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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, 1997
[_] 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 $ 12,120,842 as of March 25, 1998 based upon the
last sales price per share of the Registrant's Common Stock, as reported on the
Nasdaq SmallCap Market on such date. As of March 25, 1998, 12,923,817 shares of
Common Stock of the Registrant were outstanding.
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PART I
ITEM 1. BUSINESS
Company Overview
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. In the fourth quarter of 1997, the Company began to offer a high speed
internet access service in its Detroit market under the name SpeedChoice(TM).
The Company's executive offices are located at Two Corporate Dr., Suite 249,
Shelton, CT 06484. Its telephone number at that address is (203) 925-7900.
The Company is a developer, owner and operator of video transmission and
data communications systems. The Company's strategy is to own, develop and
operate video transmission systems and data communications systems 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 video transmission service in Chicago, Detroit, Houston,
Phoenix, St. Louis and Tucson. The Company also provides high speed internet
access service in Detroit and Phoenix. The Company also controls wireless
frequency rights in Indianapolis, Milwaukee, St. Louis and Salt Lake City. The
Company controls between 19 and 32 wireless frequencies in its nine primary
markets, which collectively represent approximately 7.8 million households which
the Company believes can be serviced by line-of-sight transmission.
Business Strategy
During 1997 and the first quarter of 1998, the Company's strategy has been
to continue conservation of capital pending (i) the launch of the Company's high
speed internet access service marketed under the name SpeedChoice(TM) (described
below) and (ii) the implementation of digital video compression technology. The
Company first began offering the SpeedChoice high speed internet service in the
Detroit market in the last quarter of 1997 and in the Phoenix market in March
1998. The Company expects to launch a digitally compressed video service in one
of its markets in the second half of 1998.
Video Transmission
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The Company currently provides analog wireless cable television service in
Chicago, Detroit, Houston, Phoenix, St. Louis, and Tucson. 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. 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 Federal Communications Commission ("FCC"). Wireless cable
requires a clear line-of-sight because the microwave frequencies used will not
pass through dense foliage, hills, buildings, or other obstructions.
In most of its video transmission systems, the Company currently transmits
programming services utilizing analog technology. Analog technology permits a
standard 6 MHz wireless frequency to carry one full-motion audio/video
programming service, like ESPN or HBO, at a time. In the second half of 1998,
the Company plans to offer a digitally compressed video service in its one of
its systems. One of the benefits of digital compression technology is that the
capacity of each wireless frequency after compression may 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. Because of the superior capacity and quality of digital
compression technology, the Company has determined not to seek to add additional
customers to its analog wireless cable television 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
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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 and successfully market digital video
transmission service in the second half of 1998 may be affected by a number of
factors. First, the Company has not resolved all of the technical issues
relating to the desired performance of its digital transmission system. Second,
the Company has not finalized the rights to the required software for an on-
screen navigation system for its digital transmission system. Third, in any
market in which the Company desires to provide digital video service, the
Company will need to obtain certain FCC approvals to implement digital
transmission on certain of the frequencies in such markets and the Company will
need to secure the consent of certain adjacent market licensees for these
approvals to be granted. Fourth, although the Company has sufficient capital
resources to launch one of its markets with digital video 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. Fifth, there can be no assurance that the
implementation and optimization of digital compression technology in the
Company's markets will not take longer than anticipated. Sixth, because of the
wide availability of digital video programming from national direct broadcast
satellite companies such as DirectTV, there may be insufficient market
acceptance of the Company's digital video product. There may be additional
factors, that the Company is unaware of at this time, that may affect the
Company's ability to implement and successfully market digital video
transmission in one of its markets in the second half of 1998.
High Speed Internet Access
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In the last quarter of 1997, the Company began offering a high speed
internet access service under the name SpeedChoice(TM) in the Detroit market. In
March of 1998, the Company began offering the SpeedChoice service in the Phoenix
market. The SpeedChoice service allows a service customer to access the internet
and World Wide Web to receive data, full motion video, and audio at speeds of up
to 10 megabits per second. SpeedChoice customers download requests are sent to
the Company's Point-of-Presence ("POP") by a regular telephone line connection.
The download request is then processed by the SpeedChoice system's servers and
high-speed network. The download request is then transmitted to the SpeedChoice
customer over the Company's wireless frequencies to the customer's receiving
dish and then to a SpeedChoice modem at the customers desktop computer or local
area network. As of this date, the Company does not have a material number of
customers that subscribe to the SpeedChoice service in either its Detroit or
Phoenix markets. The Company cannot predict at this time whether acceptable
market interest in the SpeedChoice service will emerge.
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 a tax on all video program distributors (including
wireless cable distributors) on the distributor's gross receipts comparable to
the franchise fees cable operators pay. While the proposals vary among
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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. 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 can qualify as educational programming and thereby facilitate
greater usage of an ITFS Channel by the Company. In addition, lessees of ITFS
"excess air time", including the Company, generally have the right to transmit
to their customers at no incremental cost, the educational programming provided
by the lessor. 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. 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.
Digital transmission is specifically limited to use of two types of digital
modulation, although higher modulation densities may be utilized upon submission
of specific measurement data. Digital compression techniques enable wireless
cable operators and MDS or ITFS licensees to increase their channel capacity and
service offerings using existing licenses. All modification applications
requesting the use of digital transmissions by either MDS or ITFS applicants are
considered minor changes. Therefore, it is not necessary to wait until the
Commission opens a "filing window" to submit such ITFS applications. 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.
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, St. Louis, Tucson and Phoenix.
On October 7, 1997, the FCC adopted a Notice of Proposed Rule Making
seeking comments on its proposal to amend the Commission's rules to enhance the
ability of MDS and ITFS licensees to provide two-way communication services,
which would include data communications and telephony services. The rule making
proposal was issued in response to a petition filed by a group of over 100
petitioners including the Company. The Commission proposed to substantially
amend its rules to facilitate this two-way transmission service and solicited
comments on the technical, procedural and economic effects of implementing the
proposal. The pleading cycle has been completed and the vast majority of those
parties filing comments supported rule changes allowing two-way transmission
services. However, there was significant disagreement among the commenting
parties concerning the
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specifics of the rules especially as related to potential harmful interference
to ITFS receive sites. Another area of significant disagreement involved
application processing rules for this new service.
Licensing Procedures. In 1996 the FCC awarded the rights to all
remaining commercial wireless frequencies through an auction of Basic Trading
Areas ("BTAs"). 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. Applications for new MDS frequencies may now be
filed at any time but only by BTA authorization holders. However, all
previously existing MDS licensees or applicants ("incumbents") are protected
since the BTA authorization allows the submission of applications for MDS
frequencies within the BTA only upon demonstrating interference protection to
the 35 mile radius protected service areas of incumbent MDS and ITFS frequencies
applied for or licensed 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. This five year deadline is termed the "build-
out" period, and if the BTA holder is not serving any part of the BTA at the end
of the 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 have been exempt from the auction process and applications
for ITFS licenses or major ITFS license modifications have been awarded
according to the FCC's "filing window" system and comparative criteria.
However, as part of the Balanced Budget Act of 1997, Congress amended the
Communications Act to require the FCC to use competitive bidding procedures to
resolve most initial licensing proceedings involving mutually exclusive
applications. That Act specifically exempts non-commercial educational and
public broadcast stations from the competitive bidding requirement, but omitted
a previous exemption for the instructional television fixed service. As a
result, the FCC is currently considering whether it must, and if not, whether it
should, apply competitive bidding to mutually exclusive ITFS applications. There
can be no assurance that the FCC will continue to license ITFS stations in
accordance with its past processes and criteria.
Conditional licenses awarded to an incumbent generally require construction
of the transmission facility to be completed within one year of the date of
grant of the conditional license whereupon a full term license will be issued.
However, conditional licenses awarded to BTA authorization holders require
construction of the transmission facility within the five (5) year build-out
period. All incumbent 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 may 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 transmission facility 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 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 and encoding formats. 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.
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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 utilizes a power flux density restriction which in
some instances could mean less protection afforded to new BTA holder stations
than to incumbent stations.
Emergency Alert. The Commission has determined that wireless cable systems
must participate in the Emergency Alert System ("EAS") on the same basis as
cable systems and to obtain EAS equipment by October 1, 2002. For systems with
5,000 or more customers, emergency alerts and warnings must be presented to
subscribers both visually and aurally on all programmed channels (channels
carrying video programming). For small systems (fewer than 5,000 customers),
alerts and warnings must be presented to customers aurally on all programmed
channels and visually on at least one programmed channel with video interrupt on
all channels that do not carry the EAS message.
LMDS Auction. On February 18, 1998, the FCC commenced an auction in the
Local Multipoint Distribution Service ("LMDS"). LMDS operates at a higher
frequency than MDS and has a shorter transmission range, requiring the use of
multiple cells in order to serve an entire market. Within each of the 493 BTAs
being auctioned there are two frequency blocks, an "A block" and a substantially
smaller "B Block" of spectrum. The Company participated in the auction as a
designated entity which entitles it to a small business discount on any winning
bids. The auction concluded in March, 1998. The Company was the successful
bidder for the Phoenix, Arizona "B block" license and the Prescott, Arizona "A
block" license. To participate in the auction, the Company deposited $20.3
million with the FCC. The total payment required to the FCC for the two
licenses is $3,221,400 which amount includes the Company's small business
discount. The Company will be required to pay 20% of that amount to the FCC
within five days of a public notice issued at the close of the auction
announcing it is an auction winner. The Company will then be required to submit
a long-form application which, when granted, will require that the Company pay
the remainder of the $3,221,400. The required payments will be deducted from
the deposit that the Company previously made with the FCC. The remainder of the
auction deposit will then be returned to the Company.
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", as defined in the Act, and directed the FCC to adopt
comprehensive new federal standards for local regulation of certain rates
charged by traditional hardwire cable operators. Conversely, the legislation
also provides for deregulation of traditional hardwire cable in a given market
where effective competition is shown to exist. Rates charged by wireless cable
operators, typically already lower than traditional hardwire cable rates, are
not subject to regulation under the 1992 Cable Act.
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.
1996 Telecommunications Act. The Telecommunications Act of 1996 (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 competition in the video programming delivery
industry is likely to increase as a result of the adoption of the 1996 Act.
Some of the provisions of the 1996 Act that directly affect wireless cable
television operators are discussed below.
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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 obtain 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 rates if that was the only tier subject to regulation as of
December 31, 1994. Although the Act also deregulates cable programming services
rates for all cable operators as of March 31, 1999, legislation has been
recently introduced in Congress which, if adopted, would repeal that
deregulation date. The Company cannot predict the ultimate fate of such
legislation.
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 have a uniform rate
structure 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,
regardless of whether the cable system is subject to effective competition,
except that franchised cable operators not subject to effective competition may
not charge predatory prices to MDUs, 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 is currently considering whether and to what extent its
preemption authority extends to property not within the exclusive use or control
of a person with an ownership interest, such as rental properties.
The 1996 Act eliminated the cable/telco cross ownership prohibitions,
freeing 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, while not subject to a local franchise requirement, must, among other
things, 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. However, 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.
The 1996 Act codified the concept of a national Universal Service Fund (the
"Fund") to promote availability of telecommunications services to those in low
income, rural, insular, and high cost areas at rates that are reasonably
comparable to the lower rates charged in urban areas. The 1996 Act broadened
this program to include affordable access to advanced telecommunications
services for schools, classrooms, health care facilities, and libraries and
expanded the category of entities required to contribute to the Fund. It is not
clear whether wireless cable operators, such as the Company, will be required to
contribute to the Fund. The FCC is presently considering whether and to what
extent wireless cable operators must contribute to the Fund. The outcome is
uncertain.
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Pursuant to the 1996 Act, video programming distributors, including
wireless operators, will be required to provide closed captioned video
programming on a phased-in basis starting on January 1, 2000. Requirements to
pass-through captions already contained in programming and to maintain
captioning at 1997 levels became effective on January 1, 1998. ITFS
programming, as a class, is exempt from captioning requirements. Wireless
operators that retransmit ITFS programming are not required to provide closed
captioning for such programming.
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 video programming 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
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. The Satellite Home Viewer Act of 1994
enables operators of wireless cable television systems to rely on the cable
compulsory license under Section 111 of the Copyright Act.
Section 119 of the Copyright Act provides for a similar compulsory
licensing program for the retransmission of broadcast programming to the home
via satellite. Recently, the Copyright Arbitration Royalty Panel drastically
increased the rates of entities operating under Section 119. While this action
has no direct impact on the rates applicable to the Company's services, the
differences and disparity in the compulsory licensing schemes and rates may lead
to further legislation. The Company's operations may be adversely affected by
the adoption of new or changed laws or regulations applicable to the Company's
copyright royalty liability.
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 local 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
The Company faces competition from a number of sources in both its
video transmission and high speed internet access businesses, including
potential competition from emerging trends and technologies, 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.
In the case of the Company's analog wireless cable television systems, the hard-
wire cable companies competing in the Company's markets generally offer more
channels of programming than the Company. Many hard-wire cable operators have
announced plans to enter the high speed internet access business. In the
Company's Phoenix market, Cox Communications, the largest franchised hard-wire
cable operator in that market, is now offering high speed internet access
service over its existing coaxial cable. The Company expects that hard-wire
cable companies will be significant competitors for high speed internet access
customers.
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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. 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. In addition, DirectTV offers a
high speed internet access service and the Company expects that DBS providers
will be significant competitors for high speed internet access 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. BellSouth
has made acquisitions of 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 the largest hardwire cable operators in the
U.S. The Company anticipates that the RBOC's and other LEC's will be
significant competitors for video programming customers. The RBOC's and LEC's
also offer internet access over local phone lines. Certain RBOC's and LEC's
offer high speed internet access through the use of ISDN, ASDL, and T-1
equipment and technology.
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 has awarded licenses in each
of 493 BTAs pursuant to a recently completed auction. While the Company
anticipates that LMDS may become a viable competitor for video programming
customers and high speed internet access customers, until more LMDS systems are
in operation, the level of competition that LMDS may provide cannot be
determined.
9
<PAGE>
The Company's Marketplace
Currently, the Company provides video transmission service in six
operating systems located in Chicago, Detroit, Houston, Phoenix, St. Louis and
Tucson and controls wireless frequency rights in three additional markets
located in Indianapolis, Milwaukee, and Salt Lake City. The Company provides a
high speed internet access service in the Detroit and Phoenix markets under the
name SpeedChoice(TM). The Company controls between 19 and 32 wireless
frequencies in the Company's nine primary 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. In addition, 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 Video Customers
Markets Area Households Households as of December 31, 1997
- ------- ---------------- ---------- -------------------------
<S> <C> <C> <C>
Chicago 2,836,000 2,275,000 18,100
Detroit 1,740,000 1,368,000 2,400
Indianapolis (1) 1,233,000 760,000 To be launched
Houston 1,105,000 866,000 14,400
Phoenix (2) 1,014,000 910,000 2,900
St. Louis 908,000 609,000 1,900
Milwaukee 650,000 423,000 To be launched
Salt Lake City 359,000 320,000 To be launched
Tucson 314,000 284,000 27,600
---------- --------- ------
Total 10,159,000 7,815,000 67,300
</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.
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, through its subsidiary People's Choice TV of
Detroit, Inc. ("PCTV Detroit"), provides a high speed internet access service
marketed under the name SpeedChoice in the Detroit market. The Company owns
100% of the common stock of PCTV Detroit. PCTV Detroit controls the rights to
27 wireless cable channels. The Company transmits the SpeedChoice service over
five of its wireless frequencies and transmits at 50 watts with digital
modulation. The Company also transmits 20 channels of video programming
(including eight off-air VHF/UHF channels) in the Detroit market. The Company
transmits its video programming over twelve of its wireless frequencies and
transmits at 10 watts with analog modulation.
The Company recently received digital authorizations from the FCC on
14 of its ITFS wireless frequencies. These authorizations were conditioned upon
compliance with the Canadian technical coordination agreement. These
authorizations will allow the Company to use these frequencies 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, add digital modulation and other matters with respect to its 27
Detroit wireless frequencies. Subject to the receipt of certain FCC digital
authorizations, interference agreements, and certain other consents, the Company
will be able to provide digital video, data transmission and internet service on
its 13 MMDS frequencies in the Detroit market and colocate those channels with
the 14 ITFS frequencies. Because the Detroit market is within 50 miles of the
Canadian border, wireless frequency specifications are subject to a technical
coordination agreement between the FCC and the Canadian Radio and Television
Commission which was entered into in December of 1997. This agreement governs
cross border transmission interference issues and establishes rules for
10
<PAGE>
digital transmission. 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 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 92% 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 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 frequencies
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"). The Company also offers its
SpeedChoice high speed internet access service in the Phoenix market. PCTV
Phoenix controls the rights to 32 wireless frequencies and transmits at 100
watts.
Salt Lake City. The Company controls the rights to 20 wireless
frequencies in the Salt Lake City market and also has the rights to pending
applications at the FCC for 8 additional frequencies. The Company does not
currently offer any video or data services in this market.
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 frequencies 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 wireless frequencies. 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
frequencies that it uses to transmit programming and provide high speed internet
access; 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 controlled by
Matthew Oristano, the Chairman and Chief Executive Officer of the Company. The
Company makes nominal payments to Alda Wireless Holdings, Inc. and Alda Gold,
Inc. for those lease rights and has the right to acquire the licenses for a
nominal fee. 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 frequencies to operate successful video transmission
systems and a high speed internet access system in the markets in which it is
currently operating, if a significant number of the Company's wireless
frequencies 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
11
<PAGE>
authorizations held by the Company's frequency lessors, the Company may be
unable to provide a viable video programming package to customers or high speed
internet access in some or all of its markets.
Licenses for wireless frequencies 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 video or data transmission systems in new markets
where it does not already control a critical number of frequencies, the Company
will be required to lease sufficient frequency capacity from third parties.
There can be no assurance that such frequency capacity will be available on
terms acceptable to the Company.
Employees
As of March 25, 1998 the Company had a total of 357 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 and warehouse space in Tucson
pursuant to two leases that run through November, 1998 and March, 2001. PCTV
Houston owns a 48,500 square foot building in Houston, Texas. PCTV Houston also
leases 800 square feet of office space in Houston which lease runs through
September, 1998. 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, 1999. PCTV Detroit leases approximately 8,500 square
feet of office space, which lease runs through August, 2000. 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 a warehouse and office space
totaling approximately 4,000 square feet, which lease runs through November,
2003. PCTV Indianapolis leases a small suite in Indianapolis which lease is
month to month.
The Company expects to purchase or lease additional office space in other
cities when it expands or launches other video and/or data transmission 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 video and/or data transmission systems. The Company locates
its wireless transmitters on these buildings or towers. The Company believes
that office space and space on buildings or transmission towers is readily
available on acceptable terms in the markets where the Company intends to
operate video and/or data transmission 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.
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
12
<PAGE>
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
The 1997 annual meeting of stockholders of the Company was held on December
12, 1997. The following person, who was the Company's sole nominee for
director, was elected at the meeting for a three year term:
Name Votes For Withheld
- -------------------------- ---------- --------
Terry L. Scott 10,669,174 1,032,661
At the annual meeting the stockholders also voted on a proposal to
authorize an amendment to the Company's 1993 Stock Option Plan to increase the
number of shares issuable thereunder to 1,800,000 ("Option Proposal"). The
proposal was approved at the annual meeting with votes cast in the following
manner:
Proposal Votes For Votes Against Abstain
- -------------------------- --------- ------------- -------
Option Proposal 6,547,286 1,833,868 9,082
There were 3,365,766 broker non-votes with respect to the Option Proposal.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
The Company's Common Stock is currently traded on the Nasdaq SmallCap
market under the symbol "PCTV". 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.
Closing Sale Price
--------------------
1996 High Low
First Quarter $19.75 $15.25
Second Quarter $19.00 $12.50
Third Quarter $19.00 $11.50
Fourth Quarter $15.00 $ 5.25
1997
First Quarter $ 6.50 $ 2.63
Second Quarter $ 3.25 $ 0.44
Third Quarter $ 4.00 $ 1.38
Fourth Quarter $ 3.25 $ 1.13
13
<PAGE>
Nasdaq SmallCap Market Listing Review
On March 2, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") advised the
Company that its Common Stock was scheduled to be delisted from the Nasdaq
SmallCap Market as a result of the Company's failure to satisfy a certain market
capitalization maintenance standard. This maintenance standard requires that
the aggregate market value of the Company's Common Stock must equal or exceed
$35 million. Currently, the Company does not satisfy this maintenance standard.
In accordance with Nasdaq rules, the Company has requested a temporary exception
to this maintenance standard so that its Common Stock can continue to be listed
on the Nasdaq SmallCap Market. The Company has requested a temporary exception
that would continue for a period of ninety days. The grant of any such
temporary exception to this maintenance standard would be in the sole discretion
of Nasdaq and the Company is unable to speculate as to whether any such
exception is likely to be granted. If Nasdaq refuses to grant an exception, the
Company's Common Stock will be delisted from the Nasdaq SmallCap Market. After
such a delisting, it may become difficult to make purchases and sales of the
Company's Common Stock or obtain timely and accurate quotations with respect to
trading of the Company's Common Stock.
Holders
On March 25, 1998 there were approximately 180 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 any
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.
14
<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,
------------------------------------------------------------------
1993 1994 1995 1996 1997
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues $ 5,780 $ 12,557 $ 26,004 $ 33,425 $ 32,690
Depreciation and Amortization 3,328 6,606 24,627 39,258 34,508
Operating Loss (8,189)(1) (20,573) (42,277) (50,819) (43,761)
Interest Expense 1,938 2,514 15,566 27,891 31,576
Net Loss (9,802) (19,531)(2) (53,235)(3) (75,887) (69,580)(4)
Actual and Pro Forma Basic Net Loss
Per Common Share $(1.73)(5) $(2.20)(2) $(5.23)(3) $(6.26) $(5.80)(4)
Weighted Average Number of
Common Shares Outstanding 5,367 8,949 11,072 13,100 13,149
Balance Sheets Data:
Total Assets $43,427 $117,532 $373,093 $326,148 $279,124
Notes and Other Payables 16,659 12,116 202,317 234,431 256,465
Stockholders' Equity/(Deficit) 20,865 82,997 96,519 14,089 (62,209)
</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,
1997 and the balance sheets data for December 31, 1996 and 1997 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, 1996 and 1997 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) Includes an extraordinary gain of $.8 million or $.06 per share.
(5) The pro forma net loss per share would have been $1.69 for the year ended
December 31, 1993, assuming 98,832 shares had been issued at the initial
public offering price of $10.50 per share for the common stock, and the
proceeds were received and used to retire certain indebtedness on January
1, 1992.
15
<PAGE>
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
frequency rights and to own, develop and operate wireless communications
systems. The Company's strategy is to own, develop and operate video
transmission systems and data communications systems 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
video transmission service in Chicago, Detroit, Houston, Phoenix, St. Louis and
Tucson and the Company also provides high speed internet access service in
Detroit and Phoenix. The Company also controls wireless frequency rights in
Indianapolis, Milwaukee, St. Louis and Salt Lake City. The Company controls
between 19 and 32 wireless frequencies in its nine primary markets, which
collectively represent approximately 7.8 million households which the Company
believes can be serviced by line-of-sight transmission.
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
The Company may from time to time make forward-looking statements. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of the Company.
Any such statement is qualified by reference to the following cautionary
statements.
During 1997, the Company's strategy has been to continue conservation of
capital pending (i) the launch of the Company's high speed internet service
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 high speed
internet service in the Detroit market in October 1997 and in the Phoenix market
in March 1998, and cannot at this time assess the overall market interest in
this product. With respect to the Company's proposed digital video system, the
Company is currently working to resolve certain technical issues relating to the
desired performance of the system. The Company now expects the launch of a
compressed digital video service to occur in the second half of 1998. When the
Company offers this service in a market, it anticipates that it will offer the
service in conjunction with the offering of the SpeedChoice 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 service, will enhance the Company's ability to attract and
retain customers. Both the SpeedChoice 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% for the year ended December 31, 1997 compared to the
year ended December 31, 1996. The decrease 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 and by higher third party installation
revenues. Revenues increased 29% for the year ended December 31, 1996 compared
to the comparable 1995 period. This increase 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.
Customer count decreased 13% to 67,300 at December 31, 1997 from 77,800 at
December 31, 1996. The 1997 decrease was also affected by the sale of 8,800
Multiple Dwelling Units in St. Louis which accounted for 3,900 customers.
Customer count decreased 3% to 77,800 at December 31, 1996 from 80,100 at
December 31, 1995. The decrease in customer count is primarily due to the
Company's suspension of the growth of its analog customer base in 1996.
16
<PAGE>
Service Costs
Service costs increased 1% and 19% for the years ended December 31, 1997
and December 31, 1996, respectively. Service costs are mainly programming
costs, channel lease payments, transmitter site rentals, service calls, cost of
program guides and repair and maintenance expenditures. The increase in 1997
was primarily due to an increase in costs associated with third party
installations, channel lease payments and internet related costs, offset by a
decrease in programming and service call costs. The decreases were attributable
to the aforementioned decline in customers. Service costs increased in 1996
from 1995 primarily due to the Chicago and Detroit system acquisitions and to
the increase of customers in the Phoenix system, partially offset by the
decrease of customers in the Houston system.
Selling, General and Administrative Costs
Selling, general and administrative costs decreased 10% and 7% for the
years ended December 31, 1997 and December 31, 1996, respectively. Costs
decreased in both years primarily due to the suspension of the growth of the
analog business, primarily salaries and related benefits due to personnel
reductions and lower bad debt expenses. The 1997 results also reflect decreases
in rent and occupancy costs. Partially offsetting these decreases in 1997 were
costs incurred for the launch of the high speed internet access service.
Partially offsetting these decreases in 1996 are costs associated with the
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.
Depreciation and Amortization
Depreciation and amortization expense primarily includes depreciation of
wireless systems and equipment and amortization of frequency rights.
Depreciation and amortization decreased for the year ended December 31, 1997
compared to 1996 primarily due to a decrease in amounts capitalized due to the
Company suspending the growth of the analog customer base, partially offset by
the acceleration of depreciation for certain assets. 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. 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. The Company expects that depreciation and
amortization expense will begin to increase as a result of capital expenditures
for the high speed internet access service and digital video compression
technology.
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.
Operating Loss
Operating loss was $43.8 million, $50.8 million and $42.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Operating loss
decreased from 1996 to 1997 primarily due to the Company's strategy not to
further develop its analog business. Operating loss increased in 1996 from 1995
principally due to increases in depreciation and amortization expense and the
non-cash settlement of a lawsuit, partially offset by the net increase in
revenues compared to service costs and selling, general and administrative
expenses. Cash flows used in operating activities were $3.3 million, $8.8
million and $14.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The reduction in 1997 compared to 1996 of $5.5 million was
primarily due to a favorable net change in assets and liabilities principally
due to accounts payable which increased $3.9 million in 1997 as compared to 1996
and an improvement in earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $1.7 million adjusted for the non-cash settlement of
a lawsuit, offset by a reduction in interest income, net of cash interest
expense, of $.7 million. Cash flows used in operating activities decreased $6.1
million from 1995 to 1996 principally due to improvement in EBITDA of $6.7
million adjusted for the non-cash settlement. Partially offsetting this is a
decrease in interest income, net of cash interest expense, of $1.2 million.
17
<PAGE>
Loss on Sales and Writedown of Assets
Loss on sales and writedown of assets for the 1997 period includes a $1.0
million writedown of certain assets to net realizable value, and a $.9 million
writeoff of non-strategic frequency rights, partially offset by the $1.0 million
gain on sale of service contracts and equipment in the St. Louis market, and a
$.6 million gain on sale of a non-strategic frequency.
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 $31.6 million, $27.9 million and $15.6 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in
interest expense from 1995 through 1997 was primarily a result of the accretion
of the Senior Discount Notes in May 1995. Non-cash interest expense totaled
$30.1 million, $26.8 million and $14.7 million for 1997, 1996 and 1995,
respectively, of which $29.8 million, $26.1 million and $14.3 million were
recorded on the Senior Discount Notes in 1997, 1996 and 1995, respectively.
Interest Income and Other
Interest income and other was $5.3 million, $5.7 million and $6.6 million
for the years ended December 31, 1997, 1996 and 1995, respectively. The
decrease in interest income from 1995 through 1997 was 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.
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.
Extraordinary Gain on Early Extinquishment of Debt
The 1997 amount represents a net gain on early extinguishment of a $6.7
million note for which the Company repaid $5.9 million.
The 1995 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 $69.6 million, $75.9 million and $53.2 million for the years
ended December 31, 1997, 1996 and 1995, 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
communications systems.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased to $80.3 million
at December 31, 1997 from $104.7 million at December 31, 1996, a decrease of
$24.4 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
18
<PAGE>
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 has been to continue conservation of
capital pending (i) the launch of the Company's high speed internet access
service and (ii) the implementation of digital video compression technology.
In October 1997, the Company launched a high speed internet access service
in the Detroit market and in March 1998 the Company launched the SpeedChoice
service in the Phoenix market. The service is being marketed under the name
SpeedChoice(TM). At this time, the SpeedChoice service does not have a material
number of customers. The Company's ability to further develop the SpeedChoice
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 service 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 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 service.
With respect to the Company's proposed digital video system, the company is
currently working to resolve certain technical issues relating to the desired
performance of the system. The Company now expects the launch of a compressed
digital video service to occur in the second half of 1998. When the Company
offers this service, it anticipates that it will offer the service in
conjunction with the offering of the SpeedChoice(TM) service in the same market.
As disclosed previously, based on its expected transition to a compressed
digital video service, the Company does not plan to add to its analog customer
base.
The Company anticipates that the development of its wireless communications
systems with internet access and digital compression technology will involve
capital expenditures higher than those involved in implementing analog
technology because of the costs associated with the addition of a new product
line, high speed internet access, and increased costs for the more complex
converter boxes and other equipment which utilize the digital technology. The
Company estimates that it will spend $23.2 million in 1998 on capital
expenditures compared to $15.3 million in 1997. Also in 1998, the Company will
make $4.1 million in expenditures for required debt payments, compared to $9.7
million in 1997. To fund such 1998 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 General Instruments
Corporation ("GIC") pursuant to which the Company is obligated to purchase
50,000 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 1998 payments for converter boxes under the terms
described above have been included in the Company's estimates of capital
expenditures for 1998. 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.
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 and Phoenix 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 250
properties containing 51,000 individual units located in Houston, Phoenix and
Chicago, which represents approximately 17,000 analog video customers. The
Company has entered into a letter of intent to sell these service contracts but
it is uncertain whether a definitive agreement will be executed or whether any
such transaction will be completed. On December 1, the Company closed on an
asset sale agreement selling approximately 8,800 individual units located in St.
Louis to ResNet Communications, LLC., representing approximately 3,900 analog
video customers. The net proceeds from the sale were approximately $3.4 million
resulting in a gain of approximately $1.0 million.
19
<PAGE>
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
internet and 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 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 wireless frequency rights
and wireless communications 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, 1997, for income tax purposes (subject to certain
limitations, including limitations on changes in control, and Internal Revenue
Service review) totaling approximately $140.6 million which expire in the years
2006 through 2012. Approximately $21.3 million of these NOLs at December 31,
1997 are available only to offset future taxable income of the Company's
subsidiaries.
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.
Recently Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," were issued. The Company plans to
adopt both in 1998. With respect to SFAS 130, the Company currently does not
expect any changes to its Statement of Operations for comprehensive income, as
defined. The disclosures regarding operating segments of the Company required
under SFAS 131 have no significant impact to the 1997 financial statements.
Future operations of the Company may require additional disclosures and
discussions.
Year 2000
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company is
utilizing both internal and external resources to identify, correct or
reprogram, and test the systems to ensure compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results of
operations. The Company expects its Year 2000 project to be completed on a
timely basis. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be converted on a timely
basis. A failure to convert successfully by another company could have an
adverse effect on the Company's systems. All significant software systems
utilized by the Company are provided under current licenses by third party
firms. The Company believes that these firms have Year 2000 compliance programs
in place.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page No. in
Form 10-K
-----------
<S> <C>
Report of Independent Public Accountants 22
Consolidated Balance Sheets December 31, 1996 and 1997 23
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1997 24
Consolidated Statements of Stockholders' Equity/(Deficit) for Each of the Three Years in the Period 25
Ended December 31, 1997
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997 26
Notes to Consolidated Financial Statements 28
</TABLE>
21
<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, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity/(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. 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
misstatements. 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, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 11, 1998
22
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
ASSETS 1996 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 41,305,795 $ 31,756,014
Marketable securities 63,396,191 48,519,444
Subscriber receivables, net of allowance
of $379,500 and $265,000 2,935,364 2,378,429
Notes and other receivables 1,146,928 441,335
Prepaid expenses and other assets 3,629,195 3,077,795
Investment in wireless systems and equipment, net 196,322,563 177,661,367
Organization and financing costs, net of accumulated
amortization of $2,705,560 and $4,382,312 5,731,263 4,304,511
Excess of purchase price over fair market value of assets
acquired, net of accumulated amortization of $905,010 and
$1,599,915 11,680,391 10,985,486
------------ ------------
Total assets $326,147,690 $279,124,381
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities:
Notes and other payables $234,430,828 $256,465,030
Accounts payable 1,928,429 4,476,400
Accrued expenses 5,322,670 4,363,357
Subscriber advance payments and deposits 2,662,183 2,500,002
Minority interest in consolidated subsidiaries 1,086,562 727,959
------------ ------------
Total liabilities 245,430,672 268,532,748
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 60,169,770 66,342,313
PCTV Detroit cumulative preferred stock 6,457,872 6,457,872
Stockholders' Equity/(Deficit):
Preferred stock, $0.01 par value, 4,339,547 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 1997, respectively 129,248 129,238
Additional paid-in capital 166,447,375 159,729,720
Warrants 3,756,840 3,756,840
Accumulated deficit (156,244,087) (225,824,350)
------------ ------------
Total stockholders' equity/(deficit) 14,089,376 (62,208,552)
------------ ------------
Total liabilities and stockholders' $326,147,690 $279,124,381
equity/(deficit) ============ ============
</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 OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues $ 26,003,786 $ 33,424,512 $ 32,689,684
------------ ------------ ------------
Costs and expenses:
Service costs 15,840,272 18,610,313 18,811,218
Selling, general and administrative 27,812,937 25,759,454 23,130,886
Depreciation and amortization 24,627,246 39,257,939 34,508,246
Non-cash settlement of lawsuit --- 616,000 ---
------------ ------------ ------------
68,280,455 84,243,706 76,450,350
------------ ------------ ------------
Operating loss (42,276,669) (50,819,194) (43,760,666)
Loss on sales and writedown of assets (815,521) (2,907,174) (389,521)
Interest expense:
Non cash (14,695,295) (26,824,846) (30,151,132)
Cash (793,999) (1,066,523) (1,424,540)
Omni and BCI (76,931) -- --
Interest income and other 6,550,607 5,672,691 5,314,240
Equity interest in Preferred Entertainment, Inc. (2,282,213) -- --
Minority interest 109,954 114,228 56,602
------------ ------------ ------------
Loss before income taxes (54,280,067) (75,830,818) (70,355,017)
Income tax expense 152,500 56,500 52,000
------------ ------------ ------------
Loss before extraordinary gain (54,432,567) (75,887,318) (70,407,017)
Extraordinary gain on early extinquishment of debt 1,197,424 -- 826,754
------------ ------------ ------------
Net loss (53,235,143) (75,887,318) (69,580,263)
Preferred dividends (4,696,447) (6,122,764) (6,699,040)
------------ ------------ ------------
Loss applicable to common shares $(57,931,590) $(82,010,082) $(76,279,303)
============ ============ ============
Basic and diluted loss per common share: $ (5.34) $ (6.26) $ (5.86)
Loss before extraordinary gain .11 -- .06
Extraordinary gain ------------ ------------ ------------
$ (5.23) $ (6.26) $ (5.80)
Net loss ============ ============ ============
Weighted average number of common shares outstanding 11,072,147 13,099,538 13,148,853
============ ============ ============
</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 STOCKHOLDERS' EQUITY/(DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, 1997
<TABLE>
<CAPTION>
Common Stock Par Value Additional
---------------------- Paid-In Accumulated
Shares Amount Capital Warrants Deficit
------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 9,758,208 $ 97,582 $110,020,895 -- $ (27,121,626)
Net loss -- -- -- -- (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 Cumulative
Preferred Stock -- -- (248,000) -- --
Dividends on Convertible Preferred
Stock -- -- (4,448,447) -- --
---------- -------- ------------ ---------- -------------
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)
Net loss -- -- -- -- (69,580,263)
Dividends on Cumulative
Preferred Stock -- -- (526,497) -- --
Dividends on Convertible
Preferred Stock -- -- (6,172,543) -- --
Other (1,000) (10) (18,615) -- --
---------- -------- ------------ ---------- -------------
Balance, December 31, 1997 12,923,817 $129,238 $159,729,720 $3,756,840 $(225,824,350)
========== ======== ============ ========== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
25
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (53,235,143) $ (75,887,318) $ (69,580,263)
Adjustments to reconcile net loss to net cash used in
operations -
Depreciation and amortization 24,627,246 39,257,939 34,508,246
Minority interest in subsidiaries (109,954) (114,228) (56,602)
Equity interest in Preferred Entertainment, Inc. 2,282,213 -- --
Extraordinary gain on early extinquishment of debt (1,197,424) -- (826,754)
Stock issued in settlement of lawsuit -- 616,000 --
Amortization of original issue discount 14,345,635 26,125,506 29,801,500
Amortization of imputed discount on debt 349,660 699,340 349,632
Compensation expense related to stock options 151,085 -- --
Loss on sales and writedown of assets 815,521 2,907,174 389,521
Provision for losses on subscriber receivables 1,849,000 988,700 508,430
Changes in assets and liabilities
Increase in subscriber receivables (1,320,553) (1,749,222) (69,467)
(Increase) decrease in notes and other receivables (101,079) (308,704) 342,176
(Increase) decrease in prepaid expenses and other assets (196,243) 614,280 (30,600)
Increase in organization and financing costs (295,358) -- (250,000)
Increase (decrease) in accounts payable (2,471,876) (1,320,309) 2,554,796
Increase (decrease) in accrued expenses 132,144 (1,191,865) (875,552)
Increase (decrease) in subscriber advance payments
and deposits 210,022 609,514 (41,547)
Decrease in due to affiliates (706,583) -- --
------------- ------------- -------------
Net cash used in operating activities (14,871,687) (8,753,193) (3,276,484)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of marketable securities (114,429,819) (114,505,311) (114,074,942)
Proceeds principally from maturity of marketable
securities 4,492,331 163,542,528 128,951,689
Proceeds from sales of assets 69,719 645,072 1,239,632
Sale of service contracts and equipment -- -- 3,396,838
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 --
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) -- --
Acquisition of BTA licenses -- (1,631,474) (213,284)
Investment in wireless systems and equipment (38,808,250) (12,771,773) (15,086,356)
Issuance of additional notes receivable from affiliates (9,115) -- --
Repayment of notes receivable from affiliates 162,463 -- --
------------- ------------- -------------
Net cash (used in) provided by investing activities (162,526,048) 31,582,884 4,213,577
------------- ------------- -------------
</TABLE>
26
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of notes payable 141,350 -- --
Repayment of notes payable (12,422,531) (4,406,962) (9,658,377)
Proceeds from the issuance of Senior Discount Notes, net 167,764,337 -- --
Buyout of minority interest (129,000) (190,000) (302,000)
Dividends on Cummulative Preferred Stock -- (170,492) (526,497)
Proceeds from the exercise of stock options 180,794 -- --
Proceeds from the issuance of convertible
cumulative preferred stock 40,000,000 -- --
------------ ----------- ------------
Net cash provided by (used in) financing activities 195,534,950 (4,767,454) (10,486,874)
------------ ----------- ------------
Net increase (decrease) in cash 18,137,215 18,062,237 (9,549,781)
Cash and cash equivalents, beginning of year 5,106,343 23,243,558 41,305,795
------------ ----------- ------------
Cash and cash equivalents, end of year $ 23,243,558 $41,305,795 $ 31,756,014
============ =========== ============
Supplementary disclosures of cash flow information:
Cash paid for interest, net of amount capitalized $ 635,627 $ 794,465 $ 1,364,041
Cash received for interest $ 6,060,869 $ 6,193,670 $ 4,844,438
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
During 1995, the Company acquired frequency rights in exchange for 7,143 shares
of common stock. In addition, a $4,500,000 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.
During 1996 and 1997, the Company acquired frequency rights in exchange for
notes payable of $6,525,896 and $1,891,000, respectively.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
27
<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 wireless communications since 1988.
The Company's strategy is to own, develop and operate wireless
communications systems, and provide wireless cable and internet access services
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 frequency rights in three
additional markets located in Indianapolis, Salt Lake City and Milwaukee. In
addition, the Company operates a high speed internet access service in the
Detroit and Phoenix markets.
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 has been to continue conservation of capital
pending (i) the launch of the Company's high speed internet access service
marketed under the name SpeedChoice and (ii) the implementation of digital video
compression technology. The Company first began offering the SpeedChoice high
speed internet service in the Detroit market in October 1997 and in the Phoenix
market in March 1998 and cannot at this time assess the overall market interest
in this product. With respect to the Company's proposed digital video system,
the Company is currently working to resolve certain technical issues relating to
the desired performance of the system. The Company now expects the launch of a
compressed digital video service to occur in the second half of 1998. When the
Company offers this service in a market, it anticipates that it will offer the
service in conjunction with the offering of the SpeedChoice service. The
Company believes that the implementation of digital video compression technology
will expand its video service offering, and, in conjunction with the offering of
the SpeedChoice service, will enhance the Company's ability to attract and
retain customers. Both the SpeedChoice 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.
(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.
28
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 1996 and 1997 these securities vary in maturity up to
eight 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, 1997 and 1996 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 $1,718,000, $1,664,000
and $1,677,000 in 1995, 1996 and 1997, respectively.
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 communication 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 communication system to
recover the carrying value related to the assets. The Company believes that no
such impairments exist.
Revenue recognition--
Subscription revenues are recognized in the period of service. The
Company records installment revenue billed in installments when received.
Customer related acquisition costs, including direct commissions, exceeded
installation revenues in 1995 and 1996.
System launch expenses--
Administrative and marketing expenses incurred by systems during their
launch period are expensed as incurred.
29
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Basic and diluted earnings per share--
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". There was no effect on earnings per
share in the three years ended December 31, 1997. The basic and diluted net
loss per common share has been computed based on the weighted average of common
shares outstanding. The 1995, 1996 and 1997 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:
On December 1, 1997, the Company sold service contracts and equipment, in
St. Louis, to ResNet Communications, LLC., representing approximately 3,900
analog video customers. The net proceeds were approximately $3,400,000,
resulting in a gain of approximately $1,000,000.
On September 3, 1997, the Company closed on a previously announced asset
exchange transaction with CS Wireless Systems, Inc. ("CS"). The Company
exchanged certain wireless frequencies and equipment in Kansas City for certain
of CS's wireless frequencies and equipment in Salt Lake City. The transaction
covers 21 wireless frequencies in Kansas City, 28 wireless frequencies in Salt
Lake City, and the Basic Trading Area ("BTA") licenses for both markets. The
net book value of the Kansas City assets was carried over to the Salt Lake City
assets resulting in no gain or loss on the transaction.
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.("SDIC"), a wholly-owned subsidiary of the Company,
had a two thirds partnership interest, was sold for approximately $2,200,000.
The Company's share of the net proceeds, after payment of all outstanding
liabilities, was approximately $2,000,000, resulting in a gain 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.
In April 1996, the Company sold wireless cable frequency rights in Tulsa,
Oklahoma resulting in a gain of $180,000.
30
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
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 September 8, 1995, PCTV and Preferred Entertainment, Inc. ("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, through SDIC, 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.
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.
31
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(4) Investment in Wireless Systems and Equipment:
The investment in wireless systems and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
---------------------------
<S> <C> <C>
Inventory and construction in progress $ 3,999,143 $ 7,857,585
Property and equipment 102,605,500 105,762,165
Frequency rights 145,415,892 147,947,722
------------ ------------
252,020,535 261,567,472
Less--accumulated depreciation and amortization of
property and equipment (39,890,358) (58,225,115)
accumulated amortization of frequency rights (15,807,614) (25,680,990)
------------ ------------
$196,322,563 $177,661,367
============ ============
</TABLE>
Depreciation and amortization is calculated on a straight-line basis over the
following useful lives:
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
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, 1995, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1995 1996 1997
---------------------------------------------
<S> <C> <C> <C>
Current state and local income taxes $152,500 $56,500 $52,000
======== ======= =======
</TABLE>
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,
---------------------------------------------------
1995 1996 1997
---------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax (benefit) $(18,578,900) $(26,560,600) $(24,624,300)
State and local taxes, net of federal expense 99,100 36,700 33,800
Losses not benefited 18,605,200 26,560,900 24,625,200
Other 27,100 19,500 17,300
------------ ------------ ------------
Income tax provision $ 152,500 $ 56,500 $ 52,000
============ ============ ============
</TABLE>
32
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company and its subsidiaries have net operating loss carryforwards
("NOLs") at December 31, 1997 for income tax purposes (subject to certain
limitations and Internal Revenue Service review) totaling approximately $140.6
million which expires in the years 2006 through 2012. Approximately $21.3
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,
-----------------------------
1996 1997
-----------------------------
<S> <C> <C>
Non-qualified stock options $ 297,500 $ 297,500
Depreciation and amortization 9,255,800 2,510,000
Allowance for doubtful accounts 366,500 266,800
Start up costs capitalized for tax 1,405,800 934,300
Inventory reserve 659,700 3,356,200
Amortization of discount on senior discount notes 40,471,100 70,272,600
Accrued expenses 3,170,800 3,709,400
Other 4,192,500 5,410,400
Net operating loss carryforward for income tax purposes 113,017,300 140,625,800
Utilization of financial reporting net operating loss
carryforward for deferred tax liabilities (78,134,000) (62,582,000)
------------ ------------
94,703,000 164,801,000
------------ ------------
Net deferred tax asset unrecognized at federal statutory rate 33,146,050 57,680,400
Less: valuation reserve (33,146,050) (57,680,400)
------------ ------------
Net deferred tax asset recognized $ 0 $ 0
============ ============
</TABLE>
For the years ended December 31, 1996 and 1997, the Company has utilized NOLs
for financial reporting purposes of $78.1 million and $62.6 million,
respectively. These NOLs were used to reduce the deferred tax liabilities
related to the acquisitions made by the Company.
(6) Notes and Other Payables:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
-------------------------------
<S> <C> <C>
13.125% senior discount notes due June 1, 2004 $ 332,000,000 $332,000,000
Less original issue discount ("OID") (a) (120,198,859) (90,397,359)
------------- ------------
211,801,141 241,602,641
------------- ------------
Notes payable, Federal Communications Commission, due August
and December 2006 and January 2007, with interest at 9.5% (b) 6,525,896 8,416,653
Notes payable of PCTV Detroit (c) 7,203,012 6,070,190
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 and repaid May 1997 (d) 6,377,122 --
PEI bank line of credit of $20,000,000, with interest at 9.125%,
repaid November 1997 579,016 --
Other, with interest rates ranging from 6% - 13.60% and due
dates ranging from 1997-2000, partially secured by equipment 694,641 375,546
------------- ------------
$ 234,430,828 $256,465,030
============= ============
</TABLE>
33
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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 the 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
(i) notes payable in the amount of $3,000,000 with interest at 8%, of which the
remaining $2,700,000 is due August 1998, subject to certain conditions; and (ii)
notes payable in the amount of $2,150,000, plus accrued interest of $200,000,
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 with interest at 8% payable in quarterly installments, of which the
remaining $1,100,000 is due September 1998.
(d) In accordance with a purchase agreement 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, face value 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.
34
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Annual maturities of all debt are as follows:
Years ending December 31:
1998 $ 4,116,870
1999 832,673
2000 3,162,412
2001 907,195
2002 and thereafter 337,843,239
------------
346,862,389
OID (90,397,359)
------------
$256,465,030
============
The fair value of the senior discount notes at December 31, 1997, was
approximately $93,000,000 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) 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.
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 4.444 votes per share.
The terms of the Stock Purchase Agreement provide that certain extraordinary
actions by the Company including, but not limited to, acquisitions, mergers,
incurrence of indebtedness, issuances or repurchases of debt and equity
securities, or affiliate transactions shall require the affirmative vote of two-
thirds of the Board of Directors.
35
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Dividends on the Convertible Preferred Stock (and interest on unpaid
dividends) accrue at an annual rate of 9-7/8% and are payable quarterly in
additional shares of Convertible Preferred Stock up to the fifth anniversary of
the date of issuance of such shares. After such date, dividends may only be paid
in cash. The Convertible Preferred Stock may not be redeemed by the Company
prior to the fifth anniversary of the date of its first issuance. 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 for cash or shares
of Common Stock.
The Convertible Preferred Stock is also redeemable, as defined, upon a
change in control of the Company or on the tenth anniversary of the date of its
first issuance of shares of Convertible Preferred Stock.
(8) 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 1995,
1996 and 1997, the Company incurred expenses of approximately $53,000, $89,000
and $83,000, respectively, related to these plans.
(9) Stock Options and Warrants:
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. Options granted under the Key Employee Plan
generally are non-transferable.
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.
36
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 1,800,000 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.
A summary of the status of the Company's stock option plans as of
December 31, 1995, 1996 and 1997, and changes during the years ending on those
dates, is presented below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 616,725 $13.34 653,275 $13.70 835,725 $13.67
Granted 88,500 19.92 227,750 14.53 971,750 4.92
Exercised (13,950) 12.96 -- -- -- --
Forfeited/canceled (38,000) 22.66 (45,300) 18.52 (475,250) 17.36
------- ------ ------- ------ --------- ------
Outstanding, end of year 653,275 $13.70 835,725 $13.67 1,332,225 $ 5.97
======= ====== ======= ====== ========= ======
Weighted average fair value of
options granted during year $12.26 $ 9.82 $ 1.91
====== ====== ======
Options exercisable at end of
year 458,843 535,266 452,516
======= ======= =========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------
Options Outstanding Weighted Average Weighted
at Remaining Contract Life Average
Range of Exercises December 31, 1997 Price
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ .10 72,475 5.5 years $ .10
$1.50 - $4.00 746,625 9.3 years $ 2.99
$10.50 - $23.00 513,125 7.2 years $11.08
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes Pricing Model with the following assumptions used for
grants:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.8% to 7.4% 5.8% to 6.6% 5.7% to 6.7%
Expected lives 7 years 7 years 7 years
Expected dividend rate 0% 0% 0%
Expected volatility 58% 58% 75%
</TABLE>
37
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 1996 and 1997 been determined under the
principles of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation", net loss would have been as follows:
1995 1996 1997
--------------------------------------------
Loss applicable to common
shares:
As reported $(57,931,590) $(82,010,082) $(76,279,303)
Proforma $(58,065,442) $(82,857,841) $(77,141,030)
Basic and dilutive loss per
common share:
Loss before extraordinary gain:
As reported $(5.34) $(6.26) $(5.86)
Proforma $(5.35) $(6.33) $(5.93)
Net loss:
As reported $(5.23) $(6.26) $(5.80)
Proforma $(5.24) $(6.33) $(5.87)
These proforma amounts may not be indicative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be granted in future years.
(10) Employment and Consultant Agreements:
PCTV has written employment agreements with three executives which
provide for combined annual base salaries of $514,000. Each of these officers is
eligible to receive an annual bonus as determined by the Company. The employment
agreements for these three executives expire in April 1998 through January 1999,
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 up to one year.
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.
38
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(11) Commitments and Contingencies:
Under various lease and rental agreements for offices, warehouses,
equipment and frequency licenses, the Company had expenses of approximately
$3,729,000, $6,294,000 and $5,926,000 in 1995, 1996 and 1997, respectively.
Future annual minimum payments under these non-cancelable agreements, including
only the initial terms for frequency licenses, are as follows:
<TABLE>
<S> <C>
1998 $ 4,997,000
1999 4,277,000
2000 3,587,000
2001 3,502,000
2002 and thereafter 11,737,000
-----------
$28,100,000
===========
</TABLE>
The Company has entered into an agreement with General Instruments
Corporation ("GIC") pursuant to which the Company is obligated to purchase
50,000 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 1998 payments for converter boxes under the terms
described above have been included in the Company's estimates of capital
expenditures for 1998.
On February 18, 1998, the FCC commenced an auction in the Local
Multipoint Distribution Service ("LMDS"). LMDS operates at a higher frequency
than MDS and has a shorter transmission range, requiring the use of multiple
cells in order to serve an entire market. Within each of the 493 BTAs being
auctioned there are two frequency blocks, an "A block" and a substantially
smaller "B Block" of spectrum. The Company participated in the auction as a
designated entity which entitles it to a small business discount on any winning
bids. The auction concluded in March, 1998. The Company was the successful
bidder for the Phoenix, Arizona "B block" license and the Prescott, Arizona "A
block" license. To participate in the auction, the Company deposited $20.3
million with the FCC. The total payment required to the FCC for the two licenses
is $3,221,400 which amount includes the Company's small business discount. The
Company will be required to pay 20% of that amount to the FCC within five days
of a public notice issued at the close of the auction announcing it is an
auction winner. The Company will then be required to submit a long-form
application which, when granted, will require that the Company pay the remainder
of the $3,221,400. The required payments will be deducted from the deposit that
the Company previously made with the FCC. The remainder of the auction deposit
will then be returned to the Company.
The Company has approximately $80.3 million of cash, cash equivalents
and marketable securities at December 31, 1997. The Company estimates that it
will spend $23.2 million in 1998 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. Cash payments on debt obligations for the next
five years are included in Note 6.
There are certain claims against the Company which are incidental to the
ordinary course of business. In the opinion of management, the ultimate
resolution of these claims will not have a material effect on the financial
statements.
39
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(12) 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, 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
December 31, 1997
Allowance for Doubtful Accounts $379,500 $ 508,000 $ 622,500 $265,000
</TABLE>
40
<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 and executive officers:
<TABLE>
<CAPTION>
Name Age Position with Company
- ---- --- ---------------------
<S> <C> <C>
Matthew Oristano(1)(2)(3) 41 Chairman, Chief Executive Officer, and Director
Charles F. Schwartz 42 Senior Vice President, Chief Financial Officer and
Chief of Staff
Todd A. Rowley 33 Senior Vice President--Market Development
Peter Lynch 50 Senior Vice President--Operations
Robert Young 42 Senior Vice President
Donald E. Olander 38 Vice President, General Counsel and Corporate
Secretary
Michael F. Whalen, Jr. 32 Vice President--Finance and Acquisitions
Victor Oristano 81 Vice Chairman and Director
James J. Mossman 39 Director
Anthony Grillo(1)(2)(3) 42 Director
Terry L. Scott(1)(2)(3) 47 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 five members of the Board of Directors of the
Company. Three 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
three Common Stock Directors, consisting of one director who is serving for a
term which expires in 2000, 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. 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 Blackstone Capital
Partners and their affiliates. In addition to designating two directors to the
Board of Directors of
41
<PAGE>
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 provided
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 is a Member of Blackstone Group Holdings (BGH) L.L.C.
He was a General Partner of BGH L.P. from 1990 to February 1996 and Vice
President of the Blackstone Group L.P. (The Blackstone Group) from 1987 to 1989.
Mr. Mossman serves on the board of directors of Great Lakes Dredge & Dock
Corporation, Collins & Aikman Corporation and Transtar.
42
<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.
Terry L. Scott is currently Chairman and Chief Executive Officer of
Flash Comm, Inc., a privately held company involved in data communications. From
January, 1994 through October of 1995, Mr. Scott was President and Chief
Executive Officer of Paging Network, Inc. From 1993 to 1995 Mr. Scott served on
the board of directors of Paging Network. Mr. Scott first became President of
Paging Network in February of 1993. From 1990 to 1993, Mr. Scott was Senior Vice
President--Finance and Administration, Treasurer and Chief Financial Officer of
Paging Network. Mr. Scott serves on the board of directors of the Personal
Communications Industry Association (PCIA) and was on the executive committee of
the PCIA from 1990 to 1995.
Section 16 Reports
The Company believes that all required Forms 3, 4 and 5 were filed on
time during fiscal 1997.
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(#)(2) Compensation(3)
- --------------------------- ------ -------- -------- ------------ ---------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 1997 $212,000 $ 0 $0 0 $ 1,900
Chairman and Chief Executive Officer 1996 $212,000 $ 0 $0 0 $ 1,900
1995 $212,000 $ 0 $0 0 $50,000(4)
Robert Young (5) 1997 $130,000 $50,000 $0 25,000 $ 3,800
Senior Vice President 1996 $126,000 $37,300 $0 5,000 $ 2,300
Peter Lynch (6) 1997 $143,000 $0 $0 55,000 $ 1,500
Senior Vice President--Operations 1996 $142,000 $0 $0 30,000 $ 1,500
1995 $54,000 $0 $0 25,000 $900
Charles F. Schwartz 1997 $143,000 $0 $0 70,000 $900
Senior Vice President, Chief Financial 1996 $139,000 $0 $0 30,000 $900
Officer 1995 $108,000 $0 $0 20,000 $650
Todd A. Rowley 1997 $123,000 $0 $0 55,000 $600
Senior Vice President--Market Development 1996 $121,000 $0 $0 30,000 $600
1995 $108,000 $15,000 $0 15,000 $200
</TABLE>
_______________
(1) Cash bonuses for services rendered in fiscal years 1997, 1996 and 1995 have
been listed in the year earned, but were actually paid in the following
fiscal year.
(2) The number of options granted for fiscal 1997 includes 25,000, 40,000, and
35,000 options for Messrs. Lynch, Schwartz and Rowley, respectively, which
were issued pursuant to the Company's option exchange and repricing program
implemented in 1997.
(3) Except as otherwise noted, the items reported are for life insurance
premiums and matching contributions to the Company's 401(k) plan.
(4) Reflects $50,000 received from Alda Communications Corp. as directors' fees.
43
<PAGE>
(5) Mr. Young became an executive officer of the Company in January, 1996.
(6) Mr. Lynch became an executive officer of the Company in June, 1995.
The following table sets forth certain information regarding stock option grants
made to the named executive officers in 1997.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------------
% of Total Potential Realizable Value
Options at Assumed Annual Rates
Granted to of
Employees Exercise Stock Price Appreciation
Options in Fiscal Price Expiration for Option Term(1)
Name Granted (#) Year ($/Sh.) Date 5%($) 10%($)
- ---- ---------- ---- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 0 -- -- -- -- --
Robert Young 25,000(2) 3.3% 1.6875 12/9/07 $26,531 $ 67,236
Peter Lynch 30,000(2) 4.0% 1.6875 12/9/07 $31,838 $ 80,683
12,500(3) 1.7% 4.00 1/28/07 $31,445 $ 79,687
12,500(3) 1.7% 11.50 10/15/06 $0 $0
Charles F. Schwartz 30,000(2) 4.0% 1.6875 12/9/07 $31,838 $ 80,683
20,000(3) 2.6% 4.00 1/28/07 $50,312 $127,499
20,000(3) 2.6% 11.50 10/15/06 $0 $0
Todd A. Rowley 20,000(2) 2.6% 1.6875 12/9/07 $21,225 $ 53,788
17,500(3) 2.3% 4.00 1/28/07 $44,023 $111,562
17,500(3) 2.3% 11.50 10/15/06 $0 $0
</TABLE>
_______________
1 Potential realizable value is based on an assumption that the stock price of
the Common Stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year term of the option.
Potential realizable values are net of exercise price, but before taxes
associated with exercise. These numbers are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do
not reflect the Company's estimate of future stock price growth.
2 Incentive stock option which has an exercise price equal to the fair market
value of the Common Stock on the date of grant, vests at a rate of 33 1/3
percent on the first, second and third anniversary of the grant date and has
a term of ten years.
3 Options issued in connection with the Company's option exchange and
repricing program which was implemented in 1997. Incentive stock option
which has an exercise price equal to the fair market value of the Common
Stock on the date of grant, vests at a rate of 33 1/3 percent on the first,
second and third anniversary of the grant date and has a term of ten years.
44
<PAGE>
Option Exercises and Fiscal 1997 Year-End Value
The number of options exercised and the value realized from any such
exercise during fiscal 1997 and the number and value of options held at fiscal
year end for the named executive officers are set forth in the following table.
Aggregate Option Exercises and Fiscal Year-End Option Values
------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
End (#) Fiscal Year End ($)(1)
-------------------------- --------------------------
Shares Value
Acquired on Realized
Name Exercise(#) ($)(2) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 0 $0 205,000 0 $0 $0
Robert Young 0 $0 833 29,167 $0 $0
Peter Lynch 0 $0 4,167 80,833 $0 $0
Charles F. Schwartz 0 $0 6,667 93,333 $0 $0
Todd A. Rowley 0 $0 41,833 79,167 $60,480 $0
</TABLE>
_______________
(1) Value of unexercised options is (i) the fair market value of the common
stock at fiscal 1997 year end ($1.78) 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.
Compensation Committee Interlocks and Insider Participation
The following individuals serve as members of the Compensation Committee
of the Board of Directors: Matthew Oristano, Anthony Grillo and Terry Scott.
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
$204,000 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.
Pursuant to this agreement, Mr. Lynch currently receives an annual base salary
of $155,000 and the agreement 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.
Pursuant to this agreement, Mr. Young currently receives an annual base salary
of $155,000 and may also receive an annual bonus to be determined by the
Company's Compensation Committee. The agreement became effective in January
1996 and, unless terminated earlier by the Company or Mr. Young, will
45
<PAGE>
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 an amount equal to his annual salary 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.
46
<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 25, 1998, 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 1997 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) 508,558 75% 14.2%
Blackstone Offshore Capital Partners II L.P. (1) 133,441 20% 3.7%
Blackstone Family Investment Partnership II
L.P. (1) 34,759 5% 1.0%
James J. Mossman (2) 676,758 100% 18.9%
Anthony Grillo (2) 676,758 100% 18.9%
Matthew Oristano (3) 1,249,700 9.7% 7.8%
BCI Growth III, L.P. (4) 971,974 7.5% 6.1%
FMR Corp. (5) 707,502 5.5% 4.4%
Fleming Capital Management (6) 1,242,850 9.6% 7.8%
Dimensional Fund Advisors (7) 942,421 7.3% 5.9%
Victor Oristano (8) 530,377 4.1% 3.3%
Todd A. Rowley 57,667 * *
Charles F. Schwartz 23,334 * *
Peter Lynch 18,334 * *
Robert Young 36,667 * *
All executive officers and directors as a group
(11 persons) (9) 676,758 (100%) 1,951,906 15.1% 12.3%
</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
47
<PAGE>
and Mr. Grillo may be deemed to share beneficial ownership of the PCTV
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) 888,827 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) 43,065
additional shares of Common Stock over which Matthew Oristano may be deemed
to exercise indirect control, and (iv) 205,000 shares of Common Stock which
Matthew Oristano has an option to acquire within 60 days of the date hereof
pursuant to stock option agreements.
(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 (i) 36,000 shares of Common Stock which Victor Oristano and his
spouse own directly, (ii) 381,877 shares of Common Stock held by certain
trusts and a foundation over which shares Victor Oristano may be deemed to
exercise partial control, (iii) 10,000 shares of Common Stock held by a
limited partnership over which shares Victor Oristano may be deemed to
exercise partial control, and (iv) 102,500 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 480,835 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 347,665 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 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 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 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 or 1997 fiscal years).
48
<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
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of Registrant as dated April 22, 1993.
(a)
3.2 Amendment to Certificate of Incorporation of Registrant dated 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. (h)
10.3 Employment Agreement between Registrant and Peter Lynch. (h)
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)
49
<PAGE>
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. (h)
10.21 Form of Indenture, dated May 19, 1995, between Registrant and Bank of
Montreal Trust Company as Trustee, relating to Senior Discount
Notes. (j)
10.22 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)
21. Subsidiaries of Registrant. (*)
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.
50
<PAGE>
(h) Document incorporated by reference from Form 10-K for the fiscal year
ended December 31, 1996 filed by the Registrant on March 31, 1997.
(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.
(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.
51
<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 25, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Matthew Oristano Director and Chief Executive Officer March 25, 1998
- ------------------------
Matthew Oristano
/s/ Victor Oristano Vice Chairman and Director March 25, 1998
- -----------------------
Victor Oristano
/s/ Charles F. Schwartz Principal Financial and Accounting March 25, 1998
- --------------------------- Officer
Charles F. Schwartz
/s/ Anthony Grillo Director March 25, 1998
- ----------------------
Anthony Grillo
/s/ James J. Mossman Director March 25, 1998
- ------------------------
James J. Mossman
/s/ Terry L. Scott Director March 25, 1998
- ----------------------
Terry L. Scott
</TABLE>
52
<PAGE>
Exhibit 21
----------
Subsidiaries
People's Choice TV of Tucson, Inc.
People's Choice TV of Houston, Inc.
People's Choice TV of St. Louis, Inc.
People's Choice TV of Phoenix, Inc.
Wireless Cable of Indianapolis, Inc.
People's Choice TV of Detroit, Inc.
People's Choice TV of Salt Lake City, Inc.
PCTV Gold, Inc.
Specchio Developers Investment Corp.
Arc Communications Services, Inc.
MicroFlex Corporation
Wireless Developers, Inc.
Preferred Entertainment, Inc.
Broadcast Cable, Inc.
People's Choice TV of Albuquerque, Inc.
Sat-Tel Services, Inc.
People's Choice TV of Milwaukee, Inc.
PCTV West, Inc.
PCTV North, Inc.
PCTV South, Inc.
PCTV Mid-West, Inc.
Waverunner, Inc.
53
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 31,756,014
<SECURITIES> 48,519,444
<RECEIVABLES> 2,643,429
<ALLOWANCES> 265,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 261,567,472
<DEPRECIATION> 83,906,105
<TOTAL-ASSETS> 279,124,381
<CURRENT-LIABILITIES> 0
<BONDS> 256,465,030
129,238
72,800,185
<COMMON> 0
<OTHER-SE> (62,337,790)
<TOTAL-LIABILITY-AND-EQUITY> 279,124,381
<SALES> 0
<TOTAL-REVENUES> 32,689,684
<CGS> 0
<TOTAL-COSTS> 18,811,218
<OTHER-EXPENSES> 23,130,886
<LOSS-PROVISION> 508,430
<INTEREST-EXPENSE> 31,575,672
<INCOME-PRETAX> (70,355,017)
<INCOME-TAX> 52,000
<INCOME-CONTINUING> (70,407,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 826,754
<CHANGES> 0
<NET-INCOME> (69,580,263)
<EPS-PRIMARY> (5.80)
<EPS-DILUTED> 0.00
</TABLE>
