any person other than the Board of Directors or
the Management Group, (iv) a required relocation to a location in excess of
thirty (30) miles away from the Company's present principal location, (v) a
reduced salary, or (vi) a material diminution in responsibilities.
2. EARLY TERMINATION BY EMPLOYEE. Paragraph 5 of the Agreement is hereby
amended to add new Paragraph 5.(e) as follows:
(e) CHANGE IN CONTROL. Employee may terminate his employment hereunder at
any time within one (1) year following any "Change in Control". Upon such
termination, Employee shall receive all Severance Amounts and benefits
payable pursuant to Paragraph 5.(a). For the purpose of this Agreement, a
"change in control" shall be deemed to have occurred on the date (i) a
report on Schedule 13D shall be filed with the Securities and Exchange
Commission pursuant to Section 13(d) of the Securities Exchange Act of
1934, as amended (the "Act"), disclosing that any person other than the
Company or any employee benefit plan sponsored by the Company, is the
beneficial owner (as the term is defined in Rule 13d-3 under the Act)
directly or indirectly, of thirty-five percent (35%) or more of the total
voting power represented by the Company's then outstanding Voting
Securities (calculated as provided in paragraph (d) of Rule 13d-3 under the
Act in the case of rights to acquire voting securities); or (ii) any
person, other than the Company or any employee benefit plan sponsored by
the Company, shall
2
<PAGE>
purchase shares pursuant to a tender offer or exchange offer to acquire
any Voting Securities of the Company (or securities convertible into
such Voting Securities) for cash, securities or any other consideration,
provided that after consummation of the offer, the person in question is
the beneficial owner directly or indirectly, of thirty-five percent
(35%) or more of the total voting power represented by the Company's
then outstanding Voting Securities (all as calculated under clause (i))
or; (iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation (other than a merger of the Company
in which holders of Common Shares of the Company immediately prior to
the merger have the same proportionate ownership of common Shares of the
surviving corporation immediately after the merger as before), or
pursuant to which common Shares of the Company would be converted into
cash, securities or other property, or (B) any sale, lease, exchange or
other transfer (in one transaction or series of related transactions) of
all or substantially all the assets of the Company; or (iv) there shall
have been a change in the composition of the Board of Directors of the
Company at any time during any consecutive twenty-four (24) month period
such that "continuing directors" cease for any reason to constitute at
least fifty-one percent (51%) majority of the Board. For the purposes
of this clause, "continuing directors" means those members of the Board
who either were directors at the beginning of such consecutive
twenty-four (24) month period or were elected by or on the nomination or
recommendation of at least a fifty-one percent (51%) majority of the
then-existing Board. So long as there has not been a "change of
control" within the meaning of clause (iv), the Board of Directors may
adopt a fifty-one percent (51%) majority vote of the "continuing
directors" a resolution to the effect that an event described in clauses
(i) or (ii) shall not constitute a "change of control."
3. STOCK OPTIONS. Paragraph 5 of the Agreement is hereby amended to
add the following Paragraph 5(f) to the Agreement:
(f) STOCK OPTIONS. For a period of one year following the expiration of
the Term, calculated without giving effect to any early termination,
Employee shall have the right at any time to exercise all stock options
previously granted to Employee.
3
<PAGE>
4. RELOCATION. The Agreement is hereby amended to add the
following:
17. RELOCATION. In the event that Employee consents to relocate his
residence in conjunction with a relocation of the Employer's principal
office, the Company shall pay for all of Employee's expenses in
connection with such relocation including, without limitation,
temporary residence pending relocation, moving expenses, and real
estate costs, commissions, fees and appraisals.
Executed to be effective the date set forth above.
CS WIRELESS SYSTEMS, INC.
BY: /s/ Jared E. Abbuzzese
-----------------------------------
NAME: Jared E. Abbuzzese
---------------------------------
TITLE: Chairman
--------------------------------
/s/ David E. Webb
--------------------------------------
DAVID E. WEBB
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 54144
<SECURITIES> 0
<RECEIVABLES> 1105
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 61141
<PP&E> 83448
<DEPRECIATION> 30509
<TOTAL-ASSETS> 300012
<CURRENT-LIABILITIES> 7469
<BONDS> 297365
0
0
<COMMON> 11
<OTHER-SE> (11082)
<TOTAL-LIABILITY-AND-EQUITY> 300012
<SALES> 13628
<TOTAL-REVENUES> 13628
<CGS> 0
<TOTAL-COSTS> 78346<F1>
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16892
<INCOME-PRETAX> (81432)
<INCOME-TAX> 0
<INCOME-CONTINUING> (81432)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1868)<F2>
<NET-INCOME> (83300)
<EPS-PRIMARY> (7.79)
<EPS-DILUTED> (7.79)
<FN>
<F1>Includes impairment of goodwill charge of $46.4 million
<F2>Due to adoption of SOP 98-5, "Reporting on the Costs of Start-up Activities"
</FN>
</TABLE>
