-----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, BXfPhjcNvYJF11u1pqkxknJWboqQM9kKagyGq8C+5o62BEkt3Rqovb5548UulqYf vBuNpGavX6IZlEaEfRiMFA== 0001047469-97-004598.txt : 19971117 0001047469-97-004598.hdr.sgml : 19971117 ACCESSION NUMBER: 0001047469-97-004598 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE 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: 97718022 BUSINESS ADDRESS: STREET 1: 200 CHISHOLM PLACE STREET 2: SUITE 200 CITY: PLANO STATE: TX ZIP: 75075 BUSINESS PHONE: 2145092634 MAIL ADDRESS: STREET 1: 200 CHISHOLM PLACE STREET 2: SUITE 200 CITY: PLANO STATE: TX ZIP: 75075 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, 1997 ------------------ 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 333-20295 --------- 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) 200 Chisholm Place, Suite 202, Plano, Texas 75075 - ------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (972) 633-4000 -------------- N/A - ------------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report. Indicate by check 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 / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Shares Outstanding Class as of November 14, 1997 ----- ----------------------- Common Stock, $.001 par value 10,700,506 PART I - FINANCIAL INFORMATION ITEM 1. CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data) SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . $ 83,453 $113,072 Investment in restricted cash (Note 2) . . . . . . 5,030 -- Subscriber receivables, net. . . . . . . . . . . . 817 1,079 Notes receivable . . . . . . . . . . . . . . . . . -- 1,510 Prepaid expenses and other . . . . . . . . . . . . 755 689 -------- -------- Total current assets . . . . . . . . . . . . . . . 90,055 116,350 Plant and equipment, net . . . . . . . . . . . . . . . 42,837 42,955 License and leased license investment, net . . . . . . 169,222 172,953 Goodwill, net. . . . . . . . . . . . . . . . . . . . . 49,175 52,011 Assets held for sale (Note 2). . . . . . . . . . . . . 4,609 19,366 Investment in and loans to equity affiliates (Note 2). 8,932 -- Debt issuance costs and other assets, net. . . . . . . 10,924 10,602 -------- -------- Total assets . . . . . . . . . . . . . . . . . . . $375,754 $414,237 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses. . . . . . . $ 5,079 $ 5,440 Accounts payable to affiliates . . . . . . . . . . 29 1,215 Current portion of long-term debt. . . . . . . . . 236 3,194 Current portion of BTA auction payable . . . . . . 1,324 646 Other current liabilities. . . . . . . . . . . . . 2,026 1,043 -------- -------- Total current liabilities. . . . . . . . . . . . . 8,694 11,538 Long-term debt, less current portion . . . . . . . . . 275,876 268,180 BTA auction payable, less current portion. . . . . . . 3,882 4,256 Deferred income taxes. . . . . . . . . . . . . . . . . 1,357 5,429 -------- -------- Total liabilities. . . . . . . . . . . . . . . . . 289,809 289,403 -------- -------- Stockholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares, no shares issued and outstanding . . . . . . . . . . . . . . . . . . . -- -- Common stock, $.001 par value; authorized 40,000,000 shares,issued and outstanding 10,700,506 shares in 1997 and 10,445,408 shares in 1996 . . . . . . . . . . . . . . . . . . . . . 11 10 Additional paid-in capital. . . . . . . . . . . . . 154,557 154,558 Treasury stock, at cost; 2,103 shares in 1997 . . . (40) -- Accumulated deficit . . . . . . . . . . . . . . . . (68,583) (29,734) -------- -------- Total stockholders' equity . . . . . . . . . . . . 85,945 124,834 -------- -------- Total liabilities and stockholders' equity . . . . $375,754 $414,237 -------- -------- -------- -------- See accompanying notes to unaudited condensed consolidated financial statements 2 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except share data) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ----------------- 1997 1996 1997 1996 --------- ------- --------- ------ Revenue . . . . . . . . . . . . . . . . . . $ 6,746 $ 6,274 $ 20,246 $ 15,994 Operating expenses: Systems operations. . . . . . . . . . . . 3,822 3,731 11,174 9,400 Selling, general and administrative . . . 4,528 3,984 12,299 9,726 Depreciation and amortization . . . . . . 6,976 6,074 20,266 13,853 --------- --------- --------- --------- Total operating expenses . . . . . . . 15,326 13,784 43,739 32,979 --------- --------- --------- --------- Operating loss . . . . . . . . . . . . . . . (8,580) (7,515) (23,493) (16,985) --------- --------- --------- --------- Other income (expense): Interest income . . . . . . . . . . . . . 1,379 1,929 4,261 4,907 Interest expense. . . . . . . . . . . . . (7,863) (7,245) (23,952) (17,490) Equity in losses of affiliates. . . . . . (385) -- (385) -- Other (Note 2). . . . . . . . . . . . . . (7) -- 648 -- --------- --------- --------- --------- Total other expense, net . . . . . . . (6,876) (5,316) (19,428) (12,583) --------- --------- --------- --------- Loss before income taxes . . . . . . . . . . (15,456) (12,831) (42,921) (29,568) Income tax benefit . . . . . . . . . . . . . 1,358 4,345 4,072 10,234 --------- --------- --------- --------- Net loss . . . . . . . . . . . . . . . . . . $(14,098) $ (8,486) $(38,849) $(19,334) --------- --------- --------- --------- --------- --------- --------- --------- Net loss per common share. . . . . . . . . . $ (1.32) $ (0.84) $ (3.66) $ (2.21) --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to unaudited condensed consolidated financial statements 3 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) NINE MONTHS ENDED ---------------------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------- ------------- Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . $(38,849) $(19,334) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . 20,266 13,853 Deferred income taxes . . . . . . . . . . . . . . . (4,072) (10,234) Accretion on discount notes and amortization of debt issuance costs. . . . . . . . . . . . . . . . 22,444 16,390 Non-cash interest expense on other long-term debt . 1,402 1,036 Gain on sale. . . . . . . . . . . . . . . . . . . . (648) -- Equity in losses of affiliates. . . . . . . . . . . 385 -- Changes in assets and liabilities, net of effects of contributions: Subscriber receivables. . . . . . . . . . . . . 273 (58) Prepaid expenses and other. . . . . . . . . . . (144) (122) Accounts payable, accrued expenses and other liabilities. . . . . . . . . . . . . . . . . . (1,630) 386 --------- --------- Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . (573) 1,917 --------- --------- Cash flows from investing activities: Purchases of plant and equipment . . . . . . . . . . . (12,796) (9,817) Additions to license and leased license investment . . (2,727) (11,230) Investment in assets held for sale . . . . . . . . . . (943) -- Proceeds from sale of assets . . . . . . . . . . . . . 16,350 -- Investment in restricted cash. . . . . . . . . . . . . (5,030) -- Investment in equity affiliates. . . . . . . . . . . . (5,899) -- Other. . . . . . . . . . . . . . . . . . . . . . . . . (540) (515) --------- --------- Net cash used in investing activities. . . . . . (11,585) (21,562) --------- --------- Cash flows from financing activities: Payments on notes payable. . . . . . . . . . . . . . . (17,377) (30,739) Payment on capital leases and other. . . . . . . . . . (84) -- Proceeds from unit offering. . . . . . . . . . . . . . -- 229,484 Debt issuance costs. . . . . . . . . . . . . . . . . . -- (10,792) Cash distributed pursuant to contributions . . . . . . -- (31,648) --------- --------- Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . . . . (17,461) 156,305 --------- --------- Net increase (decrease) in cash and cash equivalents . . . $(29,619) $136,660 Cash and cash equivalents at beginning of period . . . . . 113,072 184 --------- --------- Cash and cash equivalents at end of period . . . . . . . . $ 83,453 $136,844 --------- --------- --------- ---------
See accompanying notes to unaudited condensed consolidated financial statements 4 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 (Unaudited) (1) GENERAL (a) DESCRIPTION OF BUSINESS 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 services. The Company has a portfolio of wireless cable channel rights (or wireless spectrum) in various markets in the United States. As of September 30, 1997, the Company had systems in operation in ten markets. Systems in other markets are currently under construction and development by the Company. The Company also intends to use a portion of its wireless spectrum for high-speed Internet access. (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. The accompanying unaudited condensed consolidated financial information for the period from January 1, 1996 through February 23, 1996 reflects the combined financial position and results of operations for the Company's wireless cable system serving the Cleveland, Ohio metropolitan area, which includes the accounts of the Company and certain assets of an affiliated company, Atlantic Microsystems, Inc. For the period subsequent to February 23, 1996, the Company's consolidated financial statements include the results of operations of the entities and assets contributed to the Company on February 23, 1996 by CAI Wireless Systems, Inc. ("CAI") and Heartland Wireless Communications, Inc. ("Heartland") (the "February 23, 1996 Contributions"). (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 September 30, 1997, and the results of operations for the three and nine months ended September 30, 1997 and 1996 and cash flows for the nine months ended September 30, 1997 and 1996. 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 Net loss per common share is based on the net loss applicable to the weighted average number of common shares outstanding of approximately 10,700,506 and 10,110,000 for the three month periods ended September 30, 1997 and 1996, respectively and 10,618,451 and 8,758,882 in the nine months periods ended September 30, 1997 and 1996. For purposes of the accompanying condensed consolidated financial information, the Company has retroactively adjusted all references to the number of outstanding shares prior to February 23, 1996 to reflect the number of shares issued to CAI on February 23, 1996 related to the wireless cable television system in Cleveland, Ohio. Shares issuable upon exercise of stock options are anti-dilutive and have been excluded from the calculation. Fully-diluted loss per common share is not presented as it would not materially differ from primary loss per common share. (2) COMPLETED TRANSACTIONS On May 22, 1997 the Company sold to BellSouth Corporation, pursuant to the July 25, 1996 purchase agreement, (i) certain leases and licenses for wireless cable channel rights in Adairsville, Power Crossroads and Rutledge, Georgia (Atlanta Suburbs markets) and leases for four tower sites; (ii) the BTA license relating to Atlanta, Georgia and (iii) certain other assets and reimbursable expenses for approximately $16.4 million, resulting in a gain of approximately $0.7 million. On August 4, 1997 the Company acquired a 25% ownership interest in TelQuest Satellite Services LLC ("TelQuest"), for consideration of an initial contribution of $2.5 million in cash (payable in quarterly installments beginning August 1997) and, through a lease, up to $2.5 million in equipment. At September 30, 1997 the Company's recorded investment in TelQuest was $4.2 million. TelQuest was formed to provide digital video programming signals through its headend in the sky satellite service. The Company has entered into a ten-year 5 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 1997 (Unaudited) Affiliation Agreement with TelQuest through which the Company will receive TelQuest's headend in the sky service as well as other services offered by TelQuest. TelQuest Satellite Services LLC's other members are TelQuest Communications, Inc. and CAI. Both CAI and TelQuest Communications, Inc. are affiliated entities. On September 3, 1997, pursuant to an agreement dated as of November 6, 1996, the Company consummated an exchange with Peoples Choice TV Corp. of wireless cable channel rights and related assets in Salt Lake City, Utah for wireless cable channel rights and related assets in Kansas City, Missouri. On September 29, 1997, the Company acquired 39% of the voting common stock of Television Interactiva del Norte, S.A. de C.V. ("Telinor") from Heartland for cash proceeds of $915,000 and assumption of a cash call obligation in the amount of $145,000. The Company also purchased from Heartland two unsecured promissory notes payable by Telinor for $2.56 million, including accrued interest. The two notes were immediately restructured into one unsecured note accruing interest at 12% and maturing on September 21, 2002. Additionally, the Company consummated another transaction with the principal stockholders of Telinor whereby the Company purchased 49% of the voting stock of Television Inalambrica, S.A. de C.V. ("Television") for cash in the amount of $1.0 million and committed to (i) loan Television up to the sum of $5.4 million in cash or (ii) finance an equivalent amount in sales of the Company's equipment to Television. The funds committed have been deposited into escrow pending disbursement or reduction of the required escrow amount through equipment sales to Television. As of September 30, 1997 approximately $5.0 million is held in escrow pursuant to this agreement. As of September 30, 1997, the Company's recorded Investment in Telinor and Television was $2.2 million. Telinor and Television were formed to develop wireless cable television systems providing subscription television services in Mexico. (3) PENDING TRANSACTIONS The Company has entered into a letter of intent with Heartland, pursuant to which Heartland will acquire the Company's wireless cable operating system in Radcliffe, Iowa and wireless cable channel rights in Scottsbluff, Nebraska and Kalispell, Montana for an aggregate of approximately $3.9 million. Heartland is operating or maintaining each of these markets, as applicable, under a Management Agreement. Accordingly, the carrying amount of such assets of $3.9 million has been classified as assets held for sale in the accompanying condensed consolidated balance sheet. (4) RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which superseded APB Opinion No. 15, "Earnings per Share," was issued in February 1997. SFAS 128 requires dual presentation of basic and diluted earning per share ("EPS") for complex capital structures on the face of the statements of operations. Basic EPS is computed by dividing income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. SFAS 128 is required to be adopted for year-end 1997; earlier application is not permitted. Due to the Company's net losses, the loss per share amounts included in the accompanying statements of operations would not differ from the basic or the dilutive loss per share amounts calculated under SFAS 128. (5) 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. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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 services. The Company has a portfolio of wireless cable channel rights (or wireless spectrum) in various markets in the United States. As of September 30, 1997, the Company had systems in operation in ten markets. Systems in other markets are currently under construction and development by the Company. The Company also intends to use a portion of its wireless spectrum for high-speed Internet access. RESULTS OF OPERATIONS GENERAL. Period to period comparisons of financial results are not necessarily meaningful due to certain contributions to, and acquisition by, the Company and its predecessor, ACS Ohio, Inc. ("ASC Ohio"). ACS Ohio owned and operated the wireless cable television system serving the Cleveland, Ohio metropolitan area. ACS Ohio, its parent and various affiliates were acquired by CAI Wireless Systems, Inc. ("CAI") in September, 1995. CAI and Heartland Wireless Communications, Inc., ("HWC") contributed to the Company on February 23, 1996, certain wireless cable television assets comprising various domestic markets (the "February 23, 1996 Contributions"). Financial information for the period January 1, 1996 through February 23, 1996 reflects the combined financial position and results of operations for the Company's wireless cable system serving the Cleveland, Ohio metropolitan area, which includes the accounts of the Company and certain assets of an affiliated company, Atlantic Microsystems, Inc. For the period subsequent to February 23, 1996, the Company's consolidated financial statements include the results of operations of the entities and assets contributed to the Company as part of the February 23, 1996 Contributions. Additionally, on October 11, 1996 the Company acquired all of the issued and outstanding common stock of USA Wireless Cable, Inc. whereby the Company acquired certain assets in certain Midwest markets ("USA Wireless Acquisition"). REVENUE. The Company's revenue primarily consists of monthly fees paid by subscribers for basic programming, premium programming and equipment rental. The Company's revenue was $6.7 million for the third quarter of 1997 compared to $6.3 million for the third quarter of 1996, an increase of 7.5%. Revenue for the nine months ended September 30, 1997 was $20.2 million, compared to $16.0 million for the comparable prior year period, an increase of 26.6%. The increase in revenue for the periods presented is primarily due to average subscribers increasing to approximately 65,425 for the third quarter of 1997 compared to approximately 59,390 for the prior year period, an increase of 10.2% and approximately 65,520 for the nine months ended September 30, 1997 compared to approximately 51,150 for the prior year period, a 28.1% increase. The increase in subscriber levels is attributed to the February 23, 1996 Contributions and the USA Wireless Acquisition. The Company had ten systems in operation at September 30, 1997 compared to nine systems in operation at September 30, 1996, including eight markets relating to the February 23, 1996 Contributions. The increase in revenue attributed to subscriber growth was partially offset by a decrease in average recurring revenue per subscriber to approximately $33.63 and $33.56 for the quarter and nine months ended September 30, 1997 from approximately $34.68 and $34.27 for the comparable prior year periods. SYSTEMS OPERATIONS. Systems operations 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 increase. Systems operations expenses were $3.8 million and $11.2 million for the quarter and nine months ended September 30, 1997 compared to $3.7 million and $9.4 million for the prior year periods. The increase in systems operations expense for the third quarter of 1997 compared to the third quarter of 1996 is principally due to the increase in subscribers brought about by the USA Wireless Acquisition. The increase in systems operations expense for the nine months ended September 30, 1997 compared to the prior year period is primarily due to the increase in the subscriber base brought about by the February 23, 1996 Contributions and the USA Wireless Acquisition. 7 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 $4.5 million and $12.3 million for the quarter and nine months ended September 30, 1997, compared to $4.0 million and $9.7 million for the comparable prior year periods. The increase in SG&A for the third quarter of 1997 compared to the prior year period is attributed to the increase in the subscriber base brought about by the USA Wireless Acquisition. The increase in SG&A for the nine months ended September 30, 1997 compared to the prior year period is principally due to an increase in the subscriber base brought about by the February 23, 1996 Contributions and the USA Wireless Acquisition, and to a lesser extent, certain costs associated with the activities preparing for the launch of digital video and high speed Internet access services in Dallas, Texas. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense includes depreciation of systems and equipment, amortization of licenses and leased license investment and goodwill. Depreciation and amortization expenses were $7.0 million and $20.3 million for the quarter and nine months ended September 30, 1997, compared to $6.1 million and $13.9 million for the prior year periods. The increase in depreciation and amortization expense during the periods presented is attributed to capital expenditures and to the additional plant and equipment, subscriber equipment, and leased license investment contributed to the Company in connection with the February 23, 1996 Contributions and the USA Wireless Acquisition. OPERATING LOSS. The Company generated operating losses of $8.6 million and $23.5 million for the quarter and nine months ended September 30, 1997 compared to $7.5 million and $17.0 million for the comparable prior year periods. Consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") were a negative $1.6 million and a negative $3.2 million for the quarter and nine months ended September 30, 1997, compared to a negative $1.4 million and $3.1 million for the prior year periods. The increase in the Company's operating loss and decrease in EBITDA during the periods presented is primarily due to incremental net operating costs associated with the February 23, 1996 Contributions and the USA Wireless Acquisition. INTEREST INCOME. Interest income was $1.4 million and $4.3 million for the quarter and nine months ended September 30, 1997, compared to $1.9 million and $4.9 million for the comparable prior year periods. The Company consummated a private placement of $400.0 million of 11 3/8% Senior Discount Notes (the "Senior Discount Notes") on February 23, 1996, resulting in net proceeds of $162.9 million (net of debt issuance costs, payment on notes and distributions pursuant to the February 23, 1996 Contributions). The decrease in interest income is primarily due a decrease in the average invested balance, partially offset by cash equivalents being invested for a shorter period in 1996 compared to 1997. INTEREST EXPENSE. The Company incurred interest expense of $7.9 million and $24.0 million for the quarter and nine months ended September 30, 1997, compared to $7.2 million and $17.5 million for the comparable prior year periods. Interest expense during the quarter and nine months ended September 30, 1997 included (i) non-cash interest and accretion of deferred debt issuance costs of $7.6 million and $22.4 million, respectively, related to the Senior Discount Notes and (ii) non-cash interest of $.2 million and $1.5 million, respectively, relating to the Heartland Long-Term Note ("Long Note") issued by the Company in connection with the February 23, 1996 Contributions and the BTA auction payable. Interest expense during the quarter ended and nine months ended September 30, 1996 included non-cash interest and accretion of deferred debt issuance costs of $6.8 million and $17.5 million, respectively, related to the Senior Discount Notes and $.04 million and $.08 million, respectively, primarily relating to the Heartland Long Note. INCOME TAX BENEFIT. The Company recognized income tax benefits related to the Company's losses before income taxes of $1.4 million and $4.1 million for the quarter and nine months ended September 30, 1997, compared to $4.3 million and $10.2 million for the comparable prior year periods. The Company recognized income tax benefits to the extent of future expected reversals of existing taxable temporary differences. NET LOSS. The Company has recorded net losses since inception. The Company incurred net losses of $14.1 million, or $1.32 per share, during the third quarter of 1997 compared to $8.5 million, or $0.84 per share, during the prior year period and $38.8 million, or $3.66 per share, during the nine months ended September 30, 1997, compared to $19.3 million, or $2.21 per share during the prior year period. Although the Company's total revenue increased 7.5% and 26.6% during the third quarter of 1997 and the nine months ended 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued) September 30, 1997 respectively, the Company's net losses have increased due to increased SG&A, system operations, depreciation and amortization and interest expense. LIQUIDITY AND CAPITAL RESOURCES Companies within the wireless cable industry require significant capital. Funds are required for the lease or acquisition of channel rights, the acquisition of wireless cable systems, the construction of system head-end and transmission equipment, subscriber equipment, the conversion of analog systems to digital technology, start-up costs related to the commencement of operations and subscriber acquisitions and installation costs. The Company intends to finance its capital requirements through a combination of cash on hand, the issuance of debt and equity securities, financing of equipment purchases, the disposition of wireless cable systems that are inconsistent with the Company's business strategy, the incurrence of loans and the assumption of debt and other liabilities in connection with acquisitions. There can be no assurance that the Company will be able to secure its capital requirements on terms and conditions satisfactory to the Company. Each of the operating systems that was contributed to the Company in connection with the February 23, 1996 Contributions has incurred operating losses since inception. 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. Accordingly, in the event the Company is unable to secure capital requirements on satisfactory terms and conditions, the ability of the Company to develop and expand operations and satisfy its indebtedness would be materially adversely affected. The Company expects to launch its first digital video market in the fourth quarter of 1997 in Dallas, depending on the availability of digital equipment and the successful construction of the necessary infrastructure. In addition, the Company is evaluating its other markets to determine where and when to convert existing analog markets to digital or offer hybrid digital services in conjunction with existing or planned analog services. However, in the interim, the Company intends to minimize capital expenditures in its analog markets. The Company plans to launch its first high speed Internet access service in the fourth quarter of 1997 in Dallas, depending on the availability of equipment and the successful construction of the necessary infrastructure. The Company is also evaluating its other markets to determine where and when to offer high speed Internet access services. For 1997, the Company estimates capital expenditures and investment in and loans to equity affiliates of approximately $25.0 million and $12.0 million, respectively. Through September 30, 1997, such expenditures and investments have totaled $16.4 million and $10.9 million, respectively. Approximately $10.0 and $1.0 million of estimated capital expenditures relates to the launch of the digital video business and high speed Internet access service in Dallas; however, these amount may vary significantly depending on actual subscriber growth rates and the potential use of equipment leases for the acquisition of certain capital equipment. In addition, the Company estimates total capital expenditures of approximately $6.0 million in its analog markets. The remainder of the capital budget relates to strategic investments in items such as channel capacity. The key components of a new digital headend system are (1) the compression center (2) the transmitter site and (3) repeater sites and microwave or other links, as necessary. The Company estimates that the launch of a new digital wireless cable system in a typical market will require capital expenditures for the compression center of approximately $1.3 million and approximately $1.3 million for the transmitter site, based on utilizing a headend in the sky service such as offered by TelQuest Satellite Services, LLC ("Telquest") (see Note 2 to Condensed Consolidated Financial Statements). The capital expenditures associated with facilities vary significantly by market as do capital expenditures associated with microwave and other links. The capital associated with a typical repeater site is estimated at approximately $800,000. In total, with a headend in the sky solution, a new digital system is estimated to cost approximately $3.3 million. The capital expenditures associated with acquiring and installing each digital subscriber are estimated at approximately $750, based on a one terminal configuration. Also, the capital expenditures required to modify an existing analog head-end to offer a hybrid digital service are estimated at $100,000, including the utilization of a headend in the sky service such as that offered by TelQuest (see Note 2 to Condensed Consolidated Financial Statements). The Company's Dallas/Fort Worth system is ultimately expected to require two repeater sites and the construction of an additional transmitter site in Fort Worth, with the final configuration being roughly equivalent to 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued) two stand alone systems. In total, the capital expenditures estimated for the buildout of the Dallas/Fort Worth market are $7.5 million, inclusive of the compression center, transmitter site costs, repeater sites, microwave links, building and towers and warehouse and lab equipment. Approximately $6.0 million of the total headend cost is budgeted for 1997. The anticipated investments in equity affiliates for the remainder of 1997 include $1.0 million with respect to TelQuest and $145,000 with respect to Television del Norte, S.A. de C.V. and Television Inolombrica, S.A. de C.V. ("Television") (see Note 2 to Condensed Consolidated Financial Information). Funds committed to Television pursuant to a commitment to loan up to $5.4 million may be released from time to time as the Company finances purchases by Television of equipment redeployed from the Company's domestic markets in conjunction with system conversions from analog to digital. Net cash used in operating activities during the nine months ended September 30, 1997 was $.6 million versus cash provided by operating activities of $1.9 million during the comparable prior year period. The decrease in cash provided by operating activities was primarily due to timing of payments to vendors, increased SG&A and system operating expense, and to a lesser extent, certain costs associated with the activities preparing for the launch of digital video and high speed Internet access services in Dallas, Texas. Net cash used in investing activities was $11.6 million during the nine months ended September 30, 1997 compared to cash used in investing activities of $21.6 million during the comparable 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, 1997 is primarily due to the proceeds from the assets held for sale partially off-set by the investment in equity affiliates and restricted cash with no comparable amounts in the corresponding prior year period. Net cash used in financing activities was $17.5 million during the nine months ended September 30, 1997 compared to cash provided by financing activities of $156.3 million during the comparable prior year period. Cash used in financing activities during the nine months ended September 30, 1997 is primarily attributed to the repayment of $2.1 million of indebtedness related to the USA Wireless Acquisition and the repayment of $15.3 million of the Heartland Long-Term Note. Net cash provided by financing activities during the nine months ended September 30, 1996 primarily represents the net proceeds from the Company's sale of the Senior Discount Notes reduced by cash distributed pursuant to the February 23, 1996 Contributions and the repayment of a $25.0 million note to Heartland. FUTURE OPERATING RESULTS; FORWARD LOOKING STATEMENTS The Company's future revenues and profitability are difficult to predict due to a variety of risks and uncertainties, including (i) business conditions and growth in the Company's existing markets, (ii) the costs and level of consumer acceptance associated with the launch of systems in new markets, (iii) the availability and performance of digital compression equipment, (iv) the Company's existing indebtedness and the need for additional financing to fund subscriber growth and system development, (v) government regulation, including FCC regulations, and receipt of regulatory approvals for alternative uses of spectrum, (vi) the Company's dependence on channel leases, (vii) the successful integration of potential future acquisitions and (viii) numerous competitive factors, including alternative methods of distributing and receiving video transmissions. Because of the foregoing uncertainties affecting the Company's future operating results, past performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition, the Company's participation in a highly dynamic industry often results in significant volatility in the price of the Company's Senior Discount Notes. In addition to the matters noted above, certain other statements made in this report are forward-looking. Such statements are based on an assessment of a variety of factors, contingencies and uncertainties deemed relevant by management, including technological changes, competitive products and services, management issues as well as those matters discussed specifically elsewhere herein. As a result, the actual results realized by the Company could differ materially from those described in any forward-looking statements made herein. Readers of this report are 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-(Continued) cautioned not to place undue reliance on the forward-looking statements made in this report. A comprehensive listing of risk factors and a more detailed description of the Company's business are available in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the fourth quarter of 1996, the Company became aware of a dispute involving San Antonio Wireless, Inc. ("SAW") over the Company's lease rights to eight Instructional Television Fixed Services ("ITFS") channels for San Antonio. SAW is the putative lessee of channel capacity leases with two ITFS licensees and has asserted that predecessors of the Company were required to obtain SAW's consent to transfer sublease rights to the channel capacity to the Company. Therefore, SAW has asserted that the transfers of the lease rights to the Company were not valid. SAW has also alleged that the Company failed to make monthly lease payments on a timely basis, and that those failures constituted a material breach of the lease agreements. SAW has purported in writing to evict the Company from the channel leases. The Company's position has been that either SAW's consent was not required for the transfers, or that SAW was required to give its consent pursuant to the channel leases. The Company has also asserted that, to the extent it might have failed to make timely payments, such a failure or failures did not constitute a basis for SAW to terminate the Company's lease rights. If SAW evicts the Company from the eight ITFS channels, the Company's inability to transmit on such channels in the present analog system could have a material adverse effect on the Company's ability to offer subscribers in the San Antonio Market an attractive programming package unless the Company can quickly convert its system in the market from analog to digital. The Company has begun the conversion process. In addition, SAW may pursue monetary damages related to the Company's unwillingness to vacate the channels. SAW has filed a motion for summary judgment with respect to certain of its claims; the Company will contest the motion, which has been scheduled for hearing on November 19, 1997. Although there can be no assurance of the final resolution of this matter, the Company believes that, based upon its current knowledge of the facts of the case, it has meritorious defenses to the claims made and intends to defend the suit vigorously, and the Company does not believe that the outcome of this lawsuit will have a material adverse effect on the Company's financial position, results of operations or cash flows. 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 Pursuant to a certificate of Written Consent of a Majority of the Stockholders in Lieu of an Annual Meeting ("Written Consent") dated July 22, 1997, CAI and Heartland elected the members of the Board of Directors of the Company. Jared E. Abbruzzese, Alan Sonnenberg, David Webb, James P. Ashman, Robert D. Happ, D. Michael Sitton, and William W. Sprague were re-elected to the Board to hold seven of the nine positions required under the Company's By-laws. Carroll D. McHenry and L. Allen Wheeler were also elected to serve on the Board of Directors to fill the required positions. Additionally, the majority of the Stockholders authorized pursuant to the Written Consent the (i) appointment of KPMG Peat Marwick as the Company's independent auditors for the fiscal year ending December 31, 1997, and (ii) the amendment of the 1996 CS Wireless Systems, Inc. Incentive Stock Option Plan (the "Plan") to (a) increase the number of shares of the Company's common stock eligible for granting under the Plan to 1.5 million shares, (b) permit the Plan Committee to grant stock awards, other than Incentive Stock Options, to independent contractors and service providers to the Company and its affiliates and (c) provide maximum flexibility to the Committee administering the Plan to determine vesting, exercise and expiration terms of the stock awards granted under the Plan on a case-by-case basis. All of the shares of the Company's common stock owned by Heartland and CAI were voted for each of matters voted upon pursuant to the Written Consent. Heartland and CAI collectively own approximately 9,257,201 shares of the Company's common stock. 12 ITEM 5. OTHER INFORMATION On September 4, 1997, the Company's Board of Directors approved the execution of Indemnity Agreements for the benefit of each of its officers and directors. The Company believes such agreements provide each officer and director with specific contractual assurances regarding the protection provided such officer or director in the Company's By-laws. As reported on Form 8-K filed with the Securities and Exchange Commission on October 27, 1997, Mr. Sprague resigned from the Board of Directors citing other commitments. Pursuant to the Stockholders' Agreement among CAI, Heartland and the Company dated as of February 23, 1996, CAI has the right to designate the successor to Mr. Sprague. 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K (a) Exhibits *10.1 Form of Indemnity Agreement *27 Financial Data Schedule (b) Reports on Form 8 K (1) Report on Form 8-K filed August 29, 1997 with respect to Item 5. (2) Report on Form 8-K filed September 12, 1997 with respect to Item 5. (3) Report on Form 8-K filed October 27, 1997 with respect to Item 5. (4) Report on Form 8-K filed November 7, 1997 with respect to Item 5. - ----------------- *Filed herewith. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 14, 1997 CS WIRELESS SYSTEMS, INC. By: /s/ John M. Lund ------------------------------------ John M. Lund Vice President -- Finance and Controller (Principal Financial Officer) 15 INDEX TO EXHIBITS Exhibits Description -------- ----------- *10.1 Form of Indemnity Agreement *27 Financial Data Schedule - ----------------- *Filed herewith. EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 INDEMNITY AGREEMENT AGREEMENT, as of __________, (the "Agreement"), between CS Wireless Systems, Inc., a Delaware corporation (the "Company"), and __________ (the "Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors, officers and employees the most capable persons available; WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors, officers and employees of public companies in today's environment; WHEREAS, the Bylaws of the Company require the Company to indemnify its directors, officers and employees to the fullest extent permitted by law; WHEREAS, the Bylaws of the Company require the Company to advance expenses to its directors and officers to the fullest extent permitted by law, and permit the Company to advance expenses to employees and others by agreement; WHEREAS, the Indemnitee has been serving and continues to serve as a director, officer or employee of the Company in part in reliance on such Bylaws; WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued service to the Company in an effective manner and Indemnitee's reliance on the aforesaid Bylaws, and in part to provide Indemnitee with specific contractual assurance that the protection promised by such Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of such Bylaws or any change in the composition of the Company's Board of Directors or acquisition transaction relating to the Company), the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company's directors' and officers' liability insurance policies; NOW, THEREFORE, in consideration of the premises and of Indemnitee continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS: (a) Change in Control: For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (i) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" [as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")] immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifteen percent (15%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary"), (2) the Company or any Subsidiary, or (3) any Person in connection with a "Non-Control Transaction" (as hereinafter defined). (ii) The individuals who, as of September 4, 1997, are members of the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (iii) Approval by stockholders of the Company of: (A) a merger or consolidation involving the Company unless (1) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, and (3) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of fifteen percent (15%) or more of the then outstanding Voting Securities) has Beneficial Ownership of fifteen percent (15%) or more of the combined voting power of the Surviving Corporation's then outstanding voting securities. A transaction described in clauses (1) through (3) shall herein be referred to as a "Non-Control Transaction;" (B) A complete liquidation or dissolution of the Company; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that is a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (b) Claim: any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative or other, including, without limitation, an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, whether predicated on foreign, federal, state or local law and whether formal or informal. (c) Expenses: include attorney's fees and all other costs, charges and expenses paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event. (d) Indemnifiable Event: any event or occurrence related to the fact that Indemnitee is or was or has agreed to become a director, officer, employee, agent or fiduciary of the Company, or is or was serving or has agreed to serve in any capacity, at the request of the Company, in any other corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity. (e) Potential Change of Control: shall be deemed to have occurred if (i) the Company enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in control; or (ii) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in control has occurred. (f) Voting Securities: any securities of the Company which vote generally in the election of directors. 2. BASIC INDEMNIFICATION ARRANGEMENT: (a) In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee (without regard to the negligence or other fault of the Indemnitee) to the fullest extent permitted by applicable law, as soon as practicable but in no event later than thirty days after written demand is presented to the Company, against any and all Expenses, judgments, fines, penalties, excise taxes and amounts paid or to be paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties, excise taxes or amounts paid or to be paid in settlement) of such Claim. If Indemnitee makes a request to be indemnified under this Agreement, the Board of Directors (i) acting by a majority vote of the directors who are not parties to the Claim with respect to an Indemnifiable Event, even if less than a quorum, (ii) acting by a committee of such directors appointed by a majority vote of such directors, even if less than a quorum, or (iii) acting upon an opinion in writing of independent legal counsel, if there are no such directors or if such directors so request ("Board Action") shall, as soon as practicable but in no event later than thirty days after such request, authorize such indemnification. Notwithstanding anything in the Restated Certificate of Incorporation of the Company (the "Certificate of Incorporation"), the Bylaws of the Company or this Agreement to the contrary, following a Change in Control, Indemnitee shall, unless prohibited by law, be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee. (b) Notwithstanding anything in the Certificate of Incorporation, the Bylaws or this Agreement to the contrary, if so requested by Indemnitee, the Company shall advance (within two business days of such request) any and all Expenses relating to a Claim to Indemnitee (an "Expense Advance"), upon the receipt of a written undertaking by or on behalf of Indemnitee to repay such Expense Advance if a judgment or other final adjudication adverse to Indemnitee (as to which all rights or appeal therefrom have been exhausted or lapsed) establishes that Indemnitee, with respect to such Claim, is not eligible for indemnification. (c) Notwithstanding anything in the Certificate of Incorporation, the Bylaws or this Agreement to the contrary, if Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under this Agreement, the Bylaws of the Company or applicable law, any Board Action or Arbitration (as defined in Section 3) that Indemnitee would not be permitted to be indemnified in accordance with Section 2(a) of this Agreement shall not be binding. If there has been no Board Action or Arbitration, or if Board Action or Arbitration determines that Indemnitee would not be permitted to be indemnified, in any respect, in whole or in part, in accordance with Section 2(a) of this Agreement, Indemnitee shall have the right to commence litigation in the court which is hearing the action or proceeding relating to the Claim for which indemnification is sought or in any court in the States of Delaware or Texas having subject matter jurisdiction thereof and in which venue is proper seeking an initial determination by the court or challenging any such Board Action or Arbitration or any aspect thereof, and the Company thereby consents to service of process and to appear in any such proceeding. Any Board Action not followed by Arbitration or such litigation, and any Arbitration not followed by such litigation, shall be conclusive and binding on the Company and Indemnitee. 3. CHANGE IN CONTROL. The Company agrees that if there is a Change in Control, Indemnitee, by giving written notice to the Company and the American Arbitration Association (the "Notice"), may require that any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration (the "Arbitration"), in Dallas, Texas, in accordance with the Rules of the American Arbitration Association (the "Rules"). The Arbitration shall be conducted by a panel of three arbitrators selected in accordance with the Rules within thirty days of delivery of the Notice. The decision of the panel shall be made as soon as practicable after the panel has been selected, and the parties agree to use their reasonable efforts to cause the panel to deliver its decision within ninety days of its selection. The Company shall pay all fees and expenses of the Arbitration. The Arbitration shall be conclusive and binding on the Company and Indemnitee, and Indemnitee may cause judgment upon the award rendered by the arbitrators to be entered in any court having jurisdiction thereof; provided, however, that any Arbitration shall have no effect on Indemnitee's right to commence litigation pursuant to Section 2(c) of this Agreement, in which case, such Arbitration shall not be conclusive and binding on Indemnitee or the Company. 4. ESTABLISHMENT OF TRUST. In the event of a Potential Change in Control or a Change in Control, the Company shall, promptly upon written request by Indemnitee, create a Trust for the benefit of Indemnitee and from time to time, upon written request of Indemnitee to the Company, shall fund such Trust in an amount, as set forth in such request, sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for and defending any claim relating to an Indemnifiable Event, and any and all judgments, fines, penalties and settlement amounts of any and all claims relating to an Indemnifiable Event from time to time actually paid or claimed, reasonably anticipated or proposed to be paid. The terms of the Trust shall provide that upon a Change in Control (i) the Trust shall not be revoked or the principal thereof invaded, without the written consent of Indemnitee; (ii) the Trustee shall advance, within two business days of a request by Indemnitee, any and all Expenses to Indemnitee, not advanced directly by the Company to Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the circumstances under which Indemnitee would be required to reimburse the Company under Section 2(b) of this Agreement); (iii) the Trust shall continue be to funded by the Company in accordance with the funding obligation set forth above; (iv) the Trustee shall promptly pay to Indemnitee all amounts for which Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise; and (v) all unexpended funds in such Trust shall revert to the Company upon a final determination by Board Action or Arbitration or a court of competent jurisdiction, as the case may be, that Indemnitee has been fully indemnified under the terms of this Agreement. The Trustee shall be chosen by Indemnitee. Nothing in this Section 4 shall relieve the Company of any of its obligations under this Agreement. 5. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify Indemnitee against any and all expenses (including attorney's fees) and, if requested by Indemnitee, shall (within two business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted by or action brought by Indemnitee for (i) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or Company Bylaw now or hereafter in effect relating to Claims for Indemnifiable Events and/or (ii) recovery under any directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. 6. PARTIAL INDEMNITY, ETC. If Indemnitee is entitled, under any provisions of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties, excise taxes and amounts paid or to be paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including, without limitation, dismissal without prejudice, Indemnitee shall be indemnified against any and all Expenses, judgments, fines, penalties, excise taxes and amounts paid or to be paid in settlement of such Claim. In connection with any determination by Board Action, Arbitration or a court of competent jurisdiction that Indemnitee is not entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. 7. NO PRESUMPTION. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law or this Agreement. 8. CONTRIBUTION. In the event that the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any Claim relating to an Indemnifiable Event, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such action by Board Action or Arbitration or by the court before which such action was brought in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transactions(s) giving cause to such action; and/or (ii) the relative fault of the Company (and its other directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s). Indemnitee's right to contribution under this Section 8 shall be determined in accordance with, pursuant to and in the same manner as, the provisions in Sections 2 and 3 hereof relating to Indemnitee's right to indemnification under this Agreement. 9. NOTICE TO THE COMPANY BY INDEMNITEE. Indemnitee agrees to promptly notify the Company in writing upon being served with or having actual knowledge of any citation, summons, complaint, indictment or any other similar document relating to any action which may result in a claim of indemnification or contribution hereunder. 10. NON-EXCLUSIVITY, ETC. The rights of the Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Certificate of Incorporation or Bylaws or the Delaware General Corporation Law or otherwise, and nothing herein shall be deemed to diminish or otherwise restrict Indemnitee's right to indemnification under any such other provision. To the extent applicable law or the Certificate of Incorporation or the Bylaws of Company, as in effect on the date hereof or at any time in the future, permit greater indemnification than as provided for in this Agreement, the parties hereto agree that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such law or provision of the Certificate of Incorporation or Bylaws and this Agreement shall be deemed amended without any further action by the Company or Indemnitee to grant such greater benefits. Indemnitee may elect to have Indemnitee's rights hereunder interpreted on the basis of applicable law in effect at the time of execution of this Agreement, at the time of the occurrence of the Indemnifiable Event giving rise to a Claim or at the time indemnification is sought. 11. LIABILITY INSURANCE. To the extent the Company maintains at any time an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any other Company director or officer under such insurance policy. The purchase and maintenance of such insurance shall not in any way limit or affect the rights and obligations of the parties hereto, and the execution and delivery of this Agreement shall not in any way be construed to limit or affect the rights and obligations of the Company and/or of the other parties under any such insurance policy. 12. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern. 13. AMENDMENTS, ETC. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 14. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery with respect to such payment of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 15. NO-DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Bylaw or otherwise) of the amounts otherwise Indemnifiable hereunder. 16. BINDING EFFECT, ETC. This Agreement shall be binding upon and inure to the benefit of and be enforceable against and by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all of substantially all of the business and/or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director and/or officer of the Company or of any other enterprise at the Company's request. 17. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions thereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. 18. NOTICES. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or when mailed by certified registered mail, return receipt requested, with postage prepaid: A. If to Indemnitee, to: _____________________________________or to such other person or address which Indemnitee shall furnish to the Company in writing pursuant to the above. B. If to the Company, to: CS Wireless Systems, Inc., 200 Chisholm Place, Suite 202, Plano, Texas 75075 Attention: Corporate Secretary or to such person or address as the Company shall furnish to Indemnitee in writing pursuant to the above. 19. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such State without giving effect to the principles of conflicts of laws. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the ____________________, 1997. CS WIRELESS SYSTEMS, INC. By: -------------------------- Name: ------------------------ Title: ----------------------- INDEMNITEE: -------------------------------- Name EX-27 3 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CS WIRELESS SYSTEMS, INC AND SUBSIDIARIES 3RD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US DOLLARS 9-MOS DEC-31-1997 SEP-30-1997 1 83453 0 817 0 0 90055 62724 19887 375754 8694 0 0 0 11 85934 85945 20246 20246 0 43739 (263) 0 23952 (42921) (4072) (38849) 0 0 0 (38849) (3.68) (3.68)
-----END PRIVACY-ENHANCED MESSAGE-----