UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 333-20295
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CS WIRELESS SYSTEMS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2751747
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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) 633-4000
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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 August 14, 1997
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Common Stock, $.001 par value 10,702,609
PART I - FINANCIAL INFORMATION
ITEM 1.
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . $ 102,844 $ 113,072
Subscriber receivables, net. . . . . . . . . . . . 839 1,079
Notes receivable . . . . . . . . . . . . . . . . . 250 1,510
Prepaid expenses and other . . . . . . . . . . . . 737 689
---------- ----------
Total current assets . . . . . . . . . . . . . 104,670 116,350
Plant and equipment, net . . . . . . . . . . . . . . . 40,624 42,955
License and leased license investment, net . . . . . . 170,969 172,953
Goodwill, net. . . . . . . . . . . . . . . . . . . . . 50,108 52,011
Assets held for sale (Note 2). . . . . . . . . . . . . 4,609 19,366
Debt issuance costs and other assets, net. . . . . . . 12,651 10,602
---------- -----------
Total assets . . . . . . . . . . . . . $ 383,631 $ 414,237
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses. . . . . . . $ 4,192 $ 5,440
Accounts payable to affiliates . . . . . . . . . . 256 1,215
Current portion of long-term debt. . . . . . . . . 2,207 3,194
Current portion of BTA auction payable . . . . . . 646 646
Other current liabilities. . . . . . . . . . . . . 624 1,043
---------- -----------
Total current liabilities. . . . . . . . . . . 7,925 11,538
Long-term debt, less current portion . . . . . . . . . 268,341 268,180
BTA auction payable, less current portion. . . . . . . 4,610 4,256
Deferred income taxes. . . . . . . . . . . . . . . . . 2,715 5,429
---------- -----------
Total liabilities. . . . . . . . . . . . . . . 283,591 289,403
---------- -----------
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 10,702,609 shares in 1997 and
10,445,408 shares in 1996. . . . . . . . . . . . 11 10
Additional paid-in capital. . . . . . . . . . . . . 154,557 154,558
Treasury stock. . . . . . . . . . . . . . . . . . . (40) --
Accumulated deficit . . . . . . . . . . . . . . . . (54,488) (29,734)
---------- -----------
Total stockholders' equity. . . . . . . . . . 100,040 124,834
---------- -----------
Total liabilities and stockholders' equity. . $ 383,631 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenue . . . . . . . . . . . . . . . . . . $ 6,822 $ 5,864 $ 13,500 $ 9,720
Operating expenses:
Systems operations. . . . . . . . . . . . 3,657 3,363 7,352 5,664
Selling, general and administrative . . . 3,959 4,320 7,774 5,747
Depreciation and amortization . . . . . . 6,705 5,273 13,290 7,779
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . 14,321 12,956 28,416 19,190
---------- ---------- ---------- ----------
Operating loss . . . . . . . . . . . . . . . (7,499) (7,092) (14,916) (9,470)
---------- ---------- ---------- ----------
Other income (expense):
Interest income . . . . . . . . . . . . . 1,432 2,078 2,882 2,977
Interest expense. . . . . . . . . . . . . (8,093) (7,221) (16,089) (10,244)
Other (Note 2). . . . . . . . . . . . . . 655 -- 655 --
---------- ---------- ---------- ----------
Total other expense, net . . . . . . . (6,006) (5,143) (12,552) (7,267)
---------- ---------- ---------- ----------
Loss before income taxes . . . . . . . . . . (13,505) (12,235) (27,468) (16,737)
Income tax benefit . . . . . . . . . . . . . 1,357 4,451 2,714 5,890
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . . . $ (12,148) $ (7,784) $ (24,754) $ (10,847)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per common share. . . . . . . . . . $ (1.14) $ (0.77) $ (2.34) $ (1.34)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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)
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1997 1996
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Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (24,754) $ (10,847)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 13,291 7,779
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . (2,714) (5,890)
Accretion on discount notes and amortization of debt issuance costs. . . . 14,770 9,558
Non-cash interest expense on other long-term debt. . . . . . . . . . . . . 1,256 653
Gain on sale (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . (655) --
Changes in assets and liabilities, net of effects of contributions:
Subscriber receivables. . . . . . . . . . . . . . . . . . . . . . . . . 240 232
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . (126) 45
Accounts payable, accrued expenses and other liabilities. . . . . . . . (2,357) 458
----------- -----------
Net cash provided by (used in) operating activities. . . . . . . . . . . . . (1,049) 1,988
----------- -----------
Cash flows from investing activities:
Purchases of plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . (6,873) (4,686)
Additions to license and leased license investment . . . . . . . . . . . . . . . (2,063) (3,496)
Investment in assets held for sale . . . . . . . . . . . . . . . . . . . . . . . (943) --
Proceeds from sale of assets held for sale (Note 2). . . . . . . . . . . . . . . 16,350 --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220) 703
----------- -----------
Net cash provided by (used in) investing activities. . . . . . . . . . . . . 6,251 (7,479)
----------- -----------
Cash flows from financing activities:
Payments on notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,403) (25,161)
Payment on capital leases and other. . . . . . . . . . . . . . . . . . . . . . . (27) --
Proceeds from unit offering. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 229,484
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (9,731)
Cash distributed pursuant to contributions . . . . . . . . . . . . . . . . . . . -- (31,648)
----------- -----------
Net cash provided by (used in) financing activities. . . . . . . . . . . . . (15,430) 162,944
----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . $ (10,228) $ 157,453
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . 113,072 184
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . $ 102,844 $ 157,637
----------- -----------
----------- -----------
See accompanying notes to unaudited condensed consolidated financial statements
4
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 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 June 30, 1997, and the results of
operations and cash flows for the three and six months ended June 30, 1997 and
1996 and cash flows for the six months ended June 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
10,703,000 and 19,400,000 for the three month periods ended June 30, 1997 and
1996, respectively and 10,575,000 and 17,376,000 in the six months periods ended
June 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, 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.
(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 third quarter of 1997.
5
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1997
(Unaudited)
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. 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. The purchase price to be
paid by Heartland for these assets will be paid by a combination of cash and/or
an equivalent reduction of the principal balance of the Heartland Long-Term Note
("Long Note") executed by the Company in connection with the February 23, 1996
Contributions. This transaction is expected to close during the third quarter
of 1997.
(4) HEARTLAND LONG-TERM NOTE
Pursuant to its obligations under the Heartland Long Note, which includes
the requirement that all of the net proceeds received by the Company from the
sale of assets be applied against the Long Note, the Company made payments
during the three months ended June 30, 1997 of approximately $13.3 million to
Heartland. The $13.3 million represents a portion of the proceeds received
from the sale of various assets to BellSouth (see Note 2 - Completed
Transactions).
(5) 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.
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.
6
CS WIRELESS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 1997
(Unaudited)
(6) CONTINGENCIES
Effective June 17, 1997, the Company reached final settlement of all
matters related to the previously announced termination of employment of Lowell
Hussey, the Company's former President and Chief Executive Officer, including
settlement of litigation commenced by Mr. Hussey. Information regarding such
settlement was included in the Company's Form 8-K filed with the Securities and
Exchange Commission on June 26, 1997.
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 consititued 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
pursues the enforcement of an eviction of the Company from the use of the
eight ITFS channels, and is successful, the Company's inability to transmit
on eight channels in the San Antonio market could have a material adverse
effect on the Company's continued ability to offer subscribers in that market
an attractive programming package. 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 its claims; the
Company will contest the motion.
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 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) SUBSEQUENT EVENT
The Company has entered into various agreements dated as of August 4,
1997 with TelQuest Satellite Services LLC ("TelQuest"), which was formed to
provide digital video programming signals through its headend in the sky
satellite service. The Company has entered into an 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. The agreement
has a 10 year term.
The Company has also entered into an agreement to acquire a 25% ownership
interest in TelQuest in consideration of an initial contribution of $2.5
million in cash (to be paid in quarterly installments beginning August 1997)
and, through a lease, up to $2.5 million in equipment. TelQuest Satellite
Services LLC's other members are TelQuest Communications, Inc. and CAI. Both
CAI and TelQuest Communications, Inc. are affilaited organizations.
7
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 June 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. ("Heartland") contributed to the Company on
February 23, 1996 certain wireless cable television assets comprising various
domestic markets ("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 $6.8 million for the second quarter of 1997
compared to $5.9 million for the second quarter of 1996, an increase of 15.3
%. Revenue for the six months ended June 30, 1997 was $13.5 million,
compared to $9.7 million for the comparable prior year period, an increase of
39.2%. The increase in revenue for the second quarter of 1997 was primarily
due to average subscribers increasing to approximately 65,800 for the second
quarter of 1997 compared to approximately 57,200 for the second quarter of
1996, an increase of 15.0%. Average subscribers for the six months ended
June 30, 1997 were approximately 65,900 compared to approximately 40,600 for
the six months ended June 30, 1996, a 62.3% 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
June 30, 1997 compared to nine systems in operation at June 30, 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 expenses were $3.7 million and $7.4
million for the quarter and six months ended June 30, 1997 compared to $3.4
million and $5.7 million for the comparable prior year periods. The increase
in systems operations expense for the periods presented is principally due to
the increase in the subscriber base brought about by the February 23, 1996
Contributions. As a percentage of revenue, systems operations expense was
54% for the second quarter of 1997 compared to 57% for the comparable prior
year period and 54% for the six months ended June 30, 1997 compared to 58%
for the comparable prior year period.
8
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 $4.0 million and $7.8 million for the quarter and six
months ended June 30, 1997, compared to $4.3 million and $5.7 million for the
comparable prior year periods. The increase in SG&A for the six months ended
June 30, 1997 versus the comparable prior year period is principally due to
an increase in the subscriber base brought about by the February 23, 1996
Contributions. The decrease in SG&A during the quarter ended June 30, 1997
compared to the comparable prior year period is principally due to increased
organizational efficiency coupled with a decrease in direct marketing costs
and related commissions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
includes depreciation of systems and equipment, amortization of licenses and
leased license investment and amortization of goodwill. Depreciation and
amortization expenses were $6.7 million and $13.3 million for the quarter and
six months ended June 30, 1997, compared to $5.3 million and $7.8 million for
the comparable prior year periods. The increase in depreciation and
amortization expense is related to the additional plant and equipment and
leased license investment contributed to the Company in connection with the
February 23, 1996 Contributions.
OPERATING LOSS. The Company generated operating losses of $7.5 million and
$14.9 million for the quarter and six months ended June 30, 1997 compared to
$7.1 million and $9.5 million for the comparable prior year periods. The
increase in the Company's operating loss during the periods presented is
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") were a
negative $0.8 million and a negative $1.6 million for the quarter and six
months ended June 30, 1997, compared to a negative $1.8 million and $1.7
million for the comparable prior year periods. The increase in EBITDA during
1997 was principally due to the increased revenue attributed to the February
23, 1996 Contributions, partially off-set by the incremental operating costs.
INTEREST INCOME. Interest income was $1.4 million and $2.9 million for the
quarter and six months ended June 30, 1997, compared to $2.1 million and $3.0
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 $8.1 million and
$16.1 million for the quarter and six months ended June 30, 1997, compared to
$7.2 million and $10.2 million for the comparable prior year periods.
Interest expense during the quarter and six months ended June 30, 1997
included (i) non-cash interest and accretion of deferred debt issuance costs
of $7.5 million and $14.8 million, respectively, related to the Senior
Discount Notes and (ii) non-cash interest of $0.6 million and $1.3 million,
respectively, relating to the Heartland Long-Term 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 six months ended June
30, 1996 included non-cash interest and accretion of deferred debt issuance
costs of $6.7 million and $9.6 million, respectively, related to the Senior
Discount Notes and $0.5 million and $0.7 million, respectively, 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 and $2.7 million for the
quarter and six months ended June 30, 1997, compared to $4.5 million
and $5.9 million for the comparable prior year periods. 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 $12.1 million, or $1.14 per share, during the second
quarter of 1997 compared to $7.8 million, or $0.77 per share, during the
comparable prior year period and $24.8 million, or $2.34 per share, during the
six months ended June 30, 1997,
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
compared to $10.8 million, or $1.34 per share during the comparable prior
year period. Although the Company's total revenue increased 15.1% and 38.9%
during the second quarter of 1997 and the six months ended June 30,1997
respectively, the Company's net losses have increased due to increased SG&A,
depreciation and amortization expense 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 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
this fall 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 total capital expenditures of
approximately $30.0 million. Approximately $15.0 million of this amount
relates to the launch of the digital video business in Dallas; however, this
amount may vary significantly depending on actual subscriber growth rates and
the potential use of equipment leases for the acquisition of certain capital
equipment. Total capital expenditures budgeted for subscriber acquisition,
equipment and installation costs are approximately $9.0 million.
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 (see Note 7 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 offered by TelQuest (see Note 7 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 equivelant to two
standalone 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 Company estimates total capital expenditures relating to the launch of
its high speed Internet access business to be approximately $1.0 million in
1997, depending on actual subscriber growth rates. In addition, the Company
estimates total capital expenditures at approximately $6.0 million in its
analog markets. The remainder of the capital budget relates to strategic
investments in items such as additional channel capacity.
Net cash used in operating activities during the six months ended June 30,
1997 was $1.0 million versus cash provided by operating activities of $2.0
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, 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 provided by investing activities was $6.3 million during the six
months ended June 30, 1997 compared to cash used in investing activities of $7.5
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
and the investments in assets held for sale. The increase in cash provided by
investing activities in the six months ended June 30, 1997 is primarily due to
the proceeds from the assets held for sale with no comparable amounts in the
comparable prior year period.
Net cash used in financing activities was $15.4 million during the six
months ended June 30, 1997 compared to cash provided by financing activities
of $162.9 million during the comparable prior year period. Cash used in
financing activities during the six months ended June 30, 1997 is primarily
attributed to the repayment of $2.1 million of indebtedness related to the
USA Wireless Acquisition and the repayment of $13.3 million of the Heartland
Long-Term Note. Net cash provided by financing activities during the six
months ended June 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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 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
Effective June 17, 1997, the Company reached final settlement of all
matters related to the previously announced termination of employment of Lowell
Hussey, the Company's former President and Chief Executive Officer, including
settlement of litigation commenced by Mr. Hussey. Information regarding such
settlement was included in the Company's Form 8-K filed with the Securities and
Exchange Commission on June 26, 1997.
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
pursues the enforcement of an eviction of the Company from the use of the
eight ITFS channels, and is successful, the Company's inability to transmit
on eight channels in the San Antonio market could have a material adverse
effect on the Company's continued ability to offer subscribers in that market
an attractive programming package. 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 its claims; the
Company will contest the motion.
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 6. EXHIBITS AND REPORTS ON FORM 8 K
(a) Exhibits
*27 Financial Data Schedule
(b) Reports on Form 8 K
(1) Report on Form 8-K filed June 26, 1997 with respect to Item 5.
(2) Report on Form 8-K filed August 12, 1997 with respect to Item 5.
- -------------------
*Filed herewith.
12
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: August 14, 1997 CS WIRELESS SYSTEMS, INC.
By: /s/Jeffrey A. Kupp
--------------------------------
Jeffrey A. Kupp
Senior Vice President-Finance
and Chief Financial Officer
(Principal Financial Officer)