-----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, C0equ7t+I5wTJkwVMj1iFgi5f5ieNjRYIBr8/QdYkyoM0vvSBq51zm3pyhNWk7Mm SK/yS3bgtWFvGSqfkgH46g== 0001047469-99-020114.txt : 19990514 0001047469-99-020114.hdr.sgml : 19990514 ACCESSION NUMBER: 0001047469-99-020114 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99620720 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 March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission File Number: 333-3288 CS Wireless Systems, Inc. (Exact name of Registrant as specified in its charter) Delaware 23-2751747 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1101 Summit Avenue, Plano, Texas 75074 (Address of principal executive offices) (Zip Code) (972) 398-5300 (Registrant's telephone number, including area code) Indicate by check-mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
Shares Outstanding Class as of May 13, 1999 ----- ------------------ Common Stock, $.001 par value 6,864,471
INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 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 Condensed Consolidated Financial Statements...................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................8 Part II - Other Information..............................................................14 Item 1. Legal Proceedings.....................................................14 Item 6. Exhibits and Reports on Form 8-K......................................14 Signatures ..............................................................................15
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
MARCH 31, DECEMBER 31, 1999 1998 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents.................................... $ 35,994 $ 41,839 Subscriber receivables, net.................................. 1,047 1,542 Prepaid expenses and other................................... 606 638 ----------- ----------- Total current assets.................................... 37,647 44,019 Plant and equipment, net........................................ 40,084 43,645 License and leased license investment, net...................... 155,169 157,269 Assets held for sale............................................ 2,212 2,102 Investment in and loans to equity affiliates.................... 4,315 3,884 Debt issuance costs and other assets, net....................... 7,646 7,898 ----------- ----------- $ 247,073 $ 258,817 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses........................ $ 3,309 $ 5,490 Current portion of long-term debt............................ 45 199 Current portion of BTA auction payable....................... 392 354 Other current liabilities.................................... 1,081 1,237 ----------- ----------- Total current liabilities............................... 4,827 7,280 Long-term debt, less current portion............................ 325,572 316,720 BTA auction payable, less current portion....................... 3,365 3,505 ----------- ----------- Total liabilities....................................... 333,764 327,505 ----------- ----------- Stockholders' deficit: Common stock, $.001 par value; 15,000,000 shares authorized, 10,702,609 shares issued in 1999 and 1998, and 6,864,471 shares outstanding in 1999 and 1998........................ 11 11 Treasury stock, at cost; 3,838,138 shares in 1999 and 1998... (1,574) (1,574) Additional paid-in capital................................... 154,557 154,557 Accumulated deficit.......................................... (239,685) (221,682) ----------- ----------- Total stockholders' deficit............................. (86,691) (68,688) ----------- ----------- $ 247,073 $ 258,817 =========== ===========
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 MARCH 31, --------------------------------- 1999 1998 ----------- ----------- Revenue ....................................................... $ 5,940 $ 6,823 Operating expenses: Systems operations........................................... 4,181 3,908 Selling, general and administrative.......................... 5,384 4,119 Depreciation and amortization................................ 5,505 7,224 ----------- ----------- Total operating expenses.................................. 15,070 15,251 ----------- ----------- Operating loss............................................ (9,130) (8,428) Other income (expense): Interest income.............................................. 461 1,017 Equity in losses of affiliates............................... (150) (986) Interest expense............................................. (9,139) (8,271) Other ....................................................... (45) -- ----------- ----------- Total other expense, net........................................ (8,873) (8,240) ----------- ----------- Loss before income taxes........................................ (18,003) (16,668) Income tax benefit.............................................. -- -- ----------- ----------- Net loss ....................................................... $ (18,003) $ (16,668) =========== =========== Weighted average basic and diluted loss per common share........ $ (2.62) $ (1.56) =========== =========== Basic and diluted weighted average shares outstanding........... 6,864,471 10,700,506 =========== ===========
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)
THREE MONTHS ENDED MARCH 31, -------------------------------- 1999 1998 ---------- ----------- Cash flows from operating activities: Net loss................................................................. $ (18,003) $ (16,668) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization......................................... 5,505 7,224 Accretion on discount notes and amortization of debt issuance costs... 9,048 8,100 Non-cash interest expense on other long-term debt..................... 91 164 Equity in losses of affiliates........................................ 150 986 Other................................................................. 45 -- Changes in assets and liabilities, net of effects of contributions: Subscriber receivables............................................. 495 (2) Prepaid expenses and other......................................... 32 (246) Accounts payable, accrued expenses and other liabilities........... (474) (305) ---------- ----------- Net cash used in operating activities.......................... (3,111) (747) ---------- ----------- Cash flows from investing activities: Purchases of plant and equipment ..................................... (1,004) (5,964) Additions to license and leased license investment.................... (342) (956) Investment in equity affiliates....................................... (953) (998) Investment in assets held for sale.................................... (110) -- ---------- ----------- Net cash used in investing activities.......................... (2,409) (7,918) ---------- ----------- Cash flows from financing activities: Payments on notes payable............................................. (134) (156) Payments on BTA auction payable....................................... (191) (733) ---------- ----------- Net cash used in financing activities.......................... (325) (889) ---------- ----------- Net decrease in cash and cash equivalents.................................... $ (5,845) $ (9,554) Cash and cash equivalents at beginning of period............................. 41,839 74,564 ---------- ----------- Cash and cash equivalents at end of period................................... $ 35,994 $ 65,010 ========== ===========
See accompanying notes to unaudited condensed consolidated financial statements 5 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 (1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS THE COMPANY. CS Wireless Systems, Inc. and its subsidiaries (the "Company" or "CS Wireless") develop, own and operate a network of wireless cable television systems providing subscription television and high speed Internet access services. The Company has a portfolio of wireless cable channel rights in various markets in the United States. The Company currently has systems in operation in ten markets, and it owns, or holds rights to lease, radio spectrum in its 21 primary markets and certain other markets. The Company is approximately 94% owned by CAI Wireless Systems, Inc. ("CAI"). The subscription television industry is highly competitive. The Company's principal subscription television competitors in each of its markets are traditional hard-wire cable companies, direct broadcast satellite, private cable companies and other alternate methods of distributing and receiving television transmissions. Hard-wire cable companies generally are well-established and known to potential customers and have significantly greater financial and other resources than the Company. As the telecommunications industry continues to evolve, the Company may face additional competition from new providers of entertainment and data services. In addition, until the Company can increase its channels offered in all of its operating markets through the deployment of digital compression technology, the Company's existing competitors generally continue to have more channels to offer subscribers. There can be no assurance that the Company will be able to compete successfully with existing or potential competitors in the subscription television industry. The Company has incurred significant operating losses since inception and has negative stockholders' equity at March 31, 1999. Losses are expected for at least the next year as the Company continues to develop its wireless communications business. The Company has approximately $36 million in cash and cash equivalents at March 31, 1999, and, based on its current operating plan, believes that it has sufficient cash to fund its anticipated capital expenditures and operating losses through at least the first quarter of 2000. However, the growth of the Company's wireless communications business may require substantial continuing investment to finance capital expenditures related to the acquisition of channel rights and infrastructure development of digital video programming, two-way frequency utilization and telephony systems. Additionally, beginning in September 2001, the Company will be required to make payments to the holders of its 11 3/8% Senior Discount Notes due 2006. Without additional funding through debt or equity offerings, joint ventures, the sale or exchange of its wireless cable channel rights or the participation of a strategic partner, or the restructuring of its debt agreements, the Company may not be able to meet its future debt and interest payments. There can be no assurance that the Company will achieve positive cash flow from operations, or consummate the sale of any wireless cable channel rights or that sufficient debt or equity financing will be available to the Company. In addition, subject to restrictions under its outstanding debt, the Company may pursue other opportunities to acquire additional wireless cable channel rights and businesses that may utilize the capital currently expected to be available for its current markets. CAI announced on April 26, 1999 that it executed a definitive Agreement and Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom") providing for the acquisition by MCI WorldCom of all of the outstanding shares of CAI. The transaction is subject to customary conditions, including the receipt of required regulatory approvals. PRINCIPAL MARKETS OF THE COMPANY. On February 23, 1996, in exchange for approximately 60% of the Company's Common Stock, CAI, directly or indirectly, contributed to the Company the wireless cable television assets and all related liabilities, or the stock of subsidiaries owning wireless cable television assets associated with the wireless cable television markets of Bakersfield and Stockton/Modesto, California; Charlotte, North Carolina; and Cleveland, Ohio. Simultaneously, in exchange for approximately 40% of the Company's Common Stock, cash, a short-term note and a long-term note (the "Heartland Long-Term Note"), Heartland, directly or indirectly, contributed or sold to the Company the wireless cable television assets and all related liabilities associated with the 6 CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 wireless cable television markets of Grand Rapids, Michigan; Minneapolis, Minnesota; Kansas City (suburbs), Missouri; Dayton, Ohio; Dallas, Fort Worth and San Antonio, Texas; and Salt Lake City, Utah. The Company subsequently acquired wireless cable television rights and related assets in certain Midwest markets, including but not limited to, the Effingham and Wellsville, Kansas; Story City, Iowa; Scottsbluff, Nebraska; Kalispell, Montana and Rochester, Minnesota markets in connection with the Company's merger acquisition of USA Wireless Cable, Inc. on October 11, 1996 ("USA Wireless Acquisition"). The Company consummated on September 3, 1997 an exchange of its wireless cable rights and related assets in Salt Lake City, Utah for wireless cable rights and related assets in Kansas City, Missouri pursuant to an agreement dated as of November 6, 1996 with People's Choice TV Corp. On December 2, 1998, the Company, CAI and Heartland entered into a Master Agreement ("Master Agreement") providing for, among other things, the termination of Heartland's rights in, and claims against, the Company. As part of the Master Agreement, in December 1998, CAI purchased Heartland's ownership in the Company, or 3,836,035 shares of CS Wireless common stock, for $1,534,000. The Company subsequently purchased those shares from CAI for the same price. These shares are recorded as treasury stock for the periods presented. Additionally, the Company agreed to lease certain channel rights and sell the net operating assets of its Story City, Iowa market to Heartland primarily in exchange for the forgiveness by Heartland of the outstanding balance owed by the Company of $2,335,000 under the Heartland Long-Term Note and additional cash payments by the Company to Heartland of $466,000. The deposit, along with the carrying value of the net assets of the Story City, Iowa market, are classified as assets held for sale at December 31, 1998 and March 31, 1999 in the accompanying consolidated balance sheet. (b) BASIS OF PRESENTATION The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) INTERIM FINANCIAL INFORMATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements of the Company contain all adjustments, consisting only of those of a normal recurring nature, necessary to present fairly the Company's financial position as of March 31, 1999, and the results of operations and cash flows for the three months ended March 31, 1999 and 1998. These results are not necessarily indicative of the results to be expected for the full fiscal year. (d) COMMON SHARES OUTSTANDING AND NET LOSS PER COMMON SHARE The Company adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," in the fourth quarter of 1997, which required companies to present basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Potentially dilutive securities have been excluded from the diluted loss per share computation as their inclusion would be antidilutive. (2) CONTINGENCIES The Company is a party to legal proceedings incidental to its business. A discussion of certain of these legal proceedings is contained in Part II, Item 1 "Legal Proceedings" of this Form 10-Q. The Company believes that the ultimate resolution of the legal proceedings will not have a material adverse effect on the Company's consolidated financial position, operating results or liquidity. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the financial position as of March 31, 1999 and the results of operations of the Company for the three months ended March 31, 1999 and 1998. This discussion and analysis should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with the Company's December 31, 1998 consolidated financial statements and notes thereto. OVERVIEW CS Wireless and its subsidiaries develop, own and operate a network of wireless cable television systems providing subscription television services. The Company had systems in operation in ten markets at March 31, 1999 (exclusive of the Story City, Iowa market which is held for sale) and eleven markets at March 31, 1998. The Company owns, or holds rights to lease, radio spectrum in its 21 primary markets as well as certain other markets. The Company has commenced a limited commercial offering of high-speed Internet access services in Dallas, Texas. Additionally, the Company offers certain telephony services through agreements with certain local exchange carriers and a long distance carrier. As a result of the execution of the Master Agreement dated December 2, 1998 between the Company, CAI Wireless Systems, Inc. ("CAI") and Heartland Wireless Communications, Inc. ("Heartland"), the carrying value of the net assets of the Story City, Iowa market are classified as assets held for sale. Consequently, net operating income for the three months ended March 31, 1999 consisting of revenue of $138,000 and operating expense of $137,000 is excluded from the condensed consolidated statement of operations. CAI, the owner of approximately 94% of the Company's outstanding common stock, announced on April 26, 1999 the execution of a definitive Agreement and Plan of Merger with MCI WorldCom, Inc. ("MCI WorldCom") providing for the acquisition by MCI WorldCom of all of the outstanding stock of CAI. The transaction is subject to customary conditions, including the receipt of required regulatory approvals. The statements contained in this Quarterly Report on Form 10-Q relating to the Company's future operations may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Actual results of the Company may differ materially from those in the forward-looking statements and may be affected by a number of factors including the ability of CAI to complete its proposed merger with MCI WorldCom, the ability of CAI and the Company to attract an alternate strategic partner in the event that the proposed merger is not consummated, and risks and uncertainties set forth below in this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and elsewhere herein, as well as other factors contained herein and in the Company's other filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS REVENUE. The Company's revenue primarily consists of monthly fees paid by subscribers for basic programming, premium programming and equipment rental. Revenue for the three months ended March 31, 1999 was $5.9 million, compared to $6.8 million for the prior year period, a decrease of 13.2%. The decrease in revenue is primarily due to average subscribers decreasing to 57,120 (exclusive of Story City, Iowa subscribers) for the three months ended March 31, 1999 compared to approximately 67,650 for the prior year period. Average revenue per subscriber increased to approximately $34.65 for the three month period ended March 31, 1999 compared to approximately $33.60 for the prior year period, primarily due to rate increases. The decrease in subscriber levels is primarily attributed to the Company's cash conservation efforts and corresponding reduction in marketing efforts and expenditures. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SYSTEMS OPERATIONS. Systems operations expenses primarily include programming costs, channel lease payments, transmitter site and tower rentals, and other costs of providing service. Programming costs (with the exception of minimum payments) and channel lease payments (with the exception of certain fixed payments) are variable expenses which generally increase as the number of subscribers increases. Systems operations expenses were $4.2 million for the three months ended March 31, 1999, compared to $3.9 million for the corresponding prior year period, an increase of 7.7%. The increase in systems operations expenses is primarily due to increasing programming rates in substantially all of the Company's operating markets. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses ("SG&A") were $5.4 million for the three months ended March 31, 1999, compared to $4.1 million for the corresponding prior year period, an increase of 31.7%. The increase in SG&A is principally due to (i) non-recurring severance payments of approximately $0.5 million to two former officers of the Company who left the Company in February 1999 (see Item 11 in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1998), (ii) contract termination payments of approximately $0.4 million to ACS Telecommunications Systems, Inc., an installation service contractor/vendor (see Item 13 in the Company's Annual Report filed on Form 10-K for the year ended December 31, 1998) and (iii) payments to professional service advisors totaling approximately $0.8 million relating to evaluating available options with respect to the capitalization of the Company. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense includes depreciation of systems and equipment, amortization of licenses and leased license investment and goodwill. Depreciation and amortization expenses were $5.5 million for the three months ended March 31, 1999, compared to $7.2 million for the prior year period. The decrease in depreciation and amortization expense is attributed to a corresponding decrease in the underlying capital assets, as well as goodwill written-off in the second quarter of 1998 and no goodwill amortization expense incurred in 1999. OPERATING LOSS. The Company incurred operating losses of $9.1 million for the three months ended March 31, 1999, compared to $8.4 million for the corresponding prior year period. Consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") were a negative $3.6 million for the three months ended March 31, 1999, compared to a negative $1.2 million for the prior year period. EBITDA is a financial measure commonly used in the industry but is not intended to represent cash flows, as determined in accordance with Generally Accepted Accounting Policies ("GAAP"), or as an indicator of operating performance. EBITDA should not be considered a substitute for measures of performance prepared in accordance with GAAP. The increase in the Company's operating loss is due to increasing system operations expenses, SG&A expenses and depreciation expense as described above. The decrease in EBITDA is primarily due to the higher SG&A and system operations expenses as described above. INTEREST INCOME. Interest income was $0.5 million for the three months ended March 31, 1999, compared to $1.0 million for the corresponding prior year period. The decrease in interest income is primarily due to a decrease in the average invested balance. The average invested balance is comprised mainly of the proceeds remaining from the sale by the Company of $400.0 million of 11 3/8% Senior Discount Notes (the "Senior Discount Notes") in a private placement on February 23, 1996, that resulted in net proceeds of $162.9 million (net of debt issuance costs, payments on notes and certain distributions to Heartland and CAI). INTEREST EXPENSE. The Company incurred interest expense of $9.1 million for the three months ended March 31, 1999, compared to $8.3 million for the corresponding prior year period. Interest expense during the three months ended March 31, 1999 included (i) non-cash interest and accretion of deferred debt issuance costs of $9.0 million related to the Senior Discount Notes, and (ii) interest relating to other notes payable totaling approximately $0.1 million. Interest expense during the three months ended March 31, 1998 included (i) non-cash interest and accretion of deferred debt issuance costs of $8.1 million related to the Senior Discount Notes, (ii) interest expense of approximately $72,000 related to the Long-Term Note payable to Heartland and (iii) interest relating to other notes payable totaling approximately $0.1 million. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) NET LOSS. The Company has recorded net losses since inception. The Company incurred net losses of $18.0 million during the first quarter of 1999 compared to $16.7 million during the corresponding prior year period. This increase can be attributed to the Company's total revenue decreasing during the quarter ended March 31, 1999 due to the falling subscriber levels as described above, increased SG&A costs, system operations, depreciation and amortization and interest expense. LIQUIDITY AND CAPITAL RESOURCES The wireless cable television business is a capital-intensive business. Funds are required for the lease or acquisition of channel rights, the acquisition of wireless cable systems, the construction of system headend and transmission equipment, the conversion of analog systems to digital technology, and start-up costs related to the commencement of operations and subscriber installation costs. To date, the primary source of capital of the Company has been from the net proceeds from the sale of the Senior Discount Notes. The Company has approximately $36.0 million in cash and cash equivalents at March 31, 1999. The Company has used the proceeds from the sale of the Senior Discount Notes received in February 1996 primarily to fund (i) continued operating losses, (ii) capital expenditures to launch digital video and high speed Internet access services in the Dallas, Texas market, hybrid digital service in the San Antonio, Texas market and limited build-out in the Company's analog markets (iii) strategic investments in items such as channel capacity and (iv) general debt service. Beginning in 1999, the Company's strategy has been to operate its analog video systems within the confines of a cash conservation strategy, while pursuing a strategic alliance with one or more strategic partners interested in using the Company's spectrum for fixed, one- or two-way transmission services. The Company's cash conservation strategy includes the recovery of out-of-pocket expenses associated with adding a new analog video subscriber by charging such subscriber an up-front installation fee. The cash conservation strategy also includes the continued implementation of cost-cutting measures and the periodic sales of non-core assets in an effort to maximize the value of assets that are no longer used or useful to the Company's long-term operating strategy, which is to be a wholesale provider of two-way transmission services to one or more strategic partners. Accordingly, the Company is considering selling certain assets relating to the provision of video services to multiple dwelling units ("MDUs"), such as apartment and condominium complexes, in certain of its markets. It is uncertain whether a definitive agreement will be executed for the sale of any of the Company's MDU service contracts. Additionally, the Company is considering selling certain analog equipment held in inventory and other operating and non-operating systems that are not considered part of the Company's long-term business plan. For 1999, the Company has initially budgeted approximately $17.2 million to fund operations, capital expenditures and debt service. The significant components of the budget include approximately $7.2 million for operations, $2.0 million for digital subscriber installations primarily relating to MDU construction, $0.8 million for analog subscriber installations, $0.5 million to test and develop two-way technology, $0.5 million relating to Year 2000 compliance, $3.5 million for strategic investments in items such as channel capacity, $1.0 million for Basic Trading Area ("BTA") obligations and $1.25 million for other expenses. The initial 1999 budget is exclusive of costs relating to obtaining a strategic partner, costs relating to the evaluation of available options relative to the capitalization of the Company, and estimated proceeds from asset sales, if any. Based upon the Company's current operating plans, the Company believes that its available cash will provide sufficient funds to meet its needs for at least the next 12 months. The combined cash flow from operating activities of the Company's operating systems has to date been insufficient to cover the combined operating expenses of such systems. Until sufficient cash flow is generated from operations, the Company will utilize its current capital resources and may seek external sources of funding to satisfy its capital needs. Cash interest payments required under the terms of the Senior Discount Notes are scheduled to commence on September 1, 2001. There can be no assurance that the Company will be able to secure its capital requirements on terms and conditions satisfactory to the Company. Accordingly, in the event the Company is unable to secure funding for capital requirements on satisfactory terms and conditions, the ability of the Company to sustain and expand operations and fulfill its debt obligations could be materially adversely affected. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net cash used in operating activities during the three months ended March 31, 1999 was $3.1 million versus $0.7 million during the comparable prior year period. The increase in cash used in operating activities was primarily due to timing of payments to vendors and increased SG&A and system operating expenses as previously discussed. Net cash used in investing activities was $2.4 million during the three months ended March 31, 1999 compared to $7.9 million during the corresponding prior year period. Cash used in investing activities primarily relates to the acquisition and installation of subscriber receive-site equipment, the acquisition of certain wireless cable channel rights, the investments in assets held for sale and the investment in equity affiliates. The decrease in cash used in investing activities in the three months ended March 31, 1999 is primarily due to a reduction in purchasing new licenses and leased license investments and a reduction in purchasing additional subscriber and headend equipment for the digital and analog markets. Net cash used in financing activities was $0.3 million during the three months ended March 31, 1999 compared to $0.9 million during the corresponding prior year period. Cash used in financing activities during the three months ended March 31, 1999 is attributed to the repayment of the payable relating to BTAs totaling approximately $0.2 million and the repayment of other notes payable totaling approximately $0.1 million. Cash used in financing activities during the three months ended March 31, 1998 is attributed to the repayment of BTA payables of approximately $0.7 million and other notes payable of approximately $0.2 million. FUTURE LOOKING INFORMATION AND RISK FACTORS The Company or its representatives may make forward looking statements, oral or written, including statements in this Report's Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and filings with the Securities and Exchange Commission ("Commission"), regarding estimated future operating results, planned capital expenditures (including the amount and nature thereof) and the Company's financing plans, if any, related thereto, increases in subscribers and the Company's financial position and other plans and objectives for future operations. There can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effects on its business or operations. Among the factors that could cause actual results to differ materially from the Company's expectations are general economic conditions, competition, government regulations and other factors set forth among the risk factors noted in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Generally, forward looking statements include words or phrases such as "management believes," the "Company anticipates," the "Company expects" and words and phrases of similar import. Forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995. All subsequent oral and written forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. The Company assumes no obligation to update any of these statements. The Company's future revenues and profitability are difficult to predict due to a variety of risks and uncertainties, including (i) business conditions and growth in the Company's existing markets, (ii) the costs and level of consumer acceptance associated with the launch of systems in new markets, (iii) the availability and performance of digital compression equipment, (iv) the Company's existing indebtedness and the need for additional financing to fund subscriber growth and system development, (v) government regulation, including FCC regulations, and receipt of regulatory approvals for alternative uses of spectrum, (vi) the Company's dependence on channel leases, (vii) the announcements by other wireless cable companies regarding their respective intentions to restructure outstanding indebtedness and (viii) numerous competitive factors, including alternative methods of distributing and receiving video transmissions. Because the foregoing uncertainties could affect the Company's future operating results, past performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition, the Company's participation in a highly dynamic industry often results in significant volatility in the price of the Company's Senior Discount Notes. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) YEAR 2000 COMPLIANCE OVERVIEW. An undetermined number of computer software programs have been written using two digits rather than four to determine the applicable year. As a result, date-sensitive computer software may recognize a date using "00" as the year 1900 rather than year 2000. This could result in major system failures or miscalculations, and is generally referred to as the "Year 2000" problem. A preliminary review of the Company's information systems has been completed and a comprehensive program is currently in process to modify or replace those systems that are not Year 2000 compliant. STATE OF READINESS. The Company's Year 2000 compliance program focuses on the Company's analog video operations, limited Internet operations, and internal business processes, such as accounting. As of March 31, 1999, the inventory, assessment and compliance planning phases for these areas have been materially completed, and remediation, replacement or retirement and testing activities are beginning. The inventory items that are not assessed as Year 2000 compliant and that require action to avoid service impact are expected to be fixed, replaced, or retired. CS' goal for its accounting services is to have its accounting software and any other mission critical systems relating directly to the accounting function Year 2000 compliant by June 30, 1999. For all other areas, CS' goal is to have all mission critical systems Year 2000 compliant by September 30, 1999. VENDOR AND SERVICE PROVIDER ISSUES. The Company has requested that its vendors and service providers provide CS with information as to the compliance status of products and/or services used by CS and its operating subsidiaries which information is subject to Company testing and verification. Although the Company has received information from some of its vendors and service providers, it has not yet received information from each of the vendors and service providers it has identified. The Company will continue to pursue its vendors and service providers in order to obtain the necessary information regarding Year 2000 compliance of such vendors and service providers. In addition to the assessment of in-house systems, the Company is currently assessing the readiness of its vendors for the Year 2000 problem. To determine the status of third parties, letters inquiring as to their readiness have been sent or are being sent to substantially all of the Company's vendors. The Company will assess the vendors' responses and prioritizing them in order of significance to the business of the Company. Contingency plans will be developed in the event that business-critical vendors do not provide the Company with satisfactory evidence of their readiness to handle Year 2000 issues. The Company intends to make every reasonable effort to assess the Year 2000 readiness of these critical business partners and to create action plans to address the identified risks. COST. All maintenance and modification costs will be expensed as incurred, while the cost of new software, if material, will be capitalized and depreciated over its expected useful life. Testing and remediation costs of all of the Company's systems and applications are currently estimated at approximately $300,000 to $500,000 from inception in fiscal 1998 through completion in fiscal 1999. These costs are estimated to be incurred during 1999. All estimated costs are expected to be funded from existing cash. The Company does not believe the costs related to the Year 2000 compliance project will be material to its financial position or results of operation. However, the cost of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans, and other factors. Unanticipated failures by critical vendors as well as the failure by the Company to execute its own remediation efforts could have a material adverse effect on the cost of the project and its completion date. As a result, there can be no assurance that these forward-looking estimates will be achieved and the actual cost and vendor compliance could differ materially from those plans, resulting in material financial risk. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RISKS. The failure to correct a material Year 2000 problem could cause an interruption or failure of certain of the Company's normal business functions or operations, which could have a material adverse effect on its results of operations, liquidity or financial condition. Due to the uncertainty inherent in other Year 2000 issues that are ultimately beyond CS's control, including, for example, the final Year 2000 readiness of its mission critical vendors and service providers, the Company is unable to determine at this time the likelihood of a material impact on its results of operations, liquidity or financial condition, due to such Year 2000 issues. The costs of the Company's Year 2000 program and the timetable for completing its Year 2000 preparations are based on current estimates, which reflect numerous assumptions about future events, including the continued availability of certain resources, the timing and effectiveness of third-party remediation plans and other factors. The Company can give no assurance that these estimates will be achieved, and actual results could differ materially from those currently anticipated. In addition, there can be no assurance that the Company's Year 2000 program will be effective or that its contingency plans will be sufficient. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct relevant computer software codes and embedded technology, the results of internal and external testing and the timeliness and effectiveness of remediation efforts of third parties. The Company believes that the worst case scenario would be the failure of the Company's subscriber management system addressing the headend equipment, which sends the signal to the addressable controller units, as well as the addressable controller units themselves. The controller units communicate to the customer's set-top box. The loss of the ability to transmit such data would result in the loss of customers and related revenues, among other things. CONTINGENCY PLAN. At March 31, 1999, the Company is not aware of any mission critical aspect of its operations or internal business processes that can not be made Year 2000 compliant, however, its inventory and assessment of Year 2000 compliance is not yet completed. Due to the uncertainties presented by third party Year 2000 problems, and the possibility that, despite its efforts, the Company is unsuccessful in preparing its internal systems and equipment for the Year 2000, the Company expects to develop contingency plans for dealing with the most reasonably likely worst case scenario. The Company's assessment of its most reasonably likely worst case scenario and the exact nature and scope of its contingency plans will be affected by the Company's continued Year 2000 assessment and testing. The Company expects to complete such assessment during the second quarter of 1999 and to have all contingency systems in place and fully tested by the fourth quarter of 1999. RECENTLY ISSUED ACCOUNTING STANDARDS The Company is assessing the reporting and disclosure requirements of Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 1999. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2000. 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to legal proceedings incidental to its business which, in the opinion of management, are not expected to have a material adverse effect on the Company's consolidated financial position, operating results or liquidity. ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K (a) Exhibits *27 Financial Data Schedule (b) Reports on Form 8-K Current Report on Form 8-K filed on March 3, 1999 to report, under Item 5, the (i) appointments of Jared Abbruzzese as Acting Chief Executive Officer and Derwood Edge as Acting Chief Operating Officer and (ii) resignations of David E. Webb and Thomas Dixon from their respective positions of Chief Executive Officer and Senior Vice President. *Filed herewith. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CS WIRELESS SYSTEMS, INC. By: /s/ Jared E. Abbruzzese ------------------------------- Jared E. Abbruzzese Acting Chief Executive Officer and Director (Principal Executive Officer) By: /s/ John M. Lund ------------------------------- John M. Lund Senior Vice President - Finance and Chief Financial Officer (Principal Financial Officer) Dated: May 13, 1999 15 EX-27.1 2 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 35,994 0 1,047 0 0 37,647 68,986 (28,902) 247,073 4,827 326,271 0 0 11 (86,702) 247,073 5,940 5,940 0 15,070 45 0 9,139 18,003 0 18,003 0 0 0 18,003 (2.62) (2.62)
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