<PAGE>
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1996
--------------
COMMISSION FILE NUMBER: 0-21920
PEOPLE'S CHOICE TV CORP.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1366643
- - - --------------------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OF ORGANIZATION) IDENTIFICATION NO.)
2 CORPORATE DRIVE, SHELTON, CT 06484
- - - ---------------------------------------------- --------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
THE COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 925-7900
--------------
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 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.
X
----- -----
YES NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE: 12,868,817 SHARES AS OF MAY 9, 1996.
<PAGE>
PEOPLE'S CHOICE TV CORP.
------------------------
INDEX
-----
PART I FINANCIAL INFORMATION
- - - ----------------------------
PAGE(S)
-------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1995
and March 31, 1996 2
Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 1995 and 1996 3
Consolidated Statements of Stockholders'
Equity for the Three Month Periods Ended
March 31, 1995 and 1996 4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1995 and 1996 5-6
Notes to Consolidated Financial Statements 7-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10-12
PART II OTHER INFORMATION
- - - -------------------------
Items 1-5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
- - - ----------
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,243,558 $ 14,952,946
Marketable securities 112,433,408 103,771,892
Subscriber receivables, net of
allowance for doubtful accounts
of $651,300 and $422,000 2,447,297 2,114,866
Notes and other receivables 4,073,719 3,632,133
Prepaid expenses and other assets 7,394,211 7,659,860
Investment in wireless systems and
equipment, at cost, net of
accumulated depreciation and
amortization of $33,662,121
and $40,727,805 208,578,950 208,229,707
Organization and financing costs net of
accumulated amortization of $1,790,017
and $1,641,605 7,406,205 6,987,537
Excess of purchase price over fair
market value of assets acquired
net of accumulated amortization of
$360,998 and $494,811 7,515,329 11,624,631
------------ ------------
Total assets $373,092,677 $358,973,572
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and other payables $202,317,369 $208,589,367
Accounts payable 4,131,968 1,970,166
Accrued expenses 6,098,976 5,295,208
Subscriber advance payments and
deposits 2,052,969 1,970,302
Minority interest in consolidated
subsidiaries 1,297,188 1,235,225
------------ ------------
Total liabilities 215,898,470 219,060,268
Commitments and Contingencies (Note 4) -- --
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 54,577,371 55,909,476
PCTV Detroit cumulative preferred stock 6,098,000 6,231,087
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
4,440,811 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.01 par value,
75,000,000 shares
authorized, 12,841,203 shares
issued and outstanding
at December 31, 1995 and March 31, 1996 128,412 128,412
Additional paid-in capital 172,415,949 170,950,756
Warrants 4,331,244 4,331,244
Accumulated deficit (80,356,769) (97,637,671)
------------ ------------
Total stockholders' equity 96,518,836 77,772,741
------------ ------------
Total liabilities and
stockholders' equity $373,092,677 $358,973,572
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1995 1996
------------ -------------
<S> <C> <C>
REVENUES $ 5,473,260 $ 8,548,470
----------- ------------
COSTS AND EXPENSES:
Operating costs and expenses 9,233,543 11,884,979
Depreciation and amortization 4,212,128 8,478,245
----------- ------------
13,445,671 20,363,224
----------- ------------
Operating loss (7,972,411) (11,814,754)
LOSS ON SALES AND WRITEDOWN OF
ASSETS (Note 3) -- (343,381)
INTEREST EXPENSE:
Omni and BCI (50,957) --
Non Cash -- (6,420,508)
Cash (144,632) (235,360)
INTEREST INCOME AND OTHER 143,298 1,532,138
EQUITY INTEREST IN PREFERRED
ENTERTAINMENT, INC. (845,374) --
MINORITY INTEREST 54,728 27,963
----------- ------------
Loss before income tax (8,815,348) (17,253,902)
Income tax expense 46,313 27,000
----------- ------------
Loss before extraordinary gain (8,861,661) (17,280,902)
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT 1,197,424 --
----------- ------------
Net loss (7,664,237) (17,280,902)
Preferred dividends (624,773) (1,465,193)
----------- ------------
Loss applicable to common shares $(8,289,010) $(18,746,095)
=========== ============
Loss per common share:
Loss before extraordinary gain $(.94) $(1.43)
Extraordinary gain .12 --
----------- ------------
Net loss $(.82) $(1.43)
=========== ============
Weighted average number of common
shares outstanding 10,138,298 13,068,730
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PAR VALUE PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS DEFICIT
------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 9,758,208 $ 97,582 $110,020,895 -- $(27,121,626)
Net loss -- -- -- -- (7,664,237)
Issuance of common stock in
exchange 187,143 1,872 3,312,416 -- --
Dividends on Convertible
Preferred Stock -- -- (624,773) -- --
---------- -------- ------------ ---------- ------------
Balance, March 31, 1995 9,945,351 $ 99,454 $112,708,538 -- $(34,785,863)
========== ======== ============ ========== ============
Balance, December 31, 1995 12,841,203 $128,412 $172,415,949 $4,331,244 $(80,356,769)
Net Loss -- -- -- -- (17,280,902)
Dividends on Cummulative
Preferred Stock -- -- (133,088) -- --
Dividends on Convertable
Preferred Stock -- -- (1,332,105) -- --
---------- -------- ------------ ---------- ------------
Balance, March 31, 1996 12,841,203 $128,412 $170,950,756 $4,331,244 $(97,637,671)
========== ======== ============ ========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(7,664,237) $(17,280,902)
Adjustments to reconcile net loss to
net cash used in operations-
Depreciation and amortization 4,212,128 8,478,245
Minority interest in subsidiaries (54,728) (27,963)
Equity interest in Preferred
Entertainment, Inc. 845,374 --
Extraordinary gain on early
extinguishment of debt (1,197,424) --
Amortization of original issue
discount -- 6,245,673
Amortization of imputed discount
on debt -- 174,835
Loss on sales and writedown of
assets -- 343,381
Provision for losses on subscriber
receivables 580,500 287,000
Changes in assets and liabilities-
Increase in subscriber
receivables (879,009) (227,024)
(Increase) decrease in notes
and other receivables (815,834) 21,987
(Increase) decrease in prepaid
expenses and other assets (654,737) 3,974
Increase in organization and
financing costs (635,953) --
Decrease in accounts payable (104,724) (1,220,158)
Decrease in accrued expenses (1,072,202) (1,052,643)
Increase (decrease) in
subscriber advance payments
and deposits 226,769 (110,066)
Decrease in due to affiliates (107,027) --
----------- ------------
Net cash used in operating
activities (7,321,104) (4,363,661)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (1,354,468)
Proceeds principally from maturity of
marketable securities 2,495,920 10,015,982
Proceeds from sales of assets -- 212,555
Acquisition of Sat-Tel Services, Inc. -- (3,359,198)
Acquisition of Tilden and Anahuac
frequencies -- (2,253,687)
Sale of interest in Preferred
Entertainment of Champaign -- 1,839,889
Acquisition of Casa Grande frequencies (1,200,000) --
Investment in wireless systems and
equipment (9,923,389) (5,675,835)
Issuance of additional notes receivable
from affiliates (93,382) --
Repayment of notes receivable from
affiliates and related parties 121,726 --
----------- ------------
Net cash used in investing
activities (8,599,125) (574,762)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 99,000 --
Repayment of notes payable (568,155) (3,318,189)
</TABLE>
5
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Buyout of minority interest -- (34,000)
Proceeds from the issuance of
convertible preferred stock, net 40,000,000 --
----------- -----------
Net cash provided by (used in)
financing activities 39,530,845 (3,352,189)
----------- -----------
Net increase (decrease) in cash 23,610,616 (8,290,612)
Cash and cash equivalents, beginning of
year 5,106,343 23,243,558
----------- -----------
Cash and cash equivalents, end of period $28,716,959 $14,952,946
=========== ===========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest, net of
amount capitalized $ 178,550 $ 226,511
Cash received for interest 86,268 1,590,525
Supplemental disclosures of noncash
investing and financing activities:
During 1995 the Company acquired
frequency rights in exchange for
7,143 shares of common stock.
In addition, the $4,500,000
BCI note payable was
exchanged for 180,000 shares
of the Company's common
stock.
During 1996 in connection with the
acquisition of Sat-Tel Services,
Inc., the Company issued a
note payable in the amount
of $1,250,000. In addition,
the Company acquired a note
receivable in the amount of
$175,000 in connection with
the sale of a cable system.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated balance sheet as of March 31, 1996, the consolidated
statements of operations for the three months ended March 31, 1995 and 1996 and
the consolidated statements of stockholders' equity and cash flows for the three
months ended March 31, 1995 and 1996 have been prepared by People's Choice TV
Corp. (the "Company" or "PCTV") and are unaudited. In the opinion of management,
all adjustments necessary to present fairly the financial position, results of
operations and cash flows at March 31, 1995 and 1996 have been made and all such
adjustments are of a normal recurring nature. The accounting policies followed
during the interim periods reported on are in conformity with generally accepted
accounting principles and are consistent with those applied for annual periods.
Certain prior period amounts have been reclassified to conform with current
period presentation. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements for
the year ended December 31, 1995 included in the Company's filing on Form 10-
K/A. The results of operations for the three month periods ended March 31, 1995
and 1996 are not necessarily indicative of the operating results for the full
year.
(2) MARKETABLE SECURITIES:
Marketable securities consist of US Treasury Bills which mature July 25,
1996. The Company has classified these securities as held-to-maturity and they
are recorded at amoritized cost.
(3) ACQUISITIONS AND DISPOSITIONS:
In January 1996, the Company acquired rights to wireless frequencies and
certain other assets in the Tilden, Illinois and Anahuac, Texas markets for a
purchase price of approximately $2,300,000. The Company acquired leases for 20
and 16 channels in Tilden and Anahuac, respectively.
In January 1996, Preferred Entertainment of Champaign ("Champaign"), of
which Specchio Development Investment Corp. ("SDIC") had a two thirds
partnership interest, was sold for approximately $2,200,000. The Company's share
of the proceeds, after payment of all outstanding liabilities, was approximately
$670,000, resulting in a gain on sale of approximately $195,000.
On January 26, 1996, the Company acquired Sat-Tel Services Inc. ("Sat-
Tel"), its exclusive installation and technical service company. The purchase
price was $5,000,000, which consisted of $3,750,000 in cash (which included
repayment of two promissory notes in the amount of $410,000 to the shareholders)
and a note payable in the amount of $1,250,000 due January 26, 1997 with an
interest rate of 5.5% per year, which can be exchanged for 69,145 common shares
of the Company at the option of the note holder. This election shall be made
prior to the one year anniversary of the note subject to certain conditions.
Also, at closing, the Company repaid $1,500,000 of bank debt that was owed by
Sat-Tel. As additional consideration, 27,614 common shares valued at $445,000
were issued to the former owners in April 1996. The acquisition was accounted
for as a purchase transaction and, accordingly, the purchase price was allocated
to the fair value of assets acquired and liabilities assumed. The Company
believes the acquisition will reduce its installation expenses because the
Company will no longer be paying an outside contractor to perform installation
services.
On August 29, 1995 the Company closed on an acquisition transaction with
Eastern Cable Networks Corp. and affiliates ("ECN") by which the Company
acquired the rights to 26 wireless cable frequencies in the Detroit market and
certain other related assets. The acquisition was accounted for as a purchase
transaction and, accordingly, the purchase price was allocated to the fair value
of assets acquired and liabilities assumed.
Prior to September 8, 1995 the Company owned 22.2% of the Preferred
Entertainment, Inc. ("PEI") Common Stock. On September 8, 1995, PCTV and PEI
closed on a merger transaction pursuant to which PCTV acquired PEI through a
merger in which PEI became an indirect wholly-owned subsidiary of PCTV.
Pursuant to the merger agreement, PCTV acquired each share of PEI Common Stock
that it did not already own. The acquisition was accounted for as a purchase
transaction and, accordingly, the purchase price was allocated to the fair value
of assets acquired and liabilities assumed.
7
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summarized below are the pro forma unaudited results of operations for the
three months ended March 31, 1995 assuming the ECN and PEI acquisitions had
occurred on January 1, 1995. Adjustments have been made for depreciation and
amortization of the fair value write-up of assets acquired, interest expense on
debt issued in the ECN acquisition, the elimination of the equity in the net
loss of PEI recorded by the Company in 1995 and dividends on the preferred stock
issued in the ECN acquisition. The pro forma loss per common share assumes
shares issued in connection with the PEI acquisition had been outstanding since
January 1, 1995.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1995
-------------------
<S> <C>
Revenues $ 7,877,000
Loss before extraordinary gain (12,853,000)
Net loss (11,656,000)
Pro forma loss applicable to common
shares (12,461,000)
Net loss per common share:
Loss before extraordinary gain $ (1.06)
Extraordinary gain .09
------------
Net loss $ ( .97)
============
Pro forma weighted average number of
common shares outstanding 12,899,000
============
</TABLE>
Included in the proforma net loss are PEI costs in the amount of $250,000
associated with the acquisition of PEI for 1995.
During 1996, the Company recorded a further writedown to net realizable
value of the underlying collateral on the non-recourse note receivable from
Michael J. Specchio payable May 14, 1996, resulting in a loss of $517,500.
(4) COMMITMENTS AND CONTINGENCIES:
On March 28, 1996, the FCC auction for MMDS and/or MDS authorizations for
Basic Trading Areas ("BTA") came to a conclusion. The BTA authorizations will
allow the Company to expand its existing coverage of MDS and MMDS channels
throughout the geographic boundaries of the BTA, to license unallocated MDS or
MMDS channels in the Company's BTA's and to implement technological advances.
The Company purchased 28 BTA authorizations which contain 12,054,005 television
households, including each of the BTA authorizations for the Company's nine
primary markets. The purchase price was $12,895,000; however, the Company
qualifies for a 15% discount resulting in a net purchase price of $10,960,000.
The payment terms require (i) a 20% downpayment ($2,192,000), (ii) payments of
interest on the remaining principal amount during the two years after the
auction closes, and (iii) beginning two years after the auction closes,
amortization of the remaining principal amount ($8,768,000) and interest over an
eight year period. The interest rate is 2.5% plus the rate of the effective ten-
year U.S. Treasury obligation at the time the BTA authorization is issued. The
Company had placed a $3,000,000 deposit with the FCC on October 27, 1995, so the
Company will receive a refund of approximately $808,000 when the 20% downpayment
is due. The granting of the BTA authorizations is expected to take place during
the second half of 1996.
The Company is subject to claims and contingencies related to taxes,
litigation and other matters arising out of the normal course of business.
People's Choice TV Tucson, Inc. ("PCTV Tucson") may be assessed by the City of
Tucson for unpaid telecommunications taxes which, as of March 31, 1996 was
approximately $637,000 plus accrued interest and penalties. The tax accrues at
two percent (2%) of gross revenues, system-wide, for PCTV Tucson. The City of
Tucson has notified the Company that it believes that PCTV Tucson is subject to
the tax but has taken no additional action to recover the taxes that would be
payable. The Company and PCTV Tucson do not believe PCTV Tucson is subject to
the tax and intend to vigorously contest this matter. If PCTV Tucson is deemed
subject to the tax, it would be their intent to add the tax to subscriber
billings, except PCTV Tucson would not be able to recover the amount of tax
accrued to that date.
8
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Except as discussed below, the Company is not a party to any litigation
that could have a material adverse effect on its business, results of operations
or financial condition.
Cable Equity Partners, Inc. ("CEP") has filed a complaint against the
Company and People's Choice TV of Houston, Inc. The complaint was filed in the
state courts of Texas. The complaint alleges causes of action based upon
slander, libel, and tortious interference with contractual relations. The
complaint relates to certain oral and written commentary the Company provided to
an investment banking firm with respect to a private placement memorandum
prepared by CEP for an offering of notes and warrants by CEP. CEP alleges that
the commentary the Company provided to the investment banking firm constituted
slander, libel and tortious interference with contractual relations. CEP claims
damages in excess of $20 million. The Company has retained counsel and has filed
an answer denying all of the allegations in the complaint. Although there can be
no assurance as to the ultimate outcome, the Company believes it has meritorious
defenses in this action and intends to defend vigorously against this action.
The Company believes that the eventual outcome of this action will not have a
material adverse effect on the consolidated financial condition of the Company.
Wireless Enterprises, Inc. and Indianapolis Wireless, L.P. have filed a
complaint against the Company in U.S. district court in Connecticut. The
complaint alleges causes of action based on fraud, tortious interference with
contract, negligence, breach of good faith, and unfair trade practices. The
complaint alleges that the company took certain actions with respect to the
Detroit market that deprived plaintiffs of the opportunity to acquire certain
wireless cable frequencies in that market. The complaint alleges that by taking
such actions the Company breached certain obligations to the plaintiffs. The
complaint seeks money damages and injunctive relief. The Company has retained
counsel and has filed a motion to dismiss all of the actions stated in the
complaint. Although there can be no assurance as to the ultimate outcome, the
Company believes it has meritorious defenses in this action and intends to
defend vigorously against this action. The Company believes that the eventual
outcome of this action will not have a material adverse effect on the
consolidated financial condition of the Company.
9
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the corresponding discussion and
analysis included in the Company's Report on Form 10-K/A for the year ended
December 31, 1995.
RESULTS OF OPERATIONS:
STRATEGIC DIRECTION
- - - -------------------
During 1996, the Company's strategy is to conserve capital pending the
implementation of digital video compression technology. Pursuant to this
strategy, the Company does not plan to materially increase its number of
customers in 1996. The Company believes that the implementation of digital
video compression technology will expand its video product offering (possibly
beyond the number available from the Company's hardwire cable competitors) and
enhance its ability to attract and retain customers and at such time the Company
expects to resume a strong customer growth strategy. There can be no assurance
that PCTV will be able to attract and retain the customer base necessary to
compete successfully with existing competitors or new entrants in the market for
subscription television services.
REVENUES
- - - --------
Revenues increased $3.1 million or 56% from the three month period
ended March 31, 1995 to 1996. The increase in revenues is principally
attributable to the acquisition of the Chicago and Detroit systems in late 1995
and the additions of customers in the Houston and Phoenix systems. Customer
count has increased from 54,100 at March 31, 1995 to 81,300 at March 31, 1996,
an increase of 50%. These acquisitions accounted for approximately 21,000
customers at March 31, 1996.
OPERATING COSTS AND EXPENSES
- - - ----------------------------
Operating costs and expenses increased $2.7 million or 29% from the
three month period ended March 31, 1995 to 1996 primarily due to the
acquisitions of the Chicago and Detroit systems and the addition of customers in
the Houston and Phoenix systems, partially offset by costs incurred in the prior
year related to delinquent accounts in the Houston system.
DEPRECIATION AND AMORTIZATION
- - - -----------------------------
Depreciation and amortization expense includes depreciation and
amortization of wireless systems and equipment and amortization of frequency
rights. Depreciation and amortization expense increased from the three month
period ended March 31, 1995 to 1996 principally due to the acquisition of the
Chicago and Detroit systems, to the installation of receiving equipment for new
customers in the Company's other operating systems and to amortization of debt
acquisition costs. The Company's direct costs of obtaining customers exceeds
installation revenue. These excess costs are capitalized and amortized over a
three year period, or the life of the customer if shorter. The Company expects
that depreciation and amortization expense will continue to increase in the
foreseeable future.
OPERATING LOSS
- - - --------------
Operating loss increased to $11.8 million from $8.0 million for the
three months ended March 31, 1996 from the comparable period of the prior year
principally due to increases in depreciation and amortization expense partially
offset by the net increase in revenues compared to operating costs. Similarly,
cash flows from operating activities improved to $(4.4) million from $(7.3)
million primarily due to an increase in interest income in 1996 compared to
1995. Also notes and other receivables and organization and financing costs
increased in 1995 as compared to 1996.
LOSS ON SALES AND WRITEDOWN OF ASSETS
- - - -------------------------------------
Loss on sales and writedown of assets includes a $517,500 writedown of
a note receivable to net realizable value, offset by a $195,000 gain on sale of
Champaign.
10
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE
- - - ----------------
Interest expense was $6.7 million and $.2 million for the three months
ended March 31, 1996 and 1995, respectively. The increase in interest expense
from 1995 to 1996 was primarily a result of the issuance of the Senior Discount
Notes in 1995. Non-cash interest expense totalled $6.4 million in 1996 of which
$6.2 million was recorded on the Senior Discount Notes.
INTEREST INCOME AND OTHER
- - - -------------------------
Interest income was $1.5 million and $.1 million for the three months
ended March 31, 1996 and 1995, respectively. Interest income increased in 1996
compared to 1995 primarily as a result of the investment of the net proceeds
from the issuance of the Convertible Preferred Stock and Senior Discount Notes.
EQUITY INTEREST IN PREFERRED ENTERTAINMENT, INC.
- - - ------------------------------------------------
Equity interest in operations includes (i) the Company's pro rata
share of the net loss of PEI's operations for the three months ended March 31,
1995 and (ii) amortization of excess purchase price over fair market value of
net assets acquired. The Company acquired PEI on September 8, 1995. The
Company's statement of operations includes the results of PEI from the date of
acquisition.
MINORITY INTEREST
- - - -----------------
Amounts represent primarily the minority interest in the Company's
Indianapolis system.
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT
- - - --------------------------------------------------
Amount represents a net gain on early extinguishment of a $4.5 million
note in exchange for 180,000 common shares of the Company's stock.
NET LOSS
- - - --------
For the three month periods ended March 31, 1995 and 1996, the Company
incurred net losses of approximately $7.7 million, and $17.3 million,
respectively. These net losses are principally attributable to the significant
expenses incurred in connection with the development of the Company's business,
which is described above.
LIQUIDITY AND CAPITAL RESOURCES
- - - -------------------------------
Cash, cash equivalents and marketable securities decreased to $118.7
million at March 31, 1996 from $135.7 million at December 31, 1995, a decrease
of $17.0 million. This decrease is primarily attributable to cash used in
operating activities, the acquisition of Sat-Tel, the acquisition of the Tilden
and Anahuac frequencies, repayment of notes payable, investment in wireless
systems and equipment partially offset by cash received on the sale of our
interest in Preferred Entertainment of Champaign.
The wireless cable business is a capital intensive business. The
Company's operations require substantial capital investment for (i) the
acquisition or leasing of wireless cable channel rights in certain markets, (ii)
the construction of headend/transmission facilities as well as customer service,
maintenance and installation facilities in several cities, (iii) the
installation of customers, and (iv) the funding of initial start-up losses.
During 1996, the Company's strategy is to conserve capital pending the
implementation of digital video compression technology. Pursuant to this
strategy, the Company does not plan to materially increase its number of
customers in 1996. In 1996, the Company has spent $5.7 million for capital
expenditures other than acquisitions compared to $9.9 million in 1995. To fund
such capital expenditures for the remainder of 1996, the Company anticipates
using the Company's available cash and marketable securities ($118.7 million at
March 31, 1996).
11
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The level of capital expenditures incurred for customer installations
is variable and directly dependent on the customer installation activities of
the Company. Therefore, actual customer installation expenditures may be more or
less than the Company's estimate. Further significant capital expenditures for
customer installations are expected to be incurred by the Company in 1997 and
subsequent years. If the Company does not have adequate liquidity to fund its
desired capital expenditure plans, the Company may delay the launch of new
markets and slow down its system expansion activities in its operating markets.
A substantial portion of the costs of acquiring wireless cable channel
rights and establishing headend/transmission facilities for the Chicago,
Detroit, Houston, Phoenix, St. Louis and Tucson Systems have already been paid.
The Company estimates that the launch of a wireless cable system in a major
market for which it controls channel rights currently involves the expenditure
of approximately $3.0 million for headend/transmission equipment and
approximately $1.0 million for certain start-up expenditures which must be made
by the Company before it can commence the delivery of programming to its
customers. Installation costs per customer generally are incurred shortly before
or after a customer signs up for the Company's wireless cable service. The
Company anticipates that the development of its wireless cable systems with
digital technology will involve capital expenditures higher than those involved
in implementing analog technology because of the increased costs for the more
complex converter boxes and other equipment which utilize the digital
technology. The Company believes that it will be able to recover its remaining
investment in analog converter boxes through sales of such boxes to wireless
cable system operators who intend to implement digital service at a later date
than the Company.
The Company has experienced negative cash flow from operations in each
year since its formation, and although more mature individual systems of the
Company may generate positive cash flow from operations, the Company expects to
continue to experience negative consolidated cash from operations due to
operating costs associated with its system development, expansion and
acquisition activities. Until sufficient cash flow is generated from operations,
the Company will have to utilize its current capital resources or external
sources of funding to satisfy its capital needs. The development of wireless
cable systems in the Company's major markets referred to above in subsequent
years, the development of the Company's other markets, acquisitions of
additional channel rights and wireless cable systems and the Company's general
corporate activities will require the Company to secure significant additional
financing in the future and there can be no assurance that such financings will
be available when required.
12
<PAGE>
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(2) Not Applicable
(4) Not Applicable
(10) Not Applicable
(11) Statement regarding computation of per share earnings is not required
because the relevant computation can be determined from the material
contained in the Financial Statements included herein.
(15) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(23) Not Applicable
(24) Not Applicable
(25) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
(b) Reports on Form 8-K
None
13
<PAGE>
Pursuant to the requirements to the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized
PEOPLE'S CHOICE TV CORP.
------------------------
(Registrant)
Date: May 9, 1996 By /s/ Charles F. Schwartz
---------------------------------------
Name: Charles F. Schwartz
Senior Vice President and
Chief Financial Officer
and Principal Accounting Officer
14
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