-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UuhqrUDcsgae1DZINCVgnfmaXYK++XXSxfpZmbxdO9wz0RI4Tz2kdsJS8ip/Az7T jhGOLmP+jjojTqW/NwVoeg== 0000912057-99-006072.txt : 19991117 0000912057-99-006072.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006072 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CS WIRELESS SYSTEMS INC CENTRAL INDEX KEY: 0001011744 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 232751747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-03288 FILM NUMBER: 99755023 BUSINESS ADDRESS: STREET 1: 1101 SUMMIT AVENUE CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: 9723985300 MAIL ADDRESS: STREET 1: 1101 SUMMIT AVENUE CITY: PLANO STATE: TX ZIP: 75074 10-Q 1 10-Q 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 INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
SEPTEMBER 30, DECEMBER 31, 1999 1998 ----------- ----------- (Unaudited) 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 =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements 3 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ----------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ 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 =========== =========== =========== ============
See accompanying notes to unaudited condensed consolidated financial statements 4 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1999 1998 ------------- ---------- 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
5 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 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 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 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 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 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 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 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 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 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 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 EX-3.1 2 EX-3.1 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 EX-27 3 EX-27
5 1,000 3-MOS DEC-31-1999 JUL-01-1999 SEP-30-1999 32,268 0 753 0 0 33,509 68,939 34,254 228,991 4,065 341,717 0 0 11 122,329 228,991 0 5,404 11,943 11,943 2,000 0 9,652 (19,022) 0 (19,022) 0 0 0 (19,022) (2.77) (2.77)
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