<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 September 30, 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: 12,924,817 shares as of November 7, 1996.
<PAGE>
PEOPLE'S CHOICE TV CORP.
------------------------
INDEX
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE(S)
- ---------------------------- -------
<S> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1995
and September 30, 1996 2
Consolidated Statements of Operations for the Three and Nine
Month Periods Ended September 30, 1995 and 1996 3
Consolidated Statements of Stockholders'
Equity for the Nine Month Periods Ended
September 30, 1995 and 1996 4
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 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
- ----------
</TABLE>
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,243,558 $ 11,903,765
Marketable securities 112,433,408 98,108,708
Subscriber receivables, net of allowance for doubtful accounts
of $651,300 and $371,000 2,447,297 2,335,949
Notes and other receivables 4,073,719 2,717,122
Prepaid expenses and other assets 7,394,211 4,424,690
Investment in wireless systems and equipment, at cost, net of
accumulated depreciation and amortization of $33,662,121
and $55,255,534 208,578,950 206,348,580
Organization and financing costs net of accumulated
amortization of $1,790,017 and $2,469,700 7,406,205 6,159,443
Excess of purchase price over fair market value of assets acquired
net of accumulated amortization of $360,998 and $813,329 7,515,329 11,772,073
------------ ------------
Total assets $373,092,677 $343,770,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and other payables $202,317,369 $227,734,778
Accounts payable 4,131,968 1,569,486
Accrued expenses 6,098,976 6,424,043
Subscriber advance payments and deposits 2,052,969 2,001,175
Minority interest in consolidated subsidiaries 1,297,188 1,121,172
------------ ------------
Total liabilities 215,898,470 238,850,654
Commitments and Contingencies (Note 4) --- ---
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 54,577,371 58,720,118
PCTV Detroit cumulative preferred stock 6,098,000 6,495,659
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 4,412,980 shares authorized,
no shares issued and outstanding --- ---
Common stock, $0.01 par value, 75,000,000 shares
authorized, 12,841,203 shares and 12,868,817 shares issued and
outstanding at December 31, 1995 and September 30, 1996, respectively 128,412 128,688
Additional paid-in capital 172,415,949 167,414,293
Warrants 4,331,244 4,331,244
Accumulated deficit (80,356,769) (132,170,326)
------------ ------------
Total stockholders' equity 96,518,836 39,703,899
------------ ------------
Total liabilities and stockholders' equity $373,092,677 $343,770,330
============ ============
</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 Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 6,779,009 $ 8,074,685 $17,824,501 $25,213,563
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operating costs and expenses 10,534,248 10,386,899 29,719,415 33,505,783
Non-cash settlement of lawsuit -- 616,000 -- 616,000
Depreciation and amortization 6,909,849 8,710,513 15,003,170 25,659,333
----------- ----------- ----------- -----------
17,444,097 19,713,412 44,722,585 59,781,116
----------- ----------- ----------- -----------
Operating loss (10,665,088) (11,638,727) (26,898,084) (34,567,553)
LOSS ON SALES AND
WRITEDOWN OF ASSETS (Note 3) -- (760,653) -- (979,437)
INTEREST EXPENSE:
Omni and BCI -- -- (76,931) --
Non-Cash (5,890,146) (6,845,449) (8,589,511) (19,828,112)
Cash (44,653) (278,024) (282,237) (718,352)
INTEREST INCOME AND OTHER 3,039,512 1,255,187 4,736,039 4,229,280
EQUITY INTEREST IN PREFERRED
ENTERTAINMENT, INC. (567,443) -- (2,282,213) --
MINORITY INTEREST 52,967 27,570 72,817 85,617
----------- ----------- ----------- -----------
Loss before income tax (14,074,851) (18,240,096) (33,320,120) (51,778,557)
Income tax expense (benefit) (136,700) 12,000 42,000 35,000
----------- ----------- ----------- -----------
Loss before extraordinary gain (13,938,151) (18,252,096) (33,362,120) (51,813,557)
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT -- -- 1,197,424 --
----------- ----------- ----------- -----------
Net loss (13,938,151) (18,252,096) (32,164,696) (51,813,557)
Preferred dividends (1,363,346) (1,547,432) (3,241,148) (4,540,406)
----------- ----------- ----------- -----------
Loss applicable to common shares $(15,301,497) $(19,799,528) $(35,405,844) $(56,353,963)
=========== =========== =========== ===========
Loss per common share:
Loss before extraordinary gain $ (1.41) $ (1.51) $ (3.52) $ (4.31)
Extraordinary gain -- -- .12 --
----------- ----------- ----------- -----------
Net loss $ (1.41) $ (1.51) $ (3.40) $ (4.31)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 10,880,808 13,096,204 10,401,381 13,086,411
=========== =========== =========== ===========
</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 NINE MONTHS ENDED SEPTEMBER 30, 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 --- --- --- (32,164,696)
Issuance of common stock in
exchange 187,143 1,872 3,312,416 ---
Issuance of common stock in
acquisition 2,760,479 27,605 60,702,933 ---
Issuance of warrants in
acquisition --- --- --- $574,404 ---
Exercise of stock options 17,450 174 263,082 --- ---
Issuance of common stock-
employment contract 1,923 19 49,981 --- ---
Issuance of warrants in debt
offer --- --- --- 3,756,840 ---
Dividends on Convertible
Preferred Stock --- --- (3,241,148) --- ---
---------- -------- ------------ ---------- -------------
Balance, September 30, 1995 12,725,203 $127,252 $171,108,159 $4,331,244 $ (59,286,322)
========== ======== ============ ========== =============
Balance, December 31, 1995 12,841,203 $128,412 $172,415,949 $4,331,244 $ (80,356,769)
Net Loss --- --- --- --- (51,813,557)
Issuance of common stock
in acquisition (Note 3) 27,614 276 445,000 --- ---
Stock options expired --- --- (906,250) --- ---
Dividends on Cumulative
Preferred Stock --- --- (397,659) --- ---
Dividends on Convertible
Preferred Stock --- --- (4,142,747) --- ---
---------- -------- ------------ ---------- -------------
Balance, September 30, 1996 12,868,817 $128,688 $167,414,293 $4,331,244 $(132,170,326)
========== ======== ============ ========== =============
</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>
Nine Months Ended
September 30,
-----------------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(32,164,696) $(51,813,557)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation and amortization 15,003,170 25,659,333
Minority interest in subsidiaries (72,817) (85,617)
Equity interest in Preferred Entertainment, Inc. 2,282,213 ---
Extraordinary gain on early extinguishment of debt (1,197,424) ---
Amortization of original issue discount 8,414,682 19,303,607
Stock to be issued in settlement of lawsuit --- 616,000
Stock compensation 132,460 ---
Amortization of imputed discount on debt 174,829 524,505
Loss on sales and writedown of assets --- 979,437
Provision for losses on subscriber receivables 1,443,600 773,500
Changes in assets and liabilities-
Increase in subscriber receivables (1,226,155) (934,607)
(Increase) decrease in notes and other receivables 240,967 (23,253)
(Increase) decrease in prepaid expenses and other assets (270,848) 2,909,684
Increase in organization and financing costs (858,435) ---
Decrease in accounts payable (2,429,037) (1,679,252)
Decrease in accrued expenses (1,849,190) (864,775)
Increase (decrease) in subscriber advance payments and deposits 158,128 (79,193)
Decrease in due to affiliates (706,583) ---
------------ ------------
Net cash used in operating activities (12,925,136) (4,714,188)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (106,041,649) (100,888,107)
Proceeds principally from maturity of marketable securities 4,492,331 115,212,807
Purchase of wireless systems and equipment from Broadcast Cable,
Inc. (3,773,246) ---
Proceeds from sales of assets --- 606,663
Acquisition of Sat-Tel Services, Inc. --- (3,440,400)
Acquisition of Tilden and Anahuac frequencies --- (2,253,687)
Sale of interest in Preferred Entertainment of Champaign --- 1,931,262
Acquisition of BTA licenses --- (1,620,083)
Purchase of wireless systems and equipment from Preferred
Entertainment, Inc. (3,069,571) ---
Purchase of wireless systems and equipment from Eastern Cable
Networks of Michigan, Inc. (4,783,216) ---
Acquisition of Casa Grande frequencies (1,200,000) ---
Investment in wireless systems and equipment (25,927,089) (11,929,345)
Issuance of additional notes receivable from affiliates (280,194) ---
Repayment of notes receivable from affiliates and related parties 162,462 ---
------------ ------------
Net cash used in investing activities (140,420,172) (2,380,890)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 135,000 ---
Repayment of notes payable (12,032,752) (4,060,715)
</TABLE>
5
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
Proceeds from the issuance of senior
discount notes, net 167,852,231 ---
Buyout of minority interest (36,000) (184,000)
Proceeds from the issuance of
convertible preferred stock, net 40,000,000 ---
Proceeds from the exercise of stock
options 180,796 ---
------------ ------------
Net cash provided by (used in)
financing activities 196,099,275 (4,244,715)
------------ ------------
Net increase (decrease) in cash 42,753,967 (11,339,793)
Cash and cash equivalents, beginning of
year 5,106,343 23,243,558
------------ ------------
Cash and cash equivalents, end of period $47,860,310 $11,903,765
============ ============
<CAPTION>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
<S> <C> <C>
Cash paid for interest, net of
amount capitalized $ 510,108 $ 494,457
Cash received for interest $ 3,898,861 $ 4,700,316
</TABLE>
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. In connection with
the acquisition of Broadcast Cable
Inc., the Company issued a
$6,727,000 promissory note. In May
1995, the Company issued warrants
valued at $3,757,000 in connection
with the issuance of senior discount
notes.
In connection with the acquisition of
Eastern Cable Networks of Michigan,
Inc. in August 1995, the Company
issued warrants valued at $574,000,
a $3,000,000 note payable and
cumulative preferred stock in the
amount of $8,000,000. The Company
issued 2,760,479 common shares of
stock in connection with the
acquisition of Preferred Entertainment,
Inc. in September 1995.
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 and issued
27,614 shares of common stock. In
addition, the Company acquired
frequency rights in exchange for a
note payable in the amount of
$6,480,333.
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 September 30, 1996, the
consolidated statements of operations for the three and nine months ended
September 30, 1995 and 1996 and the consolidated statements of stockholders'
equity and cash flows for the nine months ended September 30, 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 September
30, 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 and nine month periods ended September 30, 1995 and 1996 are not
necessarily indicative of the operating results for the full year.
(2) Marketable Securities:
The Company has classified marketable securities and time deposits as
cash equivalents if the original maturity investments is three months or less at
time of purchase.
Marketable securities consist of US Treasury Bills/Notes, Federal Agency
bonds and commercial paper which vary in maturity from five to fourteen months.
The Company has classified these securities as held-to-maturity and they are
recorded at amortized 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 $700,000, resulting in a gain on sale of approximately $133,000.
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. Approximately
$4,700,000 of the purchase price has been allocated to excess of purchase price
over fair market value of assets acquired. 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
7
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Summarized below are the pro forma unaudited results of operations for the
nine months ended September 30, 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>
Nine Months Ended
September 30,
1995
-------------------
<S> <C>
Revenues $24,236,000
Loss before extraordinary gain (44,991,000)
Net loss (43,794,000)
Pro forma loss applicable to common
shares (47,515,000)
Net loss per common share:
Loss before extraordinary gain $(3.76)
Extraordinary gain .09
------
Net loss $(3.67)
======
Pro forma weighted average number of
common shares outstanding 12,929,000
==========
</TABLE>
Included in the pro forma net loss are PEI costs in the amount of $900,000
associated with the acquisition of PEI for 1995.
On May 31, 1995, the Company closed on an acquisition transaction with
Broadcast Cable, Inc., ("BC") by which the Company acquired all of the capital
stock of BC. BC has the rights to 12 wireless cable frequencies in the
Indianapolis market and the rights to wireless cable frequencies in other
markets in Indiana. 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.
In August 1995, the Company entered into a joint venture with Multimedia
Development Corp. ("MDC") to develop a wireless cable system in the Albuquerque,
New Mexico market. The Company has a 27% interest in the joint venture and MDC
has a 73% interest in the joint venture. The Company accounts for this
investment under the equity method.
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 that was payable May 14, 1996, resulting in a loss of
$990,000. The Company has possession of the collateral and is currently
negotiating settlement of the obligation.
In April 1996, the Company sold wireless cable frequency rights in Tulsa,
Oklahoma resulting in a gain of $180,000.
In July 1996, the Company agreed to exchange its wireless cable
frequencies in Kansas City for CS Wireless Systems, Inc.'s wireless cable
frequencies in Salt Lake City. The agreement covers 24 wireless cable
frequencies in Kansas City, 28 wireless cable frequencies in Salt Lake City, and
the Basic Trading Area (BTA) licenses for both markets. Subject to due
diligence, the transaction is expected to close by the first quarter of 1997.
In July 1996, the Company entered into an agreement with Wireless
Entertainment Systems, Inc., and its subsidiary, Valley of Sun Wireless TV,
Inc., ("Wireless") to purchase wireless cable assets in the Globe, Arizona
market for a purchase price of $5.0 million and other considerations. The
assets principally consist of rights to 8 wireless cable frequencies and leases
with applicants for an additional 20 wireless cable frequencies. The purchase
price consists of : (1) restricted stock of the Company with a value of $3.0
million; (2) a promissory note in the amount of $2.0 million, payable in cash
or additional restricted stock of the Company, and (3)
8
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
warrants to purchase 89,286 shares of the Company's stock. Subject to due
diligence, the transaction is expected to close by the first quarter of 1997.
(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 9.5%. The Company has placed
downpayments of $1,906,000 on deposit with the FCC pursuant to the granting of
some of these licenses. The remaining $286,000 downpayment will be required with
the granting of the remaining BTA authorizations which is expected to take place
during the fourth quarter 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. The
City of Tucson has notified the Company that it believes that People's Choice TV
Tucson, Inc., ("PCTV Tucson") is subject to the telecommunications tax which
accrues at two percent (2%) of gross revenues for sales within the City of
Tucson, Arizona. The City of Tucson has recently concluded an audit covering the
period March 1, 1992 through April 30, 1996 resulting in taxes due of
approximately $220,000, including interest and penalties. 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.
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") had filed a complaint against the
Company and People's Choice TV of Houston, Inc. in the state courts of Texas.
The complaint alleged causes of action based upon slander, libel and tortious
interference with contractual relations. CEP had claimed damages in excess of
$20 million. The Company and its counsel had vigorously defended against this
lawsuit. While the Company and its counsel believes that this lawsuit was
brought without merit, to avoid the risks inherent in a jury trial, the Company
elected to settle this lawsuit. The parties reached a settlement agreement at a
mediation held on October 21, 1996. The terms of the settlement provide for a
payment of $1.0 million cash to CEP and for CEP to receive 56,000 shares of
restricted Company common stock valued at $616,000. All of the cash settlement
amount will be paid by the Company's insurance carrier.
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 further develop its analog customer base.
The Company believes that the implementation of digital video compression
technology will expand its video product offering (possibly beyond the number of
channels 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 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 $1.3 million or 19% from the three month period ended
September 30, 1995 to 1996, and $7.4 million or 41% from the nine month period
ended September 30, 1995 to 1996. The increase in the three month period is
primarily due to the acquisitions of the Chicago and Detroit systems in the
third quarter of 1995 and the addition of customers in the Phoenix system,
partially offset by a decrease in installations and television subscription
revenue in the Houston system in the 1996 period. The decrease in Houston
revenues is due to the discontinued development of its analog customer base and
lower pay-per-view revenues. The increase in the nine month period is primarily
due to the acquisitions of the Chicago and Detroit systems, and the addition of
customers in the Phoenix system. Houston also reflects higher revenues in the
1996 period primarily due to a reduction in prior year revenue related to
delinquent accounts partially offset by a decrease in installation revenue due
to the discontinued development of its analog customer base. Customer count has
decreased from 79,800 at September 30, 1995 to 77,500 at September 30, 1996, a
decrease of 3%, resulting from the Company's decision not to further develop its
analog customer base. The Chicago and Detroit acquisitions accounted for
approximately 21,000 customers at September 30, 1996.
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses decreased $.1 million or 1% from the three
month period ended September 30, 1995 to 1996, primarily due to lower salaries
and related benefits as a result of headcount reductions in the Corporate office
and the Houston system and costs incurred in the prior year related to
delinquent accounts in the Houston system, partially offset by the acquisitions
of the Chicago and Detroit systems and the addition of customers in the Phoenix
system. Operating costs and expenses increased $3.8 million or 13% from the nine
month period ended September 30, 1995 to 1996, primarily due to the acquisitions
of the Chicago and Detroit systems and the addition of customers in the Phoenix
system, partially offset by lower salaries and related benefits due to headcount
reductions in the Corporate office and the Houston system and costs incurred in
the prior year related to delinquent accounts in the Houston system.
Non-cash Settlement of Lawsuit
- ------------------------------
Amount represents the value of 56,000 shares of restricted Company common
stock to be issued as part of the settlement in the CEP lawsuit.
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 and nine
month periods ended September 30, 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 Phoenix system and to amortization of debt
acquisition costs. The Company's direct costs of
10
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $11.6 million from $10.7 million and to $34.6
million from $26.9 million for the three and nine months ended September 30,
1996, respectively, from the comparable period of the prior year principally due
to increases in depreciation and amortization expense and the non-cash
settlement of the lawsuit, partially offset by the net increase in revenues
compared to operating costs. Cash flows from operating activities improved to
$(4.7) million from $(12.9) million primarily due to an improvement in earnings
before interest, taxes, depreciation and amortization of $3.6 million. Also the
net change in assets and liabilities was favorable in 1996 as compared to 1995
primarily due to prepaid expenses and other assets which decreased $3.2 million
in 1996 as compared to 1995.
Gain (loss) on Sales and Writedown of Assets
- --------------------------------------------
Gain (loss ) on sales and writedown of assets primarily includes a $1.2
million writedown of notes receivable and other assets to net realizable value,
partially offset by a $.1 million gain on sale of Champaign and a $.2 million
gain on sale of wireless cable frequency rights in Tulsa, Oklahoma.
Interest Expense
- ----------------
Interest expense was $7.1 million and $20.5 million for the three and nine
months ended September 30, 1996 compared to $5.9 million and $8.9 million in the
corresponding 1995 periods. The increase in interest expense from 1995 to 1996
was primarily a result of the issuance of the Senior Discount Notes in May 1995.
Non-cash interest expense totaled $6.8 million and $19.8 million for the three
and nine month periods ended September 30, 1996 of which $6.7 million and $19.3
million was recorded on the Senior Discount Notes.
Interest Income and Other
- -------------------------
Interest income and other was $1.3 million and $4.2 million for the three
and nine months ended September 30, 1996 compared to $3.0 million and $4.7
million in the corresponding 1995 periods, 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 Senior Discount Notes in May 1995.
Interest income will decrease in future periods as those proceeds continue to be
used by the Company. Other income (loss) in 1996 includes $.3 million for a
buyout of a lease in the St. Louis system.
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 and nine months ended September
30, 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 and the Albuquerque joint venture.
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.
11
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Loss
- --------
For the three and nine month periods ended September 30, 1996, the Company
incurred net losses of approximately $18.3 million and $51.8 million,
respectively, compared to $13.9 million and $32.2 million for the comparable
1995 periods. 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 $110.0
million at September 30, 1996 from $135.7 million at December 31, 1995, a
decrease of $25.7 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, the acquisition of BTA licenses, 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 $11.9 million for capital
expenditures other than acquisitions compared to $25.9 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 ($110.0 million at
September 30, 1996).
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 analog 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 using analog
technology 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 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 headend/transmission facilities, 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 1. Legal Proceedings
Cable Equity Partners, Inc. ("CEP") had filed a complaint against the
Company and People's Choice TV of Houston, Inc. in the state courts of Texas.
The complaint alleged causes of action based upon slander, libel and tortious
interference with contractual relations. CEP had claimed damages in excess of
$20 million. The Company and its counsel had vigorously defended against this
lawsuit. While the Company and its counsel believes that this lawsuit was
brought without merit, to avoid the risks inherent in a jury trial, the Company
elected to settle this lawsuit. The parties reached a settlement agreement at a
mediation held on October 21, 1996. The terms of the settlement provide for a
payment of $1.0 million cash to CEP and for CEP to receive 56,000 shares of
restricted Company common stock. All of the cash settlement amount will be paid
by the Company's insurance carrier.
Item 2. Changes in Securities
(c) On June 27, 1996, Alda Communications Corp. ("ACC"), an affiliate of
the Company, was merged into the Company. The primary asset of ACC was 661,304
shares of Company common stock. Such shares are now treasury shares of the
Company. In connection with the closing of this merger, the stockholders of ACC
were issued a total of 661,304 shares of Company common stock. These shares were
issued pursuant to the exemption from registration under Section 4(2) of the
Securities Act of 1933.
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: November 7, 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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