UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-03288
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CS Wireless Systems, Inc.
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(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.)
200 Chisholm Place, Suite 202, Plano, Texas 75075
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (972) 509-2634
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N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check /X/ 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
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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 May 15, 1997
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Common Stock, $.001 par value 10,702,609
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,
1997 1996
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 107,185 $ 13,072
Subscriber receivables, net . . . . . . . . . . . . . . . . . . 998 1,079
Notes receivable . . . . . . . . . . . . . . . . . . . . . . . 250 1,510
Prepaid expenses and other . . . . . . . . . . . . . . . . . . 727 689
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Total current assets. . . . . . . . . . . . . . . . . . . . 109,160 116,350
Plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . 41,240 42,955
License and leased license investment, net . . . . . . . . . . . . . 172,828 172,953
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,040 52,011
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . 20,368 19,366
Debt issuance costs and other assets, net . . . . . . . . . . . . . 10,504 10,602
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$ 405,140 $ 414,237
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . $ 6,124 $ 5,440
Accounts payable to affiliates . . . . . . . . . . . . . . . . 736 1,215
Current portion of long-term debt . . . . . . . . . . . . . . . 444 3,194
Current portion of BTA auction payable. . . . . . . . . . . . . 658 646
Other current liabilities . . . . . . . . . . . . . . . . . . . 660 1,043
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Total current liabilities . . . . . . . . . . . . . . . . . 8,622 11,538
Long-term debt, less current portion . . . . . . . . . . . . . . . . 275,724 268,180
BTA auction payable, less current portion. . . . . . . . . . . . . . 4,494 4,256
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 4,072 5,429
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Total liabilities . . . . . . . . . . . . . . . . . . . . . 292,912 289,403
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Stockholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares,
no shares issued and outstanding . . . . . . . . . . . . . . . -- --
Common stock, $.001 par value; authorized 40,000,000 shares,
issued and outstanding 10,702,609 shares in 1997 and
10,445,408 shares in 1996. . . . . . . . . . . . . . . . . . . 11 10
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 154,557 154,558
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (42,340) (29,734)
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Total stockholders' equity. . . . . . . . . . . . . . . . . 112,228 124,834
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$ 405,140 $ 414,237
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See accompanying notes to condensed consolidated financial statements
2
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
THREE MONTHS ENDED
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MARCH 31, MARCH 31,
1997 1996
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(Unaudited) (Unaudited)
Revenue. . . . . . . . . . . . . . . . . . . . . $ 6,678 $ 3,856
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Operating expenses:
Systems operations. . . . . . . . . . . . . . 3,695 2,301
Selling, general and administrative . . . . . 3,815 1,427
Depreciation and amortization . . . . . . . . 6,585 2,506
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Total operating expenses . . . . . . . . . 14,095 6,234
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Operating loss . . . . . . . . . . . . . . (7,417) (2,378)
Other income (expense):
Interest income . . . . . . . . . . . . . . . 1,450 899
Interest expense. . . . . . . . . . . . . . . (7,996) (3,023)
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Total other expense, net . . . . . . . . . (6,546) (2,124)
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Loss before income taxes . . . . . . . . . (13,963) (4,502)
Income tax benefit . . . . . . . . . . . . . . . 1,357 1,439
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Net loss . . . . . . . . . . . . . . . . . $ (12,606) $ (3,063)
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Net loss per common share. . . . . . . . . . . . $ (1.21) $ (0.51)
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See accompanying notes to condensed consolidated financial statements
3
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS ENDED
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MARCH 31, MARCH 31,
1997 1996
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(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (12,606) $ (3,063)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 6,585 2,506
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . (1,357) (1,439)
Accretion on discount notes and amortization of debt issuance costs. . 7,250 2,873
Non-cash interest expense on other long-term debt. . . . . . . . . . . 699 140
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables . . . . . . . . . . . . . . . . . . . . . . . 81 (79)
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . (116) (233)
Accounts payable, accrued expenses and other liabilities . . . . . . 263 1,737
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Net cash provided by operating activities. . . . . . . . . . . . . 799 2,442
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Cash flows from investing activities:
Purchases of plant and equipment. . . . . . . . . . . . . . . . . . . . . . (1,737) (905)
Additions to license and leased license investment. . . . . . . . . . . . . (1,669) (16)
Investment in assets held for sale. . . . . . . . . . . . . . . . . . . . . (1,002) --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (175) 258
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Net cash used in investing activities. . . . . . . . . . . . . . . (4,583) (663)
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Cash flows from financing activities:. . . . . . . . . . . . . . . . . . . . .
Payments on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . (2,103) (25,024)
Proceeds from unit offering . . . . . . . . . . . . . . . . . . . . . . . . -- 229,484
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (9,703)
Cash distributed pursuant to contributions. . . . . . . . . . . . . . . . . -- (31,648)
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Net cash provided by (used in) financing activities. . . . . . . . (2,103) 163,109
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Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . $ (5,887) $ 164,888
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 113,072 184
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Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 107,185 $ 165,072
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See accompanying notes to condensed consolidated financial statements
4
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Unaudited)
(1) GENERAL
(a) DESCRIPTION OF BUSINESS
CS Wireless Systems, Inc. and 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 March 31, 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 is also exploring the use of a portion
of its wireless spectrum for high-speed Internet access.
(b) BASIS OF PRESENTATION
The 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.
The combined financial information for the period from January 1, 1996 through
February 23, 1996 includes the accounts of the Company and certain assets of
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 (see
note 2).
(c) INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial information of the Company contains all adjustments,
consisting only of those of a normal recurring nature, necessary to present
fairly the Company's financial position as of March 31, 1997, and the results of
operations and cash flows for the three months ended March 31, 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
10,448,000 and 6,042,000 for the three month periods ended March 31, 1997 and
1996, respectively. 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 on February 23, 1996 (see note 2) related to the
wireless cable television system in Cleveland, Ohio. 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 February 23, 1996, CAI Wireless Systems, Inc. ("CAI") and
Heartland Wireless Communications, Inc. ("Heartland") contributed to the Company
(the "February 23, 1996 Contributions") certain wireless cable television assets
comprising various markets in the United States. In connection with the
February 23, 1996 Contributions, CAI and Heartland received approximately 5.4
million and 3.6 million shares, respectively, of the Company's newly-issued
common stock. In addition, CAI received approximately $750,000 in cash and
Heartland received approximately $30.9 million in cash, a nine-month note for
$25 million (subsequently repaid) and a 10-year note for $15 million (the
"Heartland Long-Term Note"). On November 8, 1996, the Company distributed an
additional $5.0 million to Heartland as a part of the equity true-up per the
provisions of the agreement governing the February 23, 1996 Contributions. On
March 31, 1997, an additional 257,201 shares of common stock of the Company were
issued to Heartland in satisfaction of certain post-closing adjustments.
5
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1997
(Unaudited)
On October 11, 1996, the Company acquired all of the issued and outstanding
common stock ("USA Common Stock") of USA Wireless Cable, Inc. ("USA") (the "USA
Wireless Acquisition"). USA provided wireless cable service in certain Midwest
markets, including but not limited to the Effingham, Kansas; Wellsville, Kansas;
Radcliffe, Iowa; Scottsbluff, Nebraska; Kalispell, Montana; and Rochester,
Minnesota markets (the "USA Markets"). At the effective time of the USA
Wireless Acquisition, the outstanding shares of USA Common Stock were converted
into rights to receive an aggregate $17.6 million of which approximately $6.3
million was paid in the form of CS Wireless common stock and approximately $11.3
million of indebtedness and payables assumed by the Company. Approximately
$7.2 million of such indebtedness was paid upon consummation of the USA Wireless
Acquisition, $800,000 attributed to assumed accounts payable was paid in the
normal course of business and the remaining $3.4 million (including accrued
interest payable) was off-set against a note receivable of $1.3 million,
extended by the Company as part of the transaction, with the difference being
paid in cash in February 1997. In connection with this acquisition, the Company
also extended a note receivable to an affiliate of USA with a principal amount
of $250,000 and an interest rate of 12%. This note receivable is due in August
1997.
(3) PENDING TRANSACTIONS
The Company has entered into an agreement dated as of November 6, 1996
with People's Choice TV Corp. ("PCTV"), pursuant to which the Company will
exchange its Salt Lake City, Utah market for PCTV's Kansas City, Missouri
market. The PCTV transaction is expected to close during the second quarter of
1997.
The Company has agreed to sell to BellSouth (i) certain leases and
licenses for wireless cable channel rights in the Atlanta (suburbs) markets and
leases to four tower sites in such markets for approximately $7.3 million
subject to adjustment, plus reimbursement of certain expenses and (ii) the BTA
(as defined) license relating to Atlanta, Georgia for approximately $6.0
million, subject to adjustment. Accordingly, the carrying amount of the leases
and licenses and the BTA license related to the Atlanta market of $13.2 million
and certain purchased equipment in the amount of $2.5 million has been
classified as assets held for sale in the accompanying condensed consolidated
balance sheet. This transaction is expected to close during the second quarter
of 1997.
The Company has entered into a letter of intent with Heartland,
pursuant to which Heartland will acquire the wireless cable operating system in
Radcliffe, Iowa and wireless cable channel rights in Scottsbluff, Nebraska and
Kalispell, Montana currently held by the Company for an aggregate of
approximately $3.9 million. 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. The purchase price to be paid by
Heartland for these assets will be paid by an equivalent reduction of the
principal balance of the Heartland Long-Term Note. This transaction is expected
to close during the second quarter of 1997.
(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. After
adoption, all prior period data presented will be restated to conform with SFAS
128. The Company will present both EPS measures on the face of the statement of
operations. The Company does not expect that basic and diluted EPS measured
under SFAS 128 will be materially different from the presentation of primary and
fully-diluted loss per common share measured under APB No. 15.
6
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1997
(Unaudited)
Statement of Financial Accounting Standards No. 129 ("SFAS 129"),
"Disclosure of Information about Capital Structure," was issued in February,
1997. The Company does not expect SFAS 129 to result in any substantive change
in its disclosure.
(5) CONTINGENCIES
The Company is a party to legal preceedings 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.
7
Part I - Financial Information
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW. CS Wireless Systems, Inc. and 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 March 31, 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 is also exploring the use of a portion
of its wireless spectrum for high-speed Internet access.
STRATEGY. The Company intends to conserve capital in anticipation of the
expected availability of digital compression technology. This technology is
expected to be available in 1997. The Company believes that the implementation
of this technology, for subscription video and Internet access services, will
increase its ability to attract and retain customers and implement its growth
strategy, although there can be no assurance that it will be able to
successfully compete with existing or new competitors. In addition, the Company
will only develop its analog, subscription television customer base as local
market conditions dictate.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997
COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
With respect to the discussion of the results of operations, the results
presented are comprised of financial information of the Company and ACS Ohio,
Inc. ("ASC Ohio"). ACS Ohio owned and operated the wireless cable television
system serving the Cleveland, Ohio metropolitan area. 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. The combined financial
information for the period from January 1, 1996 through February 23, 1996
includes the accounts of the Company and certain assets of 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 as part
of the February 23, 1996 Contributions.
Period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance
due to the February 23, 1996 Contributions and the 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 first quarter of 1997 compared to
$3.9 million for the first quarter of 1996, an increase of 73.2%. The increase
in revenue for the first quarter of 1997 was primarily due to average
subscribers increasing to approximately 65,400 for the first quarter of 1997
compared to approximately 37,200 for the first quarter of 1996, an increase of
75.8%. 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 March 31, 1997 compared to nine systems in operation at March 31,
1996, including eight markets relating to the February 23, 1996 Contributions.
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 expense was $3.7 million for the first quarter of
1997 compared to $2.3 million for the first quarter of 1996. The increase in
systems operations expense from the first quarter of 1996 to the first
quarter of 1997 is principally due to the increase in the subscriber base
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
brought about by the February 23, 1996 Contributions. As a percentage of
revenue, systems operations expense was 55.3% for the first quarter of 1997
compared to 59.7% for the first quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense ("SG&A") was $3.8 million for the first quarter of 1997 and $1.4 million
for the first quarter of 1996. The increase in SG&A of $2.4 million is
principally due to an increase in the Company's corporate and executive staff to
support the Company's launch of digital video and Internet access services and
costs attributed to the increase in the subscriber base brought about by the
February 23, 1996 Contributions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense includes
depreciation of systems and equipment and amortization of licenses and leased
license investment and goodwill. Depreciation and amortization expense was $6.6
million for the first quarter of 1997 compared to $2.5 million for the first
quarter of 1996. The increase in depreciation and amortization expense is
related to the additional plant and equipment contributed to the Company in
connection with the February 23, 1996 Contributions.
OPERATING LOSS. The Company generated operating losses of $7.4 million for the
first quarter of 1997 and $2.4 million for the first quarter of 1996. The
increase in the company's operating loss was primarily due to increased SG&A
expense and depreciation and amortization expense, partially offset by an
increase in revenue. Consolidated earnings before interest, taxes, depreciation
and amortization ("EBITDA") was a negative $832,000 for the first quarter of
1997 compared to a positive $128,000 for the first quarter of 1996. The
decrease in EBITDA was principally due to increased SG&A brought about by the
February 23, 1996 Contributions.
INTEREST INCOME. Interest income was $1.5 million for the first quarter of 1997
and $0.9 million for the first quarter of 1996. 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
$163.1 million (net of debt issuance costs, payment on notes and distributions
pursuant to the February 23, 1996 Contributions). The increase in interest
income is due to the cash equivalents being invested for a longer period in 1997
compared to 1996, partially offset by a decrease in the average invested
balance.
INTEREST EXPENSE. The Company incurred interest expense of $8.0 million during
the first quarter of 1997 and $3.0 million during the first quarter of 1996.
Interest expense during the first quarter of 1997 included non-cash interest and
accretion of deferred debt issuance costs of $7.3 million related to the Senior
Discount Notes and non-cash interest of $0.7 million relating to the Heartland
Long-Term Note and the BTA auction payable. Interest expense during the first
quarter of 1996 included non-cash interest and accretion of deferred debt
issuance costs of $2.9 million related to the Senior Discount Notes and $0.1
million relating to the Heartland Long-Term Note.
INCOME TAX BENEFIT. The Company recognized income tax benefits related to the
Company's losses before income taxes of $1.4 million for the first quarter of
1997 and $1.4 million for the first quarter of 1996. The Company recognized
income tax benefits to the extent of future reversals of existing taxable
temporary differences.
NET LOSS. The Company has recorded net losses since inception. The Company
incurred net losses of $12.6 million, or $1.21 per share, during the first
quarter of 1997 compared to $3.1 million, or $0.51 per share, during the first
quarter of 1996. Although the Company's total revenue increased 73.2% from the
first quarter of 1996 to the first quarter of 1997, due to increased SG&A,
depreciation and amortization expense and interest expense, the Company's net
losses have increased from the first quarter of 1996 to the first quarter of
1997.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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, start-up costs related to the commencement of operations
and subscriber installation costs. The Company intends to finance its capital
requirements through a combination of the issuance of debt and equity
securities, 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. Each of the
operating systems that has been contributed to the Company in connection with
the February 23, 1996 Contributions has incurred operating losses since
inception. The Company has incurred operating losses since inception and its
cash flows from operating activities at the system level to date have been
insufficient to cover operating expenses at the system level. The Company
expects to incur operating and net losses for the foreseeable future due to the
expenditures associated with its growth strategy.
The Company estimates that the launch of a new digital wireless cable
system in a typical market will require capital expenditures of approximately
$8.0 to $10.0 million of start-up expenses for head-end and transmission
equipment and booster sites. The Company estimates that the conversion of an
existing analog wireless cable system in a typical market to a digital wireless
cable system will require the expenditure of approximately $6.0 to $8.0 million.
These costs reflect the Company's good faith estimates; however, such estimates
are speculative because to date there are no operating digital wireless cable
systems, and the Company's estimates assume the efficacy and ready availability
of digital technology. The Company estimates that the launch of a new analog
wireless cable system in a typical market requires the aggregate capital
expenditure of approximately $2.2 million. Incremental installation costs are
estimated by the Company to be approximately $750 to $1,000 per subscriber in
the case of a digital wireless system and approximately $350 to $700 per
subscriber in the case of an analog or analog converting to digital system. The
head-end and transmission expenditures must be made before programming can be
delivered to subscribers and in certain instances, booster sites will be
required to increase LOS households. Labor installation costs for a subscriber
are incurred only after that subscriber signs up for services.
For 1997, the Company has budgeted approximately $58.0 million in capital
expenditures, including approximately $32.0 million for subscriber installation
costs, $10.0 million for digital head-end and transmission equipment and
approximately $5.0 million for build-out of several markets to accommodate a new
line of business, internet access. The buildout of the Dallas market is
budgeted to cost $45.0 million in total. For 1998, the Company has budgeted
approximately $120.0 million of additional capital expenditures. Based upon the
Company's current operating plans, it believes that cash on hand will provide
sufficient funds to meet its needs for at least the next 12 months.
Capital expenditures in excess of available cash may be financed, in whole
or in part, by the Company through debt or equity financings, subscriber
equipment lease financings, joint ventures or other arrangements. In the event
the Company is unable to arrange equity financing or place debt in amounts and
on terms satisfactory to the Company and consistent with its budgeted financing
requirements, the ability of the Company to develop and expand its operations
and to satisfy its fixed obligations, including its debt service and principal
payment obligations in respect of the Senior Discount Notes, would be
materially, adversely affected. The ability of the Company to take any of the
foregoing steps or enter into other significant transactions will likely require
the unanimous approval of CAI and Heartland.
Net cash provided by operating activities during the first quarter of 1997
was $800,000 versus $2.4 million during the first quarter of 1996. The
decrease in cash provided by operating activities from the first quarter of 1996
to the first quarter of 1997 was primarily due to increased SG&A and, to a
lesser extent, certain costs associated with the activities preparing for launch
of the Dallas, Texas market.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Net cash used in investing activities was $4.6 million during the first
quarter of 1997 versus $0.7 million during the first quarter of 1996. Cash used
in investing activities primarily relates to the acquisition and installation of
subscriber receive-site equipment and the acquisition of certain wireless cable
channel rights. The increase in cash used in investing activities in the first
quarter of 1997 is primarily due to investments in licenses and leased license
investment and assets held for sale, with no comparable amounts in the first
quarter of 1996. Additionally, the acquisition and installation of subscriber
equipment increased to $1.7 million in the first quarter of 1997 from $0.9
million in the first quarter of 1996 principally due to increased subscriber
levels resulting from the February 23, 1996 Contributions.
Net cash used in financing activities was $2.1 million during the first
quarter of 1997 compared to cash provided by financing activities of $163.1
million during the first quarter of 1996. Cash used in financing activities
during the first quarter of 1997 is attributed to the repayment of $2.1 million
of indebtedness related to the USA Wireless Acquisition. Net cash provided by
financing activities during the first quarter of 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, (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.
The Company intends to conserve capital in anticipation of the expected
availability of digital compression technology. This technology is expected to
be available in 1997. The Company believes that the implementation of this
technology will increase its ability to attract and retain customers and
implement a growth strategy, although there can be no assurance that it will be
able to successfully compete with existing or new competitors. In addition, the
Company will only develop its analog customer base as local market conditions
dictate.
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 bonds.
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 the statements made herein. Readers of this report are
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 1996
Annual Report on Form 10-K.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported in Item 3 of the Company's Annual Report on Form
10-K for the year ended December 31, 1996, the Company is involved in a dispute
with San Antonio Wireless, Inc. ("SAW") over the Company's lease rights to eight
ITFS channels for San Antonio. On February 12, 1997, SAW filed a lawsuit
seeking injunctive relief against the Company. The Company believes the lawsuit
is without merit and intends to defend it vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
10.1 Employment Agreement dated as of April 2, 1997 between David Webb
and CS Wireless Systems, Inc.
10.2 Employment Agreement dated as of April 2, 1997 between Frank H.
Hosea and CS Wireless Systems, Inc.
10.3 Employment Agreement dated as of April 2, 1997 between Jeffrey A.
Kupp and CS Wireless Systems, Inc.
*27 Financial Data Schedule
- ------------------
*Filed herewith.
(b) Reports on Form 8 K
None
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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: May 15, 1997 CS WIRELESS SYSTEMS, INC.
By: /s/Jeffrey A. Kupp
----------------------------
Jeffrey A. Kupp
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)
13