<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997
------------------
Commission File Number: 0-21920
People's Choice TV Corp.
--------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 06-1366643
- ------------------------------- ---------------
(State or other jurisdiction of incorporation (I.R.S. employer
of organization) identification No.)
2 Corporate Drive, Shelton, CT 06484
- --------------------------------------- ----------
(Address of principal executive offices) (Zip code)
The Company's telephone number, including area code: (203) 925-7900
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X
--- --
YES NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value: 12,923,817 shares as of November 11, 1997.
<PAGE>
PEOPLE'S CHOICE TV CORP.
------------------------
INDEX
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE(S)
- ---------------------------- -------
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997 2
Consolidated Statements of Operations for the Three and
Nine Month Periods Ended September 30, 1996 and 1997 3
Consolidated Statements of Stockholders'
Equity for the Nine Month Periods Ended
September 30, 1996 and 1997 4
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 1996 and 1997 5
Notes to Consolidated Financial Statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8-12
PART II OTHER INFORMATION
- -------------------------
Items 1-5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
- ----------
</TABLE>
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 41,305,795 $ 21,910,682
Marketable securities 63,396,191 59,999,418
Subscriber receivables, net of allowance for doubtful accounts
of $379,500 and $302,700 2,935,364 2,291,094
Notes and other receivables 1,146,928 606,922
Prepaid expenses and other assets 3,629,195 3,384,947
Investment in wireless systems and equipment, at cost, net of
accumulated depreciation and amortization of $55,697,972
and $77,161,000 196,322,563 187,828,092
Organization and financing costs net of accumulated
amortization of $2,705,560 and $3,962,234 5,731,263 4,599,589
Excess of purchase price over fair market value of assets acquired
net of accumulated amortization of $905,010 and $1,442,598 11,680,391 11,142,803
------------ ------------
Total assets $326,147,690 $291,763,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and other payables $234,430,828 $249,695,944
Accounts payable 1,928,429 3,519,024
Accrued expenses 5,152,177 4,319,923
Subscriber advance payments and deposits 2,662,183 2,644,660
Minority interest in consolidated subsidiaries 1,086,562 1,031,268
------------ ------------
Total liabilities 245,260,179 261,210,819
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 60,169,770 64,740,558
PCTV Detroit cumulative preferred stock 6,628,365 7,022,156
Stockholders' Equity:
Preferred stock, $0.01 par value, 4,353,074 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.01 par value, 75,000,000 shares
authorized, 12,924,817 and 12,923,817 shares issued and
outstanding at December 31, 1996 and September 30, 1997,
respectively 129,248 129,238
Additional paid-in capital 166,447,375 161,464,181
Warrants 3,756,840 3,756,840
Accumulated deficit (156,244,087) (206,560,245)
------------ ------------
Total stockholders' equity/(deficit) 14,089,376 (41,209,986)
------------ ------------
Total liabilities and stockholders' equity $326,147,690 $291,763,547
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
2
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 8,074,685 $ 7,830,748 $ 25,213,563 $ 25,204,922
------------ ------------ ------------ ------------
Costs and expenses:
Operating costs and expenses 10,386,899 10,303,583 33,505,783 31,741,154
Non-cash settlement of lawsuit 616,000 -- 616,000 --
Depreciation and amortization 8,522,296 8,190,093 25,471,116 24,106,050
------------ ------------ ------------ ------------
19,525,195 18,493,676 59,592,899 55,847,204
------------ ------------ ------------ ------------
Operating loss (11,450,510) (10,662,928) (34,379,336) (30,642,282)
Loss on sales and writedown of assets (948,870) (1,316,676) (1,167,654) (1,213,354)
Interest expense:
Non cash (6,845,449) (7,609,206) (19,828,112) (22,369,355)
Cash (278,024) (353,979) (718,352) (1,078,900)
Interest income and other 1,255,187 1,465,590 4,229,280 4,149,686
Minority interest 27,570 5,044 85,617 53,293
------------ ------------ ------------ ------------
Loss before income tax (18,240,096) (18,472,155) (51,778,557) (51,100,912)
Income tax expense 12,000 15,000 35,000 42,000
------------ ------------ ------------ ------------
Loss before extraordinary gain (18,252,096) (18,487,155) (51,813,557) (51,142,912)
Extraordinary gain on early extinguishment of debt -- -- -- 826,754
------------ ------------ ------------ ------------
Net loss (18,252,096) (18,487,155) (51,813,557) (50,316,158)
Preferred dividends (1,547,432) (1,699,243) (4,540,406) (4,964,579)
------------ ------------ ------------ ------------
Loss applicable to common shares $(19,799,528) $(20,186,398) $(56,353,963) $(55,280,737)
============ ============ ============ ============
Loss per common share:
Loss before extraordinary gain $ (1.51) $ (1.54) $ (4.31) $ (4.27)
Extraordinary gain -- -- -- .07
------------ ------------ ------------ ------------
Net loss $ (1.51) $ (1.54) $ (4.31) $ (4.20)
============ ============ ============ ============
Weighted average number of common
shares outstanding 13,096,204 13,147,929 13,086,411 13,149,163
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Par Value Paid-In Accumulated
Shares Amount Capital Warrants Deficit
------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 12,841,203 $ 128,412 $172,415,949 $ 4,331,244 $ (80,356,769)
Net loss -- -- -- -- (51,813,557)
Issuance of common stock in
acquisition 27,614 276 445,000 -- --
Stock options expired -- -- (906,250) -- --
Dividends on Cumulative
Preferred Stock -- -- (397,659) -- --
Dividends on Convertible
Preferred Stock -- -- (4,142,747) -- --
------------- ------------- ------------ ------------- -------------
Balance, September 30, 1996 12,868,817 $ 128,688 $167,414,293 $ 4,331,244 $(132,170,326)
============= ============= ============ ============= =============
Balance, December 31, 1996 12,924,817 $ 128,248 $166,447,375 $ 3,756,840 $(156,244,087)
Net loss -- -- -- -- (50,316,158)
Dividends on Cumulative
Preferred Stock -- -- (393,791) -- --
Dividends on Convertible
Preferred Stock -- -- (4,570,788) -- --
Other (1,000) (10) (18,615) -- --
------------- ------------- ------------ ------------- -------------
Balance, September 30, 1997 12,923,817 $ 129,238 $161,464,181 $ 3,756,840 $(206,560,245)
============= ============= ============ ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (51,813,557) $ (50,316,158)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation and amortization 25,471,116 24,106,050
Minority interest in subsidiaries (85,617) (53,293)
Extraordinary gain on early extinguishment of debt -- (826,754)
Stock to be issued in settlement of lawsuit 616,000 --
Amortization of original issue discount 19,303,607 22,019,723
Amortization of imputed discount on debt 524,505 349,632
Loss on sales and writedown of assets 1,167,654 1,213,354
Provision for losses on subscriber receivables 773,500 436,343
Changes in assets and liabilities-
(Increase) decrease in subscriber receivables (934,607) 207,927
(Increase) decrease in notes and other receivables (23,253) 255,339
(Increase) decrease in prepaid expenses and other assets 1,791,518 (32,107)
Increase in organization and financing costs -- (125,000)
Increase (decrease) in accounts payable (1,679,252) 1,590,596
Decrease in accrued expenses (864,775) (638,754)
Decrease in subscriber advance payments and deposits (79,193) (17,523)
------------- -------------
Net cash used in operating activities (5,832,354) (1,830,625)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (100,888,107) (89,421,502)
Proceeds principally from maturity of marketable securities 115,212,807 92,818,265
Proceeds from sales of assets 606,663 806,857
Acquisition of Sat-Tel Services, Inc. (3,440,400) --
Acquisition of Tilden and Anahuac frequencies (2,253,687) --
Sale of interest in Preferred Entertainment of Champaign 1,931,262 --
Acquisition of BTA licenses (1,620,083) (213,284)
Investment in wireless systems and equipment (10,811,179) (12,907,137)
------------- -------------
Net cash used in investing activities (1,262,724) (8,916,801)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (4,060,715) (8,645,687)
Buyout of minority interest (184,000) (2,000)
------------- -------------
Net cash used in financing activities (4,244,715) (8,647,687)
------------- -------------
Net decrease in cash (11,339,793) (19,395,113)
Cash and cash equivalents, beginning of year 23,243,558 41,305,795
------------- -------------
Cash and cash equivalents, end of period $ 11,903,765 $ 21,910,682
============= =============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest, net of amount capitalized $ 494,457 $ 970,970
Cash received for interest $ 4,700,316 $ 3,595,987
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
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.
During 1996 and 1997, the Company acquired frequency rights in exchange for
a note payable in the amount of $6,480,000 and $1,891,000,
respectively.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated balance sheet as of September 30, 1997, the consolidated
statements of operations for the three and nine months ended September 30, 1996
and 1997 and the consolidated statements of stockholders' equity and cash flows
for the three and nine months ended September 30, 1996 and 1997 have been
prepared by People's Choice TV Corp. (the "Company" or "PCTV") and are
unaudited. In the opinion of management, all adjustments necessary to present
fairly the financial position, results of operations and cash flows at September
30, 1996 and 1997 have been made and all such adjustments are of a normal
recurring nature. The accounting policies followed during the interim periods
reported on are in conformity with generally accepted accounting principles and
are consistent with those applied for annual periods. Certain prior period
amounts have been reclassified to conform with current period presentation. It
is suggested that these consolidated financial statements be read in conjunction
with the consolidated financial statements for the year ended December 31, 1996
included in the Company's filing on Form 10-K. The results of operations for the
three and nine month periods ended September 30, 1996 and 1997 are not
necessarily indicative of the operating results for the full year.
(2) Earnings per share:
The net loss per share has been computed based on the weighted average of
common shares outstanding. The 1996 and 1997 shares include common equivalent
shares issuable upon exercise of certain outstanding stock options and the Bank
of Montreal warrant.
The Company has determined there will be no effect of applying the
principles of Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
(3) Acquisitions and Dispositions:
On September 3, 1997, the Company closed on a previously announced asset
exchange transaction with CS Wireless Systems, Inc. ("CS") by which the Company
agreed to exchange certain wireless frequencies and equipment in Kansas City for
certain of CS's wireless frequencies and equipment in Salt Lake City. The
agreement covers 21 wireless frequencies in Kansas City, 28 wireless frequencies
in Salt Lake City , and the Basic Trading Area ("BTA") licenses for both
markets.
In January 1996, the Company acquired rights to non-strategic wireless
frequencies and certain other assets, including leases for 20 channels in
Tilden, Illinois. In August 1997, the Company returned the rights to these
frequencies to the FCC, resulting in a loss of approximately $850,000.
In January 1996, Preferred Entertainment of Champaign, of which Specchio
Development Investment Corp. 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 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.
6
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
(4) Extraordinary Gain on Early Extinguishment of Debt:
In accordance with a purchase agreement dated May 31,1995 between Wireless
Cable of Indianapolis, Inc. ("WCI"), a majority-owned subsidiary of the Company,
and Broadcast Cable, Inc. ("BC"), WCI issued a promissory note to BC in the
amount of $6,726,754, due the later of May 31, 1997 or upon completion of
certain events relating to frequencies acquired. In May 1997, the Company repaid
$5,900,000 in settlement of the note, resulting in a gain of $826,754.
(5) Commitments and Contingencies:
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.
On February 27, 1996, Wireless Enterprises, Inc. and Indianapolis
Wireless, L. P. 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 condition of
the Company.
(6) Subsequent Event:
On November 11, 1997, the Company signed a definitive asset sale agreement
to sell certain service contracts and equipment, covering approximately 9,800
individual units located in the St. Louis market, to ResNet Communications,
LLC., representing approximately 4,300 analog video customers. The proceeds from
this sale will be approximately $3,800,000 less commissions. The sale is
expected to close in December 1997 subject to certain conditions.
7
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements contained herein that are not historical facts,
including but not limited to, statements regarding anticipated future capital
requirements, the Company's ability to obtain additional debt, equity, or other
financing, the Company's ability to successfully launch a digital wireless cable
television system and/or develop a high speed internet access business, and the
Company's ability to generate cash from system operations or sale of assets are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital on terms
satisfactory to the Company to allow the Company to continue to develop its
business; competitive factors, such as the introduction of new technologies and
competitors into the subscription television business or internet access
business; pricing pressures which could affect demand for the Company's service;
changes in labor, equipment and capital costs; future acquisitions or strategic
joint ventures; general business and economic conditions; and the other risk
factors described in other parts of this report and in the Company's other
reports filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the corresponding
discussion and analysis included in the Company's Report on Form 10-K for the
year ended December 31, 1996.
RESULTS OF OPERATIONS:
Strategic Direction
- -------------------
During 1997, the Company's strategy has been to continue conservation
of capital pending (i) the launch of the Company's high speed internet access
product marketed under the name SpeedChoice(TM) (described below under
"Liquidity and Capital Resources") and (ii) the implementation of digital video
compression technology. The Company first began offering the SpeedChoice(TM)
high speed internet service in the Detroit market in late October 1997 and
cannot at this time assess the market's interest in this product. With respect
to the Company's proposed digital video system, the Company's main vendor,
NextLevel Systems, Inc. ("NSI"), is currently working to resolve certain
system integration problems with respect to the digital head-end and converter
boxes. Based on its own analysis and advice from its equipment vendors, the
Company believes that these system integration issues will be resolved. The
Company now expects the launch of a compressed digital video product to occur in
1998. When the Company offers this product in a market, it anticipates that it
will offer the product in conjunction with the offering of the SpeedChoice(TM)
service. The Company believes that the implementation of digital video
compression technology will expand its video product offering, and, in
conjunction with the offering of the SpeedChoice(TM) service, will enhance the
Company's ability to attract and retain customers. Both the SpeedChoice(TM)
service and digitally compressed video are new products for the Company and
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 video programming and internet access services.
Revenues
- --------
Revenues decreased $.2 million or 3.0% from the three month period ended
September 30, 1996 to 1997 and $8,600, or less than 1%, from the nine month
period ended September 30, 1996 to 1997. The decrease in the three and nine
month periods is principally attributable to a lower customer count and lower
installation revenue resulting from the Company's suspension of the growth of
its analog customer base, partially offset by an increase in average revenue per
customer for both periods and by higher third party installation revenues for
the nine months. Customer count decreased from 77,500 at September 30, 1996 to
72,800 at September 30, 1997, or 6.1%. Customer count was 75,200 at June 30,
1997.
8
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(Continued)
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses decreased $83,300 or less than 1% from the
three month period ended September 30, 1996 to 1997 and $1.8 million or 5.3%
from the nine month period ended September 30, 1996 to 1997 primarily due to the
Company suspending the growth of its analog customer base. The decrease for the
three month period is primarily due to a decrease in programming costs, rent and
occupancy costs and bad debt expense, substantially offset by increases in
channel lease fees, recruiting costs and costs associated with third party
installations. The decrease for the nine month period is primarily due to a
decrease in salaries and related benefits due to personnel reductions, rent and
occupancy costs, programming costs and bad debt expense, partially offset by
increases in legal fees, costs associated with third party installations and
channel lease fees.
Non-cash Settlement of Lawsuit
- ------------------------------
Amount represents the value of 56,000 shares of restricted Company
common stock issued as part of the settlement of a lawsuit.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense primarily includes depreciation
and amortization of wireless systems and equipment and amortization of frequency
rights. Depreciation and amortization expense decreased from the three and nine
month periods ended September 30, 1996 to 1997 principally due to a decrease in
amounts capitalized due to the Company's suspending the growth of its analog
customer base. Excess direct costs of obtaining customers over installation
revenues are capitalized and amortized over a three year period, or the life of
the customer if shorter.
Operating Loss
- --------------
Operating loss decreased to $10.7 million from $11.5 million and to
$30.6 million from $34.4 million for the three and nine months ended September
30, 1997, respectively, from the comparable period of the prior year principally
due to decreases in operating costs and expenses and depreciation and
amortization. The 1996 periods also included the non-cash settlement of the
lawsuit. Cash flows from operating activities improved to $(1.8) million from
$(5.8) million primarily due to improvement in earnings before interest, taxes,
depreciation and amortization of $1.8 million, excluding the non-cash settlement
of the lawsuit, and due to a favorable net change in assets and liabilities of
$3.0 million.
Loss on Sales and Writedown of Assets
- -------------------------------------
Loss on sales and writedown of assets for the 1997 period includes a $.9
million writeoff of non-strategic frequency rights, and a $.6 million writedown
of notes receivable and other assets to net realizable value, partially offset
by a $.4 million gain on sale of a non-strategic frequency.
Loss on sales and writedown of assets for the 1996 period includes a
$1.4 million writedown of a note receivable and other assets to net realizable
value, partially offset by a $.2 million gain on sale of Champaign and a $.2
million gain on sale of non-strategic wireless cable frequency rights in Tulsa,
Oklahoma.
9
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(Continued)
Interest Expense
- ----------------
Interest expense was $8.0 million and $23.4 million for the three and
nine months ended September 30, 1997 compared to $7.1 million and $20.5 million
in the corresponding 1996 periods. The increase in interest expense from 1996 to
1997 was primarily a result of the accretion of the Senior Discount Notes.
Non-cash interest expense totaled $7.6 million and $22.4 million for the three
and nine month periods ended September 30, 1997 compared to $6.8 million and
$19.8 million in the corresponding 1996 periods.
Interest Income and Other
- -------------------------
Interest income and other was $1.5 million and $4.1 million for the
three and nine months ended September 30, 1997 compared to $1.3 million and $4.2
million in the corresponding 1996 periods. Interest income decreased $.4 million
and $.9 million from the three and nine months ended September 30, 1996 to 1997
primarily 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.
Extraordinary Gain on Early Extinguishment of Debt
- --------------------------------------------------
This amount represents a net gain on early extinguishment of a $6.7
million note for which the Company repaid
$5.9 million.
Net Loss
- --------
For the three and nine month periods ended September 30, 1997, the
Company incurred net losses of approximately $18.5 million and $50.3 million,
respectively, compared to $18.3 million and $51.8 million for the comparable
1996 periods. 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 communications systems.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, cash equivalents and marketable securities decreased to $81.9
million at September 30, 1997 from $104.7 million at December 31, 1996, a
decrease of $22.8 million. This decrease is primarily attributable to cash used
in operating activities, investment in wireless systems and equipment, and
repayment of notes payable, partially offset by proceeds from sales of assets.
The wireless communications business is a capital intensive business.
The Company's operations require substantial capital investment for (i) the
acquisition or leasing of wireless frequency 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.
10
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(Continued)
In late October 1997, the Company launched a high speed internet access
service in the Detroit market. The service is being marketed under the name
SpeedChoice(TM). At this time, the SpeedChoice(TM) service does not have a
material number of customers. The Company's ability to further develop the
SpeedChoice(TM) service may be affected by a number of factors: first, the
Company has never operated such a service and the technology may not perform
adequately when material levels of customers are receiving the service; second,
the Company does not know whether there will be sufficient customer interest in
this product at a sufficient price to create a successful business model; third,
competition from cable modem, T-1, ADSL, other wireless frequencies and other
new technologies and telecommunications services providers may prevent the
Company from successfully developing further the SpeedChoice(TM) service; and
fourth, because the Company has never previously operated any internet access
system, there may be other financial, marketing, technological, customer
service, billing, operational or management issues that prevent the Company from
successfully developing further the SpeedChoice(TM) service.
During 1997, the Company's strategy has been to continue conservation
of capital pending (i) the launch of the Company's high speed internet access
product (described above) and (ii) the implementation of digital video
compression technology. The Company's main vendor, NSI, is currently working to
resolve certain system integration problems with respect to the digital
head-end and converter boxes for its proposed digital video system. Based on its
own analysis and advice from its equipment vendors, the Company believes that
these system integration issues will be resolved. The Company now expects the
launch of a compressed digital video product to occur in 1998. When the Company
offers this product, it anticipates that it will offer the product in
conjunction with the offering of the SpeedChoice(TM) product in the same market.
As disclosed previously, based on its expected transition to a compressed
digital video product, the Company does not plan to add to its analog customer
base.
The Company anticipates that the development of its wireless
communications systems with digital compression 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 $17.0 million in 1997 on capital expenditures, including $1.2 million
on the Company's launch of the SpeedChoice(TM) service. The Company has spent
$13.1 million of this $17.0 million in the nine months ended September 30, 1997.
Also in 1997, the Company will make $9.6 million in expenditures for required
debt payments of which $8.6 million has been spent in the nine months ended
September 30, 1997. 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 an agreement with NSI pursuant to which
the Company would purchase from NSI up to 300,000 digital converter boxes. The
Company is 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 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. As described above, the
Company is working with NSI to resolve certain system integration problems with
respect to the digital converter boxes and the digital head-end facility. Based
on the Company's review of these issues and advice from NSI, the Company
believes that these system integration issues will be resolved. If the system
integration issues were not resolved, the Company may seek to terminate its
purchase contract with NSI and seek other remedies, but the success of such
actions cannot be determined at this time. 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.
11
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
(Continued)
Consistent with its strategy of transitioning the business of the
Company from analog technology to digital technology, the Company is proposing
to sell certain service contracts and equipment by which the Company provides
wireless cable television service to apartment complexes, condominiums and other
multiple dwelling units in its Chicago, Houston, Phoenix and St. Louis markets.
All of the service contracts that are for sale concern properties that are
served through the use of analog technology. These service contracts cover
approximately 270 properties containing approximately 59,000 individual units
located in Houston, St. Louis, Phoenix and Chicago, which represents
approximately 21,500 analog video customers. On November 11, 1997, the Company
signed a definitive asset sale agreement to sell approximately 9,800 individual
units located in St. Louis to ResNet Communications, LLC., representing
approximately 4,300 analog video customers. The proceeds from this sale will be
approximately $3.8 million less commissions. The sale is expected to close in
December 1997 subject to certain conditions. The Company has received offers for
the service contracts in the remaining markets, but has not accepted any offer
at this time. The Company cannot determine at this time whether it will be
ultimately successful in completing any sale of these remaining service
contracts for a price and on other terms acceptable to 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
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 flow 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 communications 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 communications systems and the Company's general corporate
activities will require the Company to secure significant additional financing
in the future and there can be no assurance that such financing will be
available when required.
Prior to October 2, 1997, the common stock of the Company was listed on
the Nasdaq National Market (NNM). Prior to that date, the Company's listing on
the NNM had been under review by Nasdaq as a result of the Company's inability
to meet a net tangible asset listing requirement. The Company had requested and
received from Nasdaq a temporary exception while it sought to satisfy that
listing criteria. After working towards satisfying that requirement, the Company
determined that it could not satisfy that listing requirement within the time
frame requested by Nasdaq. Based on the new maintenance listing criteria that
will become effective on February 23, 1998, the Company requested that Nasdaq
move the listing of the Company's common stock from the NNM to the Nasdaq
SmallCap Market. Nasdaq agreed to list the Company's common stock on the Nasdaq
SmallCap Market as of October 2, 1997, and the listing on that market commenced
as of that date. Continued listing on the Nasdaq SmallCap Market will be subject
to the Company's continued satisfaction of the maintenance listing criteria for
such market.
12
<PAGE>
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement regarding computation of per share earnings is not
required because the relevant computation can be determined
from the material contained in the Financial Statements
included herein.
(27) Financial Data Schedule
(b) Reports on Form 8-K
On July 15, 1997, the Company filed a Current Report on Form
8-K dated July 15, 1997 discussing matters relating to the listing of the
Company's Common Stock on the Nasdaq National Market System.
13
<PAGE>
Pursuant to the requirements to the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized
PEOPLE'S CHOICE TV CORP.
------------------------
(Registrant)
Date: November 11, 1997 By /s/ Charles F. Schwartz
--------------------------
Name: Charles F. Schwartz
Senior Vice President and
Chief Financial Officer
and Principal Accounting Officer
14
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