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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-21920
PEOPLE'S CHOICE TV CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1366643
(State of Incorporation) (IRS Employer Identification No.)
2 Corporate Drive, Shelton, Connecticut 06484
(Address of principal executive offices & zip code)
Registrant's telephone number: (203) 925-7900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 per share par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X.
---
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $ 48,892,676 as of March 19, 1997 based upon the
last sales price per share of the Registrant's Common Stock, as reported on the
NASDAQ National Market System on such date. As of March 19, 1997, 12,924,817
shares of Common Stock of the Registrant were outstanding.
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
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People's Choice TV Corp. (the "Company" or "PCTV", which terms, as
used herein, include its consolidated subsidiaries unless the context indicates
otherwise) was incorporated in Delaware on April 22, 1993. The Company and its
predecessors have been engaged in the wireless cable television business since
1988.
BTA Auction
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On Thursday, March 28, 1996, the Federal Communication Commission ("FCC")
auction for commercial wireless cable license authorizations for Basic Trading
Areas ("BTAs") concluded. The BTA authorizations will allow the Company to
expand its existing coverage of commercial wireless channels throughout the
geographic boundaries of the BTA, to license unallocated commercial wireless
channels in the Company's BTA's and to implement technological advances, such as
wireless return path delivery, cellular engineering design and flexible use
services. The Company purchased 28 BTA authorizations which contain an
estimated 12,054,005 television households, including each of the BTA
authorizations for the Company's nine primary markets. The purchase price was
$12,894,521, which equals $1.07 per household compared with the auction average
of $2.51 per household. The Company was entitled to a small business discount
of 15%, reducing the purchase price to the amount of $10,960,343. The discount
or portions thereof would be required to be refunded to the FCC if any BTA
authorizations are sold within five years of issuance to a company not
qualifying as a small business.
The payment terms require (i) a 20% downpayment ($2,192,069), of which
$1,911,770 has been paid, (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
($6,525,896 as of December 31, 1996, increasing to $8,768,274 at the time all of
the BTA authorizations have been issued) 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 FCC has issued to the Company 26 of the 28 BTA authorizations which
the Company was awarded in the auction. Applications for the issuance of the
Milwaukee, WI and Columbus, IN BTA authorizations are currently pending at the
FCC. The 28 markets for which the Company received BTA licenses (including the
pending Milwaukee and Columbus licenses) are listed below:
<TABLE>
<S> <C> <C>
Phoenix, AZ Tucson, AZ Sierra Vista, AZ
Yuma, AZ Nogales, AZ Juneau, AK
Chicago, IL Kankakee, IL Indianapolis, IN
Anderson, IN Bloomington, IN Columbus, IN
Lafayette, IN Kokomo, IN Marion, IN
Muncie, IN Vincennes, IN Detroit, MI
Flint, MI Saginaw-Bay City, MI Kansas City, MO
St. Louis, MO Rolla, MO Houston, TX
Milwaukee, WI Janesville-Beloit, WI La Crosse, WI
Madison, WI
</TABLE>
Proposed Exchange of the Kansas City market for the Salt Lake City market
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The Company has an agreement with CS Wireless Systems, Inc. ("CS") by
which the Company would transfer to CS its Kansas City, Missouri wireless cable
television assets and in exchange CS would transfer to the Company its Salt Lake
City, Utah wireless cable television assets and certain additional wireless
cable television assets in Provo, Utah. By acquiring the Salt Lake City, Utah
market, the Company would be adding to its southwestern markets which include
Phoenix and Tucson, Arizona and an investment in the Albuquerque, New Mexico
wireless cable television system. The transaction will involve an exchange of
rights to (including applications for) 24 wireless channels in Kansas City,
rights to (including applications for) 28 wireless channels in
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Salt Lake City, and will include the BTA licenses for both markets. The Company
will also receive the BTA license to Provo/Orem, UT. The Company anticipates
that this transaction will close during 1997.
Acquisition of Sat-Tel Services, Inc.
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Sat-Tel Services, Inc. ("Sat-Tel") is the exclusive provider of customer
installations and related technical services for the Company. Prior to January
26, 1996, Sat-Tel was independently owned. On January 26, 1996, the Company
acquired all of the capital stock of Sat-Tel whereby Sat-Tel became a wholly-
owned subsidiary of the Company. The purchase price was comprised of $3.75
million in cash and a $1.25 million promissory note, which was paid in full on
January 26, 1997. Robert Young, President of Sat-Tel, has become a Senior Vice
President of the Company with responsibility for customer installations and
related technical services.
(b) Financial Information About Industry Segments
---------------------------------------------
The Company operates in the wireless cable television industry which is
its only business segment. Selected financial information with respect to the
Company's wireless cable television business is set forth in the consolidated
financial statements filed under Item 8 in Part II of this Annual Report on Form
10-K.
(c) Narrative Description of Business
---------------------------------
Company Overview
People's Choice TV Corp. is a leading developer, owner and operator of
wireless cable systems. The Company's strategy is to own, develop and operate
wireless cable systems with full channel line-ups at high signal strength in
large markets. The Company's operating and targeted markets are concentrated in
the midwestern and the southwestern regions of the United States. Currently,
the Company provides service in six operating systems located in Chicago,
Detroit, Houston, Phoenix, St. Louis and Tucson (the "Operating Markets"), and
controls wireless cable channel rights in three additional markets located in
Indianapolis, Milwaukee and Salt Lake City (subject to a pending acquisition)
(the "Pre-Launch Markets"). The Company controls between 19 and 32 wireless
cable channel rights in the nine primary markets included in the Company's
Operating and Pre-Launch Markets, which collectively represent approximately 7.8
million households which the Company believes can be serviced by line-of-sight
transmission.
Business Strategy
The Company offers its customers high quality program packages which it
believes are lower priced than equivalent packages offered by its traditional
hardwire cable competitors. The Company believes that its customers enjoy a
higher level of signal reliability and equivalent or superior picture quality
compared to traditional hardwire cable customers. To achieve such reliability
and picture quality in its large markets, the Company invests in state-of-the-
art headend/transmission facilities. The Company also provides an impulse pay-
per-view converter to its customers with a programmable remote control which
includes a VCR timer, advance event ordering capability, a parental control
option and other features. In addition, the Company offers innovative
programming packages in its markets, such as its multi-channel pay-per-view-
service, Home Video Store(R), and its innovative sports service, Team-TV(R).
The Company transmits programming through the air in a direct line-of-
sight from a headend/transmission facility to each customer's receiving antenna
by utilizing up to 200 megahertz ("MHz") of radio spectrum allocated by the FCC.
Unlike traditional hardwire cable systems, wireless cable systems do not require
extensive coaxial cable networks, amplifiers and related equipment ("Cable
Plant"). As a result, capital costs and plant-related operating costs are less
than those of a typical hardwire cable system. In addition, the elimination of
Cable Plant utilized by traditional hardwire cable operators to deliver
television signals provides wireless cable operators with operating advantages,
including: (i) a substantial portion of capital expenditures are demand driven
and are not made until shortly before or after a customer is added, (ii)
maintenance requirements in comparison to hardwire cable operators are reduced
because of the elimination of Cable Plant, (iii) reliability is improved due to
fewer
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points of failure and therefore fewer potential transmission disruptions,
(iv) an equivalent or higher quality picture is provided as a result of the
elimination of signal noise inherent in a Cable Plant and (v) flexibility to
introduce advanced technologies (including digital compression) is enhanced
because new equipment only has to be installed at the customer site and the
Company's headend/transmission facility.
In its Operating Markets, the Company currently transmits programming
services utilizing analog technology. Analog technology permits a standard 6
MHz wireless cable television frequency to carry one full-motion audio/video
programming service, like ESPN or HBO, at a time. During 1997, the Company
expects to begin the implementation of digital compression technology in one of
its systems. One of the benefits of digital compression technology is that the
capacity of each wireless cable television frequency after compression is
expected to be increased by four to ten times. Digital compression technology
is expected to enable wireless cable systems to offer more than 100 channels of
video programming services, compared to only 33 programming services over the
analog wireless cable channels available today. It may also allow the Company
to provide data delivery services, such as high speed internet access. The
Company has determined not to seek to add additional analog customers to its
systems. The implementation of digital compression technology will permit the
Company to offer many additional video programming services and the Company
believes that such increased video services will enhance its ability to attract
and retain customers. Despite the implementation of digital technology, there
can be no assurance that the Company 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.
The Company's ability to commence digital wireless cable service in 1997
may be affected by a number of factors. First, although the Company has entered
into a letter of intent with an equipment supplier for the purchase of digital
compression equipment, no such equipment has yet been delivered to the Company
and the delivery of such equipment could be delayed for one or more reasons.
Second, the Company will need to obtain certain FCC approvals to implement
digital transmission on certain of the channels in its markets and the Company
will need to secure the consent of certain adjacent market licensees for these
approvals to be granted. Third, although the Company has sufficient capital
resources to launch one of its markets with digital compression technology, the
purchase of digital receiving equipment for customers will involve substantial
capital expenditures by the Company and therefore the Company will need
additional financings to fully develop additional markets with digital
compression technology, and it is uncertain if and on what terms such financings
will be available. Fourth, no wireless cable system operator has yet made a
significant implementation of digital compression technology and there can be no
assurance that the implementation and optimization of digital compression
technology in the Company's wireless markets will not take longer than
anticipated. There may be additional factors, that the Company is unaware of at
this time, that may affect the Company's ability to implement digital technology
in one of its markets in 1997.
The Company has executed a letter of intent with an affiliate of General
Instrument Corporation ("GIC") pursuant to which the Company is negotiating an
agreement with GIC by which the Company would purchase up to 300,000 digital set
top converters and certain digital transmission equipment from GIC over a three
year period. For further discussion of the proposed agreement with GIC, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Wireless Cable Technology
Wireless cable can provide customers the same or superior video
television service as that of traditional hardwire cable. Like a traditional
hardwire cable system, wireless cable receives programming at a headend. Unlike
traditional hardwire cable systems, however, the programming is then
retransmitted by microwave transmitters from an antenna located on a tower
associated with the headend to a small receiving antenna located on a customer's
rooftop. To ensure the clearest line-of-sight possible in the Company's
markets, the Company has placed, and plans to place, such towers on top of tall
buildings or accessible mountain tops located in such markets. There exists, in
each of the Company's operating and targeted markets, a number of acceptable
locations for the placement of its towers and the Company does not believe that
the failure to secure any one location for such placement in any single market
will materially affect the Company's operations in such market. At the
customer's location, the signals are converted to frequencies that can pass
through conventional coaxial cable into a descrambling converter located on top
of a television set. Wireless cable requires a clear line-of-sight, because the
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microwave frequencies used will not pass through dense foliage, hills,
buildings, or other obstructions. Since wireless cable systems do not require
an extensive cable distribution system, wireless cable operators can provide
customers with a high quality picture resulting in a reliable signal with few
transmission disruptions at a significantly lower system capital cost per
installed customer than traditional hardwire cable systems.
Regulatory Environment
General. The wireless cable industry is subject to regulation by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The Communications Act empowers the FCC, among other things, to issue,
revoke, modify and renew licenses within the spectrum available to wireless
cable; to approve the assignment and/or transfer of control of such licenses; to
approve the location of wireless cable systems; to regulate the kind,
configuration and operation of equipment used by wireless cable systems; and to
impose certain equal employment opportunity and other reporting requirements on
wireless cable operators.
The FCC has determined that wireless cable systems are not "cable
systems" for purposes of the Communications Act. Accordingly, a wireless cable
system does not require a local franchise and is subject to fewer local
regulations than a hardwire cable system. Moreover, all transmission and
reception equipment for a wireless cable system can be located on private
property; hence, there is no need to make use of utility poles or dedicated
easements or other public rights of way. Although wireless cable operators
typically have to lease the right to use wireless cable channels from the
holders of channel licenses, unlike hardwire cable operators they do not have to
pay local franchise fees. Legislation has been introduced in some states to
authorize state and local authorities to impose on all video program
distributors (including wireless cable distributors) a tax on the distributor's
gross receipts comparable to the franchise fees cable operators pay. While the
proposals vary among states, the bills all would require, if passed, as much as
5% percent of gross receipts to be paid by wireless distributors to local
authorities. The City of Chicago has adopted an ordinance which imposes a 7%
amusement tax on the gross receipts of providers of subscription video services.
This tax has been challenged by certain hardwire cable operators in Chicago and
the Company may challenge the tax in the future. The outcome of any such legal
challenge is uncertain. Pursuant to federal legislation, providers of video
programming services utilizing direct to home satellite systems are exempt from
such tax, but such exemption is not currently available to the Company.
In each geographic service area of the 50 largest markets, 33 analog
channels are available for wireless cable (in addition to any local off-air
VHF/UHF broadcasts that are not retransmitted over the microwave channels). In
each geographic service area of all other markets, 32 analog channels are
available for wireless cable (in addition to any local off-air VHF/UHF
broadcasts that are not retransmitted over the microwave channels). Except in
limited circumstances, 20 of these analog channels in each of these geographic
service areas can generally only be licensed to qualified non-profit education
organizations ("ITFS Channels"), and, in general, each of these channels must be
used a minimum of 20 hours per week for instructional programming. The
remaining "excess air time" on an ITFS Channel may be leased to wireless cable
operators for commercial use, without restrictions (other than the right of the
ITFS license holder, at its option, to recapture up to an additional 20 hours of
air time per week for educational programming). Programs such as C-SPAN and The
Discovery Channel as well as internet service can qualify as educational
programming and thereby facilitate greater usage by the Company of an ITFS
Channel. In addition, lessees of ITFS's "excess air time", including the
Company, generally have the right to transmit to their customers the educational
programming provided by the lessor at no incremental cost. The remaining 13
analog channels, commonly referred to as Multichannel Multipoint Distribution
Service and Multipoint Distribution Service (collectively "MDS") or commercial
channels, available in most of the Company's markets are made available by the
FCC for full time usage without programming restrictions.
On July 10, 1996 the Commission issued an order approving interim use of
digital transmissions for MDS and ITFS channels. This order waived certain rules
pertaining specifically to analog use of such channels until further testing can
be conducted and a future rulemaking adopting the final rules for such use is
completed. Digital transmission is specifically limited to use of two types of
digital modulation, Quadrature Amplitude Modulation ("QAM") and Vestigial
Sideband ("VSB") up to the densities of 64-QAM and 8-VSB. MDS and ITFS licensees
may utilize higher modulation densities provided that they submit supplemental
measurement data specific to these higher modulation levels in their
applications. Digital compressed techniques enable wireless cable operators and
MDS or ITFS licensees to increase their channel capacity and service offerings
using existing licenses.
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All modification applications requesting the use of digital transmissions
by either MDS or ITFS applicants are considered minor changes and will not have
to wait the entire 30-day notice period in which to be processed. Thus, all such
ITFS applications need not wait until the Commission opens a "filing window" to
be submitted. Any objections to an MDS or ITFS digital application may be
submitted informally to the Commission at any time prior to the grant of such
application.
During the interim period governed by this ruling, the Commission will
not require additional ITFS programming by licensees who expand their spectrum
capacity by utilizing digital compression technology. The rules will continue to
provide interference protection to licensees, even when digital technology is
employed. Any conflict resulting among adjacent market stations must be resolved
by agreement between the two parties or neither party will be granted the
authority to modify its operations to employ digital technology.
However, this is an interim order and any changes to a wireless cable
system under this order may be subject to additional changes when the final
rules regarding digital transmissions are introduced. The Company has filed
numerous applications for authority to convert to digital transmission at its
option, some of which have already been granted in the markets of Chicago,
Detroit, and Phoenix.
Licensing Procedures. Although the FCC has utilized a number of
different selection procedures, by 1990, the FCC had established a procedure
whereby the FCC's selection among more than one acceptable commercial license
application filed on the same day was determined by a lottery. However, the
lottery procedure was later replaced by an auction procedure. Generally, once a
commercial license application is approved by the FCC and the applicant
satisfies any conditions imposed by the FCC, a conditional license results
allowing construction of the station to commence. Construction generally must be
completed within one year of the date of grant of the conditional license
whereupon a full term license will be issued. All commercial licenses expire on
May 1, 2001 and must then be renewed and may be revoked for cause in a manner
similar to other FCC licenses. The holder of an FCC license has the right to
renew such license at its expiration date provided that the license holder has
complied with the terms of the license and files appropriate renewal
applications in a timely manner. ITFS licenses are issued for terms of 10 years.
FCC rules prohibit the sale for profit of a conditional commercial license or of
a controlling interest in the conditional license holder prior to construction
of the station or, in certain instances, prior to the completion of one year of
operation. The FCC, however, does permit the leasing of 100% of a commercial
license holder's spectrum capacity to a third party and the granting of options
to purchase a controlling interest in a license once the required license
holding period has lapsed.
Applications for new MDS stations may be filed at any time but only by
BTA authorization holders (discussed below). Applications for new ITFS licenses
and for major ITFS modifications by qualified ITFS applicants may only be made
during specified "filing windows", the first of which occurred in October of
1995.
In June of 1995, the FCC adopted a competitive bidding (auction)
mechanism for the award of initial licenses for MDS channels. The auction was
completed on March 28, 1996. Successful bidders received the exclusive right to
apply for any and all available MDS frequencies in the entire BTA. However, all
previously existing MDS licensees or applicants are protected since the blanket
BTA authorization allows the submission of applications for MDS channels within
the BTA only upon demonstrating interference protection to the 35 mile radius
protected service areas of incumbent MDS and ITFS stations licensed, or for
which there is an application for a license pending as of September 15, 1995,
along with any modified license or application for modification of such a
license filed prior to the BTA application filing. A BTA license holder must
show coverage of at least two-thirds of the population of the area within its
control within five years of receiving the BTA authorization. If the BTA holder
is not serving any part of the BTA at the end of 5 years, it will forfeit the
BTA authorization and will not be eligible to regain it. Likewise, if there are
unserved areas in the BTA, the Commission will partition the area and hold an
auction for that partitioned area. Again, the original holder of the BTA will
not be eligible to bid on the partitioned area. ITFS licenses are exempt from
the auction process and applications for ITFS licenses are expected to continue
to be awarded according to the FCC's existing "filing window" system and
comparative criteria. For a discussion of the BTA authorizations acquired by
the Company, see "Business--General Development of Business--BTA Auction" above.
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Applications for renewal of MDS and ITFS licenses must be filed within a
certain period prior to expiration of the license term, and petitions to deny
applications for renewal may be filed during certain periods following the
filing of such applications. Licenses are subject to revocation or cancellation
for violation of the Communications Act or the FCC's rules and policies.
Conviction of certain criminal offenses may also render a licensee or applicant
unqualified to hold a license. The Company's lease agreements with license
holders typically require the license holders, at the Company's expense, to use
their best efforts, in cooperation with the Company, to make various required
filings with the FCC in connection with the maintenance and renewal of licenses.
The Company believes this reduces the likelihood that a license would be
revoked, canceled or not renewed by the FCC.
Wireless cable transmissions are governed by FCC regulations dealing with
interference and reception quality. These regulations specify important signal
characteristics such as modulation (i.e., AM/FM) or encoding formats (analog or
digital). The FCC also regulates transmitter locations and signal strength.
The operation of a wireless cable television system requires the collocation of
a commercially viable number of transmitters and operations with common power
levels. In order to commence the operations of the Company's targeted markets,
the Company has been required to file applications with the FCC to relocate and
modify existing transmission facilities. Many of the necessary FCC approvals
have been received and the Company believes that the necessary remaining FCC
approvals will be obtained; however, there can be no assurance that these
approvals will be forthcoming or timely.
Under current FCC regulations, a wireless cable operator generally may
transmit anywhere within the line of sight of its transmission facility,
provided that its signal does not violate interference standards in the FCC
protected service area of another wireless license holder. Existing wireless
license holders generally are protected from interference within 35 miles of the
transmission site; however, if that site is moved, the protection remains only
within the original 35 mile zone. Furthermore, protection to the service area
of licenses obtained through the auction is based upon an entirely different
engineering concept which may not provide an equivalent amount of protection.
This new concept requires that BTA holders must protect adjacent BTA holders by
meeting a power flux density restriction at the BTA boundary or in the case of
MDS incumbents, merely by restricting the power flux density at the border of
the incumbent's own protected service area. In some instances, this could mean
less protection afforded to BTA holder stations.
The 1992 Cable Act. On October 5, 1992, Congress enacted the 1992
Cable Act, which imposes additional regulation on traditional hardwire cable
operators and permits regulation of rates in markets in which there is no
"effective competition". The 1992 Cable Act, among other things, directs the
FCC to adopt comprehensive new federal standards for local regulation of certain
rates charged by traditional hardwire cable operators. The legislation also
provides for deregulation of traditional hardwire cable in a given market once
other multi-channel video providers offer comparable programming to at least 50%
of the households in the franchise area and serve, in the aggregate, at least
15% of the households in the cable franchise area. Rates charged by wireless
cable operators, typically already lower than traditional hardwire cable rates,
are not subject to regulation under the 1992 Cable Act.
While current FCC regulations are intended to promote the development
of a competitive television subscription industry, the rules and regulations
affecting the wireless cable industry may change, and any future changes in FCC
rules, regulations, policies and procedures could have a material adverse effect
on the Company. In addition, a number of legal challenges to the 1992 Cable Act
and the regulations promulgated thereunder have been filed, both in the courts
and before the FCC. These challenges, if successful, could result in an
increase in the Company's operating costs and otherwise have a material adverse
effect on the Company. In particular, those sections of the 1992 Cable Act
which prohibit discriminatory or unfair practices in the sale of satellite
programming to competing multi-channel video programming distributors have been
challenged. The Company's costs to acquire satellite programming may be
affected by the outcome of those challenges.
1996 Telecommunications Act. In February 1996, Congress passed and
the President signed into law the Telecommunications Act of 1996 (the "1996
Act"). Some of the provisions of the 1996 Act that directly affect wireless
cable television operators are discussed below. Beyond those specific
provisions, the 1996 Act contains provisions intended to increase competition in
the telephone, radio, broadcast television, and hardwire and wireless cable
television businesses. The long term effect of the 1996 Act cannot be
determined at this time, although
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competition in the video programming delivery industry is likely to increase as
a result of the adoption of the 1996 Act.
The 1996 Act changes the definition of cable television system in the
1984 Cable Act so that the definition excludes any systems that serve customers
without using any public right of way. This change will allow wireless cable
system operators to wire together apartment complexes and other similar
properties, as long as the wiring system does not cross a public right-of-way,
without the need to apply for a local cable television franchise.
The 1996 Act expands the effective competition test for deregulating
franchised cable operator basic and cable programming services tier rates to
include the provision of comparable video programming services directly to
customers in a cable operator's franchise area by a telephone company or its
affiliate or any multichannel video programming distributor using the facilities
of such carrier or its affiliate. The 1996 Act also deregulates cable
programming service rates for small cable operators, or such operator's basic
service tier if that was the only tier subject to regulation as of December 31,
1994, and deregulates cable programming services rates for all cable operators
as of March 31, 1999. These changes may limit or eliminate the extent to which
a particular cable operator is subject to rate regulation.
The 1996 Act changed the rules with respect to the 1992 Act's uniform
rate requirement and multiple dwelling units ("MDUs"). Prior to the adoption of
the 1996 Act, franchised cable operators were required to offer uniform rates
within franchise areas and with respect to bulk service contracts for MDUs. Now
franchised cable operators may establish different rates across franchise areas
in which they are subject to effective competition and may offer bulk service
contracts to MDUs without any uniform pricing requirement, except that the
franchised cable operator may not engage in predatory pricing, which concept is
undefined in the 1996 Act.
The 1996 Act instructs the FCC to adopt regulations to prohibit
restrictions that impair customers' ability to receive video programming
services through reception devices. The FCC now prohibits any restriction that
impairs the installation, maintenance or use of an antenna used for reception of
wireless cable services that is one meter or less in diameter or diagonal
measurement. To impair means to unreasonably delay, prevent or increase the cost
of installation, maintenance or use or to preclude reception of an acceptable
quality signal. Prohibited regulations include, but are not limited to, any
state or local law or regulation, including zoning, land use, or building
regulation, or any private covenant, homeowner's association rule or similar
restriction on property within the exclusive use or control of the antenna user
where the user has a direct or indirect ownership interest in the property. The
FCC has adopted certain regulations in according to this mandate.
The 1996 Act eliminated the cable/broadcast cross-ownership and
cable/telco cross ownership prohibitions, freeing broadcasters and telcos to own
cable systems within their service areas. Pursuant to the 1996 Act the FCC
established rules governing Open Video Systems, the operators of which among
other things, must provide non-discriminatory access to video programmers with
regard to carriage.
In general, and subject to exemption or waiver, hardwire cable operators
are prohibited from holding the license for or leasing capacity from MMDS or
ITFS channels in areas in or about their franchise areas. Additionally, the FCC
is presently considering a rule change that would allow up to 10% common
ownership between franchised and wireless cable companies serving the same area.
Other Regulations. Wireless cable license holders are subject to
regulation by the FAA with respect to the construction of transmission towers
and to certain local zoning regulations affecting construction of towers and
other facilities. There may also be restrictions imposed by local authorities.
There can be no assurance that the Company will not be required to incur
additional costs in complying with such regulations and restrictions.
Due to the regulated nature of the subscription industry, the Company's
growth and operations may be adversely impacted by the adoption of new, or
changes to existing, laws or regulations or the interpretations thereof.
Copyright. Under the federal copyright laws, permission from the
copyright holder generally must be secured before a video program may be
retransmitted. Under Section 111 of the Copyright Act, certain "cable systems"
are entitled to engage in the secondary transmission of broadcast programming
without the prior
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permission of the holders of copyrights in the programming. In order to do so, a
cable system must secure a compulsory copyright license. Such a license may be
obtained upon the filing of certain reports with and the payment of certain fees
to the U.S. Copyright Office. In 1994, Congress enacted the Satellite Home
Viewer Act of 1994 which enables operators of wireless cable television systems
to rely on the cable compulsory license under Section 111 of the Copyright Act.
Under the retransmission consent provisions of the 1992 Cable Act,
wireless and hardwire cable operators seeking to retransmit certain commercial
television broadcast signals must first obtain the permission of the broadcast
station in order to retransmit the station's signal. However, wireless cable
systems, unlike hardwire cable systems, are not required under the FCC's "must
carry" rules to retransmit a specified number of local commercial television or
qualified low power television signals. Although there can be no assurances that
the company will be able to obtain requisite broadcaster consents, the Company
believes in most cases it will be able to do so for little or no additional
cost.
Competition
Wireless cable television operators face competition from a number of
sources, including potential competition from emerging trends and technologies
in the subscription television industry, some of which are described below.
Hard-Wire Cable. The Company's principal subscription television
competitors in each market are traditional hard-wire cable operators. Hard-wire
cable companies are generally well established and known to potential customers
and have significantly greater financial and other resources than the Company.
The hard-wire cable companies competing in the Company's markets generally offer
more channels of programming than the Company.
Direct-to-Home ("DTH"). DTH satellite television services originally
were available via satellite receivers which generally were 7 to 12 foot dishes
mounted in the yards of homes to receive television signals from orbiting
satellites. Until the implementation of encryption, these dishes enabled
reception of any and all signals without payment of fees. Having to purchase
decoders and pay for programming has reduced their popularity, although the
Company will to some degree compete with these systems in marketing its
services.
Direct Broadcast Satellite ("DBS"). DBS involves the transmission of an
encoded signal direct from a satellite to the customer's home. Because the
signal is at a higher power level and frequency than most satellite-transmitted
signals, its reception can be accomplished with a relatively small receiving
dish mounted on a rooftop or in the yard. DBS service is now available from
DirecTV, Inc., United States Satellite Broadcasting Company, Inc., Prime Star
Partners, and Echostar Communications Corporation. MCI Communications recently
acquired high power DBS spectrum at an FCC auction and intends to offer
nationwide DBS service with its partner News Corp.. In addition, News Corp. has
announced that it intends to make a significant investment in Echostar. The
growth of DBS service has been significant since such service was first launched
and the Company expects that the DBS service providers will continue to be
significant competitors for video programming customers.
Private Cable. Private cable is a multi-channel subscription television
service where the programming is received by satellite receiver and then
transmitted via coaxial cable throughout private property, often multiple
dwelling units ("MDUs"), without crossing public rights of way. Private cable
operates under an agreement with a private landowner to service a specific MDU,
commercial establishment or hotel. The FCC amended its rules to provide point-
to-point delivery of video programming by private cable operators and other
video delivery systems in the 18 GHz band. Private cable operators compete with
the Company for exclusive rights of entry into larger MDUs.
Telephone Companies. The 1996 Cable Act broadened the ability for local
exchange carriers ("LECs"), including the Regional Bell Operating Companies
("RBOC's"), to acquire and develop cable television systems. Bell Atlantic,
NYNEX, BellSouth, and Pacific Telesis have all made acquisitions of and
investments in wireless cable television systems. Ameritech and other RBOC's
have begun acquiring hardwire cable television franchises. In addition, in
1996, US West Media Group closed on an agreement to acquire Continental
Cablevision Inc., one of
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the largest hardwire cable operators in the U.S. The Company anticipates that
the RBOC's and other LEC's will soon become significant competitors for video
programming customers.
Local Off-Air VHF/UHF Broadcasts. Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox) provide free programming to
the public. Potential customers may forego subscription television and only
receive free off-air programming.
Local Multi-Point Distribution Service ("LMDS"). The FCC has
redesignated portions of the 28 Ghz and 31 Ghz bands to create a new video and
data delivery service referred to as LMDS. The FCC will award licenses in each
of 493 BTAs pursuant to auctions. Final rules for LMDS have been established
but no date for the auction has been scheduled. While the Company anticipates
that LMDS may become a viable competitor for video programming customers, until
more LMDS systems are in operation, the level of competition that LMDS may
provide cannot be determined.
The Company's Marketplace
Currently, the Company provides service in six operating systems located
in Chicago, Detroit, Houston, Phoenix, St. Louis and Tucson (the "Operating
Markets") and controls wireless cable channel rights in three additional markets
located in Indianapolis, Milwaukee and Salt Lake City (subject to a pending
acquisition) (the "Pre-Launch Markets"). The Company controls between 19 and 32
wireless cable channel rights in the nine primary markets included in the
Company's Operating and Pre-Launch Markets, which collectively represent
approximately 7.8 million households which the Company believes can be serviced
by line-of-sight transmission with existing analog technology. The Company owns
a 27% interest in a partnership that operates a wireless cable television system
in Albuquerque, New Mexico, which the Company estimates has 220,000 line of
sight households. A description of the Company's principal markets is set forth
below.
<TABLE>
<CAPTION>
Estimated Signal Estimated Line-of-Sight Number of Customers as of
Markets Area Households Households December 31, 1996
- ------- ----------------- ----------------------- -------------------------
<S> <C> <C> <C>
Chicago 2,836,000 2,275,000 19,000
Detroit 1,740,000 1,368,000 3,100
Indianapolis (1) 1,233,000 760,000 To be launched
Houston 1,105,000 866,000 18,200
Phoenix (2) 1,014,000 910,000 3,400
St. Louis 908,000 609,000 6,100
Milwaukee 650,000 423,000 To be launched
Salt Lake City(3) 359,000 320,000 To be launched
Tucson 314,000 284,000 28,000
--------- --------- ------
Total 10,159,00 7,815,00 77,800
</TABLE>
(1) Includes Indianapolis and certain smaller markets surrounding Indianapolis
in which the Company has significant wireless cable frequency rights.
(2) Includes Casa Grande, Arizona, which will be served by a separate transmit
site.
(3) The acquisition of this market is pending.
Chicago. The Company offers 44 channels (including 12 off-air VHF/UHF
channels) in the Chicago market through its subsidiary Preferred Entertainment,
Inc. ("PEI"). PEI controls the rights to 32 wireless channels and transmits at
50 watts from the Sears Tower, the tallest building in Chicago.
Detroit. The Company offers 20 channels (including 8 off-air VHF/UHF
channels) in the Detroit market through its subsidiary People's Choice TV of
Detroit, Inc. ("PCTV Detroit"). The Company owns 100% of the
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common stock of PCTV Detroit. PCTV Detroit controls the rights to 26 wireless
cable channels and transmits at 10 watts.
The Company recently received digital authorizations from the FCC on 14
of its ITFS wireless cable television channels. These authorizations will allow
the Company to use these channels for digital video, data transmission and
internet service. The Company has additional applications on file at the FCC to
increase power, adjust the antenna configuration, and other matters with respect
to its 26 Detroit wireless channels. Subject to the receipt of certain
interference agreements, the Company will be able to provide digital video, data
transmission and internet service on its 12 MMDS channels in the Detroit market
and colocate those channels with the 14 ITFS channels. Because the Detroit
market is within 50 miles of the Canadian border, wireless cable television
frequency specifications are subject to a technical coordination agreement
between the FCC and the Canadian Radio and Television Commission ("CRTC").
Currently, a 1989 agreement between the FCC and CRTC regulates such cross-border
transmission interference issues. The Company expects that interference issues
arising as a result of Detroit's proximity to the Canadian border will be
resolved pursuant to this agreement. There can be no assurance, however, that
the requested applications will be approved and that the Company will be able to
modify its Detroit wireless cable television frequencies as currently proposed.
Houston. The Company offers 43 channels (including 12 off-air VHF/UHF
channels) in the Houston market through its wholly-owned subsidiary, People's
Choice TV of Houston, Inc. ("PCTV Houston"). PCTV Houston controls the rights
to 31 wireless cable channels and transmits at 100 watts of power from one of
the tallest buildings in Houston.
Indianapolis. Through its approximately 88% owned subsidiary, Wireless
Cable of Indianapolis, Inc. ("WCI"), PCTV controls the rights to 32 wireless
cable channels in the Indianapolis market. WCI also holds significant wireless
cable frequency rights in Anderson, Bloomington, Lafayette and Kokomo, Indiana,
which markets are in proximity to the Indianapolis market.
Milwaukee. The Company controls the rights to 19 wireless channels in the
Milwaukee market through its wholly-owned subsidiary, People's Choice TV of
Milwaukee, Inc. ("PCTV Milwaukee").
Phoenix. The Company offers 39 channels (including 6 off-air VHF/UHF
channels) in the Phoenix market through its wholly-owned subsidiary, People's
Choice TV of Phoenix, Inc. ("PCTV Phoenix"). PCTV Phoenix controls the rights
to 32 wireless cable channels and transmits at 100 watts.
Salt Lake City. The Company has a pending transaction to acquire the Salt
Lake City, Utah market in exchange for its Kansas City market. See "Business--
General Development of Business--Proposed Exchange of the Kansas City market for
the Salt Lake City market." Upon the closing of this acquisition, the Company
will control the rights to 20 wireless cable channels in the Salt Lake City
market and will also have the rights to pending applications at the FCC for 8
additional channels. There can be no assurance that this acquisition will be
successfully consummated.
St. Louis. The Company offers 31 channels (including 6 off-air VHF/UHF
channels) in the St. Louis market through its wholly-owned subsidiary, People's
Choice TV of St. Louis, Inc. ("PCTV St. Louis"). PCTV St. Louis controls the
rights to 29 wireless channels and transmits at 200 watts.
Tucson. The Company offers 36 channels (including 4 off-air VHF/UHF
channels) in the Tucson market through its wholly-owned subsidiary, People's
Choice TV of Tucson, Inc. ("PCTV Tucson"). PCTV Tucson controls the rights to
32 leased channels. PCTV Tucson transmits these channels at 50 watts from the
top of Tower Peak in Pima County, Arizona.
Licenses and Channel Leases
The Company does not hold directly any of the FCC licenses for channels
that it uses to transmit programming; instead, it has acquired the right to
transmit under long-term leases. Some of those leases are with Alda Wireless
Holdings, Inc. and Alda Gold, Inc., corporations which are affiliates of the
Company and which are
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controlled by Matthew Oristano. The Company makes nominal payments to Alda
Wireless Holdings, Inc. and Alda Gold, Inc. for those lease rights. The other
leases are with unaffiliated third parties. The average term of the Company's
channel leases, including renewals at the Company's option, is more than ten
years.
The holder of an FCC license has the right to renew such license at its
expiration date provided that the license holder has complied with the terms of
the license and files appropriate renewal applications in a timely manner.
Although the Company anticipates that it will continue to have access to
a sufficient number of channels to operate a successful wireless cable system,
if a significant number of the Company's channel leases are not renewed, a
significant number of its pending FCC applications are not granted or the FCC
terminates, forfeits, revokes or fails to renew the authorizations held by the
Company's channel lessors, the Company may be unable to provide a viable
programming package to customers in some or all of its markets.
Licenses for wireless cable channels in most markets that meet the
Company's market selection criteria have already been granted or applied for.
Thus, in order to build and operate wireless cable systems in new markets where
it does not already control a critical number of channels, the Company will be
required to lease sufficient channel capacity from third parties. There can be
no assurance that such channel capacity will be available on terms acceptable to
the Company.
Employees
As of March 25, 1997 the Company had a total of 450 employees. None of
the Company's employees is subject to a collective bargaining agreement. The
Company has experienced no work stoppages and believes that it has good
relations with its employees.
Trademarks
The Company owns certain trademarks; however, the Company's management
believes that the Company's business is not materially dependent upon its
ownership of any single trademark or group of trademarks.
ITEM 2. PROPERTIES
The Company leases approximately 7,600 square feet for its executive
offices in Shelton, Connecticut, which lease runs through August 31, 1998 and
5,800 square feet in Tucson which lease runs through March, 2001. PCTV Tucson
leases approximately 18,000 square feet of office space in Tucson pursuant to
two leases that run through October, 1997 and March, 2001. PCTV St. Louis leases
approximately 4,000 square feet of office and warehouse space in St. Louis,
Missouri which lease runs through December, 1999. PCTV Houston owns a 48,500
square foot building in Houston, Texas. PCTV Houston also leases 6,400 square
feet of office and warehouse space in Houston which lease runs through December,
1997 and which is currently subleased to a third party. PCTV Phoenix leases
approximately 43,000 square feet in an office building in Phoenix, which lease
expires in December, 2005, the majority of which is subleased to a third party.
PCTV Phoenix also leases approximately 12,000 square feet of office and
warehouse space in Phoenix which lease continues through January, 1998. PCTV
Detroit leases approximately 1,500 square feet of office space, which lease is
currently month to month. PCTV Detroit also leases approximately 10,000 square
feet of warehouse space, which lease runs through March, 1999. In Chicago, PEI
leases approximately 10,000 square feet of office space which space serves as
PEI's primary office and which lease expires in November, 2003. In addition,
PEI leases two warehouse and office spaces totaling approximately 8,000 square
feet, which leases expire between November, 2003 and May, 2004. PCTV
Indianapolis leases a small suite in Indianapolis which lease is month to month.
Sat-Tel leases approximately 2,500 square feet in Northfield, Illinois, which
lease expires in July, 1998.
The Company expects to purchase or lease additional office space in other
cities when it expands or launches other wireless cable systems. In addition to
office space, the Company also leases or will lease space on the top of
buildings or transmission towers located in the markets where it operates or
will operate its wireless cable systems. The Company locates its wireless cable
transmitters on these buildings or towers. The Company believes
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<PAGE>
that office space and space on buildings or transmission towers currently is
readily available on acceptable terms in the markets where the Company intends
to operate wireless cable systems.
ITEM 3. LEGAL PROCEEDINGS
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 was 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 the discovery process is proceeding. 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 statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The Common Stock is traded on the NASDAQ under the symbol "PCTV" and is
designated as a NASDAQ National Market System security. The following table
sets forth, on a per share basis for the periods shown, the range of high and
low sale prices of the Common Stock as reported by NASDAQ.
<TABLE>
<CAPTION>
Closing Sale Price
------------------
1995 High Low
<S> <C> <C>
First Quarter $28.25 $15.00
Second Quarter $30.50 $24.00
Third Quarter $25.63 $18.25
Fourth Quarter $25.25 $18.00
1996
First Quarter $19.75 $15.25
Second Quarter $19.00 $12.50
Third Quarter $19.00 $11.50
Fourth Quarter $15.00 $ 5.25
</TABLE>
Holders
On March 15, 1997 there were approximately 175 holders of record of PCTV
Common Stock.
Dividends
The Company has not declared or paid any cash dividends on its common
stock since its formation in April 1993. The Company does not currently intend
to declare or pay any cash dividends on its common stock, but intends to retain
future earnings for reinvestment in its business. The indenture relating to the
Company's Senior Discount Notes due 2004 restricts the Company from paying cash
dividends on its common stock unless certain requirements are satisfied.
Since the Company generally conducts, and in the future intends to
generally conduct, operations through subsidiaries, the Company's ability to
declare or pay cash dividends is substantially dependent on the ability of the
Company's present and future subsidiaries to declare or pay cash dividends to
the Company. Certain agreements between PCTV Tucson and its lenders prohibit
PCTV Tucson from paying dividends. Similar prohibitions or restrictions may be
placed on other subsidiaries of the Company in connection with financing
arrangements made therewith.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical data for the Company and
its predecessors. The information contained herein should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto of the Company.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues $ 3,989 $ 5,780 $ 12,557 $ 26,004 $ 33,425
Depreciation and Amortization 2,207 3,328 6,606 24,627 39,041
Operating Loss (4,782) (8,189)(1) (20,573) (42,277) (50,819)
Interest Expense 1,268 1,938 2,514 15,566 27,891
Net Loss (6,124) (9,802) (19,531)(2) (53,235)(3) (75,887)
Actual and Pro Forma Net Loss
Per Common Share $(1.44)(4) $(1.73)(4) $(2.20)(2) $(5.23)(3) $(6.26)
Weighted Average Number of
Common Shares Outstanding 3,999 5,367 8,949 11,072 13,100
Balance Sheets Data:
Total Assets $16,210 $43,427 $117,532 $373,093 $326,148
Notes and Other Payables 18,395 16,659 12,116 202,317 234,431
Partner's Capital (Deficit)/
Stockholders' Equity (5,628) 20,865 82,997 96,519 14,089
</TABLE>
___________________________
Financial Statement Presentation
The consolidated financial statements include operations of People's
Choice TV Partners ("PCTV Partners") to March 10, 1993, the operations of a
successor limited partnership, People's Choice TV Partners, L.P., ("PCTV L.P."),
from March 11, 1993 to April 29, 1993 and the operations of the Company
thereafter.
The statements of operations data for the three years ended December 31,
1996 and the balance sheets data for December 31, 1995 and 1996 are derived from
the consolidated financial statements and accompanying notes of PCTV Corp. and
Subsidiaries included in Item 8 hereto.
The balance sheets data for December 31, 1995 and 1996 are derived from
the PCTV Corp. and Subsidiaries consolidated financial statements included in
Item 8 hereto.
___________________________
(1) Includes approximately $1.2 million of non-recurring, non-cash compensation
expense in connection with grants of non-qualified options made in 1993 to
certain employees.
(2) Includes an income tax benefit of $3.2 million or $.36 per share.
(3) Includes an extraordinary gain of $1.2 million or $.11 per share.
(4) The pro forma net loss per share would have been $1.40 and $1.69 for
the years ended December 31, 1992 and 1993, respectively, assuming
97,971 and 98,832 shares, respectively, had been issued at the initial
public offering price of $10.50
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<PAGE>
per share for the common stock, and the proceeds were received and used to
retire the Graphic Scanning Liquidation Corp. note on January 1, 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company's predecessor was formed in 1988 to accumulate wireless cable
channel licenses (or frequency rights) and to own, develop and operate wireless
cable systems. The Company has accumulated one of the largest portfolios of
wireless cable channel rights in the United States. The Company has rights
to between 19 and 32 wireless cable channels in Tucson, Houston, St. Louis,
Chicago, Milwaukee, Phoenix, Indianapolis, Detroit and Salt Lake City (subject
to a pending acquisition).
The Company currently operates systems in six cities. The Tucson system
(the "Tucson System") was launched in July 1991, the Houston system (the
"Houston System") was launched in March 1994, the St. Louis system (the "St.
Louis System") was launched in October 1993, the Phoenix system (the "Phoenix
System") was launched in August, 1995, the Chicago system (the "Chicago System")
was acquired in September 1995 and the Detroit system (the "Detroit System") was
acquired in August 1995.
Results of Operations
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto, and the other financial
information appearing elsewhere in this Form 10-K.
Strategic Direction
During 1996, the Company's strategy was 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 expects to implement digital video compression technology in one of
its markets in 1997. See "Business-Business Strategy" above for certain risk
factors concerning the launch of a system with digital compression technology.
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 29% and 107% for the years ended December 31, 1996 and
December 31, 1995, respectively. The increases in revenue in 1996 compared to
1995 is principally attributable to the acquisition of the Chicago and Detroit
systems, on September 8, 1995 and August 29, 1995, respectively, and the
addition of customers in the Phoenix system. The increase in revenue in 1995
compared to 1994 is principally attributable to the addition of customers in the
Houston, Tucson and St. Louis systems and the aforementioned acquisition of the
Chicago and Detroit systems. Customer count decreased 3% to 77,800 at December
31, 1996 from 80,100 at December 31, 1995 primarily due to the Company's
suspension of the growth of its analog customer base in 1996. Customer count
increased 60% to 80,100 at December 31, 1995 from 50,100 at December 31, 1994.
Service Costs
Service Costs increased 19% and 131% for the years ended December 31,
1996 and December 31, 1995, respectively. Service Costs are mainly programming
costs, channel lease payments, transmitter site rentals, cost of program guides,
repair and maintenance expenditures and service calls. Service costs increased
in 1996 primarily due to the Chicago and Detroit system acquisitions and to the
increase of customers in the Phoenix system, partially offset by a decrease of
customers in the Houston system. Service Costs increased in the Houston System
during 1995 due to the costs associated with the high level of customers
disconnected during 1995, caused in part by delays
16
<PAGE>
in implementing the Company's computerized collection system and standardized
collections procedures. The implementation of the new billing and collection
system was completed in 1995. Service Costs in the Company's other operating
systems also increased in 1995 compared to 1994 due to increases in the number
of customers and to increases in the cost of programming.
Selling, General and Administrative Costs
Selling, general and administrative costs decreased 7% for the year ended
December 31, 1996 from the prior year due to the Company suspending the growth
of its analog customer base which caused a significant decrease in expenses,
primarily salaries and related benefits due to personnel reductions and lower
bad debt expenses in the Houston and St. Louis systems. Corporate salaries and
related benefits also decreased in 1996 due to reductions in personnel.
Partially offsetting these decreases are costs associated with the
aforementioned acquisition of the Chicago and Detroit systems, the addition of
customers in the Phoenix system, costs associated with digital compression and
internet testing, and an increase in professional fees. Selling, general and
administrative costs increased 41% for the year ended December 31, 1995 from the
prior year primarily due to the development of the Houston system, the launch of
the Phoenix system, increased corporate headquarters costs, and costs relating
to the acquisition of the Chicago and Detroit systems.
Depreciation and Amortization
Depreciation and amortization expense primarily includes depreciation of
wireless systems and equipment and amortization of frequency rights.
Depreciation and amortization increased for the year ended December 31, 1996
compared to 1995 primarily due to the acquisition of the Chicago and Detroit
systems, the launch of the Phoenix system in 1995 and additional expense
recorded on certain of the St. Louis assets. Depreciation and amortization
expense was higher for the year ended December 31, 1995 compared to 1994,
primarily due to the installation of receiving equipment for new customers in
the Tucson, Houston and St. Louis systems and the acquisition of the Chicago
and Detroit systems. 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.
Non-cash Settlement of Lawsuit
The amount represents the value of 56,000 shares of restricted Company
common stock issued as part of the settlement of a lawsuit. See Item 3 - Legal
Proceedings.
Operating Loss
Operating loss was $50.8 million, $42.3 million, and $20.6 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Operating loss
increased in 1996 from 1995 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 service costs and selling,
general and administrative expenses. Operating loss increased in 1995 from 1994
principally due to increases in expenses in connection with the development of
the Company's business as described above. Cash flows used in operating
activities were $6.2 million, $17.9 million, and $14.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The reduction in 1996
compared to 1995 of $11.7 million was principally due to improvement in earnings
before interest, taxes, depreciation and amortization of $6.5 million adjusted
for the non-cash settlement of a lawsuit. 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 $6.5 million in 1996 as compared to
1995. Partially offsetting this is a decrease in interest income from 1995 to
1996 of $.9 million. Cash flows used in operating activities increased $3.2
million from 1994 to 1995 for the same reasons that operating loss increased.
17
<PAGE>
Gain/(Loss) on Sales and Writedown of Assets
The 1996 and 1995 amounts primarily include writedowns of notes
receivable of $2.8 million and $.7 million, respectively, principally associated
with the initial investment in the Chicago System, to net realizable values.
Interest Expense
Interest expense was $ 27.9 million, $15.6 million, and $2.5 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The increase in
interest expense from 1994 through 1996 was primarily a result of the issuance
of the Senior Discount Notes in May 1995. Non-cash interest expense totaled
$26.8 million, $14.7 million and $.9 million for 1996, 1995 and 1994,
respectively, of which $26.1 million and $14.3 million were recorded on the
Senior Discount Notes in 1996 and 1995, respectively.
Interest Income and Other
Interest income and other was $5.7 million, $6.5 million, and $1.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
Interest income increased in 1995 compared to 1994 primarily as a result of the
investment of the net proceeds from the issuance of the Convertible Preferred
Stock and Senior Discount Notes. Interest income decreased in 1996 compared to
1995 due to a reduction in cash available for investment. The Company expects
interest income to continue to decrease as the cash balance available for
investment decreases.
Equity Interest in Preferred Entertainment, Inc. ("PEI")
Equity interest in operations includes (i) the Company's pro rata share
of the net loss of PEI's operations from May 15, 1994 to September 7, 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
statements of operations consolidate the results of PEI from the date of
acquisition.
Minority Interest
Minority interest was $.1 million, $.1 million and $1.2 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Amounts primarily
represent the minority interest in the Company's Albuquerque joint venture (1996
only), the Indianapolis system (1996, 1995 and 1994) and the Houston system
(1994 only).
Extraordinary Gain on Early Extinquishment of Debt
This amount represents a net gain on early extinquishment of a $4.5
million note in exchange for 180,000 common shares of the Company's common
stock.
Net Loss
Net loss was $75.9 million, $53.2 million, and $19.5 million for the
years ended December 31, 1996, 1995 and 1994, respectively. As described above,
these net losses are principally attributable to the significant expenses
incurred in connection with the development of the Company's business. The
Company expects to continue to incur net losses while it develops and expands
its wireless cable systems.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased to $104.7
million at December 31, 1996 from $135.7 million at December 31, 1995, a
decrease of $31.0 million. This decrease is primarily attributable to cash used
in operating activities, the acquisition of Sat-Tel Services, Inc., the
acquisition of the Tilden and Anahuac frequencies, the acquisition of BTA
licenses, repayment of notes payable and investment in wireless systems and
equipment, partially offset by cash received on the sale of the Company's
interest in Preferred Entertainment of Champaign.
18
<PAGE>
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 1997, the Company's strategy is to continue conservation of
capital pending the implementation of digital video compression technology which
is expected to take place in one of its markets during the second half of 1997.
Pursuant to this strategy, the Company does not plan to add to its analog
customer base. 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 estimates that it will spend $20.7 million in
1997 on investment in wireless systems and equipment, compared to $15.5 million
in 1996. Also in 1997, the Company will make $10.4 million in expenditures for
required debt payments. To fund such 1997 capital expenditures and debt
payments, the Company anticipates using the Company's available cash and
marketable securities.
The Company has entered into a letter of intent with an affiliate of
General Instrument Corporation ("GIC") pursuant to which the Company would
purchase from GIC up to 300,000 digital converter boxes. The Company would be
obligated to purchase 200,000 converter boxes over the three year life of the
contract. The Company can cancel its minimum purchase obligation by paying a per
box cancellation fee. The letter of intent is subject to the negotiation and
execution of a definitive agreement between the parties and there can be no
assurance that such an agreement will be executed or that it will not contain
terms different from those described above. The Company's anticipated 1997
payments for converter boxes under the terms described above have been included
in the Company's estimates of capital expenditures for 1997 stated in the
preceding paragraph. 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 level of capital expenditures incurred for customer installations is
primarily variable and 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 1998 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
digital markets and slow down its system expansion activities in its operating
markets.
The Company has experienced negative cash flow from operations in each
year since its formation and 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 and 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 financings in the future and there can
be no assurance that such financing will be available when required.
Income Tax Matters
The Company and its subsidiaries have net operating loss carryforwards
("NOLs") at December 31, 1996, for income tax purposes (subject to certain
limitations, including limitations on changes in control, and Internal Revenue
Service review) totaling approximately $113.0 million which expire in the years
2008 through 2011. Approximately $20.0 million of these NOLs at December 31,
1996 are available only to offset future taxable income of the Company's
subsidiaries.
19
<PAGE>
Inflation
Management does not believe that inflation has a material impact on the
Company's results of operations. Management believes it will be able to increase
customer rates to keep pace with inflationary increases in costs without a
significant decline in the number of customers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
Page No. in
Form 10-K
-----------
Report of Independent Public Accountants 21
Consolidated Balance Sheets-December
31, 1995 and 1996 22
Consolidated Statements of Operations
for Each of the Three Years in the
Period Ended December 31, 1996 23
Consolidated Statements of
Stockholders' Equity for Each of the
Three Years in the Period Ended
December 31, 1996 24
Consolidated Statements of Cash Flows
for Each of the Three Years in the
Period Ended December 31, 1996 25
Notes to Consolidated Financial
Statements 27
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To People's Choice TV Corp.:
We have audited the accompanying consolidated balance sheets of People's Choice
TV Corp. (a Delaware corporation) and subsidiaries as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of People's Choice TV
Corp. and subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 11, 1997
21
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1995 1996
------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 23,243,558 $ 41,305,795
Marketable securities 112,433,408 63,396,191
Subscriber receivables, net of
allowance for doubtful accounts
of $651,300 and $379,500 2,447,297 2,935,364
Notes and other receivables 4,073,719 1,146,928
Prepaid expenses and other assets 7,394,211 3,909,492
Investment in wireless systems and
equipment, net 208,578,950 196,042,266
Organization and financing costs net of
accumulated amortization of $1,790,017
and $2,705,560 7,406,205 5,731,263
Excess of purchase price over fair
market value of assets acquired 7,515,329 11,680,391
------------ -------------
Total assets $373,092,677 $ 326,147,690
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and other payables $202,317,369 $ 234,430,828
Accounts payable 4,131,968 1,928,429
Accrued expenses 6,098,976 5,152,177
Subscriber advance payments and
deposits 2,052,969 2,662,183
Minority interest in consolidated
subsidiaries 1,297,188 1,086,562
------------ -------------
Total liabilities 215,898,470 245,260,179
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per
share 54,577,371 60,169,770
PCTV Detroit cumulative preferred stock 6,098,000 6,628,365
Stockholders' Equity:
Preferred stock, $0.01 par value,
4,398,547 shares authorized, no
shares issued and outstanding -- --
Common stock, $0.01 par value,
75,000,000 shares authorized,
12,841,203 and 12,924,817 shares
issued and outstanding at
December 31, 1995 and 1996,
respectively 128,412 129,248
Additional paid-in capital 172,415,949 166,447,375
Warrants 4,331,244 3,756,840
Accumulated deficit (80,356,769) (156,244,087)
------------ -------------
Total stockholders' equity 96,518,836 14,089,376
------------ -------------
Total liabilities and
stockholders' equity $373,092,677 $ 326,147,690
============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
22
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 12,556,682 $ 26,003,786 $ 33,424,512
------------ ------------ ------------
Costs and expenses:
Service costs 6,861,750 15,840,272 18,827,018
Selling, general and administrative 19,662,544 27,812,937 25,759,454
Depreciation and amortization 6,605,506 24,627,246 39,041,234
Non-cash settlement of lawsuit -- -- 616,000
------------ ------------ ------------
33,129,800 68,280,455 84,243,706
------------ ------------ ------------
Operating loss (20,573,118) (42,276,669) (50,819,194)
Gain (loss) on sales and writedown of
assets 198,523 (815,521) (2,907,174)
Interest expense:
Omni and BCI (599,920) (76,931) --
Noncash (906,250) (14,695,295) (26,824,846)
Cash (1,008,229) (793,999) (1,066,523)
Interest income and other 986,795 6,550,607 5,672,691
Equity interest in Preferred
Entertainment, Inc. (1,885,743) (2,282,213)
Minority interest 1,179,965 109,954 114,228
------------ ------------ ------------
Loss before income taxes (22,607,977) (54,280,067) (75,830,818)
Income tax (benefit) expense (3,077,250) 152,500 56,500
------------ ------------ ------------
Loss before extraordinary gain (19,530,727) (54,432,567) (75,887,318)
Extraordinary gain on early
extinquishment of debt -- 1,197,424 --
------------ ------------ ------------
Net loss (19,530,727) (53,235,143) (75,887,318)
Preferred dividends (128,924) (4,696,447) (6,122,764)
------------ ------------ ------------
Loss applicable to common shares $(19,659,651) $(57,931,590) $(82,010,082)
============ ============ ============
Loss per common share:
Loss before extraordinary gain $(2.20) $(5.34) $(6.26)
Extraordinary gain -- 11 --
------------ ------------ ------------
Net loss $(2.20) $(5.23) $(6.26)
============ ============ ============
Weighted average number of common
shares outstanding 8,948,528 11,072,147 13,099,538
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
23
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996
<TABLE>
<CAPTION>
Common Stock Par Value Additional
---------------------------- Paid-In Accumulated
Shares Amount Capital Warrants Deficit
---------------------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 6,608,358 $ 66,084 $ 28,389,757 -- $ (7,590,899)
Net loss -- -- -- -- (19,530,727)
Issuance of common stock in public
offering 1,437,500 14,375 38,646,322 -- --
Issuance of stock options -- -- 906,250 -- --
Issuance of common stock in
acquisitions 1,011,266 10,112 28,877,581 -- --
Issuance of common stock in
exchange 666,674 6,667 13,326,812 -- --
Dividends on Convertible
Cumulative Preferred Stock -- -- (128,924) -- --
Exercise of stock options 34,410 344 3,097 -- --
-------------- ------------ ------------ ---------- -------------
Balance, December 31, 1994 9,758,208 97,582 110,020,895 -- (27,121,626)
Net loss -- -- -- -- (53,235,143)
Issuance of common stock in
exchanges 302,143 3,022 6,056,891 -- --
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 2,923 29 68,595 -- --
Issuance of warrants in debt offering -- -- -- 3,756,840 --
Dividends on Convertible Preferred
Stock -- -- (4,696,447) -- --
-------------- ------------ ------------ ---------- -------------
Balance, December 31, 1995 12,841,203 128,412 172,415,949 4,331,244 (80,356,769)
Net loss -- -- -- -- (75,887,318)
Issuance of common stock in
acquisition 27,614 276 445,000 -- --
Issuance of common stock in lawsuit 56,000 560 615,440 -- --
Expiration of warrants from
acquisition -- -- -- (574,404) --
Stock options expired -- -- (906,250) -- --
Dividends on Cumulative
Preferred Stock -- -- (530,365) -- --
Dividends on Convertible
Preferred Stock -- -- (5,592,399) -- --
-------------- ------------ ------------ ---------- -------------
Balance, December 31, 1996 12,924,817 $129,248 $166,447,375 $3,756,840 $(156,244,087)
============== ============ ============ ========== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,530,727) $ (53,235,143) $ (75,887,318)
Adjustments to reconcile net loss to
net cash used in operations -
Depreciation and amortization 6,605,506 24,627,246 39,041,234
Deferred income taxes (3,225,000) -- --
Minority interest in subsidiaries (1,179,965) (109,954) (114,228)
Equity interest in Preferred
Entertainment, Inc. 1,885,743 2,282,213 --
Extraordinary gain on early
extinquishment of debt -- (1,197,424) --
Amortization of original issue
discount -- 14,345,635 26,125,506
Stock issued in settlement of
lawsuit -- -- 616,000
Compensation expense related to
stock options -- 151,085 --
Amortization of imputed discount on
debt 906,250 349,660 699,340
(Gain) loss on sales and writedown
of assets (198,523) 815,521 3,123,879
Provision for losses on subscriber
receivables 482,000 1,849,000 988,700
Changes in assets and liabilities'
Increase in subscriber receivables (2,147,748) (1,320,553) (1,749,222)
(Increase) decrease in notes and
other receivables 113,546 (101,079) (308,704)
(Increase) decrease in prepaid
expenses and other assets (1,719,115) (3,196,243) 3,333,982
Increase in organization and
financing costs (903,644) (295,358) --
Increase (decrease) in accounts
payable 1,839,731 (2,471,876) (1,320,309)
Increase (decrease) in accrued
expenses 3,169,085 132,144 (1,362,357)
Increase in subscriber advance
payments and deposits 616,773 210,022 609,514
Decrease in due to affiliates (1,389,678) (706,583) --
------------ ------------- -------------
Net cash used in operating
activities (14,675,766) (17,871,687) (6,203,983)
------------ ------------- -------------
Cash flows from investing activities:
Purchase of marketable securities (15,669,725) (114,429,819) (114,505,311)
Proceeds principally from maturity
of marketable securities 26,063,262 4,492,331 163,542,528
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 -- -- 1,997,929
Acquisition of BTA licenses -- -- (1,631,474)
Purchase of wireless systems and
equipment from Broadcast Cable, Inc. -- (3,773,246) --
Purchase of wireless systems and
equipment from Preferred Entertainment,
Inc. -- (4,117,902) --
Purchase of wireless systems and
equipment from Eastern Cable Networks
of Michigan, Inc. -- (4,912,229) --
Acquisition of Casa Grande
frequencies -- (1,200,000) --
Investment in wireless systems and
equipment (41,942,339) (35,808,250) (15,491,475)
Proceeds from sales of assets 161,000 69,719 645,072
Issuance of additional notes
receivable from affiliates (4,216,547) ( 9,115) --
Repayment of notes receivable from
affiliates 1,267,306 162,463 --
------------ ------------- -------------
Net cash (used in) provided by
investing activities (34,337,043) (159,526,048) 28,863,182
------------ ------------- -------------
</TABLE>
25
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------------
1994 1995 1996
-------------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes
payable 1,655,000 141,350 --
Repayment of notes payable (8,791,247) (12,422,531) (4,406,962)
Proceeds from the issuance of common
stock from public offering, net 38,660,697 -- --
Proceeds from sale of minority interest
in consolidated subsidiary, net 6,484,860 -- --
Proceeds from the issuance of
Senior Discount Notes, net -- 167,764,337 --
Buyout of minority interest -- (129,000) (190,000)
Proceeds from the exercise of stock
options -- 180,794 --
Proceeds from the issuance of
convertible cumulative preferred stock 10,000,000 40,000,000 --
----------- ------------ -----------
Net cash provided by (used in)
financing activities 48,009,310 195,534,950 (4,596,962)
----------- ------------ -----------
Net (decrease) increase in cash (1,003,499) 18,137,215 18,062,237
Cash and cash equivalents, beginning of
year 6,109,842 5,106,343 23,243,558
----------- ------------ -----------
Cash and cash equivalents, end of year $ 5,106,343 $ 23,243,558 $41,305,795
=========== ============ ===========
Supplementary disclosures of cash flow
information:
Cash paid for interest, net of
amount capitalized $ 2,828,988 $ 635,627 $ 794,465
Cash received for interest $ 1,519,804 $ 6,060,869 $ 6,193,670
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
During 1994, the Company issued 39,768 common shares of stock and a $850,000
note in connection with the acquisition of certain frequency rights. The
Company also issued 971,498 common shares in connection with the acquisition of
Specchio Developers Investment Corp.. During the fourth quarter of 1994, the
PCTV Houston Preferred Stock which represented the minority interest in PCTV
Houston was exchanged for 666,674 shares of the Company's common stock.
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 (which expired on December 31, 1996),
$5,150,000 of notes payable, and cumulative preferred stock in the amount of
$5,850,000. The Company issued 2,760,479 common shares of stock in connection
with the acquisition of Preferred Entertainment, Inc. in September 1995. In
October 1995, the Company acquired a 17.5% equity interest in People's Choice TV
of Phoenix, Inc. in exchange for 115,000 shares of PCTV 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 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 $6,525,896.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
26
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Company:
People's Choice TV Corp. (the "Company" or "PCTV") was incorporated in
Delaware on April 22, 1993. The Company and its predecessors have been engaged
in the wireless cable television business since 1988.
The Company's strategy is to own, develop and operate wireless cable
systems with full channel line-ups at high signal strength in large markets, a
majority of which are expected to be among the top 30 Designated Market Areas.
PCTV's operating and targeted markets are concentrated in the midwestern and
southwestern regions of the United States. Currently, the Company operates six
wireless cable systems located in Houston, Tucson, Chicago, Phoenix, St. Louis
and Detroit and controls wireless cable channel rights in three additional
markets located in Indianapolis, Kansas City and Milwaukee. The Company has a
pending transaction in which it will exchange its Kansas City wireless cable
assets for the Salt Lake City wireless assets.
Wireless cable television is a new industry within the highly competitive
subscription television industry. PCTV's principal competitors in each market
are traditional hardwire cable, direct broadcast satellite and private cable
operators. The Company's strategy is to conserve capital pending the
implementation of digital video compression technology which is expected to take
place in one of its markets during the second half of 1997. 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.
(2) Summary of Significant Accounting Policies:
Principles of consolidation--
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Use of estimates---
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents--
The Company has classified marketable securities and time deposits as
cash equivalents if the original maturity of such investments is three months or
less at time of purchase.
Marketable securities--
Marketable securities consist of U.S. Government and Federal Agency bonds
which have an original maturity in excess of three months at time of purchase.
At December 31, 1995 and 1996 these securities vary in maturity up to seven
months. The Company has classified these securities as held-to-maturity and they
are recorded at amortized cost. The fair market value of the securities as of
December 31, 1996 and 1995 approximated the carrying value.
Organization and financing costs--
Organization and financing costs are being amortized over a five year
period. Amortization expense amounted to approximately $226,000, $1,718,000 and
$1,664,000 in 1994, 1995 and 1996, respectively.
27
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Excess of purchase price over fair market value of assets acquired--
Excess of purchase price over fair market value of assets acquired is
being amortized over 20 years.
Long-lived assets--
The Company periodically reviews the carrying value of the investment in
wireless systems and equipment, including frequency rights and intangible
assets, for each wireless cable system in order to determine whether an
impairment may exist. The Company considers relevant cash flow, estimated
future operating results, trends and other available information including the
fair value of frequency rights owned, in assessing whether the carrying value of
the assets can be recovered. An impairment would be measured as any deficiency
in estimated undiscounted cash flows of the wireless cable system to recover the
carrying value related to the assets. The Company believes that no such
impairments exist, and that the fair market value of its frequency rights
exceeds the carrying value at December 31, 1996.
Revenue recognition--
Subscription revenues are recognized in the period of service. The
Company charges customers an installation fee that is billed in installments for
up to six months. The Company records installment revenue billed in installments
when received. Customer related acquisition costs, including direct commissions,
exceeded installation revenues in 1994, 1995 and 1996.
System launch expenses--
Administrative and marketing expenses incurred by systems during their
launch period are expensed as incurred.
Earnings per share--
The net loss per share has been computed based on the weighted average of
common shares outstanding. The 1994, 1995 and 1996 shares also include common
equivalent shares issuable upon exercise of certain outstanding stock options
and the Bank of Montreal warrant.
Reclassification
Certain reclassifications have been made to prior year financial data to
conform to the current year presentation.
(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 the Tilden and Anahuac markets, respectively.
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, paid January 26, 1997, with an
interest rate of 5.5% per year. 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 approximately $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 "Detroit System"). PCTV holds the Detroit
System in a subsidiary named People's Choice TV of Detroit, Inc. ("PCTV
28
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Detroit"). The consideration paid for the Detroit System by PCTV includes: (i)
$4.9 million in cash (including transaction costs); (ii) $3.0 million in the
form of a promissory note of PCTV maturing in three years with an interest rate
of 8% per annum; (iii) $2.2 million in the form of a promissory note maturing in
five years with an interest rate of 9% per annum, guaranteed by PCTV; (iv)
assumption of approximately $8.7 million in indebtedness of ECN, of which $4.5
million was paid by the Company at closing; and (v) the issuance of redeemable
cumulative preferred stock of PCTV Detroit with a liquidation preference of
$5.8 million and a 9% dividend rate, guaranteed by PCTV. PCTV transferred to
ECN all of its rights to 26 wireless cable frequencies in the Baltimore market.
As of the closing date, these frequencies had a book value of approximately $1.0
million. The Company issued to ECN warrants valued at $574,000 to purchase
154,762 shares of PCTV Common Stock, exercisable for $.10 per share, provided
that the market price of PCTV Common Stock reached $30 to $35 by December 31,
1996. These warrants expired at December 31, 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.
On May 14, 1994, the Company, People's Acquisition Corp. ("Acquisition"),
Specchio Developers Investment Corp. ("SDIC"), Michael J. Specchio
("Specchio"), and Terrence S. Cassidy ("Cassidy") executed and closed an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger
Agreement, Acquisition, a wholly-owned subsidiary of the Company, was
merged with and into SDIC so that SDIC became a wholly-owned subsidiary of the
Company (the "Merger"). The Merger of Acquisition with and into SDIC became
effective on May 16, 1994 with the filing of articles of merger. 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 total purchase price was $27.7 million consisting of
971,498 shares of PCTV common stock valued at the transaction closing date. The
primary assets of SDIC were 1,015,000 shares of the common stock of Preferred
Entertainment, Inc. ("PEI"), constituting approximately 22.2% of the outstanding
common stock of PEI. In addition, the Company loaned Specchio $3,500,000 in
return for a non-recourse note that bears interest at the prime rate plus 2%.
The principal plus interest was payable in full on May 14, 1996. Specchio has
pledged to the Company 180,000 of the shares of common stock of the Company
received by him in the Merger as security for the note. The Company has
possession of the collateral. At December 31, 1996 the note was written down to
its net realizable value of $540,000. In January 1996, Preferred Entertainment
of Champaign ("Champaign"), of which 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 $2,000,000
resulting in a gain on sale of approximately $200,000.
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 for
consideration consisting of .7548 shares of PCTV Common Stock, which was valued
at $22 per share at the closing date. The total purchase price of approximately
$65,129,000 includes the issuance of approximately 2,760,479 shares of PCTV
Common Stock and other consideration. 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. Substantially all of the
excess of purchase price over the net assets acquired has been allocated to
frequency rights. Additionally, PCTV, PEI and the former CEO of PEI have entered
into a three year non-compete agreement barring the former CEO from competing
with PCTV or PEI in any markets in which PCTV has already established a presence
or in the future establishes a presence before the former CEO.
Summarized below are the pro forma unaudited results of operations for
the years ended December 31, 1994 and 1995 assuming the ECN and PEI acquisitions
had occurred on January 1, 1994. 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 1994 and 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, 1994.
29
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1994 1995
----------------------------
<S> <C> <C>
Revenues $ 18,574,000 $ 32,415,000
Loss before extraordinary gain (33,205,000) (66,062,000)
Net loss (33,205,000) (64,864,000)
Pro forma loss applicable to common
shares (34,054,000) (70,041,000)
Net loss per common share:
Loss before extraordinary gain $ (2.91) $ (5.24)
Extraordinary gain -- .09
------------ ------------
Net loss $ (2.91) $ (5.15)
============ ============
Pro forma weighted average number of
common shares outstanding 11,709,000 13,600,000
</TABLE>
Included in the pro forma net loss are costs of $720,000 and $900,000
associated with the acquisition of PEI for 1994 and 1995, respectively.
In June 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. Under the terms of the agreement, the
Company contributed four wireless cable channels and certain equipment, for
which it holds lease rights and certain equipment, which had a book value of
approximately $155,000, and contributed approximately $96,000 in cash. Each
partner has the right of first refusal with respect to any transfer of such
equity interest. MDC manages the daily operations of the joint venture. MDC
has significant wireless cable television frequency rights in other cities in
New Mexico. The Company accounts for this investment under the equity method.
Also in 1995, the Company acquired rights to wireless frequencies in the
Casa Grande, Arizona market and certain other assets for a purchase price of
$1,200,000. The Company acquired leases for 11 channels and leases with
applicants for licenses totaling 7 additional channels in the Casa Grande
market. In addition, the Company acquired a 17.5% equity interest in People's
Choice TV of Phoenix, Inc. ("PCTV Phoenix") in exchange for 115,000 shares of
PCTV Common Stock. The Company now owns 100% of the capital stock of PCTV
Phoenix.
In March 1994, the Company acquired from Indianapolis Cellular Television
Company ("ICTC") certain wireless cable television assets in the Indianapolis
market, which included leases to 13 wireless cable television frequencies, a
transmission site lease and an office lease, and equipment. No business
operations were acquired as part of this transaction. The aggregate purchase
price for these assets was approximately $3,700,000: including $2,500,000 of
cash (which includes cash paid in redemption of a promissory note of the Company
to the sellers which note had a 7% interest rate), and $1,200,000 paid in the
form of 39,768 shares of the Company's Common Stock. Pursuant to the terms of
the purchase agreement, the Company organized Wireless Cable of Indianapolis,
Inc. ("WCI"), a majority-owned subsidiary of the Company, to hold these assets.
The Company owns approximately 88% of the capital stock of WCI and certain other
investors, including principals of ICTC, own the remaining 12.25%. On May 31,
1995, WCI closed a stock purchase agreement with the stockholders of Broadcast
Cable, Inc. ("BC") pursuant to which WCI acquired all of the capital stock of
BC. BC has the rights to (i) 12 wireless cable frequencies in the Indianapolis
market, (ii) 15 wireless cable frequencies in the Anderson, Indiana market,
(iii) 19 wireless cable frequencies in the Bloomington, Indiana market, and (iv)
12 wireless cable frequencies in the Kokomo, Indiana market. The total purchase
price for BC was $10.5 million, which amount was paid by WCI through a cash
payment of $3.8 million and a promissory note with a principal amount of
approximately $6.7 million. The transaction was accounted for as a purchase.
The note is guaranteed by PCTV and collateralized by 1,941,000 shares of PCTV
Common Stock. Amounts due under the promissory note become payable two years
after the closing date and after certain triggering events relating to approvals
by the Federal Communications Commission ("FCC") of modification requests with
respect to the frequencies being acquired.
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 during 1997.
30
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Investment in Wireless Systems and Equipment:
The investment in wireless systems and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
---------------------------
<S> <C> <C>
Inventory (principally subscriber
devices) and construction in
progress (principally installations) $ 2,724,579 $ 3,999,143
Property and equipment 107,924,663 102,605,500
Frequency rights 131,591,829 145,135,595
------------ ------------
242,241,071 251,740,238
Less--accumulated depreciation and
amortization of property and equipment (27,347,905) (39,890,358)
accumulated amortization of
frequency rights (6,314,216) (15,807,614)
------------ ------------
$208,578,950 $196,042,266
============ ============
</TABLE>
Depreciation and amortization is calculated on a straight-line basis over the
following useful lives:
<TABLE>
<S> <C>
Frequency rights 12 years
Wireless systems and equipment 3-10 years
Vehicles 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Leasehold improvements Life of respective lease
</TABLE>
Wireless systems and equipment include the cost of initial customer
installations. These costs include reception equipment on customer premises,
related labor and the excess of direct commission costs over installation
revenues determined to be realizable. The excess of direct commission costs
over installation revenues are deferred and amortized over a three-year period,
the estimated useful life of customers. Amortization is accelerated upon the
disconnection of specific customers.
(5) Income Taxes:
The provision for income taxes for December 31, 1994, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
Current state and local income taxes $ 147,750 $152,500 $56,500
Deferred income tax benefit (3,225,000) -- --
----------- -------- -------
Total provision (benefit) for income
taxes $(3,077,250) $152,500 $56,500
=========== ======== =======
</TABLE>
The benefit of $3.2 million represents 1994 operating losses utilized to
reduce deferred taxes recorded in connection with the purchase of SDIC.
31
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following represents a reconciliation of the Company's federal
statutory income tax benefit to the income tax provision:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1994 1995 1996
-------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax (benefit) $(7,912,800) $(18,578,900) $(26,560,600)
State and local taxes, net of federal
expense 95,900 99,100 36,700
Losses not benefited 4,731,200 18,605,200 26,560,900
Other 8,450 27,100 19,500
----------- ------------ ------------
Income tax (benefit) provision $(3,077,250) $ 152,500 $ 56,500
=========== ============ ============
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards
("NOLs") at December 31, 1996 for income tax purposes (subject to certain
limitations and Internal Revenue Service review) totaling approximately $113.0
million which expires in the years 2008 through 2011. Approximately $20.0
million of these NOLs are available only to offset future taxable income of
individual Company subsidiaries.
The principal temporary items comprising the net unrecognized deferred
income tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
---------------------------
<S> <C> <C>
Non-qualified stock options $ 312,000 $ 297,500
Depreciation and amortization 1,757,400 9,594,600
Allowance for doubtful accounts 651,300 366,500
Start up costs capitalized for tax 1,799,000 1,405,800
Amortization of discount on senior
discount notes 14,346,000 40,471,100
Accrued expenses 1,400,800 3,491,700
Other 1,590,800 4,192,500
Net operating loss carryforward for
income tax purposes 70,478,800 113,017,300
Utilization of financial reporting net
operating loss carryforward for
deferred tax liabilities (73,425,000) (78,134,000)
------------ ------------
18,911,100 94,703,000
------------ ------------
Net deferred tax asset unrecognized at
federal statutory rate 6,618,885 33,146,050
Less: valuation reserve (6,618,885) (33,146,050)
------------ ------------
Net deferred tax asset recognized $ 0 $ 0
============ ============
</TABLE>
For the years ended December 31, 1995 and 1996, the Company has utilized NOLs
for financial reporting purposes of $73.4 million and $ 78.1 million,
respectively. These NOLs were used to reduce the deferred tax liabilities
related to the acquisitions made by the Company.
32
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Notes and Other Payables:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1996
-------------------------------
<S> <C> <C>
13.125% senior discount notes due June 1, 2004 $ 332,000,000 $ 332,000,000
Less original issue discount ("OID") (146,324,365) (120,198,859)
------------- -------------
185,675,635(a) 211,801,141(a)
------------- -------------
Notes payable, Federal Communications
Commission, due August and December
2006, with interest at 9.5% -- 6,525,896(b)
Note payable from acquisition, due and
paid January 1997, with interest at 5.5% -- 1,250,000
Note payable, Broadcast Cable, Inc.
non-interest bearing, due May
1997, face value $6,726,754 less
imputed discount of $1,048,972
and $349,632 at December 31, 1995
and 1996, respectively 5,677,782 6,377,122
Notes payable of PCTV Detroit 8,767,648(c) 7,203,012(c)
Non-compete agreement 400,000(d) 300,000(d)
PEI bank line of credit of $20,000,000
expiring May 1997 with
interest at 9.125% 579,016 579,016
Bank lines of credit of $450,000 with
interest rates ranging from
8.75% - 9.25% 393,388 --
Other, with interest rates ranging from
6% - 13.60% and due
dates ranging from 1997-2000,
partially secured by equipment 823,900 394,641
------------- -------------
$ 202,317,369 $ 234,430,828
============= =============
</TABLE>
(a) On May 19, 1995 the Company completed a public offering of $332,000,000
principal amount of 13.125% senior discount notes due 2004 and warrants for the
purchase of 473,764 shares of the Company's common stock. The Company received
net proceeds after underwriting discounts and other transaction expenses of
approximately $168,000,000. The notes were sold at a discount from the face
amount and will accrete in value until June 1, 2000 at a rate of 13.125% per
annum, compounded semi-annually. Cash interest will accrue at a rate of 13.125%
subsequent to June 1, 2000 and be payable in cash, thereafter, semi-annually on
June 1 and December 1, commencing on December 1, 2000.
The notes and warrants trade separately. Each warrant is exercisable for
1.427 shares of common stock at a exercise price of $31.90 per share. Such
warrants will expire on June 1, 2000.
The Company has the option to redeem the notes, in whole or in part, on
or after June 1, 2000. For the 12 month period beginning June 1, 2000, the
redemption value is 106.0% of the accreted value plus accrued and unpaid
interest, if any, at the redemption date. After May 31, 2001, the redemption
value decreases at 2% intervals to 100% of the accreted value plus accrued and
unpaid interest at June 1, 2003 and after.
The Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur indebtedness, to pay
dividends or make other restricted payments, to permit restrictions on dividends
and other payments by subsidiaries to the Company and to engage in certain
transactions.
(b) As a result of the FCC auction for Multichannel Multipoint Distribution
Service ("MMDS") and/or Multipoint Distribution Service ("MDS") authorizations
for BTA's, the Company purchased 28 BTA authorizations. The payment terms
require a 20% downpayment; for two years after the conclusion of the auction,
payments of interest in the remaining principal balance; and beginning two years
after the conclusion of the auction, amortization of the remaining principal and
interest over an eight year period.
(c) As a result of the acquisition of the Detroit System, the Company issued
notes payable in the amount of $3,000,000 due in August 1998 which bears
interest at a rate of 8% per year, of which $189,000 was paid in January 1996,
and $2,150,000 of notes payable due December 2000 with an interest rate of 9%
per year. The Company also assumed a note payable to the predecessor owners in
the amount of approximately $4,200,000 due September 1998 with interest at 8%
payable in quarterly installments.
33
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) In connection with the acquisition of PEI, the Company entered into a three
year non-compete agreement with the former CEO of PEI. The total amount of the
agreement was $600,000, of which $200,000 was paid at closing and $100,000 was
paid in September 1996 and $300,000 is payable in September 1997.
Annual maturities of all debt are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1997 $ 10,395,387
1998 3,987,764
1999 648,896
2000 2,803,152
2001 and thereafter 337,144,120
-------------
354,979,319
OID and Imputed Discount (120,548,491)
-------------
$ 234,430,828
=============
</TABLE>
The fair value of the senior discount notes at December 31, 1996, was
approximately $144,000,000 and is based on the quoted market price of the debt.
The fair value of the other notes and other payables approximate the carrying
value.
(7) Houston Financing:
During 1993, PCTV Houston and the Company entered into a stock purchase
agreement with certain private placement investors pursuant to which PCTV
Houston agreed to sell $7,000,000 of 6% convertible preferred stock of PCTV
Houston to such investors and pursuant to which the Company agreed to purchase
$4,000,000 of PCTV Houston's 6% convertible preferred stock. The transaction
closed in March 1994. On October 17, 1994, the Company acquired, through an
exchange offer, all of the outstanding Convertible Preferred Stock of PCTV
Houston not already owned by PCTV for 666,674 shares of the Company's common
stock. The common stock was valued at $20 per share at the closing date. PCTV
presently owns 100% of the capital stock of PCTV Houston.
(8) Convertible Pay-In-Kind Preferred Stock:
On October 27, 1994, the Company, Blackstone Capital Partners II Merchant
Banking Fund L.P. and Blackstone Offshore Capital Partners II L.P. (collectively
"Blackstone") entered into a Stock Purchase Agreement (the "Stock Purchase
Agreement"), pursuant to which the Company agreed to sell, and Blackstone agreed
to acquire, 500,000 shares of Convertible Cumulative Pay-In-Kind Preferred
Stock, par value $.01 per share and liquidation preference $100 per share (the
"Convertible Preferred Stock") of the Company for an aggregate cash purchase
price of $50,000,000. The Convertible Preferred Stock is convertible at any
time after its date or dates of issuance into shares of the common stock, par
value $.01 per share, of the Company (the "Common Stock") and has a conversion
price of $22.50 per share, subject to anti-dilution adjustments. The Company
closed on the sale of 100,000 shares of the Convertible Preferred Stock on
November 14, 1994, 100,000 shares on January 20, 1995, 50,000 shares on January
23, 1995, and the remaining 250,000 shares on March 24, 1995.
The terms of the Convertible Preferred Stock and the Stock Purchase
Agreement entitle the holders of Convertible Preferred Stock, voting as a class,
to elect two members of the Board of Directors (or, if the size of the Board of
Directors is increased, a proportionately greater number) for so long as
Blackstone and certain permitted transferees own shares of Convertible Preferred
Stock in certain minimum amounts. Following conversion of the Convertible
Preferred Stock there are conditions under which holders of Common Stock shall
have the right to designate a like number of persons to the Board of Directors.
34
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Convertible Preferred Stock is entitled to vote as a single class
with the Common Stock on all matters submitted to a vote of the stockholders.
Each share of Convertible Preferred Stock is entitled to the number of votes
equal to the number of shares of Common Stock that could be obtained upon
conversion at the then applicable conversion price. Under certain conditions,
approval of two-thirds of the outstanding shares of Convertible Preferred Stock
are required to approve (i) certain amendments to the Certificate of
Incorporation or Certificate of Designations, (ii) the issuance or
reclassification of junior or parity securities and (iii) certain consolidations
and mergers or the sale or disposal of substantially all of the assets of the
Company.
The terms of the Stock Purchase Agreement provide: (i) that the
affirmative vote of two-thirds of the Board of Directors of the Company is
required to approve a sale of the Company, certain divestitures and
acquisitions, any amendment to the Company's Certificate of Incorporation, the
entry into a line of business other than the telecommunications business and
certain other transactions; (ii) Blackstone the right of first refusal to
provide additional capital to the Company on terms and conditions proposed by
the Company or alternative terms and conditions proposed by and agreed to by the
Company; and (iii) that if the Company issues or proposes to issue for cash any
Common Stock or other securities having voting power, as defined, Blackstone
will have the right to acquire from the Company the number of shares or other
amount of such security so that Blackstone's outstanding voting interest on a
fully diluted basis following such issuance equals the outstanding voting
interest on a fully diluted basis held immediately prior to such issuance. Such
obligations under (i) and (ii) terminates if Blackstone and certain permitted
transferees, as defined, do not own Convertible Preferred Stock and/or Common
Stock in certain minimum amounts.
Dividends on the Convertible Preferred Stock (and interest on unpaid
dividends) accrue at an annual rate of 9-7/8% and are payable quarterly. Upon
the occurrence of certain defaults, such rate will increase to 12% and will
continue for so long as any such default continues. Dividends on shares of the
Preferred Stock in respect of each dividend period ending prior to the fifth
anniversary of the date of issuance of such shares of Convertible Preferred
Stock (and interest on unpaid dividends) will be paid in additional shares of
Convertible Preferred Stock. The issuance of these shares reduces the number of
authorized shares of preferred stock. Holders of Convertible Preferred Stock
will acquire additional shares of Convertible Preferred Stock (and thus have the
right to acquire additional shares of Common Stock) as a result of such stock
dividends.
The Convertible Preferred Stock may not be redeemed by the Company prior
to the fifth anniversary of the date of the first issuance of the Convertible
Preferred Stock. Thereafter, the Company may redeem all of the Convertible
Preferred Stock at a price per share equal to 106% of the liquidation preference
plus 106% of the sum of accrued and unpaid dividends and interest on unpaid
dividends. The Company may at its option redeem the Convertible Preferred Stock
for cash or shares of Common Stock.
The Convertible Preferred Stock is also redeemable upon a change in
control of the Company, at a redemption price per share equal to the higher of
(i) 106% of the per share liquidation preference plus accrued and unpaid
dividends and interest on unpaid dividends to the date of redemption and (ii)
the sum of accrued and unpaid cash dividends to the date of redemption and the
value of consideration that could be obtained upon conversion of the Convertible
Preferred Stock (and any related accrued but unpaid dividends payable in shares
of Convertible Preferred Stock) into Common Stock and participating in the
change of control transaction.
The Convertible Preferred Stock will be redeemed on the tenth anniversary
of the date of the first issuance of shares of Convertible Preferred Stock, at
an aggregate redemption price equal to 100% of the liquidation preference per
share, plus an amount in cash equal to all accrued and unpaid dividends and
interest on unpaid dividends outstanding to the redemption date.
In connection with the execution of the Stock Purchase Agreement,
Blackstone has entered into an Agreement, dated as of October 27, 1994, with
Matthew Oristano, Victor Oristano (the "Oristanos") and the Company (the
"Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, the
Oristanos have agreed that (i) they will not sell or otherwise transfer their
shares of Common Stock prior to September 30, 1999, subject to certain
exceptions, (ii) to use their best efforts to cause the nominating committee of
the Board of Directors of the Company to nominate and recommend to stockholders
the election of persons to which Blackstone, as holders of Common Stock, are
entitled to designate as described above, and to vote all shares of Common Stock
owned by them in favor of the election of such persons and (iii) to use their
best efforts to cause such person to serve on the compensation committee of the
Board of Directors of the Company and to vote all shares of Common Stock owned
by them in favor of certain amendments to the Certificate of Incorporation of
the Company which are necessary to give effect to the provisions contained in
the Stock Purchase Agreement and the Certificate of Designations relating to the
Preferred Stock. These obligations terminate if
35
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Blackstone and certain permitted transferees do not own Convertible Preferred
Stock and/or Common Stock in certain minimum amounts. The holders of the
Convertible Preferred Stock and Common Stock issued upon conversion thereof also
have certain registration rights under federal and state securities laws.
(9) Employee Benefits:
The Company maintains two 401(k) employee benefit plans pursuant to which
participants can defer a certain percent of their annual compensation in order
to receive certain benefits upon retirement, death, disability or termination of
employment. The Company makes matching contributions of up to $400 per employee
in one plan which vests immediately and 40% of up to 6% of employee salary,
per employee in another plan which vests over a period of seven years. During
1994, 1995 and 1996, the Company incurred expenses of approximately $28,000,
$53,000 and $89,000, respectively, related to these plans.
(10) Common Stock, Stock Options and Warrants:
On February 3, 1994 the Company closed on the sale of 1,250,000 shares of
common stock in connection with a public offering and received net proceeds of
approximately $34.1 million (before expenses of approximately $500,000). On
March 9, 1994, the Company issued 187,500 shares of common stock in connection
with the exercise of the underwriters' over allotment option granted in
connection with this public offering and received additional net proceeds of
approximately $5.1 million.
In connection with the initial public offering, the underwriter was
granted a warrant for 250,000 shares of common stock at an exercise price of
$12.60 per share. These warrants expire on July 8, 1998.
On April 30, 1993, PCTV adopted a non-qualified stock option plan for
certain key employees (the "Key Employee Plan"), which is administered by three
members of PCTV's Board of Directors. Under the Key Employee Plan, 111,085
shares of common stock are reserved for issuance pursuant to options granted
thereunder at an exercise price of $.10 per share. Options to purchase 111,085
shares of common stock were issued in April and June 1993. The option holders
are entitled during their employment to exercise the options for a cash payment
of the exercise price at any time between the first and tenth anniversaries of
the date of grant of the options. As a result of these grants the Company
recorded $1,155,284 of non-cash, non-recurring compensation expense in 1993.
Options granted under the Key Employee Plan generally are non-transferable. As
of December 31, 1993, 1994, 1995 and 1996, 111,085, 76,675, 73,475, and 72,475
of these options are exercisable and outstanding, respectively.
On April 30, 1993, non-qualified options to purchase shares of common
stock, were granted under a plan (the "Founders Plan") to Matthew and Victor
Oristano in the amounts of 200,000 shares and 100,000 shares, respectively. The
per share exercise price of these options is $10.50. All of these options are
fully vested as of this date and are exercisable until April 30, 2003. Non-
qualified stock options were granted to Matthew and Victor Oristano in the
amounts of 5,000 and 2,500 respectively for fiscal 1994. These options have an
exercise price of $23.00 per share and have a ten year term. As of December 31,
1993, 1994, 1995 and 1996, 300,000, 300,000, 302,500, and 305,000 options are
exercisable and outstanding, respectively.
In April 1993, PCTV adopted its 1993 Stock Option Plan (the "1993 Plan"),
which is administered by three members of PCTV's Board of Directors. Under the
1993 Plan, options to purchase an aggregate of not more than 900,000 shares of
common stock may be granted from time to time to key employees (including
officers), advisors and independent consultants to PCTV or to any of its
subsidiaries (other than those persons eligible for participation under the
Founders Plan). Options granted to officers and employees may be designated as
incentive stock options ("ISOs") or non-qualified stock options ("NQSOs").
Options granted to independent consultants and other non-employees may only be
designated NQSOs. As of December 31, 1996, 616,500 option grants are outstanding
under the 1993 Plan. The option agreements pursuant to which these grants were
made include various vesting provisions. The per share exercise price of these
options range from $4.00 to $11.50. As of December 31, 1996, no options are
currently exercisable under this plan and 9,750 options have been previously
exercised.
36
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for stock options and warrants under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
under which no compensation cost has been recognized for the options granted.
Had compensation cost for 1995 and 1996 been determined under the principles of
Statement of Financial Accounting Standards ("SFAS") No. 123, the impact on net
loss and loss per common share would have been insignificant.
(11) Employment and Consultant Agreements:
PCTV has written employment agreements with Matthew Oristano, Peter Lynch
and Robert Young which provide for annual base salaries of $212,000, $143,000
and $133,000, respectively. Each of these officers is eligible to receive an
annual bonus as determined by the Company. The employment agreements for Messrs.
Oristano, Lynch and Young expire in April 1998, February 1999 and January 1999,
respectively, unless earlier terminated by the Company or the employee. The
agreements contain confidentiality and non-competition provisions and require
the officers to devote full time to the business of the Company. Pursuant to
these agreements, if their employment is terminated by the Company without
cause, they are entitled to their base salary and certain benefits for, in the
case of Mr. Oristano, the remainder of the employment term, in the case of Mr.
Lynch, a period of one year, and in the case of Mr. Young, for a period of six
months. In such case, Mr. Young is also entitled to receive half of his annual
bonus.
The Company has entered into change of control severance agreements with
six of its executive officers which require the Company, in the case of a change
of control of the Company, to pay each of such officers two times their annual
base salary and bonus. In addition, in the case of a change of control, options
issued under the Company's 1993 Stock Option Plan vest immediately.
PCTV also has a written consulting agreement with Alda Limited Partners,
pursuant to which it and its chairman, Mr. Victor Oristano (the "Consultant"),
have agreed to render management consulting services to PCTV including advice
concerning strategic and financial planning matters, wireless development and
operation activities and public and stockholder relation matters. This
agreement provides that the Consultant shall be paid consulting fees of $158,000
per annum and provides that the Consultant may receive an annual performance
bonus to be determined by PCTV. This agreement will continue to July 1998 and,
if the consulting relationship is terminated by PCTV without cause, entitles the
Consultant to the base consulting fees for the remainder of the consulting term.
(12) Commitments and Contingencies:
Under various lease and rental agreements for offices, warehouses,
equipment and frequency licenses, the Company had expenses of approximately
$2,381,000, $3,729,000 and $6,294,000 in 1994, 1995 and 1996, respectively.
Future annual minimum payments under these non-cancelable agreements, including
only the initial terms for frequency licenses, are as follows:
<TABLE>
<S> <C>
1997 $ 5,219,000
1998 4,593,000
1999 3,944,000
2000 2,927,000
2001 and thereafter 13,240,000
-----------
$29,923,000
===========
</TABLE>
37
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into a letter of intent with an affiliate of
General Instrument Corporation ("GIC") pursuant to which the Company would
purchase from GIC up to 300,000 digital converter boxes. The Company would be
obligated to purchase 200,000 converter boxes over the three year life of the
contract. The Company can cancel its minimum purchase obligation by paying a per
box cancellation fee. The letter of intent is subject to the negotiation and
execution of a definitive agreement between the parties and there can be no
assurance that such an agreement will be executed or that it will not contain
terms different from those described above.
The Company estimates that it will spend $20.7 million in 1997 on
investment in wireless systems and equipment. The level of capital expenditures
incurred for customer installations is primarily variable and dependent on the
customer installation activities of the Company. Therefore, actual customer
installation expenditures may be more or less than the Company's estimate.
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 statements.
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 provided 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 was 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 the discovery process is proceeding. 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 statements of the Company.
(13) Valuation and Qualifying Accounts:
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning Costs & at end
Description of Period Expenses Deductions of Period
- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1994
Allowance for Doubtful Accounts $ 51,100 $ 482,000 $ 249,400 $283,700
December 31, 1995
Allowance for Doubtful Accounts $283,700 $1,849,000 $1,481,400 $651,300
December 31, 1996
Allowance for Doubtful Accounts $651,300 $ 989,000 $1,260,800 $379,500
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following table sets forth certain information concerning each of the
Company's directors, director nominees and executive officers:
<TABLE>
<CAPTION>
Name Age Position with Company
- ---- --- ---------------------
<S> <C> <C>
Matthew Oristano(1)(2)(3) 40 Chairman, Chief Executive Officer, and
Director
Charles F. Schwartz 41 Senior Vice President, Chief Financial
Officer and Chief of Staff
Todd A. Rowley 32 Senior Vice President--Market Development
Peter Lynch 49 Senior Vice President--Operations
Robert Young 41 Senior Vice President
Donald E. Olander 37 Vice President, General Counsel and Corporate
Secretary
Michael F. Whalen, Jr. 31 Vice President--Finance and Acquisitions
Victor Oristano 80 Vice Chairman and Director
James J. Mossman(1) 38 Director
Anthony Grillo(1)(2)(3) 41 Director
- ---------------
</TABLE>
(1) Member of the Audit Committee. The Audit Committee assists the Board of
Directors in fulfilling its responsibilities with respect to the Company's
accounting and financial reporting activities.
(2) Member of Compensation Committee. The Compensation Committee determines the
compensation to be paid by the Company to its officers.
(3) Member of Stock Option Committee. The Stock Option Committee determines the
stock options to be granted by the Company to employees, consultants and
advisors.
There are currently four members of the Board of Directors of the
Company. Two of these members are elected by the holders of the Common Stock and
Convertible Preferred Stock voting as a single class (the "Common Stock
Directors"). Two of these directors are elected by the holders of the
Convertible Preferred Stock voting as a separate class (the "Preferred Stock
Directors"). The Common Stock Directors are divided into three classes, with
directors in each class serving three-year staggered terms. There are currently
two Common Stock Directors, consisting of one director who is serving for a term
which expires in 1999, and one director who is serving for a term which expires
in 1998. The Board currently has vacant seats in the class of directors serving
for a term which expires in 1997. The Board is in the process of considering
nominees for such vacancies but has not selected any candidates at this time.
All directors hold office until their successors have been elected and
qualified. In connection with its initial public offering of Common Stock, the
Company agreed with Gerard Klauer Mattison & Co, Inc. ("GKM"), the
representative of the underwriters for that offering, that until July 8, 1998
the Company will use its best efforts to cause, if requested by GKM, an
individual selected by GKM and reasonably acceptable to the Company to be
elected to the Company's Board of Directors, who may be an officer, director or
affiliate of GKM. GKM has not exercised such right to date.
Pursuant to the terms of the Certificate of Designations with respect to
the Convertible Preferred Stock, the holders of the Convertible Preferred Stock
have the right, voting as a separate class, to elect two persons to the Board of
Directors of the Company. Currently, James J. Mossman and Anthony Grillo are the
designees of the holders of the Convertible Preferred Stock. All of the
outstanding shares of Convertible Preferred Stock are held by
39
<PAGE>
Blackstone Capital Partners and their affiliates. In addition to designating two
directors to the Board of Directors of the Company, the holders of the
Convertible Preferred Stock are entitled to vote with the holders of PCTV Common
Stock with respect to the election of the other members of the Board of
Directors.
Matthew Oristano has been the Chairman and Chief Executive Officer and a
director of the Company since its formation in April 1993. From 1988 to 1993,
Mr. Oristano served as an executive and manager of the Company's predecessors.
From 1984 to 1988 Mr. Oristano was on the executive committee of and was the
Chief Executive of Croydon Cable Television, one of the first cable systems in
the United Kingdom built by a U.S. company. Also, Mr. Oristano was founder and,
from 1984 to 1988, the Chief Executive Officer of Bravo, a UK movie service
delivered to cable operators. Mr. Oristano was on the board of directors and
executive committee of the Cable Television Association of Great Britain from
1987 to 1988. From 1982 to 1984, Mr. Oristano was the General Manager of the
Bridgeport, Connecticut cable system owned and operated by a corporation which
was owned by the Oristano family. During 1984 and 1985, Mr. Oristano was also
President of the Connecticut Cable Television Association. Mr. Oristano holds a
degree in physics from Rennselaer Polytechnic Institute. Mr. Oristano is the
son of Mr. Victor Oristano.
Charles F. Schwartz has been Vice President and Chief Financial Officer
of the Company since August 1993 and Chief of Staff since March 1994. In
December 1994, Mr. Schwartz was named Senior Vice President. From January 1989
to August 1993, Mr. Schwartz had been Chief Financial Officer of Jimbo's Jumbos,
Incorporated, an affiliate of Chock Full O' Nuts. Mr. Schwartz is a Certified
Public Accountant.
Todd A. Rowley has been Senior Vice President-Market Development of the
Company since its formation in April 1993, and since 1988 had been Vice-
President of the Company's predecessor.
Peter Lynch has been Senior Vice President-Midwest Region of the Company
from August 1995 and Senior Vice President-Operations of the Company since
February, 1996. Prior to joining the Company, Mr. Lynch was executive director
of operations for NYNEX Cable Communications in England.
Robert Young has been Senior Vice President of the Company from January
1996. From the 1980's to January 1996, Mr. Young was an executive officer and
principal stockholder of Sat-Tel Services, Inc., which company provides
installation services for the Company. In January 1996 the Company acquired all
of the outstanding capital stock of Sat-Tel Services, Inc. and Mr. Young became
an officer of the Company.
Donald E. Olander has been Vice President, General Counsel and Secretary
of the Company since November 1993. From May 1993 until joining the Company, Mr.
Olander was an attorney with Lehman Brothers. From April 1992 to May 1993, Mr.
Olander had his own legal practice. From 1990 to 1992, Mr. Olander was an
attorney with the firm of Shea & Gould.
Michael F. Whalen, Jr. has been Vice President-Finance and Acquisitions
of the Company since April 1994. From August 1993 until joining the Company, Mr.
Whalen was a Vice President in charge of the New York office for Amsterdam
Pacific Corporation, a media/telecommunication investment banking firm. From
October 1988 to August 1993, Mr. Whalen was employed by Bank of Montreal holding
various positions, the latest of which was as a director in the bank's private
placement group.
Victor Oristano has been Vice Chairman and a director of the Company
since its formation in April 1993, and since 1988 has been Chairman of the
partnership that managed the business of the Company's predecessors. Mr.
Oristano is also a director of Cablevision Systems Corporation, one of the
largest U.S. hardwire cable system operators. Mr. Oristano was a Lieutenant
Commander in the United States Navy during World War II. Mr. Oristano is the
father of Mr. Matthew Oristano.
James J. Mossman has been a Senior Managing Director of The Blackstone
Group L.P. since January 1990. He was a Vice President of The Blackstone Group
from September 1986 to December 1989. Mr. Mossman serves on the board of
directors of Transtar, Inc., Collins & Aikman Corporation, and Great Lakes
Dredge & Dock Corporation.
40
<PAGE>
Anthony Grillo has been a Senior Managing Director of The Blackstone
Group L.P. since January 1993. He was a Managing Director of The Blackstone
Group from May 1991 to January 1993. Mr. Grillo serves on the board of directors
of Littelfuse, Inc., Tracor, Inc., General Aquatics, Inc., Joule, Inc., Barr
Technologies, Inc. and other privately held companies.
Section 16 Reports
The Company believes that all required Forms 3, 4 and 5 were filed on
time during fiscal 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses compensation for the fiscal years listed
received by the Company's Chief Executive Officer and the Company's four other
most highly compensated executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------
Long Term
Fiscal Other Annual Compensation Awards All Other
Name and Principal Position Year Salary Bonus(1) Compensation Options(#) Compensation(2)
- ---------------------------------------- ------ -------- ---------- ------------ -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 1996 $212,000 $ 0 $0 0 $ 1,900
Chairman and Chief Executive Officer 1995 $212,000 $ 0 $0 0 $50,000(3)
1994 $212,000 $50,000 $0 5,000 $50,000(3)
Robert Young (4) 1996 $126,000 --(4) $0 5,000 $ 2,300
Senior Vice President
Peter Lynch (5) 1996 $142,000 $ 0 $0 30,000 $ 1,500
Senior Vice President--Operations 1995 $ 54,000 $ 0 $0 25,000 $ 900
Charles F. Schwartz 1996 $139,000 $ 0 $0 30,000 $ 900
Senior Vice President, Chief 1995 $108,000 $ 0 $0 20,000 $ 650
Financial Officer 1994 $108,000 $25,000 $0 7,000 $ 400
Todd A. Rowley 1996 $121,000 $ 0 $0 30,000 $ 600
Senior Vice President--Market 1995 $108,000 $15,000 $0 15,000 $ 200
Development 1994 $108,000 $ 7,500 $0 7,000 $ 200
</TABLE>
_______________
(1) Cash bonuses for services rendered in fiscal years 1996, 1995 and 1994 have
been listed in the year earned, but were actually paid in the following
fiscal year.
(2) Except as otherwise noted, the items reported are for life insurance
premiums and matching contributions to the Company's 401(k) plan.
(3) Reflects $50,000 received from Alda Communications Corp. as directors' fees.
(4) Mr. Young became an executive officer of the Company in January, 1996. Mr.
Young may receive a cash bonus for the 1996 fiscal year, but such amount has
not been determined as of the date of this report.
(5) Mr. Lynch became an executive officer of the Company in June, 1995.
41
<PAGE>
The following table sets forth certain information regarding stock option grants
made to the named executive officers in 1996.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION> Individual Grants
----------------------------------------------------
Potential Realizable Value
% of Total at Assumed Annual Rates of
Options Stock Price Appreciation
Granted to Exercise for Option Term/(1)/
Options Employees Price Expiration
Name Granted (#) in Fiscal Year ($/Sh.) Date 5%($) 10%($)
- ---- ----------- -------------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 0 -- -- -- -- --
Robert Young 5,000/(2)/ 1.9% 4.00 1/28/07 $12,578 $ 31,875
Peter Lynch 30,000/(2)/ 11.6% 4.00 1/28/07 $75,467 $191,249
Charles F. Schwartz 30,000/(2)/ 11.6% 4.00 1/28/07 $75,467 $191,249
Todd A. Rowley 30,000/(2)/ 11.6% 4.00 1/28/07 $75,467 $191,249
- ---------------
</TABLE>
1 Potential realizable value is based on an assumption that the stock price
of the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year term of the option.
Potential realizable values are net of exercise price, but before taxes
associated with exercise. These numbers are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price growth.
2 Incentive stock option which has an exercise price equal to the fair market
value of the Common Stock on the date of grant, vests at a rate of 33 1/3
percent on the first, second and third anniversary of the grant date and has a
term of ten years.
Option Exercises and Fiscal 1996 Year-End Value
The number of options exercised and the value realized from any such
exercise during fiscal 1996 and the number and value of options held at fiscal
year end for the named executive officers are set forth in the following table.
Aggregate Option Exercises and Fiscal Year-End Option Values
------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
End (#) Fiscal Year End ($)(1)
-------------------------- --------------------------
Shares Value
Acquired on Realized
Name Exercise(#) ($)(2) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 0 $ 0 201,667 3,333 $ 0 $0
Robert Young 0 $ 0 0 5,000 $ 0 $0
Peter Lynch 0 $ 0 0 55,000 $ 0 $0
Charles F. Schwartz 0 $ 0 0 70,000 $ 0 $0
Todd A. Rowley 0 $ 0 36,000 65,000 $216,900 $0
- ---------------
</TABLE>
(1) Value of unexercised options is (i) the fair market value of the common
stock at fiscal 1996 year end ($6.125) less the option exercise price per
share, times (ii) the number of shares subject to the option.
(2) Value realized upon exercise is (i) the fair market value of the Common
Stock on the date of exercise, less the option exercise price, times (ii)
the number of shares of common stock received on exercise of the option.
42
<PAGE>
Compensation Committee Interlocks and Insider Participation
The following individuals serve as members of the Compensation Committee
of the Board of Directors: Matthew Oristano and Anthony Grillo. Certain
transactions between members of the Compensation Committee and the Company are
described below under "Certain Relationships and Related Transactions".
Employment and Consulting Agreements
The Company has a written employment agreement with Matthew Oristano.
Pursuant to this agreement Mr. Oristano receives an annual base salary of
$212,000 and he may receive an annual bonus to be determined by the Company's
Compensation Committee. The agreement was executed by the Company and Mr.
Oristano in April 1993, became effective in July 1993 upon the consummation of
the Company's initial public offering and, unless terminated earlier by the
Company or Mr. Oristano, will continue in effect for five years from the
effective date. The agreement contains confidentiality and non-competition
provisions and contemplates that Mr. Oristano will devote his full time to the
business of the Company. Pursuant to this agreement, if Mr. Oristano's
employment is terminated by the Company without cause, he is entitled to his
base salary and certain benefits for the remainder of the employment term.
The Company has a written employment agreement with Peter Lynch. This
agreement provides that Mr. Lynch shall be entitled to an annual base salary of
$143,000 and provides that he may receive an annual bonus to be determined by
the Company's Compensation Committee. The agreement became effective in
February 1996 and, unless terminated earlier by the Company or Mr. Lynch, will
continue in effect for three years from the effective date. The agreement
contains confidentiality and non-competition provisions and contemplates that
Mr. Lynch will devote his full time to the business of the Company. If the
Company terminates Mr. Lynch's employment prior to the end of his employment
term, Mr. Lynch is entitled to receive the continuation of his base salary and
benefits for a period of one year from the date of termination.
The Company has a written employment agreement with Robert Young. This
agreement provides that Mr. Young shall be entitled to an annual base salary of
$133,000 and provides that he may receive an annual bonus of up to $50,000. The
agreement became effective in January 1996 and, unless terminated earlier by the
Company or Mr. Young, will continue in effect for three years from the effective
date. The agreement contains confidentiality and non-competition provisions and
contemplates that Mr. Young will devote his full time to the business of the
Company. If Mr. Young's employment with the Company is terminated by the
Company without cause Mr. Young is entitled to receive half his annual salary
and bonus and six month's benefits as a severance payment.
The Company has entered into change of control severance agreements with
each of Mr. Lynch, Mr. Rowley and Mr. Schwartz which require the Company, in the
case of a change of control of the Company, to pay each of such officers two
times their annual base salary and bonus. In addition, in the case of a change
of control, options issued under the Company's 1993 Stock Option Plan vest
immediately.
The Company also has a written consulting agreement with Alda Limited
Partners pursuant to which it and its chairman, Mr. Victor Oristano, have agreed
to render management consulting services to the Company, including advice
concerning strategic and financial planning matters, wireless cable system
development and operation activities and public and stockholder relations
matters. This agreement provides that the consultant shall be paid consulting
fees of $158,000 per annum and provides that the consultant may receive an
annual performance bonus to be determined by the Company. This agreement was
executed by the Company and the consultant in April 1993, became effective in
July 1993 upon the consummation of the Company's initial public offering of
Common Stock and, unless terminated earlier by the Company or the consultant,
will continue in effect for 5 years from the effective date. The agreement
contains confidentiality and non-competition provisions and, if the consulting
relationship is terminated by the Company without cause, entitles the consultant
to the base consulting fees for the remainder of the consulting term.
43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The authorized capital stock of the Company consists of Common Stock and
Convertible Preferred Stock. The holders of the Convertible Preferred Stock are
entitled to vote with the holders of the Common Stock as a single class on all
matters submitted to the stockholders of the Company. When voting with the
Common Stock as a single class, each share of Convertible Preferred Stock is
entitled to 4.444 votes per share.
The table below sets forth, as of March 14, 1997, certain information
regarding beneficial ownership of Common Stock or Convertible Preferred Stock
with respect to (i) each person or entity known to the Company who beneficially
owns 5% or more of the outstanding shares of Common Stock or Convertible
Preferred Stock, (ii) each director, (iii) the Company's Chief Executive Officer
and other most highly compensated executive officers in fiscal 1996 and (iv) all
executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Number and Percentage of Percentage
Shares of Number and of Common
Convertible Percentage of Shares Voting
Name of Beneficial Owner Preferred Stock of Common Stock Power
- ------------------------ -------------------------- --------------------- -----------
<S> <C> <C> <C> <C> <C>
Blackstone Capital Partners II Merchant
Banking Fund L.P. (1) 450,177 75% 12.6%
Blackstone Offshore Capital Partners II
L.P. (1) 118,122 20% 3.3%
Blackstone Family Investment
Partnership II L.P. (1) 30,769 5% *
James J. Mossman(2) 599,068 100% 16.7%
Anthony Grillo (2) 599,068 100% 16.7%
Matthew Oristano (3) 783,315 6.1% 5.0%
BCI Growth III, L.P. (4) 1,180,474 9.1% 7.6%
FMR Corp. (5) 1,252,079 9.7% 8.0%
Fleming Capital Management(6) 1,211,450 9.4% 7.8%
Dimensional Fund Advisors(7) 942,421 7.3% 6.0%
Victor Oristano (8) 222,582 1.7% 1.4%
Todd A. Rowley 36,000 * *
Charles F. Schwartz 0 * *
Peter Lynch 0 * *
Robert Young 10,200 * *
All executive officers and directors as
a group (10 persons) (9) 599,068 (100%) 1,078,372 8.3% 24.0%
</TABLE>
- ---------------
* Less than 1%
(1) The principal address of Blackstone Capital Partners II Merchant Banking
Fund L.P. ("BCPII") and Blackstone Family Investment Partnership II L.P.
("BFIPII") is 118 North Bedford Road, Mount Kisco, New York 10549. The
principal address of Blackstone Offshore Capital Partners II L.P. ("BCP
Offshore") is c/o Mees Pierson Management (Cayman), British American Center,
Dr. Roy's Drive, Georgetown, Grand Cayman, British West Indies. The general
partner of BCPII, BFIPII and BCP Offshore is Blackstone Management
Associates II L.L.C. ("BMAII"). The members of BMAII have the power to vote
and dispose of the PCTV Convertible P-I-K Preferred Stock.
(2) Messrs. Mossman and Grillo are affiliated with The Blackstone Group L.P. in
the capacities described under Item 10 Directors and Officers of the
Registrant. Each such person's business address is c/o The Blackstone Group
L.P., 345 Park Avenue, New York, NY 10154. Mr. Mossman and Mr. Grillo are
members of BMAII. Therefore, Mr. Mossman and Mr. Grillo may be deemed to
share beneficial ownership of the PCTV
44
<PAGE>
Convertible Preferred Stock. Mr. Mossman and Mr. Grillo disclaim beneficial
ownership of any such shares of PCTV Convertible Preferred Stock.
(3) Includes (i) 112,808 shares of Common Stock which Matthew Oristano owns
directly, (ii) 447,227 shares of Common Stock owned by Alda Multichannels,
Ltd. for which Matthew Oristano may be deemed to share voting power and
investment power with members of his immediate family, (iii) 21,613
additional shares of Common Stock over which Matthew Oristano may be deemed
to exercise indirect control, and (iv) 201,667 shares of Common Stock which
Matthew Oristano has an option to acquire within 60 days of the date hereof
pursuant to stock option agreements but excludes 3,333 shares which he has
the option to acquire thereafter.
(4) BCI Growth's mailing address is c/o BCI Advisors, Inc., Glenpointe Centre
West, Teaneck, New Jersey 07666.
(5) The address of FMR Corp. is 82 Devonshire Street, Boston, MA 02109.
(6) The address of Fleming Capital Management is 320 Park Ave., New York, NY
10022.
(7) The address of Dimensional Fund Advisors is 1299 Ocean Avenue, Santa Monica,
CA 90401.
(8) Includes 100,667 shares of Common Stock which Victor Oristano has an option
to acquire within 60 days of the date hereof pursuant to a stock option
agreement.
(9) Includes 377,475 shares of Common Stock which all directors and executive
officers of the Company have the option to acquire within 60 days of the
date hereof but does not include 295,000 additional shares which all
directors and executive officers have an option to acquire thereafter.
ITEM 13. Certain Relationships and Related Transactions
Alda Channel Leases
Alda Wireless Holdings, Inc. and Alda Gold, Inc. (together, the "Alda
Companies"), which are controlled by Matthew Oristano, lease to the Company the
rights to approximately 40 wireless cable frequencies held by such entities.
The leases provide that the Company shall have the exclusive right to use the
frequencies for an unlimited number of successive one-year terms renewable at
the option of the Company. The annual lease payments to be paid by the Company
are nominal. The Company has the option to acquire these frequency licenses for
$100 per license, and the right to lease any wireless cable frequency licenses
acquired by the Alda Companies. The Company believes that the terms of
these leases between the Company and the Alda Companies are no less favorable to
the Company than the terms of any similar lease that could have been obtained
through arm's length negotiations with an unaffiliated third party.
Blackstone Services
The Company and affiliates of The Blackstone Group have entered into the
following two agreements: (a) an advisory and consulting agreement pursuant to
which Blackstone Management Partners L.P. will provide strategic financial
planning and other services (other than investment banking or other financial
advisory services in connection with acquisitions and divestitures by the
Company) to the Company for an annual fee of $250,000 (plus reimbursement of
certain out-of-pocket expenses) subject to the approval of the Company in each
year (no such amount was paid with respect to the 1996 fiscal year); and (b) a
separate agreement pursuant to which the Company paid The Blackstone Group L.P.
a fee of $600,000 for financial advisory services provided by Blackstone in
connection with the Company's acquisition of Preferred Entertainment, Inc.
Merger of Alda Communications Corp. into the Company
The Chairman and Vice Chairman of the Company were stockholders and
officers of Alda Communications Corp. ("ACC"). The primary asset of ACC was
661,304 shares of Company Common Stock. On June 27, 1996, ACC was merged into
the Company and the Company thereby acquired the 661,304 shares of Common Stock
held by ACC. As consideration in the merger, the Company issued 661,304 shares
of Common Stock to the former stockholders of ACC including the Chairman and
Vice Chairman of the Company. The merger was consummated without any cost to
the Company.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial statements
The consolidated financial statements included in this item are
indexed in Item 8 of this report.
2. Exhibit List
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Certificate of Incorporation of Registrant as dated April 22, 1993. (a)
3.2 Amendment to Certificate of Incorporation of Registrant date June 16, 1994. (i)
3.3 Bylaws of Registrant. (a)
10.1 Employment Agreement between Registrant and Mr. Matthew Oristano. (a)
10.2 Employment Agreement between Registrant and Robert Young. (*)
10.3 Employment Agreement between Registrant and Peter Lynch. (*)
10.4 Consulting Agreement between Registrant and Alda Limited Partners. (a)
10.5 Key Employee Stock Plan of Registrant. (a)
10.6 1993 Founders' Stock Option Plan of Registrant. (a)
10.7 1993 Stock Option Plan of Registrant. (a)
10.8 Excess Capacity Royalty Agreement between the Arizona Board of Regents for
Benefit of the University of Arizona and People's Choice TV of Tucson,
Inc., dated December 8, 1992, relating to the lease of sixteen ITFS
channels in Tucson, Arizona. (a)
10.9 Form of lease agreement used by Registrant for ITFS or educational channel
leases, along with amended schedule of such leases. (b)
10.10 Form of lease agreement used by Registrant for channel leases with
Alda Multichannels Ltd., along with a schedule of such leases. (b)
10.11 Antenna Site License Agreement of People's Choice TV of Tucson, Inc. (e)
10.12 Antenna Site License Agreement of People's Choice TV of Houston, Inc. (e)
10.13 Stockholders' Agreement, dated March 15, 1994, among the Registrant,
Wireless Cable of Indianapolis, Inc., Donald Boehm, Andrew V. Saban and Cathy Schubert. (f)
</TABLE>
46
<PAGE>
<TABLE>
<S> <C>
10.14 Warrant to Purchase Common Stock of Registrant issued by
Registrant to BOM dated April 1993. (c)
10.15 Gerard Klauer Mattison & Co., Inc. Warrant Agreement. (d)
10.16 Stock Purchase Agreement, dated October 27, 1994, by and among Registrant
and Blackstone Capital Partners II Merchant Banking Fund L.P. ("BCP
II") and Blackstone Offshore Capital Partners II L.P., ("BOCP II"). (g)
10.17 Stockholders Agreement, dated October 27, 1994, among Registrant, BCP II,
BOCP II, Matthew Oristano and Victor Oristano. (g)
10.18 Registration Rights Agreement among Registrant and BCP II and BOCP II. (g)
10.19 Certificate of Designation of Convertible Cumulative Pay-in-Kind Preferred Stock. (g)
10.20 Asset Exchange Agreement, dated November 6, 1996, among CS Wireless Systems,
Inc., Registrant, and People's Choice TV of Kansas City, Inc. (*)
10.21 Agreement and Plan of Merger among Registrant, Preferred Entertainment,
Inc. and Chicago Wireless, dated March 26, 1995. (h)
10.22 Agreement and Plan of Merger among Registrant, Wireless Developers, Inc. and
Fred Atchity, dated March 26, 1995. (h)
10.23 Agreement and Plan of Merger, dated March 28, 1995, among Registrant, People's
Choice TVof Baltimore, Inc., Eastern Cable Networks Corp ("ECN"), and
Eastern Cable Networks of Michigan, Inc. ("ECNI"). (i)
10.24 Asset Exchange Agreement dated March 28, 1995, among Registrant, ECN and
Eastern Cable Networks of Michigan II, Inc. ("ECNII"). (i)
10.25 Stock Purchase Agreement, dated as of March 14, 1995, among Wireless Cable of
Indianapolis, Inc. ("WCI"), Broadcast Cable Bloomington, Inc. ("BCI"), and
the shareholders of BCI. (l)
10.26 Note Agreement, dated as of May 31, 1995, among WCI, BCI, and the
shareholders of BCI and Guarantee of Registrant. (l)
10.27 Form of Indenture, dated May 19, 1995, between Registrant and Bank of
Montreal Trust Company as Trustee, relating to Senior Discount Notes. (j)
10.28 Form of Warrant Agreement, dated May 19, 1995, between Registrant and
Harris Trust Company of New York, as Warrant Agent, with respect to
warrants issued with Senior Discount Notes. (k)
10.29 Stock Purchase Agreement, dated August 9, 1995, among Registrant,
Robert Young and Michael Sigesmund. (l)
10.30 Stock Acquisition Agreement, dated as of September 29, 1995, among
Registrant, Wireless Telecommunications L.L.C., and George Ring and
Vincent Tese. (l)
21. Subsidiaries of Registrant. (l)
</TABLE>
47
<PAGE>
<TABLE>
<S> <C>
27. Financial Data Schedule. (*)
___________________________
(*) Filed herewith.
(a) Document incorporated by reference from Form S-1 Registration
Statement No. 33-61996 filed by the Registrant on May 3, 1993.
(b) Document incorporated by reference from Amendment No. 1 to Form S-1
Registration Statement No. 33-61996 filed by Registrant on June 14, 1993.
(c) Document incorporated by reference from Amendment No. 2 to Form S-1
Registration Statement No. 33-61996 filed by Registrant on July 2, 1993.
(d) Document incorporated by reference from Form S-1
Registration Statement No. 33-72180 filed by Registrant on November 26, 1993.
(e) Document incorporated by reference from Amendment No. 1 to Form S-1
Registration Statement No. 33-72180 filed by Registrant on December 28, 1993.
(f) Document incorporated by reference from Form 10-K for the fiscal year ended
December 31, 1993 filed by the Registrant on March 30, 1994.
(g) Document incorporated by reference from Form 8-K of Registrant dated
October 27, 1994.
(h) Document incorporated by reference from Amendment No. 5 to Schedule 13D of PCTV
and SDIC, dated March 26, 1995, with respect to PEI common stock.
(i) Document incorporated by reference from Form 10-K for the fiscal year ended
December 31, 1994 filed by Registrant on April 3, 1995.
(j) Document incorporated by reference from Amendment No. 1 to Form S-3 Registration
Statement No. 33-80928 filed by Registrant on April 4, 1995.
(k) Document incorporated by reference from Amendment No. 3 to Form S-3 Registration
Statement No 33-80928 filed by Registrant on May 12, 1995.
(l) Document incorporated by reference from Form 10-K for the fiscal year ended
December 31, 1995 filed by Registrant on April 1, 1996.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PEOPLE'S CHOICE TV CORP.
By: /s/Matthew Oristano
--------------------------
Matthew Oristano
Chairman and Chief Executive Officer
Dated: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Matthew Oristano Director and Chief Executive Officer March 28, 1997
- --------------------
Matthew Oristano
s/ Victor Oristano Vice Chairman and Director March 28, 1997
- ------------------
Victor Oristano
/s/ Charles F. Schwartz Principal Financial and Accounting March 28, 1997
- ----------------------- Officer
Charles F. Schwartz
/s/ Anthony Grillo Director March 28, 1997
- -------------------
Anthony Grillo
/s/ James J. Mossman Director March 28, 1997
- ---------------------
James J. Mossman
49
<PAGE>
EXHIBIT NO. 10.2
----------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into on January 26,
1996 by and between ROBERT A. YOUNG ("Employee") and PEOPLE'S CHOICE TV CORP., a
Delaware corporation (the "Company").
R E C I T A L S:
- - - - - - - -
A. The Company is in the business of developing, owning and operating
wireless cable television systems and conducting various other activities
associated therewith (the "Business").
B. The Company desires to employ Employee as its Vice President and
Employee desires to be so employed by the Company, on the terms and conditions
set forth herein.
C. The Company desires to bind Employee to certain restrictive covenants
and Employee agrees to be so bound, on the terms and conditions set forth
herein.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment Term.
---------------
Subject to the terms and conditions set forth herein, including Section 11,
the Company will employ Employee and Employee will serve as Vice President for a
three (3) year term commencing on the date hereof (the "Effective Date") and
ending on the third anniversary of the Effective Date (the "Employment Term").
2. Employment Duties.
-----------------
During the Employment Term, Employee will serve as Vice President
subject to the terms of this Agreement and the direction and control of the
Chairman and Chief Executive Officer and President of the Company. Employee
shall, during the Employment Term, perform such duties for the Company and its
subsidiaries as may be assigned by the President from time to time and serve the
Company faithfully, diligently and competently and to the best of his ability.
Employee's duties as assigned by the President will be similar to those duties
performed by Employee in his previous capacity as President of Sat-Tel Services,
Inc. The Company will provide the Employee with a staff of employees necessary
for the Employee to efficiently and properly implement and carry our his duties
and responsibilities. During the term of this Agreement, Employee will reside
and have his permanent residence in Tucson, Arizona and shall
<PAGE>
not be required to move his residence as part of this Agreement. Employees
primary place of work shall be located at the Company's offices in Tucson,
Arizona. Nothing in this agreement shall be construed as preventing Employee
from investing his assets in such form or manner as will not require any
services on his part in the operation of the affairs of the business
organization in which such investments are made, including, but not limited to
Employee's interest in MIS/RAY Partners.
3. Compensation.
------------
(a) Salary. In exchange for Employee's services hereunder, during
------
the Employment Term, the Company shall pay to Employee for services rendered by
Employee under this Agreement an annual salary of One Hundred Twenty-Five
Thousand Dollars ($125,000), or such higher salary as approved by the Chairman
and President of the Company in their sole discretion. Such Salary shall be
payable in arrears not less frequently than monthly, but otherwise in accordance
with the Company's ordinary payment practices.
(b) Bonus. In addition, the Employee shall be entitled to a yearly
-----
bonus of up to Fifty Thousand Dollars ($50,000.00) based on the following
criteria:
(1) Completion Rate Increase
(2) Quality Control and Trouble Call Decrease
(3) Lower Cost per Install
The amount of the bonus will be determined by the Chief Executive Officer, the
President and the Chief Financial Officer based on their assessment of the
improvements made in the above three areas. The amount of bonus will be
determined on a good faith basis, based on their objective assessments.
(c) Stock Options. The Employee shall be given stock options in the
--------------
stock of the Company, according to the terms of the Stock Option Agreement,
attached hereto as Exhibit A.
4. Benefits During the Employment Term.
-----------------------------------
(a) Employee shall be entitled during the Employment Term to participate
in such employee benefit plans and programs, including, health
insurance plans and the Company's 401(k) plan, as described in the
Associate Handbook of People's Choice TV (the "Handbook"). For purposes
of Company benefits, including vacations, holidays and personal time,
Employee shall be given credit for the time since January, 1991 that
the Employee has been employed by Sat-Tel Services, Inc. The Company
does not promise the adoption or continuance of any particular plan or
program during the Employment Term, and Employee's (and his
dependents') participation in any such plan or program shall be subject
to the provisions, rules, regulations and laws applicable thereto. At
the sole cost and
2
<PAGE>
expense of the Company, the Employee shall be provided family medical
and hospitalization insurance coverage as agreed and described in the
Stock Purchase Agreement executed by and between the Company, Employee
and Michael Sigesmund.
(b) Employee shall also be entitled to be paid for Company holidays and
vacation, personal, and sick days as provided in the Handbook.
(c) Employee shall receive a car allowance of Eight Thousand Dollars
($8,000) per year to be paid every other week in installments of Three
Hundred Eight Dollars ($308.00).
5. Reimbursement of Expenses. Employee shall be entitled to reimbursement
-------------------------
for ordinary, necessary and reasonable out-of-pocket trade or business expenses
which Employee incurs in connection with performing his duties under this
Agreement, including reasonable travel and meal expenses. The reimbursement of
all such expenses shall be made upon presentation of evidence reasonably
satisfactory to the Company's President (or such other officer of the Company
designated thereby) of the amounts and nature of such expenses and shall be
subject to the Company's policies regarding business expenses and to the
reasonable approval of the Company's President (or such other officer of the
Company designated thereby). The reimbursement of expenses shall be paid within
thirty days after receipt by the Company. The majority of air travel and hotel
lodgings shall be billed by Company's vendors directly to the Company. The
Employee shall be provided with a written list from the Company specifically
setting forth a description of business expenses which the Company will not
reimburse.
6. Restrictive Covenants. Employee acknowledges and agrees that (i)
---------------------
through his position as an employee of the Company, he will learn valuable trade
secrets and other proprietary information relating to the Business of the
Company, (ii) Employee's services to the Company are unique in nature, and (iii)
the Company would be irreparably damaged if Employee were to provide services to
any person or entity in violation of the restrictions contained in this
Agreement. Accordingly, as an inducement to the Company to enter into this
Agreement and in consideration of his employment hereunder, Employee agrees that
during the time he is employed at the Company and for an additional one (1) year
thereafter (such period being referred to herein as the "Restricted Period"),
the Employee shall not, directly or indirectly, either for himself or for any
other person or entity:
(a) engage or participate in, or assist, advise or be connected with
(including as an employee, owner, partner, shareholder, officer,
director, advisor, consultant, agent or otherwise), or permit his name
to be used by or render services for, any person or entity engaged in
a Competing Business (as hereinafter defined) provided however, that
Employee shall not be in breach of this Agreement if the Employee
makes a passive investment in a business that later becomes a
Competing Business;
3
<PAGE>
(b) take any action which might divert from the Company or an Affiliate of
the Company any business which is within the scope of the Company's
business, including but not limited to a Competing Business;
(c) solicit or attempt to solicit (i) any then subscriber or other
customer of the Company with whom the Employee had contact and/or
knowledge during the Employment Term to purchase Competing Products or
Services (as herein defined) from any person or entity (other than the
Company) or (ii) any then subscriber, customer, supplier, licensor,
licensee or other business relation of the Company with whom the
Employee had contact and/or knowledge during the Employment Term to
cease doing business with the Company; or
(d) solicit or hire any person who is or was in the preceeding six months
a director, officer, employee or agent of the Company or any Affiliate
of the Company to perform services for any entity other than the
Company and its Affiliates.
As used herein, a "Competing Business" shall mean any company or person engaged
in, or planning to engage in, the business of providing pay or subscription
television services (whether through hard-wire, wireless or other transmissions)
to any customer in any market in which the Company or any Affiliate thereof is
providing pay or subscription television services or was planning to provide
such services as of the date of the termination of Employee's employment with
the Company, excepting that Young shall not be prohibited from owning, managing,
working for or operating a hard-wire or wireless installation company or
business regardless of its location so long as such installation company or
entity is not owned in whole or part by a "Competing Business". Such markets
currently include Albuquerque, Baltimore, Chicago, Detroit, Houston,
Indianapolis, Kansas City, Milwaukee, Phoenix, St. Louis and Tucson and other
markets may be added in the future. The products and services subject to these
restrictive covenants are herein referred to as "Competing Products and
Services". The restrictions contained herein and the Employee's obligation to
comply with this Section 6 shall not relate to products and services offered by
the Company after the execution of this Agreement which are not characteristic
of nor related to the Employee's area of expertise.
7. Disclosure of Confidential Information. Employee recognizes that he
--------------------------------------
possesses or as a result of his employment by the Company will gain possession
of Confidential Information (as defined below). Accordingly, as an inducement
for the Company to enter into this Agreement and in consideration of Employee's
employment, Employee agrees that:
(a) for the longest period permitted by law from the date of this
Agreement, Employee and each Affiliate of Employee shall hold in
strictest confidence and shall not, other than as required by law,
without the prior written consent of the Company, use for his own
benefit or that of any third party or intentionally or negligently
disclose in a manner which could be harmful to the Company to any
person, firm or corporation except the Company, an Affiliate of the
Company or employees of the Company any Confidential Information (as
defined below). For purposes of this Agreement, intending that the
term shall be broadly construed to
4
<PAGE>
include anything protectible as a trade secret under applicable law,
"Confidential Information" shall mean all information, and all
documents and other tangible items which record information, relating
to the creation and marketing by the Company of products and services,
from time to time, which at the time or times concerned is protectible
as a trade secret under applicable law, and which has been or is from
time to time learned by, disclosed to or known by Employee including,
without limitation, the following especially sensitive types of
information relating to the creation and marketing of products and
services of the Company:
(i) product development and marketing plans and strategies;
(ii) budgetary and financial information;
(iii) wireless cable development or launch plans for new or
existing systems or services;
(iv) information concerning contractual relationships by and
among the Company, its vendors, licensors, program suppliers,
employees or subscribers or other customers; and
(v) information concerning the character and scope of
business or personal relationships between employees, directors, and
consultants of the Company.
As used herein, an "Affiliate" shall mean and include any person or
entity which controls a party, which such party controls or which is under
common control with such party. "Control" means the power, direct or indirect,
to influence or cause the direction of the management and policies of a person
or entity through voting securities, contract or otherwise;
(b) Employee and each Affiliate of Employee shall promptly following a
request therefor from the Company return to the Company, without
retaining copies, all tangible items which are or which contain
Confidential Information, it being agreed by Employee on behalf of
himself and his heirs, successors and assigns that the Company shall
be entitled to rely on any action taken by Employee or the
Representative in connection with this paragraph (b); and
(c) at the request of the Company made at any time or from time to time
hereafter, Employee and each Affiliate of Employee shall make, execute
and deliver all applications, papers, assignments, conveyances,
instruments or other documents and shall perform or cause to be
performed such other lawful acts as the Company may reasonably deem
necessary or desirable to implement any of the provisions of this
Agreement, and shall give testimony and cooperate with the Company,
its Affiliates or its representatives in any controversy or legal
proceedings involving
5
<PAGE>
the Company, its Affiliates or its representatives with respect to any
Confidential Information, provided that the Company shall promptly
reimburse Employee and each Affiliate thereof for his reasonable costs
incurred in connection with the foregoing, including but not limited
to the reasonable costs and expenses of legal counsel retained by
Employee.
8. Inventions. Employee acknowledges that in his capacity as an employee
----------
of the Company, he may be involved in (i) the conception or making of
improvements, discoveries, inventions or the like (whether patentable or
unpatentable and whether or not reduced to practice), (ii) the authorship of
copyrightable works, or (iii) the development of trade secrets relating to the
Business. Employee acknowledges that all such intellectual property is the
exclusive property of the Company. Employee hereby waives any rights he may have
in or to such intellectual property, and Employee hereby assigns to the Company
all right, title and interest in and to such intellectual property. At the
Company's request and at no expense to Employee, Employee shall execute and
deliver all such papers, including, without limitation, any assignment
documents, and shall provide such cooperation as may be necessary or desirable,
or as the Company may reasonably request, in order to enable the Company to
secure and exercise its rights to such intellectual property. All concepts and
inventions known to and/or utilized by the Employee prior to his employment with
the Company shall remain the sole and exclusive right and property of the
Employee and the Company shall not be entitled to claim any right, title or
interest therein.
9. Specific Performance.
--------------------
(a) Employee agrees that any violation by him of Sections 6, 7 or 8 of
this Agreement, as applicable, would be highly injurious to the
Company and would cause irreparable harm to the Company. By reason of
the foregoing, Employee consents and agrees that if he violates any
provision of Sections 6, 7 or 8 of this Agreement the Company shall be
entitled, in addition to any other rights and remedies that it may
have, to apply to any court of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce, or
prevent any continuing violation of, the provisions of such Section.
In the event Employee breaches a covenant contained in this Agreement,
the Restricted Period applicable to Employee with respect to such
breached covenant shall be extended for the period of such breach.
(b) In the event that the Company or any Affiliate of the Company has
reason to believe that the Employee has breached this Agreement and or
has failed to perform any of the terms, conditions and covenants of
this Agreement, the Company shall deliver to the Employee a written
memorandum, acknowledged by the Employee, specifically setting forth
and describing the facts, circumstances, events and or documents which
the Company believes represent such breach and/or non-performance by
the Employee. The Employee shall thereafter have five (5) business
days to cure such breach and or events of non-performance (the "Cure
Period"). Until such time as the Company has provided notice the
6
<PAGE>
Employee and the Cure Period has run, the Employee shall not be deemed
to have breached and/or failed to perform this Agreement. If the
Employee has cured the breach or event(s) of non-performance, then the
Company shall not have the right to terminate this Agreement or the
employment of the Employee. If the alleged breach or event(s) of non-
performance represent matters which cannot by their nature by cured,
the Employee will provide the Company with written assurances that
such acts will not re-occur. If the same breach of event of non-
performance thereafter occurs as a result of the fault of Employee,
the Employee will be deemed to have waived further notice and the Cure
Period associated with the re-occurrence.
10. Enforcement. Employee acknowledges that the territorial, time and
-----------
scope limitations set for in Section 6 and 7, as applicable, are reasonable and
are properly required for the protection of the Company and in the event that
any such territorial, time or scope limitation is deemed to be unreasonable by a
court of competent jurisdiction, the Company and Employee agree, and Employee
submits, to the reduction of any or all of said territorial, time or scope
limitations to such an area, period or scope as said court shall deem reasonable
under the circumstances. Notwithstanding anything contained herein, if the
Employee is terminated from his employment with the Company without cause or the
Company breaches this Agreement, the Employee shall be released from his
obligations to comply with Section 6(a). If the Company breaches this Agreement
or terminates the Employee without cause, the Employee shall be entitled to the
severance salary and benefits described in Section 11(b) in addition to any
other remedies to which the Employee may be entitled.
11. Termination; Severance.
----------------------
(a) Notwithstanding the provisions of Section 1 and the other provisions
of this Agreement, Employee's employment with the Company may be
terminated at any time by the Company's Chairman, Chief Executive
Officer or President for "cause," which shall include (i) Employee's
conviction for, or plea of nolo contendere to, a felony, (ii)
Employee's intentional commission of an act involving self-dealing,
fraud or personal profit materially injurious to the Company, (iii)
Employee's commission of an act of willful misconduct or gross
negligence in the conduct of his duties hereunder, (iv) habitual
absenteeism or tardiness on the part of Employee provided that the
Employee has at least received one (1) prior written reprimand for
previous incidents of absenteeism or tardiness, (v) Employee's
intentional breach or violation of any material internal policies or
rules of the Company, including those rules adopted by PCTV concerning
the purchase and sale of PCTV's common stock or other securities by
employees of the Company, and (vi) Employee's breach of any material
provision of this Agreement. Any termination by the Company under this
Section 11(a) shall be in writing and shall set forth the reason for
such termination. In the event of termination under this Section
11(a), the Company's obligations under this Agreement shall cease and
Employee shall forfeit all right to receive any other compensation or
benefits under this Agreement, except that Employee shall be
7
<PAGE>
entitled to his Salary (under Section 3) and benefits (under Section
4) for services already performed as of the date of termination of
this Agreement. Without limitation, termination of Employee pursuant
to this Section 11(a) shall not relieve Employee of his obligations
under Sections 6, 7 or 8 hereof. Notwithstanding anything else in this
Agreement, if the Employee is terminated pursuant to Section 11(a)(i),
(ii) or (iii) above, the Company shall not be obligated to comply with
Section 9.2 above.
(b) Notwithstanding the provisions of Section 1 and the other provisions
of this Agreement, one year after the anniversary date of this
Agreement, Employee's employment with the Company may be terminated at
any time for any reason or no reason by the Company's Chairman and
Chief Executive Officer, or President without cause, provided that in
the event of such a termination, Employee shall be paid within 30 days
after the termination date both (1) an amount equivalent to one
hundred eighty days of his Salary and bonus (under Section 3) and (2)
an amount equivalent to one hundred eighty days of his benefits (under
Section 4). All matters concerning Stock Options referred to in
Section 3(c) shall be determined under the Stock Option Agreement.
Except as otherwise specifically provided above, the Company's
obligations under this Agreement shall cease upon termination and
Employee shall forfeit all rights to receive any other compensation or
benefits under this Agreement. Without limitation, a termination of
Employee pursuant to this Section 11(b) shall not relieve Employee of
his obligations under Sections 6, 7 or 8 hereof.
(c) Notwithstanding the provisions of Section 1 and the other provisions
of this Agreement, after the one (1) year anniversary of the execution
of this Agreement, Employee's employment with the Company may be
terminated by Employee upon the provision of not less than ninety (90)
days prior written notice to the Company. In the event of termination
under this Section 11(c) and except as otherwise provided herein, the
Company's and Employee's obligations under this Agreement shall cease
upon the date indicated in Employee's notice, except that Employee
shall be entitled to his Salary (under Section 3) and benefits (under
Section 4) for services already performed as of the date of
termination of this Agreement. Without limitation, termination of
Employee pursuant to this Section 11(c) shall not relieve Employee of
his obligations under Sections 6, 7, or 8 hereof.
12. Death or Disability.
-------------------
(a) If Employee becomes permanently disabled (determined as provided
below) during the Employment Term, his employment may terminate at the
election of the Company as of the date such permanent disability is
determined. Employee shall be considered to be permanently disabled
for purposes of this Agreement if he is unable by reason of accident,
illness or physical condition (including mental illness) to perform
the material duties of his regular position with the Company
8
<PAGE>
and is not expected to recover from his disability within a period of
six (6) months from the commencement of the disability. If at any time
Employee claims or is claimed by the Company to be permanently
disabled, a physician acceptable to both Employee, or his
representative or guardian, and the Company (which acceptances shall
not be unreasonably withheld) shall be retained and paid for by the
Company and shall examine Employee. Employee shall cooperate fully
with the physician. If the physician determines that Employee is
permanently disabled, the physician shall deliver to the Company and
the Employee a certificate certifying both that Employee is
permanently disabled and the date upon which the condition of
permanent disability commenced. The determination of the physician may
be relied upon by the Company, unless demonstrated otherwise by the
Employee.
(b) Employee's right to his compensation and benefits under this Agreement
shall cease upon his death or disability, except that (i) Employee (or
his estate or heirs) shall be entitled to his Salary (under Section 3)
and benefits (under Section 4) for services performed as of the date
of his death or termination due to permanent disability, and (ii) in
addition, with respect to termination due solely to Employee's
permanent disability as determined pursuant to this Section 12, he
shall also be entitled to his Salary (under Section 3) and benefits
(under Section 4) for the ninety (90) day period beginning on the date
the permanent disability began; provided, however, that any such
amounts for Salary continuation shall be reduced by any amount
received by Employee under any disability insurance policy or other
benefit program such as Social Security.
13. Miscellaneous.
-------------
(a) All notices hereunder shall be in writing and shall be deemed given
when delivered in person, or three (3) business days after being
deposited in the United States mail, postage prepaid, registered or
certified mail, or two (2) business days after delivery to a
nationally recognized express courier, expenses prepaid, addressed as
follows:
If to Employee:
Mr. Robert Young
6755 North Nanini Drive
Tucson, Arizona 85704
If to the Company:
People's Choice TV Corp.
Two Corporate Drive
Shelton, CT 06484
Att: General Counsel
9
<PAGE>
and/or at such other addresses and/or to such other addressees as may be
designated by notice given in accordance with the provisions hereof.
(b) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors and permitted
assigns. No party shall assign this Agreement or its rights hereunder
without the prior written consent of the other party hereto; provided,
--------
however, that the Company may assign this Agreement without the prior
-------
written consent of Employee to any person or entity acquiring all or
substantially all of the Business of the Company (whether by sale of
stock, sale of assets, merger, consolidation or otherwise).
(c) This Agreement contains all of the agreements between the parties with
respect to the subject matter hereof and this Agreement supersedes all
other agreements, oral or written, between the parties hereto with
respect to the subject matter hereof., except that this Agreement
shall not supersede or alter any of the other agreements and documents
executed as part of the transaction involving the sale and purchase of
the Employee's shares of Sat-Tel Services, Inc. by the Company.
(d) No change or modification of this Agreement shall be valid unless the
same shall be in writing and signed by all of the parties hereto. No
waiver of any provisions of this Agreement shall be valid unless in
writing and signed by the waiving party. No waiver of any of the
provisions of this Agreement shall be deemed, or shall constitute, a
waiver of any other provision, whether or not similar, nor shall any
waiver constitute a continuing waiver, unless so provided in the
waiver.
(e) If any provisions of this Agreement (or portions thereof) shall, for
any reason, be considered invalid or unenforceable by any court of
competent jurisdiction and such provision is not subject to revision
pursuant to Section 10, such provisions (or portions thereof) shall be
ineffective only to the extent of such invalidity or unenforceability,
and the remaining provisions of this Agreement (or portions thereof)
shall nevertheless be valid, enforceable and of full force and effect.
The Company's rights and the rights of the Employee under this
Agreement shall not be exclusive and shall be in addition to all other
rights and remedies available at law or in equity, including but not
limited to statutory rights provided pursuant to legislation involving
the protection of trade secrets.
(f) The section or paragraph headings or titles herein are for convenience
of reference only and shall not be deemed a part of this Agreement.
(g) This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original and all of which when taken together
shall constitute a single instrument.
10
<PAGE>
(h) This Agreement shall be governed and controlled as to validity,
enforcement, interpretation, construction, effect and in all other
respects by the laws of the State of Arizona applicable to contracts
made in that State (other than any conflict of laws rule which might
result in the application of the laws of any other jurisdiction).
Employee hereby expressly submits and consents in advance to the
jurisdiction of the federal and state courts of the State of Arizona
for all purposes in connection with any action or proceeding arising
out of or relating to this Agreement.
(i) Notwithstanding anything else contained in this Agreement, Employee's
right to medical benefits shall be controlled and determined pursuant
to the Stock Purchase Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
People's Choice TV Corp.
By:________________________________
Joseph Hipple, President
_________________________________
Robert A. Young
11
<PAGE>
EXHIBIT NO. 10.3
----------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of February 1,
1996, by and between PETER LYNCH ("Employee") and PEOPLE'S CHOICE TV CORP., a
Delaware corporation (the "Company").
R E C I T A L S:
- - - - - - - -
A. The Company is in the business of developing, owning and operating
wireless cable television systems and conducting various other activities
associated therewith (the "Business").
B. The Company desires to employ Employee as Senior Vice President --
Operations and Marketing and Employee desires to be so employed by the Company,
on the terms and conditions set forth herein.
C. The Company desires to bind Employee to certain restrictive covenants
and Employee agrees to be so bound, on the terms and conditions set forth
herein.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment Term. Subject to the terms and conditions set forth herein,
---------------
including Section 12, the Company will employ Employee and Employee will serve
as Senior Vice President -- Operations and Marketing for a three year term
commencing on the date hereof (the "Effective Date") and ending on the third
anniversary of the Effective Date (the "Employment Term").
2. Employment Duties.
-----------------
During the Employment Term, Employee will serve as Senior Vice
President -- Operations and Marketing, subject to the terms of this Agreement
and the direction and control of the Chairman and Chief Executive Officer of the
Company. Employee shall, during the Employment Term, be primarily based in the
Chicago metropolitan area and perform such duties for the Company and its
subsidiaries as may be assigned by the Chairman and Chief Executive Officer from
time to time and serve the Company and its subsidiaries faithfully, diligently
and competently and to the best of his ability.
<PAGE>
3. Compensation. In exchange for Employee's services hereunder, the
------------
Company shall have the following compensation obligations, which shall be
cumulative:
(a) During the Employment Term, the Company shall pay to Employee as
salary for services rendered by Employee under this Agreement $135,000
per annum (the "Salary"). Such Salary shall be payable in arrears not
less frequently than monthly, but otherwise in accordance with the
Company's ordinary payment practices. Such Salary may be reviewed and
adjusted periodically at the Company's option.
(b) Employee shall be eligible to earn a structured bonus with a minimum
target of $40,000 per annum based on the attainment of certain
operating targets to be agreed upon by the Compensation Committee of
the Company's Board of Directors and Employee.
Any payments of Salary and Bonus made to Employee shall be treated as wages for
withholding and employment tax purposes.
4. Insurance. During the Employment Term, the Company shall be entitled
---------
to obtain as the beneficiary "key man" or similar other life insurance on
Employee in an amount that the Company shall in its discretion deem necessary.
Employee shall cooperate with all requirements necessary for obtaining such
insurance, including, without limitation, submitting to any tests or physicals
reasonably required by the insurers in order to obtain such insurance.
5. Benefits.
--------
(a) Employee shall be entitled during the Employment Term to participate
in such employee benefit plans and programs, including, without
limitation, the Company's current automobile allowance program which
provides for a payment of $8,000 per annum, life insurance program
which provides Employee with life insurance coverage in an amount
equal to three times his Salary and health insurance plans, as are
maintained from time to time for employees of the Company to the
extent that his position, tenure, compensation, age, health and other
qualifications make him eligible to participate, and the Company's
401(k) plan. The Company does not promise the adoption or continuance
of any particular plan or program during the Employment Term, and
Employee's (and his dependents') participation in any such plan or
program shall be subject to the provisions, rules, regulations and
laws applicable thereto.
(b) During the Employment Term, Employee shall be entitled to three (3)
weeks of paid vacation for each full twelve (12) month period during
the Employment Term, or such greater amount of vacation time which the
Company grants to its senior managers generally. Vacations taken by
Employee shall be taken at times mutually acceptable to Employee and
the Company; accumulated and unused vacation time may not be carried
beyond such twelve (12) month period. Except
2
<PAGE>
as expressly provided elsewhere in this Agreement, in the event an
Employee's employment is terminated under this Agreement, the
entitlement to paid vacation hereunder shall be reduced to correspond
to the portion of the applicable period the Employee remained employed
by the Company. Employee shall also be entitled to such paid holidays
as are observed by the Company from time to time.
6. Reimbursement of Expenses. Employee shall be entitled to reimbursement
-------------------------
for ordinary, necessary and reasonable out-of-pocket trade or business expenses
which Employee incurs in connection with performing his duties under this
Agreement, including reasonable travel, meal and home relocation expenses. The
reimbursement of all such expenses shall be made upon presentation of evidence
reasonably satisfactory to the Company's Chairman and Chief Executive Officer
(or such other officer of the Company designated thereby) of the amounts and
nature of such expenses and shall be subject to the Company's policies regarding
business expenses and to the reasonable approval of the Company's Chairman and
Chief Executive Officer (or such other officer of the Company designated
thereby).
7. Restrictive Covenants. Employee acknowledges and agrees that (i)
---------------------
through his position as an employee of the Company, he will learn valuable trade
secrets and other proprietary information relating to the Business, (ii)
Employee's services to the Company are unique in nature, and (iii) the Company
would be irreparably damaged if Employee were to provide services to any person
or entity in violation of the restrictions contained in this Agreement.
Accordingly, as an inducement to the Company to enter into this Agreement and in
consideration of his employment hereunder, Employee agrees that during the
Employment Term and for an one year thereafter (such period being referred to
herein as the "Restricted Period"), neither Employee nor any Affiliate of
Employee (as defined below) shall, directly or indirectly, either for himself or
for any other person or entity:
(a) engage or participate in, or assist, advise or be connected with
(including as an employee, owner, partner, shareholder, officer,
director, advisor, consultant, agent or otherwise), or permit his name
to be used by or render services for, any person or entity engaged in
a Competing Business (as hereinafter defined); provided, however, that
nothing in this Agreement shall prevent Employee from acquiring or
owning, as a passive investment, up to one percent (1%) of the
outstanding voting securities of an entity engaged in a Competing
Business which is publicly traded on any recognized national
securities market;
(b) take any action which might divert from the Company or an Affiliate of
the Company any business which is within the scope of the Company's or
such Affiliate's then business, including but not limited to the pay
or subscription television business;
(c) solicit or attempt to solicit (i) any then subscriber or other
customer of the Company with whom the Employee had contact and/or
knowledge during the Employment Term to purchase Competing Products or
Services (as herein defined) from any person or entity (other than the
Company) or (ii) any then
3
<PAGE>
subscriber, customer, supplier, licensor, licensee or other business
relation of the Company with whom the Employee had contact and/or
knowledge during the Employment Term to cease doing business with the
Company; or
(d) solicit or hire any director, officer, employee or agent of the
Company or any Affiliate of the Company to perform services for any
entity other than the Company and its Affiliates.
As used herein, a "Competing Business" shall mean any company or person engaged
in, or planning to engage in, the business of providing pay or subscription
television services (whether through hard-wire, wireless or other transmissions)
to any customer in any market in which the Company or any Affiliate thereof is
or is planning during the Employment Term or on the termination thereof to
provide pay or subscription television services. Such markets shall include but
not be limited to Albuquerque, Chicago, Detroit, Houston, Indianapolis, Kansas
City, Milwaukee, Phoenix, St. Louis and Tucson. The products and services
subject to these restrictive covenants are herein referred to as "Competing
Products and Services".
8. Disclosure of Confidential Information. Employee recognizes that he
--------------------------------------
possesses or as a result of his employment by the Company will gain possession
of Confidential Information (as defined below). Accordingly, as an inducement
for the Company to enter into this Agreement and in consideration of Employee's
employment, Employee agrees that:
(a) for the longest period permitted by law from the date of this
Agreement, Employee and each Affiliate of Employee shall hold in
strictest confidence and shall not, other than as required by law,
without the prior written consent of the Company, use for his own
benefit or that of any third party or intentionally or negligently
disclose in a manner which could be harmful to the Company to any
person, firm or corporation except the Company, an Affiliate of the
Company or employees of the Company or an Affiliate of the Company any
Confidential Information (as defined below). For purposes of this
Agreement, intending that the term shall be broadly construed to
include anything protectible as a trade secret under applicable law,
"Confidential Information" shall mean all information, and all
documents and other tangible items which record information, relating
to the creation and marketing by the Company of products and services,
from time to time, which at the time or times concerned is protectible
as a trade secret under applicable law, and which has been or is from
time to time learned by, disclosed to or known by Employee including,
without limitation, the following especially sensitive types of
information relating to the creation and marketing of products and
services of the Company:
(i) product development and marketing plans and strategies;
(ii) budgetary and financial information;
4
<PAGE>
(iii) wireless cable development or launch plans for new or
existing systems or services;
(iv) information concerning contractual relationships by and
among the Company its vendors, licensors, program suppliers, employees
or subscribers or other customers; and
(v) information concerning the character and scope of business
or personal relationships between employees, directors, and
consultants of the Company.
As used herein, an "Affiliate" shall mean and include any person or
entity which controls a party, which such party controls or which is under
common control with such party. "Control" means the power, direct or
indirect, to influence or cause the direction of the management and policies
of a person or entity through voting securities, contract or otherwise;
(b) Employee and each Affiliate of Employee (and if deceased, his legal
representative, who shall be the person set forth as such in Section
14(a) until written notice of a successor is delivered to the Company
(the "Representative")) shall promptly following a request therefor
from the Company return to the Company, without retaining copies, all
tangible items which are or which contain Confidential Information, it
being agreed by Employee on behalf of himself and his heirs,
successors and assigns that the Company shall be entitled to rely on
any action taken by Employee or the Representative in connection with
this paragraph (b); and
(c) at the request of the Company made at any time or from time to time
hereafter, Employee and each Affiliate of Employee (and if deceased,
the Representative) shall make, execute and deliver all applications,
papers, assignments, conveyances, instruments or other documents and
shall perform or cause to be performed such other lawful acts as the
Company may reasonably deem necessary or desirable to implement any of
the provisions of this Agreement, and shall give testimony and
cooperate with the Company, its Affiliates or its representatives in
any controversy or legal proceedings involving the Company, its
Affiliates or its representatives with respect to any Confidential
Information, provided that the Company shall promptly reimburse
Employee and each Affiliate thereof for his reasonable costs incurred
in connection with the foregoing, including but not limited to the
reasonable costs and expenses of legal counsel retained by Employee.
9. Inventions. Employee acknowledges that in his capacity as an employee
----------
of the Company, he may be involved in (i) the conception or making of
improvements, discoveries, inventions or the like (whether patentable or
unpatentable and whether or not reduced to practice), (ii) the authorship of
copyrightable works, or (iii) the development of trade secrets
5
<PAGE>
relating to the Business. Employee acknowledges that all such intellectual
property is the exclusive property of the Company. Employee hereby waives any
rights he may have in or to such intellectual property, and Employee hereby
assigns to the Company all right, title and interest in and to such intellectual
property. At the Company's request and at no expense to Employee, Employee shall
execute and deliver all such papers, including, without limitation, any
assignment documents, and shall provide such cooperation as may be necessary or
desirable, or as the Company may reasonably request, in order to enable the
Company to secure and exercise its rights to such intellectual property.
10. Specific Performance. Employee agrees that any violation by him of
--------------------
Sections 7, 8 or 9 of this Agreement, as applicable, would be highly injurious
to the Company and would cause irreparable harm to the Company. By reason of
the foregoing, Employee consents and agrees that if he violates any provision of
Sections 7, 8 or 9 of this Agreement the Company shall be entitled, in addition
to any other rights and remedies that it may have, to apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce, or prevent any continuing violation of, the
provisions of such Section. In the event Employee breaches a covenant contained
in this Agreement, the Restricted Period applicable to Employee with respect to
such breached covenant shall be extended for the period of such breach.
11. Enforcement. Employee acknowledges that the territorial, time and
-----------
scope limitations set for in Section 7 and 8, as applicable, are reasonable and
are properly required for the protection of the Company and in the event that
any such territorial, time or scope limitation is deemed to be unreasonable by a
court of competent jurisdiction, the Company and Employee agree, and Employee
submits, to the reduction of any or all of said territorial, time or scope
limitations to such an area, period or scope as said court shall deem reasonable
under the circumstances.
12. Termination; Severance.
----------------------
(a) Notwithstanding the provisions of Section 1 and the other provisions
of this Agreement, Employee's employment with the Company may be
terminated at any time for any reason or no reason by the Company's
Chairman and Chief Executive Officer or Board of Directors with or
without cause, provided that in the event of such a termination,
Employee shall be entitled to continuation of his Salary (under
Section 3(a)) and benefits (under Section 5) through the period (the
"Severance Period") ending twelve (12) months after the date of such
termination; provided that any such amount for Salary or benefit
continuation shall be reduced by any amount received or earned by
Employee during the Severance Period pursuant to any employment,
consulting or similar other relationship between Employee and any
other person. Except as otherwise specifically provided above, the
Company's obligations under this Agreement shall cease upon
termination and Employee shall forfeit all rights to receive any other
compensation or benefits under this Agreement. Without limitation, a
termination of Employee pursuant to this Section 12(b) shall not
relieve Employee of his obligations under Sections 7,
6
<PAGE>
8 or 9 hereof, and Employee is further obligated during the Severance
Period to promptly notify Company of any employment, consulting or
other relationship that might result in the reduction of any Salary or
benefit continuation payments hereunder and to provide to Company all
documents reasonably requested by it relating thereto. Any termination
by the Company under this Section 12(a) shall be in writing.
(b) Notwithstanding the provisions of Section 1 and the other provisions
of this Agreement, Employee's employment with the Company may be
terminated by Employee upon the provision of not less than six (6)
months prior written notice to the Company. In the event of
termination under this Section 12(b) and except as otherwise provided
herein, the Company's and Employee's obligations under this Agreement
shall cease upon the date indicated in Employee's notice or such
earlier date after the date of notice as selected by the Company in
its sole discretion and Employee shall forfeit all right to receive
any compensation or benefits under this Agreement, including, without
limitation, any unearned performance bonus, except that Employee shall
be entitled to his Salary (under Section 3(a)) and benefits (under
Section 5) for services already performed as of the date of
termination of this Agreement. Without limitation, termination of
Employee pursuant to this Section 12(b) shall not relieve Employee of
his obligations under Sections 7, 8 or 9 hereof.
13. Death or Disability.
-------------------
(a) If Employee becomes permanently disabled (determined as provided
below) during the Employment Term, his employment may terminate at the
election of the Company as of the date such permanent disability is
determined. Employee shall be considered to be permanently disabled
for purposes of this Agreement if he is unable by reason of accident
or illness (including mental illness) to perform the material duties
of his regular position with the Company and is not expected to
recover from his disability within a period of six (6) months from the
commencement of the disability. If at any time Employee claims or is
claimed by the Company to be permanently disabled, a physician
acceptable to both Employee, or the Representative, and the Company
(which acceptances shall not be unreasonably withheld) shall be
retained by the Company and shall examine Employee. Employee shall
cooperate fully with the physician. If the physician determines that
Employee is permanently disabled, the physician shall deliver to the
Company a certificate certifying both that Employee is permanently
disabled and the date upon which the condition of permanent disability
commenced. The determination of the physician shall be conclusive.
(b) Employee's right to his compensation and benefits under this Agreement
shall cease upon his death or disability, except that (i) Employee (or
his estate or heirs) shall be entitled to his Salary (under Section
3(a)) and benefits (under Section 5) for services performed as of the
date of his death or permanent disability and (ii)
7
<PAGE>
in addition, with respect to termination due solely to Employee's
permanent disability as determined pursuant to this Section 13, he
shall also be entitled to his Salary (under Section 3(a)) and benefits
(under Section 5), in the event the permanent disability began prior
to the second anniversary of the Effective Date, through the period
ending six (6) months after the date such permanent disability began
or, in the event the permanent disability began on or after the second
anniversary and before the end of the three (3) year Employment Term,
through the remainder of the Employment Term; provided, however, that
any such amounts for Salary continuation shall be reduced by any
amount received by Employee under any disability insurance policy or
other benefit program such as Social Security.
14. Miscellaneous.
-------------
(a) All notices hereunder shall be in writing and shall be deemed given
when delivered in person, or three (3) business days after being
deposited in the United States mail, postage prepaid, registered or
certified mail, or two (2) business days after delivery to a
nationally recognized express courier, expenses prepaid, addressed as
follows:
If to Employee:
Peter Lynch
--------------------------------
--------------------------------
If to the Representative:
--------------------------------
--------------------------------
--------------------------------
If to the Company:
People's Choice TV Corp.
Two Corporate Drive, Suite 249
Shelton, Connecticut 06484
Attention: Matthew Oristano,
Chairman and Chief Executive Officer
and/or at such other addresses and/or to such other addressees as may be
designated by notice given in accordance with the provisions hereof.
(b) This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors and permitted
assigns. No party shall
8
<PAGE>
assign this Agreement or its rights hereunder without the prior
written consent of the other party hereto; provided, however, that the
-------- -------
Company may assign this Agreement without the prior written consent of
Employee to any person or entity acquiring all or substantially all of
the Business of the Company (whether by sale of stock, sale of assets,
merger, consolidation or otherwise).
(c) This Agreement contains all of the agreements between the parties with
respect to the subject matter hereof and this Agreement supersedes all
other agreements, oral or written, between the parties hereto with
respect to the subject matter hereof.
(d) No change or modification of this Agreement shall be valid unless the
same shall be in writing and signed by all of the parties hereto. No
waiver of any provisions of this Agreement shall be valid unless in
writing and signed by the waiving party. No waiver of any of the
provisions of this Agreement shall be deemed, or shall constitute, a
waiver of any other provision, whether or not similar, nor shall any
waiver constitute a continuing waiver, unless so provided in the
waiver.
(e) If any provisions of this Agreement (or portions thereof) shall, for
any reason, be considered invalid or unenforceable by any court of
competent jurisdiction and such provision is not subject to revision
pursuant to Section 11, such provisions (or portions thereof) shall be
ineffective only to the extent of such invalidity or unenforceability,
and the remaining provisions of this Agreement (or portions thereof)
shall nevertheless be valid, enforceable and of full force and effect.
The Company's rights under this Agreement shall not be exclusive and
shall be in addition to all other rights and remedies available at law
or in equity, including but not limited to statutory rights provided
pursuant to legislation involving the protection of trade secrets.
(f) The section or paragraph headings or titles herein are for convenience
of reference only and shall not be deemed a part of this Agreement.
(g) This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original and all of which when taken together
shall constitute a single instrument.
(h) This Agreement shall be governed and controlled as to validity,
enforcement, interpretation, construction, effect and in all other
respects by the laws of the State of Connecticut applicable to
contracts made in that State (other than any conflict of laws rule
which might result in the application of the laws of any other
jurisdiction). Employee hereby expressly submits and consents in
advance to the jurisdiction of the federal and state courts of the
State of Connecticut for all purposes in connection with any action or
proceeding arising out of or relating to this Agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
PEOPLE'S CHOICE TV CORP.
By:
--------------------------------
Signature
--------------------------------
Name and Title
PETER LYNCH
--------------------------------
Signature
10
<PAGE>
EXHIBIT 10.20
-------------
ASSET EXCHANGE AGREEMENT
ASSET EXCHANGE AGREEMENT (the "Agreement"), entered into as of the 6th day
of November, 1996, by and between CS WIRELESS SYSTEMS, INC., a Delaware
corporation ("CS Wireless"), PEOPLE'S CHOICE TV CORP., a Delaware corporation
("PCTV"), and PEOPLE'S CHOICE TV OF KANSAS CITY, INC., a Delaware corporation
that is wholly-owned by PCTV ("PCTV KC").
WITNESSETH:
WHEREAS, CS Wireless is the owner of wireless cable assets in the Salt Lake
City, Utah market (the "Salt Lake Market");
WHEREAS, PCTV KC is the owner of wireless cable assets in the Kansas City,
Missouri market (the "Kansas City Market"); and
WHEREAS, CS Wireless and PCTV KC each desires to exchange the Salt Lake
Assets for the KC Assets and the parties hereto intend that such exchange
qualify as a "like-kind exchange" under Section 1031 of the Internal Revenue
Code of 1986 (the "Code").
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereby agree as follows:
1. Assets Exchanged.
----------------
(a) Transfer of Salt Lake Assets. Upon the terms and subject to the
-----------------------------
conditions set forth in this Agreement and upon the representations and
warranties made herein, at the Closing (as hereinafter defined), CS Wireless
shall, or shall cause an affiliate of CS Wireless to, grant, convey, assign,
transfer and deliver to PCTV, and PCTV shall acquire from CS Wireless, or an
affiliate of CS Wireless, all of CS Wireless' or such affiliate's right, title
and interest in and to the Salt Lake Assets, in each case free and clear of any
liens, charges or encumbrances. The "Salt Lake Assets" shall mean all of the
property and assets, real, personal or mixed, tangible and intangible, of every
kind and description, wherever located, belonging to CS Wireless or any
affiliate of CS Wireless at the close of business on the Closing Date and
relating to the Salt Lake Market, including, without limitation, those assets,
properties and rights more particularly described on Schedule 2.1(a).
---------------
1
<PAGE>
(b) Transfer of KC Assets. Upon the terms and subject to the conditions
----------------------
set forth in this Agreement and upon the representations and warranties made
herein, at the Closing, PCTV shall, or shall cause an affiliate of PCTV to,
grant, convey, assign, transfer and deliver to CS Wireless, and CS Wireless
shall acquire from PCTV, or an affiliate of PCTV, all of PCTV's or such
affiliate's right, title and interest in and to the KC Assets, in each case free
and clear of any liens, charges or encumbrances. The "KC Assets" shall mean all
of the property and assets, real, personal or mixed, tangible and intangible, of
every kind and description, wherever located, belonging to PCTV or any affiliate
of PCTV at the close of business on the Closing Date and relating to the Kansas
City Market, including, without limitation, those assets, properties and rights
more particularly described on Schedule 2.1(b).
---------------
(c) Manner of Exchange. The Salt Lake Assets and the KC Assets shall be
------------------
exchanged for each other (the "Asset Exchange"). The Asset Exchange shall be
accomplished, in part, as follows:
(i) At the time of Closing, CS Wireless shall assign to PCTV KC,
and PCTV KC shall assume, pursuant to an Assignment substantially in the
form of Exhibit A, all of CS Wireless' rights and obligations under its
---------
lease agreements (the "CS Wireless Channel Leases") for the wireless cable
television frequencies commonly known as the A, B (excluding B1), D, E, F
and G Groups for the Salt Lake City, Utah market.
(ii) At the time of Closing, PCTV KC shall assign to CS Wireless,
and CS Wireless shall assume, pursuant to an Assignment substantially in
the form of Exhibit A, all of PCTV KC's rights and obligations under its
---------
lease agreements (the "PCTV KC Channel Leases") for the wireless cable
television frequencies commonly known as the B, C, and D Groups for the
Kansas City, Missouri market.
(iii) At the time of Closing, CS Wireless agrees to enter into a
lease/option agreement (the "Salt Lake Lease/Option Agreement"), on terms
mutually satisfactory to PCTV KC and CS Wireless, which will provide PCTV
KC a lease to the licenses to the wireless cable television frequencies
commonly known as H-1, H-2, H-3 and MDS1 for the Salt Lake City, Utah
market (the "CS Owned Channels") for $100 per annum and an option to
purchase such frequencies for $100.
(iv) At the time of Closing, CS Wireless agrees to enter into a
lease/option agreement (the "Salt Lake BTA Agreement"), on terms mutually
satisfactory to PCTV KC and CS Wireless, which will provide PCTV KC a lease
to (a) the license to the wireless cable television frequency commonly
known as MDS-2A for the Salt Lake City, Utah market and (b) all other
rights associated with CS Wireless' ownership of the Salt
2
<PAGE>
Lake BTA License, in each case, as awarded to CS Wireless in the FCC's
auction for the right to apply for and receive licenses in certain basic
trading areas (the "BTA Auction") for $100 per annum and an option to
purchase such frequencies for $100.
(v) At the time of Closing, PCTV KC agrees to enter, or to cause
one or more affiliates to enter, into a lease/option agreement (the "KC
Lease/Option Agreement"), on terms mutually satisfactory to PCTV KC and CS
Wireless, which will provide CS Wireless a lease to the rights to the
wireless cable television frequencies commonly known as H-1, H-2, H-3, and
MDS1 for the Kansas City, Missouri market (the "PCTV KC Owned Channels")
for $100 per annum and an option to purchase such frequencies for $100.
(vi) At the time of Closing, PCTV KC agrees to enter into a
lease/option agreement (the "Kansas City BTA Agreement"), on terms mutually
satisfactory to PCTV KC and CS Wireless, which will provide CS Wireless a
lease to (a) the license to the wireless cable television frequency
commonly known as MDS-2A for the Kansas City, Missouri market and (b) all
other rights associated with PCTV KC's ownership of the Kansas City BTA
License, in each case, as awarded to PCTV KC in the BTA Auction for $100
per annum and an option to purchase such frequencies for $100.
(vii) If, at the time of Closing, CS Wireless, or an affiliate of CS
Wireless, should own the rights to the wireless cable television
frequencies commonly known as the E and F Groups for the Salt Lake City,
Utah market (the "Salt Lake E/F Channels"), CS Wireless shall assign, or
cause its affiliate to assign, and PCTV KC shall assume, all of CS
Wireless', or its affiliate's, rights to the Salt Lake E/F Channels and
PCTV KC, or an affiliate of PCTV KC, shall assign and CS Wireless shall
assume, all of PCTV KC's, or its affiliate's, rights to the wireless cable
frequencies commonly known as the E and F Groups for the Kansas City,
Missouri market (the "KC E/F Channels"). If, at the time of Closing
neither CS Wireless nor any of its affiliates own the rights to the Salt
Lake E/F Channels, (i) CS Wireless shall assign to PCTV KC, and PCTV KC
shall assume, pursuant to an Assignment substantially in the form of
Exhibit A, all of CS Wireless' rights and obligations under its lease
---------
agreement for the Salt Lake E/F Channels (the "Salt Lake E/F Channel
Lease") and (ii) PCTV KC shall enter into a lease agreement (the "KC E/F
Channel Lease") with CS Wireless on terms identical to the Salt Lake E/F
Channel Lease pursuant to which PCTV KC shall lease to CS Wireless its
rights to the KC E/F Channels and (iii) each of PCTV KC and CS Wireless
shall execute an option agreement (together, the "Option Agreements") (such
option agreements to be on substantially identical terms) in favor of the
other party granting an option to acquire the Salt Lake E/F Channels (if
and when owned by CS Wireless) or the KC E/F Channels, as the case may be,
and, in the case of the Option Agreement granted by PCTV KC, further
providing that
3
<PAGE>
if at any time subsequent to the Closing, PCTV or any of its affiliates
acquires the Salt Lake E/F Channels, CS Wireless shall have the option to
purchase the KC E/F Channels from PCTV or such affiliate at a price equal
to the price paid by PCTV or such affiliate for the Salt Lake E/F Channels.
The parties recognize that if PCTV or one of its affiliates should acquire
the Salt Lake E/F Channels, CS Wireless may, at its option, either (i)
exercise its right under the Option Agreement granted by PCTV KC to acquire
the KC E/F Channels or (ii) continue leasing the KC E/F Channels pursuant
to the KC E/F Channel Lease.
2. Tax Effects of Asset Exchange. The parties hereby acknowledge their
-----------------------------
intention that the exchange to be effected pursuant to this Agreement qualify as
a "like-kind exchange" under Section 1031 of the Code.
3. Limited Assumption of Liabilities. (a) At the time of Closing, PCTV KC
---------------------------------
shall assume all liabilities and obligations with respect to the Salt Lake
Assets accruing or arising out of events which occur after the Closing Date (the
"Salt Lake Assumed Liabilities"). Notwithstanding any other provision of this
Agreement to the contrary, PCTV KC is not assuming, and shall not in any way be
liable or responsible for, any liabilities or obligations of with respect to the
Salt Lake Assets (whether known or unknown by CS Wireless at the time of
Closing) except as specifically provided in the prior sentence (the "Salt Lake
Excluded Liabilities"). CS Wireless shall indemnify, defend and hold harmless
PCTV KC from any and all Salt Lake Excluded Liabilities. PCTV KC shall
indemnify, defend and hold harmless CS Wireless from any and all Salt Lake
Assumed Liabilities.
(b) At the time of Closing, CS Wireless shall assume all liabilities
and obligations with respect to the KC Assets accruing or arising out of events
which occur after the date of Closing (the "KC Assumed Liabilities").
Notwithstanding any other provision of this Agreement to the contrary, CS
Wireless is not assuming, and shall not in any way be liable or responsible for,
any liabilities or obligations of with respect to the KC Assets (whether known
or unknown by PCTV KC at the time of Closing) except as specifically provided in
the prior sentence (the "KC Excluded Liabilities"). PCTV KC shall indemnify,
defend and hold harmless CS Wireless from any and all KC Excluded Liabilities.
CS Wireless shall indemnify, defend and hold harmless PCTV KC from any and all
KC Assumed Liabilities.
4. Reimbursement of FCC Fees and Construction Expenses. On or prior to
---------------------------------------------------
the Closing, (a) PCTV KC shall certify to CS Wireless the amounts it has paid to
the FCC in connection with its being the winning bidder for the Kansas City
Market in the BTA Auction and (b) CS Wireless shall certify to PCTV KC the
amounts it has paid to the FCC in connection with its being the winning bidder
for the Salt Lake Market in the BTA Auction. At closing, each of PCTV KC and CS
Wireless shall reimburse the other party for each payment.
4
<PAGE>
5. Closing. The consummation of the transactions contemplated by this
-------
Agreement (the "Closing") shall take place at 10:00 a.m., on the first date that
all of the conditions to closing listed in Sections 10 and 11 shall have been
satisfied, at the offices of PCTV KC at Two Corporate Drive, Suite 249, Shelton,
CT 06484, or at such other time, date and place as the parties may agree. The
effective date of the transfer of legal title to the Salt Lake Assets and the KC
Assets shall be the "Closing Date".
6. Representations and Warranties of PCTV KC. PCTV KC represents and
-----------------------------------------
warrants to CS Wireless that the following are true and correct:
(a) Organization, Power and Authority of PCTV KC. PCTV KC is a corporation
--------------------------------------------
duly organized and legally existing in good standing under the laws of its state
of incorporation and has full corporate power and authority (i) to own or lease
its properties and to carry on its business as it is now being conducted, (ii)
to enter into this Agreement and to sell, convey, assign, transfer and deliver
the KC Assets to CS Wireless as provided herein, and (iii) to carry out the
other transactions and agreements contemplated hereby.
(b) Licenses and Permits of PCTV KC
-------------------------------
(i) Schedule 6(b)(i) currently sets forth all of the FCC licenses,
----------------
permits, applications, and authorizations (collectively, the "PCTV KC FCC
Licenses") either owned by PCTV KC, or an affiliate thereof, or relating to the
channel leases (the "PCTV KC Channel Leases") that are being transferred and
assigned pursuant to this Agreement, and such Schedule 6(b)(i) correctly sets
----------------
forth the identity of the holder of such PCTV KC FCC Licenses and the
termination date, if any, of such PCTV KC FCC Licenses. Except as set forth on
Schedule 6(b)(i), each PCTV KC FCC License was duly and validly issued and
- ----------------
assigned to the holder thereof by the FCC pursuant to procedures which comply
with all requirements of applicable law and there has been no occurrence of any
event or the existence of any circumstances which may lead to the forfeiture,
revocation, suspension, impairment, adverse modification or non-renewal of any
PCTV KC FCC License. Each PCTV KC FCC License is in full force and effect and
the holders of the PCTV KC FCC Licenses and PCTV KC are in substantial and
material compliance therewith and there is no known conflict with the valid
rights of others which could have a material adverse effect on the value and use
of the PCTV KC FCC Licenses. Except as set forth on Schedule 6(b)(i), no event
----------------
has occurred which permits, or after notice or lapse of time or both would
permit, the forfeiture, revocation, impairment, adverse modification or non-
renewal of any PCTV KC FCC License, or the imposition of a monetary fine. Upon
the closing of the transactions contemplated by this Agreement, CS Wireless will
have the right to use all of the PCTV KC FCC Licenses in the ordinary course of
business for the operation of a wireless cable television system pursuant to the
terms of the various PCTV KC Channel Leases.
5
<PAGE>
(ii) Each of the holders of the PCTV KC FCC Licenses have duly filed
in a timely manner all filings and reports required to be filed by the holders
of the PCTV KC FCC Licenses under the Communications Act of 1934, as amended
(the "Communications Act") and are in all material respects in substantial
compliance with the Communications Act, including, without limitation, the rules
and regulations of the FCC relating to licenses and the operation of a wireless
cable television system, and each filing and report filed with respect to the
PCTV KC FCC Licenses is true, correct and complete in all respects and there
have been no changes in the ownership of the PCTV KC FCC Licenses since the
filing of the most recent ownership report.
(iii) Schedule 6(b)(iii) correctly sets forth all of the PCTV KC
------------------
Channel Leases pursuant to which the PCTV KC may use the PCTV KC FCC Licenses,
which PCTV KC Channel Leases will be assigned to CS Wireless pursuant to the
terms of this Agreement. Each of the PCTV KC Channel Leases was duly and
validly entered into by the parties thereto pursuant to procedures which comply
with all requirements of applicable law and no event has occurred or
circumstance exists which may lead to the revocation, suspension, termination,
breach, default, adverse modification or non-renewal of any PCTV KC Channel
Lease or material provision thereof. PCTV KC has the sole right to use the PCTV
KC FCC License under each PCTV KC Channel Lease in the ordinary course of
business for the operation of a wireless cable television system (except with
respect to the rights of the ITFS license holders) and CS Wireless upon the
closing of the transactions contemplated by this Agreement, will have the sole
right to use the PCTV KC FCC License under each PCTV KC Channel Lease in the
ordinary course of business for the operation of a wireless cable television
system (except with respect to the rights of the ITFS license holder). Each
PCTV KC Channel Lease is in full force and effect and the parties thereto are in
compliance with the terms thereof with no known conflicts with the valid rights
of others. No event has occurred which permits or after notice or lapse of time
or both would permit the revocation, suspension, termination, breach, default,
adverse modification or non-renewal of any PCTV-KC Channel Lease by the lessor.
There are no material defaults by the lessors under the PCTV-KC Channel Leases.
(iv) PCTV KC and the holders of the PCTV KC FCC Licenses have duly
filed in a timely manner all FCC filings and other filings relating to the PCTV
KC FCC Licenses or the operation of the KC Assets which are required to be filed
under the Communications Act and under any federal, state and local laws and
authorities.
(v) PCTV KC represents and warrants to CS Wireless that it has no
applications pending with the FCC for wireless cable frequencies relating to the
Kansas City, Missouri market.
6
<PAGE>
(vi) Except as set forth on Schedule 6(b)(vi), neither PCTV KC, any
-----------------
affiliate of PCTV KC, nor any lessor under any PCTV KC Channel Lease has agreed
to accept any interference from any third party or to take any action to protect
any third party's reception from interference that would diminish the protected
service area of the PCTV KC FCC Licenses, as provided under FCC rules and
regulations.
(c) No Conflicts. Neither the execution and delivery of this Agreement nor
------------
the consummation of the transactions contemplated hereby will: (i) conflict with
or violate any provision of PCTV KC's articles of incorporation or bylaws, or of
any law, ordinance or regulation or any decree or order to any court or
administrative or other governmental body which is either applicable to, binding
upon or enforceable against PCTV KC; (ii) result in any breach of or default
under any mortgage, contract, agreement, indenture, will, trust or other
instrument which is either binding upon or enforceable against PCTV KC or the KC
Assets; (iii) violate any legally protected right of any individual or entity or
give to any individual or entity (including in each case without limitation any
shareholder of PCTV KC) a right or claim against CS Wireless or the KC Assets;
or (iv) impair or in any way limit any governmental or official license,
approval, permit or authorization of PCTV KC.
(d) Litigation. Except as set forth on Schedule 6(d), there is no action,
---------- -------------
suit, arbitration, proceeding or investigation pending or, to the knowledge of
PCTV or any of its subsidiaries, threatened by or before any governmental
authority against PCTV KC that (a) relates to its ownership of the PCTV KC Owned
Channels and the KC E/F Channels or (b) may reasonably be expected to restrain,
enjoy or otherwise prevent consummation by PCTV KC of the transactions
contemplated by this Agreement, including, without limitation, the sale of the
KC Assets to CS Wireless pursuant hereto or permit the consummation of such sale
only subject to any material condition or restriction applicable to CS Wireless.
There are no judgments, orders, injunctions, decrees, stipulations or awards
entered or rendered by any governmental authority against PCTV KC or any of its
properties or businesses that may reasonably be expected to restrain, enjoy or
otherwise prevent the sale of the KC Assets to CS Wireless pursuant to this
Agreement or permit the consummation of such sale only subject to any material
condition or restriction applicable to CS Wireless.
(e) Taxes. There is not, and there will not be, any liability for federal,
-----
state or local income, sales, use, excise or other taxes, additions to tax,
penalties or interest arising out of, or attributable to, or affecting the KC
Assets through the close of business on the Closing Date for which CS Wireless
will have any liability for payment or otherwise, or attributable to the conduct
of the operations of PCTV KC at any time with regard to the KC Assets for which
CS Wireless will have any liability for payment or otherwise. There does not
exist, and will not exist by virtue of the transactions contemplated by this
Agreement and the other agreements, documents and instruments executed pursuant
thereto, any liability for taxes which may be
7
<PAGE>
asserted by any federal, state or local taxing authority against the KC Assets,
and no lien or other encumbrance for taxes which accrued as of or prior to the
Closing Date has or will attach to the KC Assets.
(f) Liabilities. Except as shown on Schedule 6(f), there are no
----------- -------------
liabilities or obligations of any kind (including without limitation inter-
company obligations) that are secured by or otherwise relate in any way to the
KC Assets.
(g) No Competition. As of the Closing Date, neither PCTV nor any Affiliate
--------------
(as defined in Section 12) of PCTV either directly or indirectly, as a
consultant, agent, principal, owner, sponsor, partner, shareholder, or in any
representative capacity, will be engaging or participating in any video
programming delivery business, or will own or have any interest in any ITFS, MDS
or MMDS frequencies, within 100 miles of the municipal boundaries of Kansas
City, Missouri.
7. Representations and Warranties of CS Wireless. CS Wireless represents
---------------------------------------------
and warrants to PCTV KC that the following are true and correct:
(a) Organization, Power and Authority of CS Wireless. CS Wireless is a
------------------------------------------------
corporation duly organized and legally existing in good standing under the laws
of its state of incorporation and has full corporate power and authority (i) to
own or lease its properties and to carry on its business as it is now being
conducted, (ii) to enter into this Agreement and to sell, convey, assign,
transfer and deliver the Salt Lake Assets to PCTV KC as provided herein, and
(iii) to carry out the other transactions and agreements contemplated hereby.
(b) Licenses and Permits of CS Wireless
-----------------------------------
(i) Schedule 7(b)(i) currently sets forth all of the FCC licenses,
----------------
permits, applications, and authorizations (collectively, the "CS Wireless FCC
Licenses") either owned by CS Wireless, or an affiliate thereof, or relating to
the channel leases (the "CS Wireless Channel Leases") that are being transferred
and assigned pursuant to this Agreement, and such Schedule 7(b)(i) correctly
----------------
sets forth the identity of the holder of such FCC Licenses and the termination
date, if any, of such CS Wireless FCC Licenses. Except as set forth on Schedule
--------
7(b)(i), each CS Wireless FCC License was duly and validly issued and assigned
- -------
to the holder thereof by the FCC pursuant to procedures which comply with all
requirements of applicable law and there has been no occurrence of any event or
the existence of any circumstances which may lead to the forfeiture, revocation,
suspension, impairment, adverse modification or non-renewal of any CS Wireless
FCC License. Each CS Wireless FCC License is in full force and effect and the
holders of the CS Wireless FCC Licenses and CS Wireless are in substantial and
material compliance therewith and there is no known conflict with the valid
rights of others which could have a
8
<PAGE>
material adverse effect on the value and use of the CS Wireless FCC Licenses.
Except as set forth on Schedule 7(b)(i), no event has occurred which permits, or
----------------
after notice or lapse of time or both would permit, the forfeiture, revocation,
impairment, adverse modification or non-renewal of any CS Wireless FCC License,
or the imposition of a monetary fine. Upon the closing of the transactions
contemplated by this Agreement, PCTV KC will have the right to use all of the CS
Wireless FCC Licenses in the ordinary course of business for the operation of a
wireless cable television system pursuant to the terms of the various CS
Wireless Channel Leases.
(ii) Each of the holders of the CS Wireless FCC Licenses have duly
filed in a timely manner all filings and reports required to be filed by the
holders of the CS Wireless FCC Licenses under the Communications Act and are in
all material respects in substantial compliance with the Communications Act,
including, without limitation, the rules and regulations of the FCC relating to
licenses and the operation of a wireless cable television system, and each
filing and report filed with respect to the CS Wireless FCC Licenses is true,
correct and complete in all respects and, excluding assignments to CS Wireless,
there have been no changes in the ownership of the CS Wireless FCC Licenses
since the filing of the most recent ownership report.
(iii) Schedule 7(b)(iii) correctly sets forth all of the CS Wireless
------------------
Channel Leases pursuant to which CS Wireless may use the CS Wireless FCC
Licenses and which CS Wireless Channel Leases will be assigned to PCTV KC
pursuant to the terms of this Agreement. Each of the CS Wireless Channel Leases
was duly and validly entered into by the parties thereto pursuant to procedures
which comply with all requirements of applicable law and no event has occurred
or circumstance exists which may lead to the revocation, suspension,
termination, breach, default, adverse modification or non-renewal of any CS
Wireless Channel Lease or material provision thereof. CS Wireless has the sole
right to use the CS Wireless FCC License under each CS Wireless Channel Lease in
the ordinary course of business for the operation of a wireless cable television
system (except with respect to the rights of the ITFS license holder) and PCTV
KC, upon the closing of the transactions contemplated by this Agreement, will
have the sole right to use the CS Wireless FCC License under each CS Wireless
Channel Lease in the ordinary course of business for the operation of a wireless
cable television system (except with respect to the rights of the ITFS license
holder). Each CS Wireless Channel Lease is in full force and effect and the
parties thereto are in compliance with the terms thereof with no known conflicts
with the valid rights of others. No event has occurred which permits or after
notice or lapse of time or both would permit the revocation, suspension,
termination, breach, default, adverse modification or non-renewal of any CS
Wireless Channel Lease by the lessor. There are no material defaults by the
lessors under the CS Wireless Channel Leases.
(iv) CS Wireless and the holders of the CS Wireless FCC Licenses have
duly filed in a timely manner all FCC filings and other filings relating to the
CS Wireless FCC
9
<PAGE>
Licenses or the operation of the Salt Lake Assets which are required to be filed
under the Communications Act and under any federal, state and local laws and
authorities.
(v) Schedule 7(b)(v) sets forth each new station application included
----------------
in the Salt Lake Assets pending before the FCC. Except with respect to pending
new station applications that are deemed by the FCC to be mutually exclusive
with those applications listed on Schedule 7(b)(v), the applications are
----------------
complete, comply with the rules and regulations promulgated by the FCC, and
propose facilities requesting authorizations consistent with the requirement to
protect adjacent and co-channel stations from harmful interference, as defined
by the rules and regulations promulgated by the FCC, or, alternatively, where
harmful interference exists with adjacent and co-channel stations, no objection
letters have been obtained from adjacent and co-channels licensees.
(vi) Except as set forth on Schedule 7(b)(vi), neither CS Wireless,
-----------------
any affiliate of CS Wireless, nor any lessor under any CS Wireless Channel Lease
has agreed to accept any interference from any third party or to take any action
to protect any third party's reception from interference that would diminish the
protected service area of the CS Wireless FCC Licenses, as provided under FCC
rules and regulations.
(c) No Conflicts. Neither the execution and delivery of this Agreement nor
------------
the consummation of the transactions contemplated hereby will: (i) conflict with
or violate any provision of CS Wireless's articles of incorporation or bylaws,
or of any law, ordinance or regulation or any decree or order to any court or
administrative or other governmental body which is either applicable to, binding
upon or enforceable against CS Wireless; (ii) result in any breach of or default
under any mortgage, contract, agreement, indenture, will, trust or other
instrument which is either binding upon or enforceable against CS Wireless or
the Salt Lake Assets; (iii) violate any legally protected right of any
individual or entity or give to any individual or entity (including in each case
without limitation any shareholder of CS Wireless) a right or claim against PCTV
KC or the Salt Lake Assets; or (iv) impair or in any way limit any governmental
or official license, approval, permit or authorization of CS Wireless.
(d) Litigation. Except as set forth on Schedule 7(d), there is no action,
---------- -------------
suit, arbitration, proceeding or investigation pending or, to the knowledge of
CS Wireless, threatened by or before any governmental authority against CS
Wireless that (a) relates to its ownership of the CS Wireless Owned Channels and
the Salt Lake E/F Channels or (b) may reasonably be expected to restrain, enjoy
or otherwise prevent consummation by CS Wireless of the transactions
contemplated by this Agreement, including, without limitation, the sale of the
Salt Lake Assets to PCTV KC pursuant hereto or permit the consummation of such
sale only subject to any material condition or restriction applicable to PCTV
KC. There are no judgments, orders, injunctions, decrees, stipulations or
awards entered or rendered by any governmental authority
10
<PAGE>
against CS Wireless or any of its properties or businesses that may reasonably
be expected to restrain, enjoy or otherwise prevent the sale of the Salt Lake
Assets to PCTV KC pursuant to this Agreement or permit the consummation of such
sale only subject to any material condition or restriction applicable to PCTV
KC.
(e) Taxes. There is not, and there will not be, any liability for federal,
-----
state or local income, sales, use, excise or other taxes, additions to tax,
penalties or interest arising out of, or attributable to, or affecting the Salt
Lake Assets through the close of business on the Closing Date for which PCTV KC
will have any liability for payment or otherwise, or attributable to the conduct
of the operations of CS Wireless at any time with regard to the Sale Lake Assets
for which PCTV KC will have any liability for payment or otherwise. There does
not exist, and will not exist by virtue of the transactions contemplated by this
Agreement and the other agreements, documents and instruments executed pursuant
thereto, any liability for taxes which may be asserted by any federal, state or
local taxing authority against the Salt Lake Assets, and no lien or other
encumbrance for taxes which accrued as of or prior to the Closing Date has or
will attach to the Salt Lake Assets.
(f) Liabilities. Except as shown on Schedule 7(f), there are no
----------- -------------
liabilities or obligations of any kind (including without limitation inter-
company obligations) that are secured by or otherwise relate in any way to the
Salt Lake Assets.
(g) No Competition. As of the Closing Date, neither CS Wireless nor any
--------------
Affiliate (as defined in Section 12) of CS Wireless either directly or
indirectly, as a consultant, agent, principal, owner, sponsor, partner,
shareholder, or in any representative capacity, will be engaging or
participating in any video programming delivery business, or will own or have
any interest in any ITFS, MDS or MMDS frequencies, within 100 miles of the
municipal boundaries of Salt Lake City and Provo, Utah; provided that the
foregoing shall not be applicable to the rights of Cablemaxx, Inc. (an indirect,
wholly-owned subsidiary of Heartland Wireless Communications, Inc.
("Heartland")) as the sublessor to PCTV of certain ITFS channels in Provo, Utah.
8. Covenants of PCTV KC. PCTV KC hereby covenants with CS Wireless as
--------------------
follows:
(a) Between the date hereof and the Closing Date, PCTV KC shall give
CS Wireless, and its agents and representatives, reasonable access, during
normal business hours, to the KC Assets and all of PCTV KC's employees,
books, accounts, records and documents relating to the KC Assets.
(b) Between the date hereof and the Closing Date, PCTV KC shall give
11
<PAGE>
prompt written notice to CS Wireless, but in no event later than two (2)
days after discovery, of any material change to the disclosure contained in
the Exhibits hereto.
(c) Between the date hereof and the Closing Date, PCTV KC shall
maintain the KC Assets in the ordinary course consistent with past
practices and in a manner such that the representations and warranties
contained in Section 6 hereof shall be true and correct on the Closing
Date. Other than to satisfy prior commitments pursuant to the KC Channel
Leases or tower site leases and trade liabilities arising in the ordinary
course of business, PCTV KC shall not make any expenditure or commitment to
make an expenditure with respect to the KC Assets in excess of $5,000
without the prior written consent of CS Wireless, which consent shall not
be unreasonably withheld, conditioned or delayed.
(d) Between the date hereof and the Closing Date, PCTV KC shall not
solicit or request from third persons any offers to purchase or acquire
through any means the KC Assets, or any substantial part thereof, or
participate in any discussions or negotiations related to any offers
received from third persons or any plan of reorganization relating to the
KC Assets, or any substantial part thereof.
(e) PCTV KC shall cooperate with CS Wireless and take all actions
necessary to promptly obtain all consents, approvals, amendments and
agreements required of them in order to duly and validly carry out the
transactions contemplated by this Agreement and to satisfy the conditions
precedent herein including, without limitation, from the FCC and under the
H-S-R Act, if required.
(f) Between the date hereof and the third anniversary of the Closing
Date, upon any request of CS Wireless during such period PCTV KC shall
promptly and fully cooperate with CS Wireless, and shall cause PCTV KC's
independent public accountants to so cooperate with CS Wireless at CS
Wireless' expense, in connection with the preparation of financial
statements and related schedules and reports required in the judgment of CS
Wireless to be prepared by CS Wireless, including but not limited to CS
Wireless' audited annual financial statements, unaudited quarterly
financial statements and other financial and statistical information
required to be filed by CS Wireless with the Securities and Exchange
Commission.
(g) From the date hereof forward, upon any request of CS Wireless,
PCTV KC shall cooperate with and take such actions necessary for CS
Wireless to obtain all consents to the assignment of, and all rights and
benefits under, any KC Channel Lease or tower site lease, including,
without limitation, cooperating in the preparation and filing with the FCC
of an application for consent to the assignment or transfer of the PCTV KC
12
<PAGE>
Owned Channels and KC E/F Channels (if applicable) for which PCTV KC is the
licensee or permittee, from PCTV KC to CS Wireless, taking all other
actions necessary and appropriate to facilitate the earliest possible
approval of such assignment or transfer by the FCC and allowing CS Wireless
to communicate directly with the other parties to the KC Channel Leases and
tower site lease to obtain such consents. During such period PCTV KC shall
not take and shall refrain from taking any action that could reasonably be
expected to adversely affect any such rights or benefits.
(h) PCTV KC shall cooperate with CS Wireless and use its best efforts
to resolve any material interference issues concerning the KC Assets.
(i) PCTV KC shall use its best lawful efforts to cause the conditions
in Section 11 to be satisfied.
9. Covenants of CS Wireless. CS Wireless hereby covenants with PCTV KC as
------------------------
follows:
(a) Between the date hereof and the Closing Date, CS Wireless shall
give PCTV KC and its agents and representatives reasonable access, during
normal business hours, to the Salt Lake Assets and all of CS Wireless
employees, books, accounts, records and documents relating to the Salt Lake
Assets.
(b) Between the date hereof and the Closing Date, CS Wireless shall
give prompt written notice to PCTV, but in no event later than two (2) days
after discovery, of any material change to the disclosure contained in the
Exhibits hereto.
(c) Between the date hereof and the Closing Date, CS Wireless shall
maintain the Salt Lake Assets in the ordinary course consistent with past
practices and in a manner such that the representations and warranties
contained in Section 7 hereof shall be true and correct on the Closing
Date. Other than to satisfy prior commitments pursuant to the Salt Lake
Channel Leases or tower site leases and trade liabilities arising in the
ordinary course of business, CS Wireless shall not make any expenditure or
commitment to make an expenditure with respect to the Salt Lake Assets in
excess of $5,000 without the prior written consent of PCTV KC, which
consent shall not be unreasonably withheld, conditioned or delayed.
(d) Between the date hereof and the Closing Date, CS Wireless shall
not solicit or request from third persons any offers to purchase or acquire
through any means any portion of the Salt Lake Assets, or any substantial
part thereof, or participate in any discussions or negotiations related to
any offers received from third persons or any plan
13
<PAGE>
of reorganization relating to the Salt Lake Assets, or any substantial part
thereof.
(e) CS Wireless shall cooperate with PCTV KC and take all actions
necessary to promptly obtain all consents, approvals, amendments and
agreements required of it in order to duly and validly carry out the
transactions contemplated by this Agreement and to satisfy the conditions
precedent herein including, without limitation, from the FCC and under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("H-S-R Act").
(f) Between the date hereof and the third anniversary of the Closing
Date, upon any request of PCTV KC during such period CS Wireless shall
promptly and fully cooperate with PCTV KC, and shall cause its independent
public accountants to so cooperate with PCTV KC at PCTV KC's expense, in
connection with the preparation of financial statements and related
schedules and reports required in the judgment of PCTV KC to be prepared by
PCTV KC, including but not limited to audited annual financial statements,
unaudited quarterly financial statements and other financial and
statistical information required to be filed by PCTV KC with the Securities
and Exchange Commission.
(g) From the date hereof forward, upon any request of PCTV KC, CS
Wireless shall cooperate with and take such actions necessary for PCTV KC
to obtain all consents to the assignment of, and all rights and benefits
under, any Salt Lake Channel Lease or tower site leases, including, without
limitation, cooperating in the preparation and filing with the FCC of an
application for consent to the assignment or transfer of the CS Owned
Channels and Salt Lake E/F Channels (if applicable) for which CS Wireless
is the licensee or permittee, from CS Wireless to PCTV KC, taking all other
actions necessary and appropriate to facilitate the earliest possible
approval of such assignment or transfer by the FCC and allowing PCTV KC to
communicate directly with the other parties to the Salt Lake Channel Leases
and the tower site leases to obtain such consents. During such period CS
Wireless shall not take and shall refrain from taking any action (including
any action that would result in the discontinuance of CS Wireless'
corporate existence) that could reasonably be expected to adversely affect
any such rights or benefits. CS Wireless will not make any changes,
modifications or supplements to the modification applications without the
prior written consent of PCTV KC, which consent shall not be unreasonably
withheld.
(h) CS Wireless shall cooperate with PCTV KC and use its best efforts
to resolve any material interference issues concerning the Salt Lake
Assets.
(i) CS Wireless shall use its best lawful efforts to cause the
conditions in Section 10 to be satisfied.
14
<PAGE>
10. Conditions Precedent to the Obligations of PCTV KC. All
--------------------------------------------------
obligations of PCTV KC under this Agreement are subject to the performance,
at or prior to Closing, of the following conditions, unless expressly
waived in writing by PCTV KC at or prior to Closing:
(a) representations and warranties made by CS Wireless contained in
Section 7 shall be true and accurate as of the date hereof and as of the
date of Closing in all material respects, CS Wireless shall have complied
with, and satisfied, in all material respects, all the covenants,
agreements and obligations of CS Wireless contained herein, and CS Wireless
shall have delivered to PCTV KC a certificate attesting to the foregoing
signed by the Chairman or President or Chief Operating Officer of CS
Wireless;
(b) [reserved];
(c) the receipt of necessary consents or approvals of governmental
entities, lenders, lessors, or other third parties relating to the transfer
of the Salt Lake Assets to PCTV KC, including, but not limited to, consents
related to the transfer to PCTV KC of CS Wireless' rights and obligations
under the CS Owned Channels, Salt Lake City E/F Channels, CS Wireless
Channel Leases, and the tower site leases to be transferred;
(d) the receipt of estoppel certificates substantially in the form of
Exhibit B from the lessors under each of the CS Wireless Channel Leases;
---------
(e) the absence of pending or threatened litigation involving the
transactions contemplated by this Agreement or any injunction or other
court order is in place directing that the transactions contemplated by
this Agreement not be consummated;
(f) delivery of necessary agreements, certificates and other documents
necessary to effect the transfer of CS Wireless' rights and obligations
with respect to the Salt Lake Assets to PCTV KC;
(g) the Salt Lake City Lease/Option Agreement shall have been executed
and delivered;
(h) if required pursuant to Section 1, the Salt Lake City E/F Channel
Lease and the related Option Agreement shall have been executed and
delivered;
(i) PCTV KC shall have received confirmation from its tax advisors
that the Asset Exchange shall not be a taxable event under the Internal
Revenue Code and
15
<PAGE>
relevant regulations and rulings;
(j) PCTV KC shall have completed its due diligence review of the Salt
Lake Assets, shall have received full cooperation of CS Wireless in the
conduct of such due diligence, and shall be satisfied in its reasonable
opinion that such due diligence review has not presented any material
issues with respect to the Salt Lake Assets;
(k) PCTV KC shall have received an opinion of CS Wireless' counsel, in
form and substance reasonably acceptable to PCTV KC's counsel; and
(l) PCTV or its designee shall have entered into (i) a sublease
agreement with Heartland Wireless Communications, Inc. ("Heartland") for
the wireless cable television frequencies owned or leased by Heartland or
any of its Affiliates (as defined in Section 12(a)) with respect to the
Provo, Utah market (the "Provo Market") and (ii) a lease option agreement
for the Provo, Utah BTA authorization, both on terms satisfactory to PCTV.
11. Conditions Precedent to the Obligations of CS Wireless. All
------------------------------------------------------
obligations of CS Wireless under this Agreement are subject to the performance,
at or prior to Closing, of the following conditions, unless expressly waived in
writing by CS Wireless at or prior to Closing:
(a) representations and warranties of PCTV KC contained in Section 6
shall be true and accurate as of the date hereof and as of the date of
Closing in all material respects, PCTV KC shall have complied with, and
satisfied, in all material respects, all the covenants, agreements and
obligations of PCTV KC contained herein, and PCTV KC shall have delivered
to CS Wireless a certificate attesting to the foregoing signed by the
Chairman or President or Chief Operating Officer of PCTV KC;
(b) [reserved];
(c) the receipt of necessary consents or approvals of governmental
entities, lenders, lessors, or other third parties relating to the transfer
of the KC Assets to CS Wireless, including, but not limited to, consents
related to the transfer to CS Wireless of PCTV KC's rights and obligations
under the PCTV KC Owned Channels, KC E/F Channels, PCTV KC Channel Leases,
and the tower site leases to be transferred;
(d) the receipt of estoppel certificates substantially in the form of
Exhibit B from the lessors under each of the PCTV KC Channel Leases.
---------
(e) the absence of pending or threatened litigation involving the
transactions contemplated by this Agreement or any injunction or other
court order directing that the
16
<PAGE>
transactions contemplated by this Agreement not be consummated;
(f) delivery of necessary agreements, certificates and other documents
necessary to effect the transfer of PCTV KC's rights and obligations with
respect to the KC Assets to CS Wireless;
(g) the KC Lease/Option Agreement shall have been executed;
(h) if required pursuant to Section 1, the KC/EF Channel Lease and the
related Option Agreement shall have been executed and delivered;
(i) CS Wireless shall have received confirmation from its tax advisors
that the Asset Exchange shall not be a taxable event under the Internal
Revenue Code and relevant regulations and rulings.
(j) CW Wireless shall have completed its due diligence review of the
KC Assets, shall have received full cooperation of PCTV KC in the conduct
of such due diligence, and shall be satisfied in its reasonable opinion
that such due diligence review has not presented any material issues with
respect to the KC Assets; and
(k) CS Wireless shall have received an opinion of PCTV KC's and PCTV's
counsel, in form and substance reasonably acceptable to CS Wireless'
counsel.
12. Non-Competition. In order to fully effectuate the purposes of this
---------------
Agreement, the parties agree as follows:
(a) If, within three (3) years from the Closing Date (the "Non-Competition
Period"), CS Wireless or its Affiliates (as hereinafter defined), own or lease
MMDS, MDS or ITFS channels with transmission facilities within a one hundred
(100) mile radius from the transmission facilities of the Salt Lake City and
Provo Markets (in this paragraph (a), "Non-Compete Stations"), and if, pursuant
to the rules, regulations or policies of the FCC, PCTV, PCTV KC or their
Affiliates are required to obtain one or more No Objection Letters (as
hereinafter defined) from CS Wireless or its Affiliates in connection with
constructing and/or operating the Salt Lake Market or the Provo Market, as the
case may be, CS Wireless or its Affiliates shall promptly provide, and shall do
all things necessary and appropriate (other than paying consideration that is
otherwise not due) to prevail upon its channel capacity lessors to promptly
provide, such No Objection Letters upon receipt of a written request from PCTV,
PCTV KC or their Affiliates. For purposes of this Section 12, the term "No
Objection Letter" shall mean a letter signed by the licensee of MDS, MMDS or
ITFS channels that reflects the licensee's consent, without conditions or
qualifications, to the grant of a pending FCC
17
<PAGE>
application for a new facility or to make modifications to an existing facility,
notwithstanding the potential for interference with the licensee's signal
pursuant to the technical rules and regulations of the FCC. For purposes of this
Section 12 and Sections 6(g), 7(g) and 15(l), an "Affiliate" of a Person (as
hereinafter defined) means any other Person, directly or indirectly,
controlling, controlled by or under common control with such Person. "Person"
shall mean any natural person or corporation, partnership, trust or other
organization or entity. In the case of CS Wireless, "Affiliate" shall
specifically include, without limitation, CAI Wireless Systems, Inc. and its
Affiliates and Heartland and its Affiliates.
(b) During the Non-Competition Period, neither CS Wireless nor any
Affiliate shall, directly or indirectly, as a consultant, agent, principal,
owner, sponsor, partner, shareholder, or in any representative capacity, own or
acquire any rights in (including, but not limited to, any lease arrangement) any
ITFS, MDS or MMDS channels with transmission facilities within a fifty (50)-mile
radius from the transmission facilities of the Salt Lake City Market and the
Provo, Utah Market, provided that the foregoing shall not be applicable to the
rights of Cablemaxx, Inc. (an indirect, wholly-owned subsidiary of Heartland),
or Heartland or its other Affiliates, as the sublessor to PCTV of certain ITFS
channels in Provo, Utah.
(c) If, within the Non-Competition Period, PCTV, PCTV KC or its Affiliates
own or lease MMDS, MDS or ITFS channels with transmission facilities within a
one hundred (100)- mile radius from the transmission facilities of the Kansas
City Market (in this paragraph (b), "Non-Compete Stations"), and if, pursuant to
the rules, regulations or policies of the FCC, CS Wireless or its Affiliates are
required to obtain one or more No Objection Letters from PCTV, PCTV KC or their
Affiliates in connection with constructing and/or operating the Kansas City
Market, PCTV, PCTV KC or their Affiliates shall promptly provide, and shall do
all things necessary and appropriate (other than paying consideration that is
otherwise not due) to prevail upon its channel capacity lessors to promptly
provide, such No Objection Letters upon receipt of a written request from CS
Wireless or its Affiliates.
(d) During the Non-Competition Period, none of PCTV, PCTV KC, or any
Affiliate shall, directly or indirectly, as a consultant, agent, principal,
owner, sponsor, partner, shareholder, or in any representative capacity, own or
acquire any rights in, (including, but not limited to, any lease arrangement)
any ITFS, MDS or MMDS channels with transmission facilities within a fifty (50)-
mile radius from the transmission facilities of the Kansas City Market.
13. Indemnification
---------------
(a) CS Wireless agrees that it will defend, indemnify and hold PCTV KC and
its affiliates harmless in respect of the aggregate of all indemnifiable damages
of PCTV KC. For
18
<PAGE>
this purpose, "indemnifiable damages" of PCTV KC means the aggregate of all
expenses, losses, costs, deficiencies, liabilities and damages (including
related counsel fees and expenses) incurred or suffered by PCTV KC as a result
of or in connection with any: (i) inaccurate representation or warranty made by
CS Wireless in or pursuant to this Agreement, (ii) default in the performance of
any of the covenants or agreements made by CS Wireless in this Agreement; or
(iii) failure of CS Wireless to pay, discharge or perform any of the Salt Lake
Excluded Liabilities.
(b) PCTV KC and PCTV jointly and severally agree to defend, indemnify and
hold CS Wireless harmless in respect of the aggregate of all indemnifiable
damages of CS Wireless. For this purpose, "indemnifiable damages" of CS
Wireless means the aggregate of all expenses, losses, costs, deficiencies,
liabilities and damages (including related counsel fees and expenses) incurred
or suffered by such parties as a result of or in connection with any: (i)
inaccurate representation or warranty made by PCTV KC in or pursuant to this
Agreement; (ii) default in the performance of any of the covenants or agreements
made by PCTV KC in this Agreement; or (iii) failure of PCTV KC to pay, discharge
or perform any of the KC Excluded Liabilities.
14. Termination
-----------
(a) This Agreement may be terminated at any time prior to the Closing Date,
by the mutual consent of CS Wireless and PCTV KC.
(b) This Agreement may be terminated by the giving of written notice by
either CS Wireless or PCTV KC at any time prior to the Closing Date, if (a) a
court or other governmental authority of competent jurisdiction shall have
issued an order or decree or taken other action permanently restraining the
consummation of the transactions contemplated by this Agreement and such order,
decree or other action shall have become final and nonappealable, (b) any
statute, rule or regulation shall have been enacted or promulgated by any
government or governmental agency which makes consummation of the transaction
illegal, (c) other than due to the terminating party's breach of this Agreement,
the Closing shall not have occurred on or before December 31, 1996, or (d) at
any time, if the other party has breached in any material respect its
obligations, covenants, agreements or the representations and warranties in this
Agreement and has failed to cure such breach within ten (10) business days of
the receipt of notice that a breach has occurred.
15. Further Assurances; Survival. Prior to, at and after the Closing, the
----------------------------
parties hereto will, without further consideration, execute and deliver such
further documents and take such other actions as may be necessary or desirable
to consummate and perfect the transactions contemplated hereby. After the
Closing, CS Wireless agrees to make its records (or copies thereof) reasonably
available to PCTV KC as PCTV KC may reasonably require for tax, accounting or
other business purposes and PCTV KC agrees to make its records (or copies
19
<PAGE>
thereof) reasonably available to CS Wireless as CS Wireless may reasonably
require for tax, accounting or other business purposes. Unless otherwise
expressly provided herein, the representations, warranties, covenants and other
agreements herein made by the parties shall survive the Closing for twelve (12)
months.
16. Notices. Any notice, consent, waiver, or other communication that is
-------
required or permitted hereunder shall be sufficient if it is in writing, signed
by or on behalf of the party giving such notice, consent, waiver or other
communication, and delivered by both facsimile and either personally or by
Federal Express or similar overnight courier, postage prepaid, to the addresses
set forth below, or to such other addressee or address as shall be set forth in
a notice given in the same manner:
If to CS Wireless:
------------------
CS Wireless Systems, Inc.
200 Chisholm Place
Suite 200
Plano, TX 75075
Attention: Tom Dixon
Facsimile: 214-423-0819
If to PCTV KC or PCTV:
----------------------
c/o People's Choice TV Corp.
2 Corporate Drive, Suite 249
Shelton, Connecticut 06484
Attention: Donald E. Olander
Facsimile: 203-929-1454
Any such notice shall be deemed to have been given upon delivery if delivered
personally, or three (3) days after it has been provided to Federal Express or a
similar overnight courier for delivery thereby.
17. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Connecticut, without regard to
conflicts of laws rules.
18. Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the parties hereto and their respective successors,
assigns, heirs and personal representatives. No party, without the consent of
all other parties, may assign its rights or obligations under or related to this
Agreement whether voluntarily, involuntarily, by operation of law, transfer of
the capital stock or assets or otherwise. Nothing herein, expressed or implied,
is intended or shall be construed to confer upon or give any person, other than
CS Wireless, PCTV
20
<PAGE>
KC and their respective heirs, legal representatives or successors and assigns
any rights or remedies under or by reason of this Agreement.
19. Scope of Agreement. This Agreement and the other documents and
------------------
instruments referred to herein embody the entire agreement and understanding of
the parties hereto in connection with the matters covered herein.
20. Amendment. No alteration, modification or change in this Agreement
---------
shall be valid unless executed in writing by all of the parties hereto.
21. Counterparts. This Agreement may be executed in two (2) or more
------------
counterparts, but all of which together shall constitute one and the same
instrument.
22. Section Headings. The Section headings herein have been inserted for
----------------
convenience of reference only and shall in no way modify or restrict any of the
terms and provisions hereof.
23. Expenses; Brokers. Except as otherwise specifically provided in this
-----------------
Agreement, each party will each be responsible for and pay its own respective
costs and expenses, including but not limited to legal counsel, accountants and
other advisors, arising out of or in connection with pursuing or consummating
the transaction contemplated hereby. The parties represent to each other that
neither party has engaged any broker in connection with the transactions
proposed herein.
24. Preparation of Documents. This Agreement is the joint work product of
------------------------
the parties hereto and, in the event of any ambiguity herein, no inference shall
be drawn against a party by reason of document preparation.
25. Knowledge. For purposes of this Agreement, when the phrase "to the
---------
best of [party's] knowledge" or any similar phrase implying a limitation of a
representation on the basis of knowledge is used, it shall means facts actually
known by any officer, director or controlling person of such party, or knowledge
of facts that would reasonably indicate that further investigation is warranted
to established that the representation is materially accurate.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
PEOPLE'S CHOICE TV OF
KANSAS CITY, INC.
By:
----------------------
Name:
Title:
PEOPLE'S CHOICE TV CORP.
By:
----------------------
Name:
Title:
CS WIRELESS SYSTEMS, INC.
By:
----------------------
Name:
Title:
22
<PAGE>
Each of CAI Wireless Systems, Inc. and Heartland Wireless Communications,
Inc. is executing this Agreement for the limited purpose of confirming its
agreement to be bound by the pertinent provisions of Sections 12(a) and (b)
hereof.
Executed as of November 6, 1996.
CAI WIRELESS SYSTEMS, INC.
By:
-----------------------
Name:
Title:
HEARTLAND WIRELESS
COMMUNICATIONS, INC.
By:
-----------------------
Name:
Title:
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 41,305,795
<SECURITIES> 63,396,191
<RECEIVABLES> 3,314,864
<ALLOWANCES> 379,500
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 251,740,238
<DEPRECIATION> 55,697,972
<TOTAL-ASSETS> 326,147,690
<CURRENT-LIABILITIES> 0
<BONDS> 234,430,828
129,248
66,798,135
<COMMON> 0
<OTHER-SE> 13,960,128
<TOTAL-LIABILITY-AND-EQUITY> 326,147,690
<SALES> 0
<TOTAL-REVENUES> 33,424,512
<CGS> 0
<TOTAL-COSTS> 18,827,018
<OTHER-EXPENSES> 26,375,454
<LOSS-PROVISION> 988,700
<INTEREST-EXPENSE> 27,891,369
<INCOME-PRETAX> (75,830,818)
<INCOME-TAX> 56,500
<INCOME-CONTINUING> (75,887,318)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75,887,318)
<EPS-PRIMARY> (6.26)
<EPS-DILUTED> 0.00
</TABLE>
