<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period ended March 31, 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
incorporation or organization) Identification No.)
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:
<TABLE>
<CAPTION>
Shares Outstanding
Class as of May 13, 1999
----- ------------------
<S> <C>
Common Stock, $.001 par value 6,864,471
</TABLE>
<PAGE>
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<S> <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 Condensed Consolidated Financial Statements...................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................8
Part II - Other Information..............................................................14
Item 1. Legal Proceedings.....................................................14
Item 6. Exhibits and Reports on Form 8-K......................................14
Signatures ..............................................................................15
</TABLE>
2
<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>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 35,994 $ 41,839
Subscriber receivables, net.................................. 1,047 1,542
Prepaid expenses and other................................... 606 638
----------- -----------
Total current assets.................................... 37,647 44,019
Plant and equipment, net........................................ 40,084 43,645
License and leased license investment, net...................... 155,169 157,269
Assets held for sale............................................ 2,212 2,102
Investment in and loans to equity affiliates.................... 4,315 3,884
Debt issuance costs and other assets, net....................... 7,646 7,898
----------- -----------
$ 247,073 $ 258,817
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses........................ $ 3,309 $ 5,490
Current portion of long-term debt............................ 45 199
Current portion of BTA auction payable....................... 392 354
Other current liabilities.................................... 1,081 1,237
----------- -----------
Total current liabilities............................... 4,827 7,280
Long-term debt, less current portion............................ 325,572 316,720
BTA auction payable, less current portion....................... 3,365 3,505
----------- -----------
Total liabilities....................................... 333,764 327,505
----------- -----------
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.......................................... (239,685) (221,682)
----------- -----------
Total stockholders' deficit............................. (86,691) (68,688)
----------- -----------
$ 247,073 $ 258,817
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue ....................................................... $ 5,940 $ 6,823
Operating expenses:
Systems operations........................................... 4,181 3,908
Selling, general and administrative.......................... 5,384 4,119
Depreciation and amortization................................ 5,505 7,224
----------- -----------
Total operating expenses.................................. 15,070 15,251
----------- -----------
Operating loss............................................ (9,130) (8,428)
Other income (expense):
Interest income.............................................. 461 1,017
Equity in losses of affiliates............................... (150) (986)
Interest expense............................................. (9,139) (8,271)
Other ....................................................... (45) --
----------- -----------
Total other expense, net........................................ (8,873) (8,240)
----------- -----------
Loss before income taxes........................................ (18,003) (16,668)
Income tax benefit.............................................. -- --
----------- -----------
Net loss ....................................................... $ (18,003) $ (16,668)
=========== ===========
Weighted average basic and diluted loss per common share........ $ (2.62) $ (1.56)
=========== ===========
Basic and diluted weighted average shares outstanding........... 6,864,471 10,700,506
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
4
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. $ (18,003) $ (16,668)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 5,505 7,224
Accretion on discount notes and amortization of debt issuance costs... 9,048 8,100
Non-cash interest expense on other long-term debt..................... 91 164
Equity in losses of affiliates........................................ 150 986
Other................................................................. 45 --
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables............................................. 495 (2)
Prepaid expenses and other......................................... 32 (246)
Accounts payable, accrued expenses and other liabilities........... (474) (305)
---------- -----------
Net cash used in operating activities.......................... (3,111) (747)
---------- -----------
Cash flows from investing activities:
Purchases of plant and equipment ..................................... (1,004) (5,964)
Additions to license and leased license investment.................... (342) (956)
Investment in equity affiliates....................................... (953) (998)
Investment in assets held for sale.................................... (110) --
---------- -----------
Net cash used in investing activities.......................... (2,409) (7,918)
---------- -----------
Cash flows from financing activities:
Payments on notes payable............................................. (134) (156)
Payments on BTA auction payable....................................... (191) (733)
---------- -----------
Net cash used in financing activities.......................... (325) (889)
---------- -----------
Net decrease in cash and cash equivalents.................................... $ (5,845) $ (9,554)
Cash and cash equivalents at beginning of period............................. 41,839 74,564
---------- -----------
Cash and cash equivalents at end of period................................... $ 35,994 $ 65,010
========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
5
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 ten markets, and it owns, or holds rights to
lease, radio spectrum in its 21 primary markets and certain other markets.
The Company is approximately 94% owned by CAI Wireless Systems, Inc. ("CAI").
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 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 existing competitors 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.
The Company has incurred significant operating losses since
inception and has negative stockholders' equity at March 31, 1999. Losses are
expected for at least the next year as the Company continues to develop its
wireless communications business. The Company has approximately $36 million
in cash and cash equivalents at March 31, 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 first 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 and infrastructure
development of digital video programming, two-way frequency utilization and
telephony systems. Additionally, beginning in September 2001, the Company
will be required to make payments to the holders of its 11 3/8% Senior
Discount Notes due 2006. Without additional funding through debt or equity
offerings, joint ventures, the sale or exchange of its wireless cable channel
rights or the participation of a strategic partner, or the restructuring of
its debt agreements, the Company may not be able to meet its future debt and
interest payments. There can be no assurance that the Company will achieve
positive cash flow from operations, or consummate the sale of any wireless
cable channel rights or that sufficient debt or equity financing will be
available to the Company. In addition, subject to restrictions under its
outstanding debt, the Company may pursue other opportunities to acquire
additional wireless cable channel rights and businesses that may utilize the
capital currently expected to be available for its current markets.
CAI announced on April 26, 1999 that it executed a definitive
Agreement and Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom")
providing for the acquisition by MCI WorldCom of all of the outstanding
shares of CAI. The transaction is subject to customary conditions, including
the receipt of required regulatory approvals.
PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange
for approximately 60% of the Company's Common Stock, CAI, directly or
indirectly, contributed to the Company the wireless cable television assets
and all related liabilities, or the stock of subsidiaries owning wireless
cable television assets associated with the wireless cable television markets
of Bakersfield and Stockton/Modesto, California; Charlotte, North Carolina;
and Cleveland, Ohio. Simultaneously, in exchange for approximately 40% of the
Company's Common Stock, cash, a short-term note and a long-term note (the
"Heartland Long-Term Note"), Heartland, directly or indirectly, contributed
or sold to the Company the wireless cable television assets and all related
liabilities associated with the
6
<PAGE>
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
wireless cable television markets of Grand Rapids, Michigan; Minneapolis,
Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas, Fort Worth
and San Antonio, Texas; and Salt Lake City, Utah. The Company subsequently
acquired wireless cable television rights and related assets in certain
Midwest markets, including but not limited to, the Effingham and Wellsville,
Kansas; Story City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana and
Rochester, Minnesota markets in connection with the Company's merger
acquisition of USA Wireless Cable, Inc. on October 11, 1996 ("USA Wireless
Acquisition"). The Company consummated on September 3, 1997 an exchange of
its wireless cable rights and related assets in Salt Lake City, Utah for
wireless cable rights and related assets in Kansas City, Missouri pursuant to
an agreement dated as of November 6, 1996 with People's Choice TV Corp.
On December 2, 1998, the Company, CAI and Heartland entered into a
Master Agreement ("Master Agreement") providing for, among other things, the
termination of Heartland's rights in, and claims against, the Company. As
part of the Master Agreement, in December 1998, CAI purchased Heartland's
ownership in the Company, or 3,836,035 shares of CS Wireless common stock,
for $1,534,000. The Company subsequently purchased those shares from CAI for
the same price. These shares are recorded as treasury stock for the periods
presented. Additionally, the Company agreed to lease certain channel rights
and sell the net operating assets of its Story City, Iowa market to Heartland
primarily in exchange for the forgiveness by Heartland of the outstanding
balance owed by the Company of $2,335,000 under the Heartland Long-Term Note
and additional cash payments by the Company to Heartland of $466,000. The
deposit, 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
March 31, 1999 in the accompanying consolidated balance sheet.
(b) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of the Company contain all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of March 31, 1999, and the results
of operations and cash flows for the three months ended March 31, 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
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. Potentially dilutive securities 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 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.
7
<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 as of March 31, 1999 and the results of operations of the
Company for the three months ended March 31, 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 ten markets at March 31,
1999 (exclusive of the Story City, Iowa market which is held for sale) and
eleven markets at March 31, 1998. 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. Additionally, the Company offers
certain telephony services through agreements with certain local exchange
carriers and a long distance carrier. As a result of the execution of the
Master Agreement dated December 2, 1998 between the Company, CAI Wireless
Systems, Inc. ("CAI") and Heartland Wireless Communications, Inc.
("Heartland"), 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 three months ended March 31, 1999 consisting of revenue of
$138,000 and operating expense of $137,000 is excluded from the condensed
consolidated statement of operations.
CAI, the owner of approximately 94% of the Company's outstanding
common stock, announced on April 26, 1999 the execution of a definitive
Agreement and Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom")
providing for the acquisition by MCI WorldCom of all of the outstanding stock
of CAI. The transaction is subject to customary conditions, including the
receipt of required regulatory approvals.
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 ability of CAI to complete its proposed merger with MCI
WorldCom, the ability of CAI and the Company to attract an alternate
strategic partner in the event that the proposed merger is not consummated,
and risks and uncertainties set forth below in this MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and elsewhere
herein, as well as other factors contained herein and in the Company's other
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 for the three months ended March 31, 1999 was $5.9 million,
compared to $6.8 million for the prior year period, a decrease of 13.2%. The
decrease in revenue is primarily due to average subscribers decreasing to
57,120 (exclusive of Story City, Iowa subscribers) for the three months ended
March 31, 1999 compared to approximately 67,650 for the prior year period.
Average revenue per subscriber increased to approximately $34.65 for the
three month period ended March 31, 1999 compared to approximately $33.60 for
the prior year period, primarily due to rate increases. The decrease in
subscriber levels is primarily attributed to the Company's cash conservation
efforts and corresponding reduction in marketing efforts and expenditures.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 $4.2
million for the three months ended March 31, 1999, compared to $3.9 million
for the corresponding prior year period, an increase of 7.7%. The increase in
systems operations expenses is primarily due to increasing programming rates
in substantially all of the Company's operating markets.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") were $5.4 million for the three months ended
March 31, 1999, compared to $4.1 million for the corresponding prior year
period, an increase of 31.7%. The increase in SG&A is principally due to (i)
non-recurring severance payments of approximately $0.5 million to two former
officers of the Company who left the Company in February 1999 (see Item 11 in
the Company's Annual Report filed on Form 10-K for the year ended December
31, 1998), (ii) contract termination payments of approximately $0.4 million
to ACS Telecommunications Systems, Inc., an installation service
contractor/vendor (see Item 13 in the Company's Annual Report filed on Form
10-K for the year ended December 31, 1998) and (iii) payments to professional
service advisors totaling approximately $0.8 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 goodwill. Depreciation and amortization
expenses were $5.5 million for the three months ended March 31, 1999,
compared to $7.2 million for the prior year period. The decrease in
depreciation and amortization expense is attributed to a corresponding
decrease in the underlying capital assets, as well as goodwill written-off in
the second quarter of 1998 and no goodwill amortization expense incurred in
1999.
OPERATING LOSS. The Company incurred operating losses of $9.1
million for the three months ended March 31, 1999, compared to $8.4 million
for the corresponding prior year period. Consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA") were a negative
$3.6 million for the three months ended March 31, 1999, compared to a
negative $1.2 million for the prior year period. EBITDA is a financial
measure commonly used in the industry but is not intended to represent cash
flows, as determined in accordance with Generally Accepted Accounting
Policies ("GAAP"), or as an indicator of operating performance. EBITDA should
not be considered a substitute for measures of performance prepared in
accordance with GAAP. The increase in the Company's operating loss is due to
increasing system operations expenses, SG&A expenses and depreciation expense
as described above. The decrease in EBITDA is primarily due to the higher
SG&A and system operations expenses as described above.
INTEREST INCOME. Interest income was $0.5 million for the three
months ended March 31, 1999, compared to $1.0 million for the corresponding
prior year period. The decrease in interest income is primarily due to a
decrease in the average invested balance. The average invested balance is
comprised mainly of the proceeds remaining from the sale by the Company of
$400.0 million of 11 3/8% Senior Discount Notes (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 Heartland and CAI).
INTEREST EXPENSE. The Company incurred interest expense of $9.1
million for the three months ended March 31, 1999, compared to $8.3 million
for the corresponding prior year period. Interest expense during the three
months ended March 31, 1999 included (i) non-cash interest and accretion of
deferred debt issuance costs of $9.0 million related to the Senior Discount
Notes, and (ii) interest relating to other notes payable totaling
approximately $0.1 million. Interest expense during the three months ended
March 31, 1998 included (i) non-cash interest and accretion of deferred debt
issuance costs of $8.1 million related to the Senior Discount Notes, (ii)
interest expense of approximately $72,000 related to the Long-Term Note
payable to Heartland and (iii) interest relating to other notes payable
totaling approximately $0.1 million.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
NET LOSS. The Company has recorded net losses since inception. The
Company incurred net losses of $18.0 million during the first quarter of 1999
compared to $16.7 million during the corresponding prior year period. This
increase can be attributed to the Company's total revenue decreasing during
the quarter ended March 31, 1999 due to the falling subscriber levels as
described above, increased SG&A costs, system operations, depreciation and
amortization and interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The wireless cable television business is a capital-intensive
business. Funds are required for the lease or acquisition of channel rights,
the acquisition of wireless cable systems, the construction of system headend
and transmission equipment, the conversion of analog systems to digital
technology, and start-up costs related to the commencement of operations and
subscriber installation costs. To date, the primary source of capital of the
Company has been from the net proceeds from the sale of the Senior Discount
Notes. The Company has approximately $36.0 million in cash and cash
equivalents at March 31, 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 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, which is to be a wholesale provider
of two-way transmission services to one or more strategic partners.
Accordingly, the Company is considering selling certain assets relating to
the provision of video services to multiple dwelling units ("MDUs"), such as
apartment and condominium complexes, in certain of its markets. It is
uncertain whether a definitive agreement will be executed for the sale of any
of the Company's 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 business plan.
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 is exclusive of costs relating to obtaining a strategic partner,
costs relating to the evaluation of available options relative to the
capitalization of the Company, and estimated proceeds from asset sales, if
any. 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 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 sustain and expand operations
and fulfill its debt obligations could be materially adversely affected.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net cash used in operating activities during the three months ended
March 31, 1999 was $3.1 million versus $0.7 million during the comparable
prior year period. The increase in cash used in operating activities was
primarily due to timing of payments to vendors and increased SG&A and system
operating expenses as previously discussed.
Net cash used in investing activities was $2.4 million during the
three months ended March 31, 1999 compared to $7.9 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 three months ended
March 31, 1999 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 $0.3 million during the
three months ended March 31, 1999 compared to $0.9 million during the
corresponding prior year period. Cash used in financing activities during the
three months ended March 31, 1999 is attributed to the repayment of the
payable relating to BTAs totaling approximately $0.2 million and the
repayment of other notes payable totaling approximately $0.1 million. Cash
used in financing activities during the three months ended March 31, 1998 is
attributed to the repayment of BTA payables of approximately $0.7 million and
other notes payable of approximately $0.2 million.
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 ("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.
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 announcements by other wireless cable companies
regarding their respective intentions to restructure outstanding indebtedness
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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
areas have been materially completed, and remediation, replacement or
retirement and testing activities are beginning. The inventory items that are
not assessed as Year 2000 compliant and that require action to avoid service
impact are expected to be fixed, replaced, or retired. CS' goal for its
accounting services is to have its accounting software and any other mission
critical systems relating directly to the accounting function Year 2000
compliant by June 30, 1999. For all other areas, CS' goal is to have all
mission critical systems Year 2000 compliant by September 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.
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 will assess the vendors' responses and
prioritizing them in order of significance to the business of the Company.
Contingency plans will be 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 intends to make 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 will be expensed as
incurred, while the cost of new software, if material, will be 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. All estimated costs are expected to be funded from existing cash.
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 March 31, 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 expects to
complete such assessment during the second quarter of 1999 and 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, 1999. 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 2000.
13
<PAGE>
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 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
*27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed on March 3, 1999 to report,
under Item 5, the (i) appointments of Jared Abbruzzese as
Acting Chief Executive Officer and Derwood Edge as Acting
Chief Operating Officer and (ii) resignations of David E. Webb
and Thomas Dixon from their respective positions of Chief
Executive Officer and Senior Vice President.
*Filed herewith.
14
<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/ Jared E. Abbruzzese
-------------------------------
Jared E. Abbruzzese
Acting Chief Executive Officer
and Director
(Principal Executive Officer)
By: /s/ John M. Lund
-------------------------------
John M. Lund
Senior Vice President - Finance
and Chief Financial Officer
(Principal Financial Officer)
Dated: May 13, 1999
15
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