<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 September 30, 1999
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 November 15, 1999
----- -------------------------
Common Stock, $.001 par value 6,864,471
<PAGE>
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets........................................................3
Condensed Consolidated Statements of Operations..............................................4
Condensed Consolidated Statements of Cash Flows..............................................5
Notes to Unaudited Condensed Consolidated Financial Statements...............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................15
Part II - Other Information......................................................................................15
Item 1. Legal Proceedings...........................................................................15
Item 4. Submission of Matters to a Vote of Security Holders.........................................15
Item 6. Exhibits and Reports on Form 8-K............................................................15
Signatures ...................................................................................................16
</TABLE>
2
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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,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 32,268 $ 41,839
Subscriber receivables, net.................................. 753 1,542
Prepaid expenses and other................................... 488 638
----------- -----------
Total current assets.................................... 33,509 44,019
Plant and equipment, net........................................ 34,685 43,645
License and leased license investment, net...................... 150,667 157,269
Assets held for sale............................................ 2,248 2,102
Investment in and loans to equity affiliates.................... 840 3,884
Debt issuance costs and other assets, net....................... 7,042 7,898
----------- -----------
$ 228,991 $ 258,817
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses........................ $ 2,720 $ 5,490
Current portion of long-term debt............................ 44 199
Current portion of BTA auction payable....................... 380 354
Other current liabilities.................................... 921 1,237
----------- -----------
Total current liabilities............................... 4,065 7,280
Long-term debt, less current portion............................ 344,058 316,720
BTA auction payable, less current portion....................... 3,186 3,505
----------- -----------
Total liabilities....................................... 351,309 327,505
----------- -----------
Stockholders' deficit:
Common stock, $.001 par value; 15,000,000 shares
authorized, 10,702,609 shares issued in 1999 and 1998,
and 6,864,471 shares outstanding in 1999 and 1998.......... 11 11
Treasury stock, at cost; 3,838,138 shares in 1999 and 1998... (1,574) (1,574)
Additional paid-in capital................................... 154,557 154,557
Accumulated deficit.......................................... (275,312) (221,682)
----------- -----------
Total stockholders' deficit............................. (122,318) (68,688)
----------- -----------
$ 228,991 $ 258,817
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue .............................. $ 5,404 $ 6,448 $ 16,917 $ 20,076
Operating expenses:
Systems operations.................. 3,458 4,094 11,317 12,019
Selling, general and administrative. 3,117 4,500 12,209 13,602
Impairment of goodwill ............. -- -- -- 46,378
Depreciation and amortization....... 5,368 7,062 16,279 22,003
------------ ------------ ------------ ------------
Total operating expenses......... 11,943 15,656 39,805 94,002
------------ ------------ ------------ ------------
Operating loss......................... (6,539) (9,208) (22,888) (73,926)
------------ ------------ ------------ ------------
Other income (expense):
Interest income..................... 442 803 1,317 2,746
Interest expense.................... (9,652) (8,765) (28,266) (25,657)
Equity in losses of affiliates...... (1,273) (292) (1,573) (2,057)
Other .............................. (2,000) -- (2,220) --
------------ ------------ ----------- -----------
Total other expense, net......... (12,483) (8,254) (30,742) (24,968)
------------ ------------ ------------ ------------
Loss before cumulative effect of
change in accounting principle...... (19,022) (17,462) (53,630) (98,894)
Cumulative effect of change in
accounting principle for
organizational costs ............... -- -- -- (1,868)
------------ ------------ ------------ ------------
Net loss .............................. $ (19,022) $ (17,462) $ (53,630) $ (100,762)
============= ============ ============ ============
Basic and diluted loss per common
share before cumulative effect of
change in accounting principle...... $ (2.77) $ (1.63) $ (7.81) $ (9.24)
=========== =========== =========== ============
Basic and diluted loss per common
share .............................. $ (2.77) $ (1.63) $ (7.81) $ (9.42)
=========== =========== =========== ============
Weighted average basic and
diluted shares outstanding.......... 6,864,471 10,700,506 6,864,471 10,700,506
=========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (53,630) $ (100,762)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 16,279 22,003
Accretion on discount notes and amortization of debt issuance costs........ 28,001 25,055
Non-cash interest expense on other long-term debt.......................... 265 602
Equity in losses of affiliates............................................. 450 2,057
Impairment of goodwill..................................................... -- 46,378
Write-down of investment in and loans to equity affiliates................. 3,547 --
Cumulative effect of change in accounting principle for
organizational costs..................................................... -- 1,868
Other...................................................................... (206) 250
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables.................................................. 789 (4)
Prepaid expenses and other.............................................. 150 (505)
Accounts payable, accrued expenses and other liabilities................ (1,219) (2,323)
---------- -----------
Net cash used in operating activities............................... (5,574) (5,381)
---------- -----------
Cash flows from investing activities:
Purchases of plant and equipment .......................................... (1,915) (16,991)
Proceeds from sale of property and equipment............................... 466 --
Additions to license and leased license investment......................... (742) (4,589)
Investment in equity affiliates............................................ (953) (1,270)
Investment in assets held for sale......................................... (146) --
Investment in restricted cash.............................................. -- 808
Other...................................................................... -- (160)
---------- -----------
Net cash used in investing activities............................... (3,290) (22,202)
---------- -----------
Cash flows from financing activities:
Payments on notes payable and other........................................ (151) (221)
Payments on BTA auction payable............................................ (556) (1,366)
---------- -----------
Net cash used in financing activities............................... (707) (1,587)
---------- -----------
Net decrease in cash and cash equivalents......................................... $ (9,571) $ (29,170)
---------- -----------
Cash and cash equivalents at beginning of period.................................. 41,839 74,564
---------- -----------
Cash and cash equivalents at end of period........................................ $ 32,268 $ 45,394
========== ===========
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
5
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
THE COMPANY. CS Wireless Systems, Inc. and its subsidiaries (the
"Company" or "CS Wireless") develop, own and operate a network of wireless
cable television systems providing subscription television and high speed
Internet access services. The Company has a portfolio of wireless cable
channel rights in various markets in the United States. The Company currently
has systems in operation in eleven markets (exclusive of the Story City, Iowa
market, contemplated to be transferred to Nucentrix Broadband Networks, Inc.
("Nucentrix") (f/k/a Heartland Wireless Communications, Inc.) pursuant to the
Master Agreement described below). The Company believes that there are a
total of approximately 7.7 million estimated total service area households in
the 21 primary markets where it holds significant Multichannel Multipoint
Distribution Services and Multichannel Distribution Services channel rights
and Instructional Television Fixed Services leases. The Company is
approximately 94% owned by CAI Wireless Systems, Inc. ("CAI"), a Connecticut
corporation and a wholly owned subsidiary of MCI WORLDCOM, Inc., a Georgia
corporation ("MCI WorldCom").
The subscription television industry is highly competitive. The
Company's principal subscription television competitors in each of its
markets are traditional hard-wire cable companies, direct broadcast
satellite, private cable companies and other alternate methods of
distributing and receiving television transmissions. Hard-wire cable
companies generally are well-established and well-known to potential
customers and have significantly greater financial and other resources than
the Company. As the telecommunications industry continues to evolve, the
Company may face additional competition from new providers of entertainment
and data services. In addition, until the Company can increase its channels
offered in all of its operating markets through the deployment of digital
compression technology, the Company's competitors in the subscription
television business generally continue to have more channels to offer
subscribers. There can be no assurance that the Company will be able to
compete successfully with existing or potential competitors in the
subscription television industry.
On August 31, 1999, MCI WorldCom acquired all of the outstanding
common stock of CAI pursuant to an Agreement and Plan of Merger dated as of
April 26, 1999. In connection with the acquisition, the members of the
Company's Board of Directors resigned and two nominees of MCI WorldCom were
elected to the Company's Board. On November 12, 1999, MCI WorldCom advised
the Company that it owns substantially all of the Company's Senior Discount
Notes due 2006. The notes are described below in MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
The Company has incurred significant operating losses since
inception and has negative stockholders' equity at September 30, 1999. Losses
are expected to continue for at least the next year as the Company begins to
integrate its wireless communications business within the parameters of MCI
WorldCom's strategic direction. The Company has approximately $32.3 million
in cash and cash equivalents at September 30, 1999, and, based on its current
operating plan, believes that it has sufficient cash to fund its anticipated
capital expenditures and operating losses through at least the third quarter
of 2000. However, the growth of the Company's wireless communications
business may require substantial continuing investment to finance capital
expenditures related to the acquisition of channel rights, the continued
development of infrastructure related to digital video programming, and the
two-way utilization of the Company's frequency rights. Additionally,
beginning in September 2001, the Company will be required to make payments to
the holders of its Senior Discount Notes due 2006. Without additional funding
from MCI WorldCom, the Company may not be able to meet its future payment
obligations required under the notes. There can be no assurance that the
Company will achieve positive cash flow from operations or that additional
financing will be available to the Company.
6
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CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 certain 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
"Long-Term Note"), Heartland (currently known as Nucentrix), directly or
indirectly, contributed or sold to the Company the wireless cable television
assets and certain 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"). On
September 3, 1997, the Company consummated 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.
On December 2, 1998, the Company, CAI and Nucentrix entered into a
Master Agreement ("Master Agreement") providing for, among other things, the
termination of Nucentrix's rights in, and claims against, the Company. The
master agreement is to be performed in two stages. Stage I, which has been
consummated, required the Company to lease to Nucentrix certain assets
related to the Story City, Iowa market, sell to Nucentrix certain consumer
premises equipment at agreed upon prices and pay to Nucentrix $366,000 in
cash. In consideration, Nucentrix leased to the Company certain assets
related to the Portsmouth, New Hampshire market, effected a partial
satisfaction of the Long-Term Note and agreed to various mutual cooperation
obligations relative to developmental applications filed by Nucentrix or the
Company for two-way authority in adjacent and overlapping markets, including
Dallas-Ft. Worth. At the Stage II closing, which is to occur following
receipt of necessary governmental approvals, the Company and Nucentrix expect
to transfer to one another their respective ownership interests in the Story
City, Iowa and Portsmouth, New Hampshire markets, the Long-Term Note shall be
canceled and the Company shall pay to Nucentrix $100,000; additionally, the
Company agreed to transfer certain inventory to Nucentrix. In connection with
the Master Agreement, the three Nucentrix designees to the Company's Board of
Directors resigned and the Stockholders Agreement among CAI, the Company and
Nucentrix was terminated. At the Stage I closing, CAI purchased all of the
Company's common stock held by Nucentrix for $1,534,000. Subsequent to the
Stage I closing, the Company redeemed the shares of the Company's common
stock that CAI acquired from Nucentrix in consideration for approximately
$1.5 million in cash. The Company solicited and obtained written consents and
waivers from the holders of a majority of the Company's outstanding notes
relative to the transactions described in this paragraph. The Company agreed
to pay to the holders of its notes, as of December 3, 1998, the aggregate sum
of $1.25 million in connection with the consents and waivers that were deemed
by the Company to be necessary under the terms of the Indenture governing the
Company's notes. The payment shall be made upon the latter to occur of (i)
three business days following the Stage II closing and (ii) the date on which
the Company may be legally permitted to make such payment.
The redemption of the Company's common stock that CAI acquired from
Nucentrix reduced the total number of the Company's common shares outstanding
to 6,864,471. This reduction in outstanding shares had the effect of
increasing CAI's percentage ownership of the Company to approximately 94%.
The funds paid to Nucentrix, along with the carrying value of the net assets
of the Story City, Iowa market, are classified as assets held for sale at
December 31, 1998 and September 30, 1999 in the accompanying consolidated
balance sheet. Pending consummation of the sale of the Story City, Iowa
market, Nucentrix is providing certain management services in connection with
the operation of that market.
7
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(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 normal recurring adjustments) necessary to present fairly
the Company's financial position as of September 30, 1999, the results of
operations for the three and nine months ended September 30, 1999 and 1998
and cash flows for the nine months ended September 30, 1999 and 1998. 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
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. Potentially
dilutive securities, consisting of options to purchase shares of common
stock, have been excluded from the diluted loss per share computation as
their inclusion would be antidilutive.
(2) CONTINGENCIES
The Company is a party to legal proceedings incidental to its
business. A discussion of the legal proceedings, and the opinion of
management relative to the resolution of such proceedings, is contained in
Part II, Item 1 "Legal Proceedings" of this Form 10-Q.
(3) RELATED PARTIES
The Company entered into an Engineering and Spectrum Management
Agreement with CAI and a wholly-owned subsidiary whereby effective March 1,
1999, CAI assumed supervision and delivery of all engineering and technical
management services. The Company pays CAI a fee equal to 40% of the
wholly-owned subsidiary's fully allocated costs plus an administrative fee of
20% of such amount. The Company expensed and paid approximately $271,000 and
$0, respectively, related to this Agreement for the three months ended
September 30, 1999.
A portion of the interest expense of $9.6 million incurred on the
Company's Senior Discount Notes due 2006 for the three months ended September
30, 1999 is a related party interest expense. As of November 12, 1999,
substantially all of the notes are owned by MCI WorldCom.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the financial
position of the Company as of September 30, 1999 and the results of operations
of the Company for the three and nine months ended September 30, 1999 and 1998.
This discussion and analysis should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto, and
with the Company's December 31, 1998 consolidated financial statements and notes
thereto.
OVERVIEW
CS Wireless and its subsidiaries develop, own and operate a network of
wireless cable television systems providing subscription television services.
The Company had systems in operation in eleven markets at September 30, 1999
(exclusive of the Story City, Iowa market which is held for sale). The Company
owns, or holds rights to lease, radio spectrum in its 21 primary markets as well
as certain other markets. The Company has commenced a limited commercial
offering of high-speed Internet access services in Dallas, Texas. As a result of
the execution of the Master Agreement dated December 2, 1998 between the
Company, CAI and Nucentrix, the carrying value of the net assets of the Story
City, Iowa market are classified as assets held for sale. Consequently, net
operating income for the nine months ended September 30, 1999 consisting of
revenue of $181,000 and operating expense of $191,000, are excluded from the
condensed consolidated statements of operations.
The statements contained in this Quarterly Report on Form 10-Q relating
to the Company's future operations may constitute forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results of the Company may differ materially from those in the
forward-looking statements and may be affected by a number of factors including
the integration of the Company's operations into the businesses operated by MCI
WorldCom and its subsidiaries, the risks and uncertainties set forth below in
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS and other factors described herein and in the Company's other filings
with the Securities and Exchange Commission.
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 was $5.4 million and $16.9 million for the three and nine months ended
September 30, 1999, compared to $6.4 million and $20.1 million for the
corresponding prior year periods, a decrease of 16.2% and 15.7% respectively.
The decrease in revenue is primarily due to average number of subscribers
decreasing to approximately 50,920 and 53,990 for the three and nine months
ended September 30, 1999 (both 1999 periods are exclusive of the Story City,
Iowa subscribers) compared to approximately 64,640 and 66,380 for the
corresponding prior year periods. Average revenue per subscriber increased to
approximately $35.38 and $34.82 for the three and nine month periods ended
September 30, 1999 compared to approximately $33.25 and $33.60 for the
corresponding prior year periods, primarily due to rate increases. The decrease
in subscriber levels is attributed to the exclusion of the Story City
subscribers described above as well as the Company's cash conservation efforts
and corresponding reduction in marketing efforts and related expenditures.
SYSTEMS OPERATIONS. Systems operations expenses primarily include
programming costs, channel lease and copyright payments, transmitter site and
tower rentals, employee salaries and benefits, subcontractor costs, 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 that generally increase as the number of
subscribers increases. Although a significant portion of the systems operations
expenses are variable based on subscriber levels, these expenses may not trend
directly with revenues due to significant fixed cost components. Systems
operations expenses were $3.5 million and $11.3 million for the three and nine
months ended September 30, 1999, compared to $4.1 million and $12.0 million for
the corresponding prior year periods, a decrease of 15.5% and 5.8% respectively.
The decrease in systems operations expenses is primarily due to a decline in the
subscriber base, partially offset by increasing programming rates in
substantially all of the Company's operating markets.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") were $3.1 million and $12.2 million for the
three and nine months ended September 30, 1999, compared to $4.5 million and
$13.6 million for the corresponding prior year periods, a decrease of 30.7% and
10.2% respectively. The decrease in SG&A during the three months ended September
30, 1999 compared to the corresponding prior year period is principally due to
the Company operating its business within the confines of a cash conservation
strategy. During the nine month period ended September 30, 1999, the decrease in
spending pursuant to the cash conservation strategy was offset by non-recurring
payments including: (i) severance payments of approximately $0.5 million to two
former officers of the Company who left the Company in February 1999, (ii)
contract termination payments of approximately $0.4 million to ACS
Telecommunications Systems, Inc., an installation service contractor/vendor and
(iii) payments to professional service advisors totaling approximately $0.7
million relating to evaluating available options with respect to the
capitalization of the Company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment and, in the nine months ended September 30, 1998,
goodwill. Depreciation and amortization expenses were $5.4 million and $16.3
million for the three and nine months ended September 30, 1999, compared to $7.1
million and $22.0 million for the corresponding prior year periods. The decrease
in depreciation and amortization expense is primarily attributed to a
corresponding decrease in the underlying capital assets, as well as goodwill
written-off in the second quarter of 1998.
OPERATING LOSS. The Company incurred operating losses of $6.5 million
and $22.9 million for the three and nine months ended September 30, 1999,
compared to $9.2 million and $73.9 million for the corresponding prior year
periods. Consolidated earnings before interest, taxes, depreciation and
amortization and impairment of long lived assets ("EBITDA") were a negative $1.2
million and a negative $6.6 million for the three and nine months ended
September 30, 1999, compared to a negative $2.1 million and a negative $5.5
million for the corresponding 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 ("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
decrease in the Company's operating loss in both periods presented is primarily
due to decreasing system operations expenses, SG&A expenses and depreciation
expense as described above. Additionally, the decrease in operating loss during
the nine months ended September 30, 1999 compared to the corresponding period is
due to the impairment of goodwill recorded in 1998. These decreases in expenses
were partially offset by a decrease in revenue for the corresponding periods.
The decrease in negative EBITDA for the three months ended September 30, 1999
compared to the corresponding prior year period is primarily due to the lower
SG&A and system operations expenses as described above. The increase in negative
EBITDA for the nine months ended September 30, 1999 compared to the
corresponding prior year period is primarily due to the non-recurring payments
for severance, contract termination and professional service advisors discussed
within the SG&A section above.
INTEREST INCOME. Interest income was $0.4 million and $1.3 million
for the three and nine months ended September 30, 1999, compared to $0.8
million and $2.7 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 sale by the Company of $400.0 million of 11 3/8%
Senior Discount Notes due 2006 (the "Senior Discount Notes") in a private
placement on February 23, 1996, that resulted in net proceeds of $162.9
million (net of debt issuance costs, payments on notes and certain
distributions to Nucentrix and CAI).
INTEREST EXPENSE. The Company incurred interest expense of $9.7 million
and $28.3 million for the three and nine months ended September 30, 1999,
compared to $8.8 million and $25.7 million for the corresponding prior year
periods. Interest expense during the three and nine months ended September 30,
1999 is primarily comprised of (i) non-cash interest and accretion of deferred
debt issuance costs of $9.5 million and $28.0 million related to the Senior
Discount Notes, and (ii) interest relating to other notes payable totaling
approximately $0.2 million and $0.3 million, respectively. Interest expense
during the three and nine months ended September 30, 1998 included (i) non-cash
interest and accretion of deferred debt issuance costs of $8.5 million and $25.1
million related to the Senior Discount Notes, and (ii) interest relating to
other notes payable totaling approximately $0.3 million and $0.6 million,
respectively.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OTHER EXPENSE. Other expense of $2.1 and $2.2 million during the three
and nine months ended September 30, 1999 is primarily due to the Company
recording a long-term reserve for the notes receivable from Television
Interactiva de Norte S.A. de C.V. totaling $2.0 million and $2.4 million,
respecitvely.
EQUITY IN LOSSES OF AFFILIATES. Equity in operating losses of
affiliates was $1.3 million and $1.6 million for the three and nine months ended
September 30, 1999 primarily due to the Company writing off the balance in
investments to equity affiliates totaling $1.1 million. Equity in losses of
affiliates represent losses from Television Interactiva del Norte S.A. de C.V.
in which the Company has an approximate 39% interest and Television Inalambrica,
S.A. de C.V. in which the Company has an approximate 49% interest. The total
charge of $3.2 million and $3.5 million, which includes the $2.0 million and
$2.4 million long term reserve noted above, was recorded during the three and
nine months ended September 30, 1999 due to the Company entering into initial
discussions with Telinor to dispose of its remaining interests.
NET LOSS. The Company has recorded net losses since inception. The
Company incurred net losses of $19.0 million and $53.6 million for the three and
nine months ended September 30, 1999 compared to $17.5 million and $100.8
million during the corresponding prior year periods. This decrease in net loss
for both periods presented is due to the decrease in systems operations, SG&A
and depreciation and amortization expenses partially offset by a decrease in
revenue. Additionally, the decrease in net loss during the nine months ended
September 30, 1999 compared to the corresponding period is due to the impairment
of goodwill and cumulative effect of change in accounting principle recorded in
1998.
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 the net proceeds from the sale of the Senior Discount Notes. The Company
has approximately $32.3 million in cash and cash equivalents at September 30,
1999. The Company has used the proceeds from the sale of the Senior Discount
Notes received in February 1996 primarily to fund (i) continued operating
losses, (ii) capital expenditures to launch digital video and high speed
Internet access services in the Dallas, Texas market, hybrid digital service in
the San Antonio, Texas market and a limited build-out in the Company's analog
markets, (iii) strategic investments in items such as channel capacity, and (iv)
general debt service.
Beginning in 1999, the Company's strategy has been to operate its
analog video systems within the confines of a cash conservation strategy, while
pursuing a strategic alliance with one or more strategic partners interested in
using the Company's spectrum for fixed, one- or two-way transmission services.
The Company's cash conservation strategy includes the recovery of out-of-pocket
expenses associated with adding a new analog video subscriber by charging such
subscriber an up-front installation fee. The cash conservation strategy also
includes the continued implementation of cost-cutting measures and the periodic
sales of non-core assets in an effort to maximize the value of assets that are
no longer used or useful to the Company's long-term operating strategy. The
Company has sold certain of its Multiple Dwelling Unit ("MDU") service
contracts, but is uncertain whether a definitive agreement will be executed for
the sale of any of the Company's remaining MDU service contracts. Additionally,
the Company is considering selling certain analog equipment held in inventory
and other operating and non-operating systems that are not considered part of
the Company's long-term operating strategy.
For 1999, the Company has initially budgeted approximately $17.2
million to fund operations, capital expenditures and debt service. The
significant components of the budget include approximately $7.2 million for
operations, $2.0 million for digital subscriber installations primarily relating
to MDU construction, $0.8 million for analog subscriber installations, $0.5
million to test and develop two-way technology, $0.5 million relating to Year
2000 compliance, $3.5 million for strategic investments in items such as channel
capacity, $1.0 million for Basic Trading Area ("BTA") obligations and $1.25
million for other expenses. The initial 1999 budget was exclusive of costs
relating to obtaining a strategic partner, costs relating to the evaluation of
available options relative to
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
capitalization of the Company, and estimated proceeds from asset sales,
if any. The Company believes this initial budget still reflects expected cash
requirements for 1999. 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 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. 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. Cash interest payments
required under the terms of the Senior Discount Notes are scheduled to commence
on September 1, 2001. There can be no assurance that the Company will be able to
secure its capital requirements absent the approval and/or participation of MCI
WorldCom. In the event the Company is unable to secure funding for capital
requirements on satisfactory terms and conditions, the ability of the Company to
sustain and expand operations and fulfill its debt obligations could be
materially adversely affected.
Net cash used in operating activities during the nine months ended
September 30, 1999 was $5.6 million versus $5.4 million during the corresponding
prior year period. The increase in cash used in operating activities during the
nine months ended September 30, 1999 is primarily due to the non-recurring
payments for severance, contract termination and professional service advisors
totaling $1.6 million as discussed within the SG&A section above. These payments
were partially offset by lower systems operations and SG&A expenses due to the
Company operating its business within the confines of a cash conservation
strategy.
Net cash used in investing activities was $3.3 million during the nine
months ended September 30, 1999 compared to $22.2 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
decrease in cash used in investing activities in the nine months ended September
30, 1999 as compared to the corresponding prior year period is primarily due to
a reduction in purchasing new licenses and leased license investments and a
reduction in purchasing additional subscriber and headend equipment for the
digital and analog markets.
Net cash used in financing activities was $0.7 million during the nine
months ended September 30, 1999 compared to $1.6 million during the
corresponding prior year period. Cash used in financing activities during the
nine months ended September 30, 1999 compared to the corresponding prior year
period is attributed to the repayment of the payables relating to the Basic
Trading Areas (BTA) totaling approximately $0.6 million and $1.4 million and the
repayment of other notes payable totaling approximately $0.1 million and $0.2
million, respectively.
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 Securities and Exchange 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, 1998.
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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, and (vii) 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.
YEAR 2000 COMPLIANCE
OVERVIEW. An undetermined number of computer software programs have
been written using two digits rather than four to determine the applicable
year. As a result, date-sensitive computer software may recognize a date
using "00" as the year 1900 rather than year 2000. This could result in major
system failures or miscalculations, and is generally referred to as the "Year
2000" problem. A preliminary review of the Company's information systems has
been completed and a comprehensive program is currently in process to modify
or replace those systems that are not Year 2000 compliant
STATE OF READINESS. The Company's Year 2000 compliance program
focuses on the Company's analog video operations, limited Internet
operations, and internal business processes, such as accounting. As of March
31, 1999, the inventory, assessment and compliance planning phases for these
were materially completed, and remediation, replacement or retirement and
testing activities was begun. The inventory items that are not assessed as
Year 2000 compliant and that require action to avoid service impact are being
fixed, replaced, or retired. Although significant progress has been made,
CS's goal for compliance of its accounting software and any other mission
critical systems relating directly to the accounting function Year 2000 has
been revised to November 30, 1999. Additionally, CS's goal to have all other
mission critical systems Year 2000 compliant by September 30, 1999 was
substantially on schedule for completion; however, the Company has
experienced certain vendor related delays relative to its Automated Response
Unit ("ARU"). It is anticipated that the Company will be able to resolve the
matters relative to the ARU by November 30, 1999.
VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that
its vendors and service providers provide CS with information as to the
compliance status of products and/or services used by CS and its operating
subsidiaries which information is subject to Company testing and
verification. Although the Company has received information from some of its
vendors and service providers, it has not yet received information from each
of the vendors and service providers it has identified. The Company will
continue to pursue its vendors and service providers in order to obtain the
necessary information regarding Year 2000 compliance of such vendors and
service providers.
In addition to the assessment of in-house systems, the Company is
currently assessing the readiness of its vendors for the Year 2000 problem
relative to the operation of their respective businesses. To determine the
status of third parties, letters inquiring as to their readiness have been
sent or are being sent to substantially all of the Company's vendors. The
Company is assessing the vendors' responses and prioritizing them in order of
significance to the business of the Company. Contingency plans are being
developed in the event that business-critical vendors do not provide the
Company with satisfactory evidence of their readiness to handle Year 2000
issues. The Company is making every reasonable effort to assess the Year 2000
readiness of these critical business partners and to create action plans to
address the identified risks.
COST. All maintenance and modification costs are being expensed as
incurred, while the cost of new software, if material, is being capitalized
and depreciated over its expected useful life. Testing and remediation costs
of all of the Company's systems and applications are currently estimated at
approximately $300,000 to $500,000 from inception in fiscal 1998 through
completion in fiscal 1999. These costs are estimated to be incurred during
1999 and funded from existing cash.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The Company does not believe the costs related to the Year 2000
compliance project will be material to its financial position or results of
operation. However, the cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and other factors. Unanticipated failures by critical
vendors as well as the failure by the Company to execute its own remediation
efforts could have a material adverse effect on the cost of the project and
its completion date. As a result, there can be no assurance that these
forward-looking estimates will be achieved and the actual cost and vendor
compliance could differ materially from those plans, resulting in material
financial risk.
RISKS. The failure to correct a material Year 2000 problem could
cause an interruption or failure of certain of the Company's normal business
functions or operations, which could have a material adverse effect on its
results of operations, liquidity or financial condition. Due to the
uncertainty inherent in other Year 2000 issues that are ultimately beyond
CS's control, including, for example, the final Year 2000 readiness of its
mission critical vendors and service providers, the Company is unable to
determine at this time the likelihood of a material impact on its results of
operations, liquidity or financial condition, due to such Year 2000 issues.
The costs of the Company's Year 2000 program and the timetable for completing
its Year 2000 preparations are based on current estimates, which reflect
numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of
third-party remediation plans and other factors. The Company can give no
assurance that these estimates will be achieved, and actual results could
differ materially from those currently anticipated. In addition, there can be
no assurance that the Company's Year 2000 program will be effective or that
its contingency plans will be sufficient. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
relevant computer software codes and embedded technology, the results of
internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
The Company believes that the worst case scenario would be the
failure of the Company's subscriber management system addressing the headend
equipment, which sends the signal to the addressable controller units, as
well as the addressable controller units themselves. The controller units
communicate to the customer's set-top box. The loss of the ability to
transmit such data would result in the loss of customers and related
revenues, among other things.
CONTINGENCY PLAN. At September 30, 1999, the Company is not aware of
any mission critical aspect of its operations or internal business processes
that can not be made Year 2000 compliant, however, its inventory and
assessment of Year 2000 compliance is not yet completed. Due to the
uncertainties presented by third party Year 2000 problems, and the
possibility that, despite its efforts, the Company is unsuccessful in
preparing its internal systems and equipment for the Year 2000, the Company
expects to develop contingency plans for dealing with the most reasonably
likely worst case scenario. The Company's assessment of its most reasonably
likely worst case scenario and the exact nature and scope of its contingency
plans will be affected by the Company's continued Year 2000 assessment and
testing. The Company has revised its estimated completion date for such
assessment to the fourth quarter of 1999 and expects to have all contingency
systems in place and fully tested by the fourth quarter of 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company is assessing the reporting and disclosure requirements
of Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 2000. The Company
believes SFAS No. 133 will not have a material impact on its financial
statements or accounting policies. The Company will adopt the provisions of
SFAS No. 133 in the first quarter of 2001.
14
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
fluctuations from changes in interest rates on long-term debt. The Company's
Senior Discount Notes bear a fixed interest rate. To date, the Company has
not entered into any derivative financial instruments to manage interest rate
risk and currently is not evaluating the future use of any such financial
instruments.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the consummation of the transactions described in
the Agreement and Plan of Merger dated as of April 26, 1999 executed by MCI
WorldCom, CAI and a wholly owned subsidiary of MCI WorldCom, CAI executed a
Written Consent of Majority of the Stockholders in Lieu of Special Meeting of
the Stockholders of the Company. The Consent, dated as of August 30, 1999,
effected the (i) election of Bernard J. Ebbers and Charles T. Canada to the
Company's Board of Directors and (ii) ratification of an amendment approved
by the Company's Board of Directors to the Bylaws that reduced the number of
authorized directors to two. Each of the members of the Board serving as of
August 30, 1999 tendered his resignation in fulfillment of certain conditions
prescribed by the Agreement and Plan of Merger dated April 26, 1999. Notice
of the execution of, and the actions authorized or ratified pursuant to, the
Consent was sent to the Company's stockholders of record on August 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
Exhibit 3.1 - *Amendment to the Amended and Restated
By-laws of the Company.
Exhibit 27 - *Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August
31, 1999 reporting that MCI WorldCom acquired CAI pursuant to
the Agreement and Plan of Merger dated April 26, 1999. The
basic terms of the agreement were described in the CAI proxy
statement dated July 30, 1999.
*Filed herewith.
15
<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/Scott D. Sullivan
--------------------------
Scott D. Sullivan
Chief Financial Officer
Dated: November 15, 1999
<PAGE>
Exhibit 3.1
Amendment to Amended and Restated Bylaws of
CS Wireless Systems, Inc.
Pursuant to a Unanimous Written Consent in Lieu of Special Meeting of
Directors dated August 30, 1999, the members of the Board of Directors of CS
Wireless Systems, Inc., pursuant to the provisions of the General Corporation
Laws of the State of Delaware, unanimously consented to the adoption of an
amendment to Section 2 of Article IV of the company's Amended and Restated
Bylaws. Pursuant to the Consent, Section 2 was amended and restated in its
entirety, effective as of August 31, 1999, to read as follows:
Section 2. Number of Directors. The number of directors of the
Corporation shall be set at two (2)
Dated to be effective the 30th day of August, 1999.
CS Wireless Systems, Inc.
By: /s/ Albert G. McGrath, Jr.
--------------------------
Albert G. McGrath, Jr.
Acting Secretary
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