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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, 1998
[ ] 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 non-affiliates was
$14,229,755 as of March 25, 1999 based upon the last sales price per share of
the Registrant's Common Stock, as reported on the OTC Bulletin Board on such
date. As of March 25, 1999, 12,923,817 shares of Common Stock of the Registrant
were outstanding.
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PART I
ITEM 1. BUSINESS
Forward Looking Statements
In addition to historical information, this Report contains forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and are subject to assumptions, risks, uncertainties and other
factors that may cause actual results of the Company to differ materially from
historical results or from any results expressed or implied by such forward-
looking statements. Factors that may cause such a difference include, but are
not limited to, those discussed in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors that May
Affect Future Results and Performance." Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. The Company disclaims any obligation to
update or revise any forward-looking statements contained in this Report,
whether as a result of new information, future events or otherwise. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including the Quarterly Reports on Form 10-Q to be filed by the Company in
fiscal year 1999.
General
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 communications business since
1988. As used herein, wireless communications refers to transmissions made
utilizing wireless frequencies or channels authorized by the Federal
Communications Commission ("FCC") to transmit between the 2.5 GHz to 2.7 GHz
radio band and between the 2.15 to 2.16 GHz radio band. A wireless frequency or
channel refers to 6 MHz of spectrum located in these bands. 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 wireless communications
systems. These systems provide (i) high speed Internet access services and
private data communications services, which are marketed under the name
SpeedChoice/TM/, and (ii) digital and analog video transmission services. The
digital video service is marketed under the name DigitalChoice TV/TM/ ("DCTV").
The Company's strategy is to own, develop and operate SpeedChoice systems and
DCTV systems in large markets. The Company's markets are concentrated in the
midwestern and the southwestern regions of the United States. Currently, the
Company provides the SpeedChoice service in Detroit and Phoenix. The Company
provides DCTV service in Phoenix and analog video service in Chicago, Detroit,
Houston, St. Louis and Tucson. The Company intends to launch SpeedChoice two-way
service in Phoenix in the second quarter of 1999. The Company also leases
wireless frequency rights in Indianapolis, Milwaukee, and Salt Lake City. The
Company leases the rights to between 21 and 33 wireless frequencies in its nine
primary markets. In total, the Company leases the rights to 272 wireless
frequencies in its nine primary markets, of which 227 are leased from third
parties and 45 are leased from affiliates of the Company. Because wireless
communications depend on a direct line-of-sight between the transmission site
and the customer's location, the Company's ability to provide its services to
households and businesses in each of its markets is limited by topography,
foliage and the location of buildings and other obstructions. When utilizing a
single point of transmission, the Company believes that its wireless
transmissions will be received by 50% to 90% of the homes and businesses in a
given market.
Business Overview
SpeedChoice Service
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The Company offers its SpeedChoice/TM/ service in the Detroit and Phoenix
markets. The SpeedChoice service includes private data communications and high
speed Internet access, which allows customers to access the Internet at speeds
of up to 10 megabits per second ("Mbps"). The SpeedChoice customers' download
requests are
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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 backbone connection to either the Internet or to a
private data network. The download is then transmitted to the SpeedChoice
customer over the Company's wireless frequencies to the customer's receiving
antenna and then to a SpeedChoice modem at the customers desktop computer or
local area network. The Company sells the SpeedChoice service directly to
residential and business customers and has developed a network of value added
resellers and retailers that market and sell the SpeedChoice service on behalf
of the Company. The Company has also signed agreements with Internet service
providers ("ISPs") in the Detroit and Phoenix markets that permit the ISP to
provide the Company's SpeedChoice service to the ISP's existing customer base.
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.
DigitalChoice TV Service
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The Company began offering its DCTV service in Phoenix in the first quarter
of 1999. The Company transmits DCTV programming in a digitally compressed format
in direct line-of-sight from a transmission site to each customer's receiving
antenna over the Company's wireless frequencies. The Company is currently
compressing its wireless frequencies at a ratio of five to one, which means that
DCTV can carry up to five digital video program tracks (like HBO or ESPN) on
each wireless frequency. This compression allows the Company to provide 125
channels of video programming and 40 audio channels, compared to only 33
channels of analog video programming services that were previously transmitted
over the frequencies. The Company does not currently have plans to launch its
DCTV service in any of its other markets.
Analog Video Service
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The Company currently provides analog video service in Chicago, Detroit,
Houston, St. Louis, and Tucson. Analog technology permits each wireless
frequency to carry one programming service. 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 video systems and not to actively
seek to replace those customers that disconnect from the analog service. The
Company is also proposing to sell certain service contracts and equipment by
which the Company provides analog video services to apartments complexes,
condominiums and other multiple dwelling units. It is uncertain whether the
Company will be able to complete a transaction to sell such service contracts.
The Company anticipates that the number of customers subscribing to its analog
video service will continue to decrease during 1999.
Two-Way Data and Internet Service
---------------------------------
The Company intends to launch a SpeedChoice two-way service in its Phoenix
market in the second quarter of 1999. The SpeedChoice two-way service will be an
enhancement of the current SpeedChoice service and will allow the customer's
upstream or response transmissions to be sent over the wireless frequencies to
the Company's POPs. Currently, these response transmissions are sent by the
customer by a regular telephone line connection.
The Company is authorized to provide SpeedChoice two-way service on two of
its wireless frequencies in the Phoenix market. These two frequencies will
initially be used for all response transmissions for the SpeedChoice two-way
service. The Company is in the process of preparing applications for two-way use
for additional wireless frequencies in accordance with the rules that were
released by the FCC on September 17, 1998 with respect to two-way transmissions
(the "Two-way Rules"). A summary of the Two-way rules is located in this Report
in the section entitled "Regulatory Environment-Two Way Transmissions." The
Company is currently analyzing the potential uses for wireless frequencies in a
two-way environment, including data, telephony and video transmission services.
In accordance with certain authorizations granted to the Company by the FCC
prior to the release of the Two-way Rules, the Company has performed extensive
testing of fixed, two-way data transmissions using its wireless frequencies. The
use of wireless frequencies for two-way transmissions involves the deployment of
new
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technology, engineering and equipment, some of which is being deployed in the
Phoenix and Detroit markets, but most of which will be developed for the first
time by the Company and other wireless communications operators.
The Company plans to use a sectorized, super-cell design for its
SpeedChoice two-way service. With traditional wireless communications
transmissions, the signal is transmitted in a 360 degree omni-directional
pattern. The super-cell design divides the response channel service areas into
eight 45 degree sectors. Sectorization of the response transmissions under this
design allows the Company to re-use each frequency in every other sector four
times for response transmissions, greatly increasing the bandwidth capacity for
a response channel. For example, if the Company has two channels authorized for
two-way transmissions, and allocates each channel into every other sector of
eight possible sectors, the first channel could be re-used for response
transmissions in sectors 1, 3, 5 and 7, while the second channel could be re-
used for response transmissions in sectors 2, 4, 6 and 8. The Company does not
intend to use sectorization for its downstream transmissions at this time. The
Company plans to utilize the 2.15 to 2.16 GHz radio band and channels at either
end of the 2.5 to 2.7 GHz radio band for response channels. The Company has
selected the super-cell design over a cellularized design because of the
simplicity of the design, the lower infrastructure costs associated with super-
cell and the relative ease and speed, compared with a cellularized design, with
which the required licensing modifications can be accomplished. Cellularization
of the channels in certain markets could increase both the number of households
the Company's signal can reach and the bandwidth capacity of the channels. The
Company intends to continue to research and test cellularized designs and plans.
Although the Company believes that it will be able to adapt its two-way
transmission engineering plans to provide deployment of its wireless frequencies
in a two-way environment, there can be no assurance that the new technology and
engineering will be successful, that cost-effective and efficient equipment will
be developed and produced by the vendor community, or that the Company will be
able to deploy wireless frequencies in a two-way environment in any of its
markets on a competitive, cost-effective basis. Furthermore, there can be no
assurance that the Company will be able to obtain the necessary cooperation and
coordination from wireless communications operators in markets that are
contiguous or adjacent to the Company's markets to enable the Company to
maximize the use of its wireless frequencies in a two-way environment. There can
be no assurance that the Company will be able to secure consents from its
channel lessors to file two-way applications, complete the necessary processes
to enable it to file two-way applications for each of its markets, or that
applications filed will not be preempted or otherwise limited by previously
filed applications of other operators. Moreover, the initial plan applied for
may not be the frequency plan or system design ultimately desirable for the
future business conducted in a particular market. The deployment of wireless
frequencies in a digital two-way environment will require significant capital
expenditures. Implementation of two-way operations requires a wireless
communications operator to build an infrastructure that is significantly more
complex than the infrastructure necessary to operate a one-way analog or digital
video system using wireless frequencies. Because the Company has only conducted
testing with a limited number of customers utilizing the SpeedChoice two-way
service, whether the service will perform satisfactorily at higher user levels
is uncertain. The majority of the channel leases to which the Company is a party
do not contemplate two-way usage. The Company is in the process of negotiating
amendments to these channel leases to provide for the use of the leased channels
by the Company for two-way services. The Company believes that it will be able
to negotiate revised leases with most of the channel lessors in its markets on
terms and conditions that are fair and reasonable to the Company.
Regulatory Environment
General. The wireless communications industry is subject to regulation by
the FCC pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). As used herein, wireless communications refers to
transmissions made utilizing wireless frequencies or channels authorized by the
FCC to transmit between the 2.5 GHz to 2.7 GHz radio band and in the 2.15 to
2.16 GHz radio band. A wireless frequency or channel refers to 6 MHz of spectrum
located in these bands. The Communications Act empowers the FCC, among other
things, to issue, revoke, modify and renew licenses within the spectrum
available to wireless communications; to approve the assignment and/or transfer
of control of such licenses; to approve the location of wireless communications
systems; to regulate the kind, configuration and operation of equipment used by
wireless communications systems; and to
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impose certain equal employment opportunity and other reporting requirements on
wireless communications operators.
In each geographic service area of the 50 largest markets, 33 six MHz
channels are generally available for wireless communications. In all other
geographic areas, 32 six MHz channels and 1 four MHz channel are generally
available for wireless communications. Except in limited circumstances, 20 of
these channels in each of these geographic service areas are generally only
licensed to qualified non-profit educational 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 communications operators for commercial use,
except that the ITFS license holder, at its option, retains the right to
recapture up to an additional 20 hours of air time per week for educational
programming. Notwithstanding the above, in no event may an operator lease
greater than 95% of the air time of an ITFS license holder. The remaining 13
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, may be licensed or leased by the
Company for full time usage.
Franchise Requirements and Taxation. The FCC has determined that, provided
that the operator does not cross a public right of way, wireless communications
systems are not "cable systems" for purposes of the Communications Act.
Accordingly, a wireless communications system does not require a local
franchise, is not required to pay franchise fees, and is subject to fewer local
regulations than a hardwire cable system. Moreover, all transmission and
reception equipment for a wireless communications 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.
Legislation has been introduced in some states to authorize state and local
authorities to impose a tax on all video program distributors (including
wireless communications distributors) on the distributor's gross receipts. While
the proposals vary among states, the bills all would require, if passed, as much
as 8% 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.
The Company may also be subject to a 2% Telecommunications Tax imposed by the
cities of Phoenix and Tucson, Arizona; however, the Company is paying the
Phoenix tax under protest and is challenging the Tucson tax. 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.
Licensing Procedures. Any channel that has been licensed or for which an
application was filed prior to September 15, 1995, is considered an incumbent
channel. The vast majority of the wireless frequencies available in the
Company's major markets are incumbent, have been licensed and constructed, and
such frequencies are controlled by the Company through long-term channel leases.
The FCC has auctioned the rights to apply for any and all available MDS and
commercial ITFS frequencies which are not incumbents throughout Basic Trading
Areas ("BTAs"), which are service areas based on the 1992 Rand McNally
commercial atlas. The Company has acquired all of the BTA authorizations for
each of its major markets.
Incumbent MDS applicants are initially granted a conditional license, which
requires construction of the channels to be completed within one year of the
date of grant of such license whereupon a full term license will be issued. A
BTA MDS conditional license requires construction of the channel within a five
year build-out period. Construction of a new or modified ITFS channel must be
completed within 18 months. All incumbent MDS licenses expire on May 1, 2001 and
all BTA MDS licenses expire on March 28, 2006. ITFS licenses are issued for a
term of 10 years from date of grant. All MDS and ITFS licensees must submit an
application for renewal of their respective authorizations by a certain time
prior to their expiration. Petitions to deny applications for renewal may be
filed. Any license may be revoked for cause in a manner similar to other FCC
licenses.
ITFS licenses had been exempt from the BTA 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. A filing
window is the period, announced in advance by the FCC, during which applications
for licenses and modifications will be accepted by the FCC. As part of the
Balanced Budget Act of 1997, Congress amended
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the Communications Act to require the FCC to use competitive bidding procedures
to resolve most licensing proceedings involving applications that conflict
because they cause interference to each other ("conflicting applications"). That
Act specifically exempts non-commercial educational and public broadcast
stations from the competitive bidding requirement, but omitted a previous
exemption for ITFS licenses and modifications. As a result, the FCC must apply
competitive bidding to conflicting applications, and may apply similar
procedures to conflicting major modification applications, unless Congress
reinstates the former exemption. There can be no assurance that Congress will do
so.
Successful bidders in the BTA auction received the exclusive right to apply
for any and all available MDS frequencies and commercial ITFS frequencies
throughout the entire BTA. Applications for new MDS frequencies may be filed at
any time but only by BTA authorization holders. Applications for commercial ITFS
frequencies may only be submitted in an ITFS filing window. Furthermore, all
incumbents must be afforded interference protection to the 35 mile radius
protected service areas of the incumbent. A BTA license holder must provide
signals that are capable of reaching at least two-thirds of the population of
the area within its control within five years of receiving the BTA authorization
(the "build-out period"). If the BTA holder is not serving any part of the BTA
at the end of the build-out period it will forfeit the BTA authorization and
will not be eligible to regain it. Likewise, if there are unserved areas in the
BTA and the BTA holder has not met its build out requirements, the Commission
will partition the unserved area using county lines and make it available
through an auction. Again, the original holder of the BTA will not be eligible
to bid on the partitioned area.
The FCC rules prohibit the sale of an incumbent conditional license, or of
a controlling interest in the license holder for such license, prior to
construction of the channel or, in certain circumstances, prior to the
completion of one year of operation. BTA channels, however, need not be
constructed prior to a sale of such license. In addition, the BTA authorization
or BTA licenses may be assigned either together or separately. 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.
Rate Regulation. The FCC currently regulates the rates of hardwire cable
operators in markets in which there is no "effective competition" and does not
regulate the rates of hardwire cable operators in a given market where effective
competition is shown to exist. Rates charged by wireless communication operators
typically are not subject to regulation. The 1996 Telecommunications Act (the
"1996 Act") expanded 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 deregulated 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. Franchised cable operators may establish different rates
across franchise areas in which they are subject to effective competition. They
may also 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 deregulates rates for all cable operators as of
March 31, 1999, unless Congress repeals the deregulation date.
Signal Interference. Wireless communications transmissions are governed by
FCC regulations dealing with interference and reception quality. These
regulations specify important signal characteristics such as power, location,
polarization, and modulation. The operation of a wireless communications system
requires the collocation of a commercially viable number of transmitters and
operations with common power levels. In order to commence the operations of the
Company's markets, the Company has been required to file applications with the
FCC to relocate and modify existing transmission sites. Many of the necessary
FCC approvals have been received and the
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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, prior to obtaining a license or modification
to an existing license, an applicant or licensee must meet FCC interference
standards in the protected service area of any collocated or adjacent MDS or
ITFS license holders. Once an FCC authorization has been obtained, a licensee
generally may transmit anywhere within the line of sight of its transmission
site. License holders generally are protected from interference within 35 miles
of the transmission site; however, if the MDS license site is moved, the
protection for the MDS transmission site remains only within the original 35
mile zone. Furthermore, protection to the service area of MDS licenses obtained
through the BTA 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 licensees than to incumbent licensees.
Digital Transmission. The FCC has 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. However, this is an interim order and any changes to a
wireless communications 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 certain approved types of
digital modulation, subject to the submission of specific measurement data.
Digital compression techniques enable wireless communications 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 FCC opens a filing window to
submit such ITFS applications. Any objections to an MDS or ITFS digital
application may be submitted informally to the FCC at any time prior to the
grant of such application. The Company has the authority to utilize digital
transmissions on all of its channels in its Phoenix, Chicago, and Tucson
markets, the majority of its channels in its Detroit, St. Louis, and Milwaukee
markets, and between five and seven channels in its Houston, Salt Lake City and
Indianapolis markets. The Company has pending applications for digital
transmission for almost all other channels in its major markets.
Two-Way Transmission. On September 17, 1998, the FCC adopted new rules
which allow MDS and ITFS licensees to provide two-way communication services,
including data communications and telephony services (the "Two-way Rules").
Although petitions for reconsideration or clarification of various portions of
this ruling were filed by the Company and others and remain pending, portions of
the Two-way Rules became effective on February 8, 1999 with the remainder
expected to become effective by the end of the first half of 1999. The Two-way
Rules provide for the use of wireless frequencies for both downstream and
response transmissions. Under these new rules, the following new terminology is
used. A response station is a customer's location which is transmitting response
signals back to the Company's transmit site. A response station hub is an array
of receive antennas at the Company's transmit site that receives the signals
being transmitted from the customer response stations. A signal booster station
is a transmission site not located at the Company's main transmit site which is
used to either relay or originate signals to customers and which would also
serve as a response station hub for those customers. A signal booster station is
similar in concept to a cell in cellular technology.
Under the Two-way Rules, the Commission will announce a one-week filing
window for response stations, response station hubs, booster stations and other
two-way related modification applications, in which all applications will be
considered simultaneously filed. All such applications must meet FCC
interference protection rules or receive the consent of all co-channel and
adjacent channel licensees in the Company's market and neighboring markets. The
Company expects to make two-way filings for a number of its markets in this one-
week window. All complete applications which have not been opposed within 120
days after the close of such window will be granted. This may include
applications whose interference conflicts could not be resolved by the parties.
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Thereafter, a rolling one-day filing system will be implemented in which
applicants may make such filings at any time as long as interference protection
is provided to all previously authorized or proposed facilities. The Company has
received two-way authorizations on two channels in both the Phoenix and Detroit
markets, but the Company is not certain that it will receive additional
approvals for two-way transmissions for any other channels in any of its
markets. When two-way transmissions are implemented, the equipment currently
available will require the Company to separate downstream and response
transmissions by up to 50 MHz ("channel separation") to avoid overloading a two-
way customer's receive equipment. The frequencies that are not used for two-way
transmissions because of this channel separation may be used for downstream only
services. However, current FCC rules require that the Company provide a guard
band of 6 MHz between the downstream only services and services utilizing
response transmissions.
The new rules require the operator of a response station to notify an ITFS
license holder 20 days prior to the installation of a response station, if the
response will be located with 1960 feet of an ITFS receive site (the
"notification requirement"). The Company is seeking waivers from all of the ITFS
license holders in its markets to allow the Company to install response stations
without complying with the notification requirement. If the Company is not able
to secure waivers in the markets in which it provides SpeedChoice two-way
service, the company will need to develop new installation procedures, which may
have an adverse affect on the Company's operations. The new rules also provide
that any activated response station that causes interference to an existing or
applied for neighboring transmit site or ITFS receive site may be requested to
suspend service until it disproves or cures such interference. Other provisions
of the Two-way Rules include the ability for both MDS and ITFS licensees to
shift the transmission of the licensee's programming to another channel within
the wireless communications system, or to actually exchange frequencies with
another licensee in the same system. The Company expects to use one or more of
these techniques in developing its SpeedChoice two-way service.
Use of Reception Devices. The 1996 Act prohibited certain restrictions that
impair customers' ability to receive video programming services through
reception devices. The FCC prohibits any restriction that impairs the
installation, maintenance or use of an antenna used for reception of video
programming 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
prohibitions have two important exceptions, which provide that certain safety
restrictions and historical preservation rules are still enforceable. The FCC
recently revised its rule to extend the prohibition to include viewers who rent
property and wish to install and use antennas in areas where they have exclusive
use, but no ownership interest, such as balconies or patios. These prohibitions,
at present, do not apply to reception devices used for Internet access or data
communications services.
Copyright. Under the federal copyright laws, permission from the copyright
holder generally must be secured before a video program may be retransmitted.
For most of the programming transmitted by the Company, copyright permission is
secured by the programming licensor, such as MTV and CNN. However, for the
secondary retransmission of distant broadcast programming, such as WGN, Section
111 of the Copyright Act establishes the cable compulsory license. Under Section
111, cable systems, including wireless communications systems, are entitled to
engage in these secondary transmission 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 by filing certain reports with and paying
certain fees to the U.S. Copyright Office. Section 119 of the Copyright Act
provides for a similar compulsory licensing program for the retransmission of
broadcast programming to the home via satellite. The Copyright Arbitration
Royalty Panel has set very high rates for 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. Under FCC rules, a broadcast station
may not enter into an exclusive retransmission agreement with a hardwire cable
operator. Wireless communications 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.
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Other Regulations. FAA Regulations. FCC 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.
Availability of Equipment. The FCC has adopted rules providing for the
commercial availability of set top boxes and other consumer equipment to allow
subscribers to obtain set top boxes, remote control units, etc., from commercial
sources such as electronic retailers, rather than only from the wireless
communications operator. However, wireless operators are still permitted to take
steps necessary to guarantee system security. There can be no assurance that the
Company will not be required to incur additional costs in complying with such
regulations and restrictions.
Equal Employment Opportunities. In 1998, the D.C. Circuit Court of Appeals
ruled that the FCC's broadcast equal employment opportunity rules were
unconstitutional. In response to that decision, the FCC has proposed to amend
its EEO rules to eliminate the requirement that the wireless communications
operator's employee group reflects the racial or minority composition of the
local community labor force and instead to require recruitment for every job
opening except for internal promotion and some possible lower level positions.
This would require active, public recruitment for each non-exempt position to be
filled. The operator would be required to make an effort to inform all potential
job candidates of openings. The FCC is currently considering several alternative
approaches to specific recruitment requirements.
Emergency Alert System. The Commission has determined that wireless
communications systems must participate in the Emergency Alert System ("EAS") on
the same basis as cable systems and must install 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.
Cross Ownership Rules. The 1996 Act permits telephone companies 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 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 MDS 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 communications companies serving the
same area.
Internet Regulatory Matters. Except as described above, the Company is not
currently subject to direct regulation by the FCC or any other agency, other
than regulations applicable to businesses generally. The Company could become
subject in the future to regulations by the FCC or other regulatory agencies as
a provider of basic telecommunications services. Adverse changes in the legal or
regulatory environment relating to the SpeedChoice service could have a material
adverse effect on the Company's business, financial condition and operating
results.
The law relating to the liability of Internet access and data
communications services for information carried on or transmitted through their
networks is unsettled. As the law in this area develops, the potential
imposition of liability upon the Company for information carried on and
transmitted through its network could require the Company to implement measures
to reduce its exposure to such liability, which may require the expenditure of
substantial resources or the discontinuation of certain products or service
offerings. In the future, it is possible that additional laws and regulations
may be adopted with respect to the Internet, covering issues such as content,
indecency and obscenity, defamation, privacy, and pricing. The Company cannot
predict the impact, if any, that any future regulatory changes or developments
may have on its business, financial condition, and results of operations.
Congress has recently enacted the Online Copyright Infringement Liability
Limitation Act. This Act limits the liability of ISPs for copyright infringement
claims for infringing material carried on and transmitted through its network,
provided that the service provider complies with certain requirements. In
general, the Act requires that in
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order to benefit from its protections, the infringing material must be
transmitted through the providers network via an automatic process, the provider
must not be aware that the infringing material is on the provider's network, and
the provider must expeditiously remove such material upon notification from the
copyright holder. In addition, the service provider may not initiate placement
of the infringing work on its network.
The Company's growth and operations as a provider of SpeedChoice service
and DCTV service may be adversely impacted by the adoption of new, or changes
to, existing laws or regulations or the interpretations thereof.
Competition
The Company faces competition from a number of sources in both its
SpeedChoice service and its DCTV service, including potential competition from
emerging trends and technologies, some of which are described below.
Competition for SpeedChoice Service
-----------------------------------
The markets for consumer and business Internet access and data
communications services are extremely competitive, and the Company expects that
competition will intensify in the future. The Company's most direct competitors
in these markets are ISPs, national long distance carriers and local exchange
carriers, other wireless or satellite service providers, Internet content
aggregators, and cable television company providers. Many of these competitors
are offering, or may soon offer, technologies that will attempt to compete with
some or all of the Company's SpeedChoice service offerings. Such technologies
include cable modem, ISDN, and DSL. The bases of competition in these markets,
some of which are outlined below, include transmission speed, network
configuration, reliability of service, ease of access, price/performance, ease-
of-use, content quality, quality of presentation, customer support, brand
recognition, operating experience and revenue sharing, and leverage of other
content and distribution businesses.
Superior Performance Aspects. Certain telephone products, i.e., DS-3
----
lines, can carry data at speeds of up to 45 Mbps in full symmetrical paths.
These products are available from local telephone companies such as US West and
Ameritech, and their resellers. While DS-3 lines are extremely expensive, giving
the Company a useful price/performance comparison, certain users may wish to
bear the expense in return for faster symmetrical performance. Certain high
level data networking companies offer mission critical level networking
services, with large resources dedicated to guaranteeing such performance
aspects as service uptime, response levels and redundancy. Such companies
include AT&T, Ameritech and MCI WorldCom. The reputation and service levels
these companies bring to bear on a prospective customer may lead prospects to
choose other suppliers.
Similar Performance Aspects. Most major cable TV companies provide high
speed Internet access service and have begun deployment of cable modems. These
modems use technology that is fundamentally the same as that used by the
Company's SpeedChoice service, and provide a similar service performance. Given
pricing or bundling incentives, prospective residential or commercial customers
may choose to use such competitive services rather than SpeedChoice.
Furthermore, wireless ISPs, such as Winstar and Teligent, are offering business
services which may seem similar or superior in certain aspects to the Company's
service. The presence of multiple providers in a market with products that have
similar service aspects will serve to reduce the market share the Company may
otherwise expect to attain. In addition, satellite providers of
telecommunications services, such as DirecTV, are offering high speed Internet
access services and may become significant competitors.
Brand Names and Bundling. Certain competitors of the Company have more
established brand names, and sell other widely used communications products that
could be bundled with competing high speed Internet access products. In the
Phoenix market, Cox Communications is bundling its @Home Internet access service
with its video service, providing mutual discounts. Thus, residential and
commercial customers already taking Cox service for video service may be more
inclined to remain with Cox for Internet access service as well. While the
Company will seek to offset this advantage with its own DCTV product, the Cox
service is highly penetrated into the video market at this time. Furthermore,
the brand names of the Company's competitors, such as Cox, are better known in
10
<PAGE>
the marketplace than SpeedChoice, and will also provide these competitors an
advantage in consumer recognition and potential sales results.
Proprietary Content and Services. Certain competitors of the Company own
significant web content, and use that content to attract and retain subscribers.
AOL has significant amounts of proprietary content and services, including e-
mail addresses, chat rooms, buddy lists, news, and information. @Home, the
service distributed by Cox, provides its own content. To the extent that users
of these services value competitors' content over any speed or price advantages
the Company may offer, it may be difficult for the Company to induce those users
to switch to its services.
Microsoft. Microsoft has integrated Internet access into its Windows 98
operating system. Furthermore, Microsoft has made significant investments and
alliances with the cable industry, including direct investment in Comcast, and
agreed to provide an operating system for next generation cable TV set top
boxes. Finally, Microsoft has purchased Web TV, a service that delivers Internet
to TV sets. Microsoft has shown itself to be extremely adept at leveraging a
dominant position in one area (operating systems) into other targeted areas. To
the extent that it is successful in driving Internet users to its cable TV
clients or to Web TV, the Company could find it difficult to market against such
leverage.
National Presence. Certain ISPs, such as AOL, MCI Worldcom and AT&T have
national networks, and can satisfy user demands in almost any area of the
country. The Company's SpeedChoice service is available only in certain regions.
To the extent that users demand specific service in specific regions from a
single provider, the Company would be at a disadvantage marketing its service to
those users, and will attract fewer of them as customers.
Financial Resources. All of the competitors named above, and others as
well, have substantially greater financial, technical and marketing resources,
larger subscriber bases, longer operating histories, greater name recognition,
and more established relationships with advertisers and content and application
providers than the Company. Such competitors may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and devote
substantially more resources to developing Internet services or online content
than the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect the
Company's business, operating results or financial condition. Further, as a
strategic response to changes in the competitive environment, the Company may
make certain pricing, service or marketing decisions or enter into acquisitions
or new ventures that could have a material adverse effect on the Company's
business, operating results or financial condition.
Competition for Video Services
------------------------------
Hardwire Cable. The Company's principal subscription television competitors
in each market are traditional hardwire cable operators. Hardwire 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 DCTV service, it is expected that the hardwire cable
companies competing in the Company's markets will offer as many channels of
video programming as the Company. In addition, these competitors are also
bundling additional services with their cable TV services, such as high speed
Internet access, to enhance their products.
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 available from DirecTV,
Inc., which is a subsidiary of the Hughes Electronic unit of General Motors,
United States Satellite Broadcasting Company, Inc., PrimeStar, Inc. 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 December, 1998, DirecTV announced plans to acquire United States
Satellite Broadcasting, a
11
<PAGE>
premium movie channel and pay-per-view programming provider, and PrimeStar,
Inc., the second largest satellite video service. If these deals are
consummated, DirecTV will have approximately 7 million subscribers and the
ability to provide more than 370 channels of programming.
Telephone Companies. Local exchange carriers ("LECs"), including the
Regional Bell Operating Companies ("RBOC's"), are acquiring and developing cable
television systems. BellSouth has made acquisitions of wireless communications
systems. Ameritech and other RBOC's operate hardwire cable television
franchises. US West Media Group owns 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. In March, 1999, AT&T closed a merger agreement with Tele-
Communications, Inc. ("TCI"), the largest cable operator in the United States.
AT&T will combine its current consumer long-distance, wireless and Internet
services units with TCI's cable, telecommunications and high speed Internet
access businesses. AT&T has also announced that it has entered into joint
ventures with five other cable operators, which are affiliates of TCI. AT&T is
expected to provide telephone service over cable television wires instead of
traditional copper lines. AT&T has also recently signed an agreement with Time
Warner, Inc., and announced a plan to offer cable-based telephone service to
homes and small businesses in 33 states. The Company expects that AT&T will be
a significant competitor for SpeedChoice and for DCTV.
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. FCC rules permit 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.
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 video
services.
Local Off-Air VHF/UHF Broadcasts. Local off-air VHF/UHF broadcast
television stations (such as ABC, NBC, CBS and Fox affiliates) provide free
programming to the public. Potential customers may forego subscription
television and only receive free off-air programming.
The Company's Marketplace
Currently, the Company provides its SpeedChoice service in the Detroit and
Phoenix markets. The Company provides its DCTV service in Phoenix and its analog
video service in Chicago, Detroit, Houston, St. Louis and Tucson. The Company
intends to launch its SpeedChoice two-way service in the Phoenix market in the
second quarter of 1999. The Company controls wireless frequency rights in three
additional markets located in Indianapolis, Milwaukee, and Salt Lake City. The
Company leases the rights to between 21 and 33 wireless frequencies in its nine
primary markets. In total, the Company leases the rights to 272 wireless
frequencies in its nine primary markets, of which 227 are leased from third
parties and 45 are leased from affiliates of the Company. In addition, the
Company owns a 27% interest in a partnership that operates a wireless
communications system in Albuquerque, New Mexico. Because wireless
communications depends on a direct line-of-sight between the transmission site
and the customer's location, the Company's ability to provide its services to
households and businesses in each of its markets is limited by topography,
foliage and the location of buildings and other obstructions. When utilizing a
single point of transmission, the Company believes that its wireless
transmissions will be received by 50% to 90% of the homes and businesses in a
given market. The Company had 45,700 analog video customers at the end of 1998.
The Company did not have a material number of SpeedChoice customers at the end
of 1998. A description of the Company's principal markets is set forth below.
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Estimated Households
Markets Within Signal Area
------- --------------------
Chicago 2,836,000
Detroit 1,740,000
Indianapolis (1) 1,233,000
Houston 1,105,000
Phoenix (2) 1,014,000
St. Louis 908,000
Milwaukee 650,000
Salt Lake City 359,000
Tucson 314,000
----------
Total 10,159,000
(1) Includes Indianapolis and certain smaller markets surrounding Indianapolis
in which the Company has significant wireless communications frequency rights.
(2) Includes Casa Grande, Arizona, which will be served by a separate transmit
site.
Chicago. The Company offers 44 channels of analog video programming
(including 12 off-air VHF/UHF channels) in the Chicago market through its
wholly-owned subsidiary Preferred Entertainment, Inc. ("PEI"). PEI leases the
rights to 32 wireless frequencies and transmits at 50 watts from the Sears
Tower, the tallest building in the United States.
Detroit. The Company, through its subsidiary SpeedChoice of Detroit, Inc.
("SpeedChoice Detroit"), provides its SpeedChoice service in the Detroit market.
The Company owns 100% of the common stock of SpeedChoice Detroit. SpeedChoice
Detroit leases the rights to 27 wireless frequencies. 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 analog
video programming (including 8 off-air VHF/UHF channels) in the Detroit market.
The Company transmits its video programming over 12 of its wireless frequencies
and transmits at 10 watts with analog modulation. SpeedChoice Detroit is
authorized to provide two-way transmissions on two frequencies.
The Company has received digital authorizations from the FCC on 14 of its
Detroit ITFS frequencies. These authorizations were conditioned upon compliance
with the Canadian technical coordination agreement. These authorizations will
allow the Company to use these frequencies for its SpeedChoice and DCTV
services. 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 its SpeedChoice
service on its 13 MDS frequencies in the Detroit market and collocate 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 1997. This agreement
governs cross border transmission interference issues and establishes rules for
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.
Indianapolis. Through its approximately 92% owned subsidiary, Wireless
Cable of Indianapolis, Inc. ("WCI"), the Company leases the rights to 33
wireless frequencies 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. Some of
these frequency rights are held by Broadcast Cable, Inc., a
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<PAGE>
company 86% owned by the Company and WCI. The Company does not currently offer
any video or data services in this market.
Houston. The Company offers 43 channels of analog video programming
(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 leases the rights to 33 wireless frequencies and transmits the
majority of its channels at 100 watts from one of the tallest buildings in
Houston.
Phoenix. The Company offers its SpeedChoice service in the Phoenix market
through its wholly-owned subsidiary, SpeedChoice of Phoenix, Inc. ("SpeedChoice
Phoenix"). SpeedChoice Phoenix also offers its DCTV service, which includes 125
channels of digital video programming and 40 channels of digital music
programming. SpeedChoice Phoenix intends to launch SpeedChoice two-way service
in the second quarter of 1999. SpeedChoice Phoenix leases the rights to 33
wireless frequencies. The Company transmits its SpeedChoice service over 4 of
its wireless frequencies and transmits its DCTV service over 29 wireless
frequencies. The Company is authorized to transmit at 100 watts digital and
currently transmits at 25 watts digital. SpeedChoice Phoenix is authorized to
provide two way transmissions on two channels.
St. Louis. The Company offers 31 channels of analog video programming
(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 leases the rights to 31 wireless frequencies and
transmits at 200 watts.
Milwaukee. The Company leases the rights to 21 wireless frequencies in the
Milwaukee market through its wholly-owned subsidiary, People's Choice TV of
Milwaukee, Inc. ("PCTV Milwaukee"). The Company does not currently offer any
video or data services in this market.
Salt Lake City. The Company leases the rights to 28 wireless frequencies in
the Salt Lake City market through its wholly-owned subsidiary, People's Choice
TV of Salt Lake City, Inc ("PCTV Salt Lake City"). The Company does not
currently offer any video or data services in this market.
Tucson. The Company offers 36 channels of analog video programming
(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 leases the rights to 33 wireless frequencies and transmits 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 provide its wireless communications services; instead, it has
acquired the right to transmit under long-term leases. Some of those leases are
with Alda Wireless Holdings, Inc., Alda Tucson, Inc. and Alda Gold, Inc. (the
"Alda Companies"), corporations which are affiliates of the Company and which
are controlled by Matthew Oristano, the Chairman and Chief Executive Officer of
the Company. 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 the appropriate renewal
applications in a timely manner. In its nine major markets, the Company leases
45 wireless frequencies from the Alda Companies (the "Alda Frequencies"). The
Company leases the Alda Frequencies for nominal cost, has unlimited lease term
renewal rights, and has the option to acquire ownership of the frequencies for a
nominal cost. The loss of a material number of the Alda Frequencies and other
wireless frequencies the Company leases in its nine major markets would have a
substantial negative impact on the business and operations of the Company.
Although the Company anticipates that it will continue to have access to a
sufficient number of frequencies to operate successful wireless communications
systems 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 authorizations held by the
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<PAGE>
Company's frequency lessors, the Company may be unable to provide viable
wireless communications services 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 SpeedChoice and DCTV 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 1, 1999 the Company had a total of 381 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, 2000 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 October, 2001 and March, 2001. PCTV
Houston leases 7,500 square feet of office space in Houston which lease runs
through July, 2001 and also leases 800 square feet of office space in Houston
which lease runs through September, 1999. SpeedChoice 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.
SpeedChoice Phoenix also leases approximately 12,000 square feet of office and
warehouse space in Phoenix which lease continues through July, 1999 and which
may be extended for three additional six month renewal terms. SpeedChoice
Detroit leases approximately 8,500 square feet of office space, which lease runs
through August, 2000. 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.
The Company expects to purchase or lease additional office space in other
cities when it expands or launches other wireless communications systems. In
addition to office space, the Company also leases or will lease space on the top
of buildings or transmission towers located in the markets where it operates or
will operate its wireless communications 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 wireless
communications systems.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
15
<PAGE>
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 OTC Bulletin Board
("OTC") operated by NASDAQ 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
------------------
1997 High Low
First Quarter $6.50 $2.63
Second Quarter $3.25 $0.44
Third Quarter $4.00 $1.38
Fourth Quarter $3.25 $1.13
1998
First Quarter $2.06 $ .75
Second Quarter $1.81 $ .41
Third Quarter $1.50 $ .44
Fourth Quarter $ .81 $ .18
Holders
On March 25, 1999, there were approximately 158 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.
16
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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,
--------------------------------------------------------------
1994 1995 1996 1997 1998
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues $ 12,557 $ 26,004 $ 33,425 $ 32,690 $ 25,185
Depreciation and Amortization 6,606 24,627 39,258 34,508 35,027
Operating Loss (20,573) (42,277) (50,819) (43,761) (64,338)
Interest Expense 2,514 15,566 27,891 31,576 35,109
Net Loss (19,531)(1) (53,235)(2) (75,887) (69,580)(3) (94,021)
Basic and Diluted Loss
Per Common Share $ (2.20)(1) $ (5.23)(2) $ (6.26) $ (5.80)(3) $ (7.59)(4)
Weighted Average Number of
Common Shares Outstanding 8,949 11,072 13,100 13,149 12,924
Balance Sheets Data:
Total Assets $117,532 $373,093 $326,148 $279,124 $ 208,002
Notes and Other Payables 12,116 202,317 234,431 256,465 286,879
Convertible Preferred Stock 10,129 54,577 60,170 66,342 73,132
Stockholders' Equity/(Deficit) 82,997 96,519 14,089 (62,209) (160,338)
</TABLE>
- ---------------------------
Financial Statement Presentation
The statements of operations data for the three years ended December 31,
1998 and the balance sheets data for December 31, 1997 and 1998 are derived from
the consolidated financial statements and accompanying notes of PCTV Corp. and
Subsidiaries included in Item 8 hereto.
- ---------------------------
(1) Includes an income tax benefit of $3.2 million or $.36 per share.
(2) Includes an extraordinary gain of $1.2 million or $.11 per share.
(3) Includes an extraordinary gain of $.8 million or $.06 per share.
(4) Includes a gain on extinguishment of preferred stock of $3.1 million or
$.24 per share.
17
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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. These systems provide (i) high speed Internet access services and
private data communications services, which are marketed under the name
SpeedChoice/TM/, and (ii) digital and analog video transmission services. The
digital video service is marketed under the name DigitalChoice TV/TM/ ("DCTV").
The Company's strategy is to own, develop and operate SpeedChoice and DCTV
systems in large markets. The Company's markets are concentrated in the
midwestern and the southwestern regions of the United States. As of December 31,
1998, the Company provides analog video transmission service in Chicago,
Detroit, Houston, St. Louis, Phoenix and Tucson, and its SpeedChoice service in
Detroit and Phoenix. In the first quarter of 1999, the Company launched its DCTV
service in Phoenix. The Company intends to launch the SpeedChoice two-way
service in the Phoenix market in the second quarter of 1999. The Company also
leases wireless frequencies in Indianapolis, Milwaukee and Salt Lake City. The
Company leases between 21 and 33 wireless frequencies in its nine primary
markets. Because wireless communications depends on a direct line-of-sight
between the transmission site and the customer's location, the Company's ability
to provide its services to households and businesses in each of its markets is
limited by topography, foliage and the location of buildings and other
obstructions. When utilizing a single point of transmission, the Company
believes that its wireless transmissions will be received by 50% to 90% of the
homes and businesses in a given market.
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's strategy has been to focus on (i) further development of its
SpeedChoice service, (ii) the launch of its DCTV service in the Company's
Phoenix market, and (iii) further technical analysis of the potential use of the
Company's wireless spectrum for two-way transmission services. The Company first
began offering the SpeedChoice service in the Detroit market in October 1997,
and in the Phoenix market in March 1998. The Company launched its DCTV service
in Phoenix in the first quarter of 1999 and intends to launch the SpeedChoice
two-way service in the Phoenix market in the second quarter of 1999. The Company
is focusing on the SpeedChoice service because it offers greater business
opportunities at this time. The Company does not currently have plans to launch
DCTV in any of its other markets. Both the SpeedChoice service and DCTV service
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 high-
speed data communications and video programming services.
Revenues
Revenues decreased 23% or $7.5 million for the year ended December 31, 1998
compared to the year ended December 31, 1997. The decrease is primarily
attributable to a lower analog video customer count ($7.0 million), lower
related installation revenue ($.4 million), and lower third party installation
revenues ($.7 million), partially offset by SpeedChoice customer revenue ($.5
million). Revenues decreased 2% or $.7 million for the year ended December 31,
1997 compared to the year ended December 31, 1996. The decrease is principally
attributable to a lower analog video customer count ($1.7 million) and lower
related installation revenue ($.6 million), partially offset by an increase in
average revenue per customer ($.9 million) and by higher third party
installation revenues ($.7 million). The decrease attributable to a lower analog
video customer count and lower installation revenue for both years results from
the Company's suspension of the growth of its analog video customer base in
1996. Installation revenue is a charge to customers for the installation of the
Company's services in their premises. Third party installation revenue resulted
from the Company performing installation services for another company that
provides a video service outside of the Company's service area. This
installation activity stopped in the fourth quarter of 1997. Analog video
customer count decreased 32% to 45,700 at December 31, 1998 from 67,300 at
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December 31, 1997. The customer count at December 31, 1997 decreased 13% from
77,800 at December 31, 1996. The 1998 and 1997 decreases were also affected by
the sale of certain service contracts and equipment related to providing analog
video service to multiple dwelling units ("MDU's") which accounted for 11,600
and 3,900 analog video customers in 1998 and 1997, respectively. These sales
account for $3.8 million and $.1 million of the decrease in 1998 and 1997
revenues compared to prior periods attributable to the decrease in analog video
customer count. The decrease in customer count for all periods is primarily due
to the Company's suspension of the growth of its analog video customer base in
1996. As customers disconnected their service in the normal course of business
due to moving, changing video services or other reasons, the Company did not
actively pursue replacing these customers.
Service Costs
Service costs decreased 8.1% or $1.5 million for the year ended December
31, 1998 and increased 1% or $.2 million for the year December 31, 1997. Service
costs are mainly programming costs, channel lease payments, transmitter site
rentals, service calls, disconnect costs, backbone costs, call aggregation costs
and repair and maintenance expenditures. The decrease in 1998 was primarily due
to decreases in programming costs ($2.0 million), costs associated with third
party installations ($.7 million) and service call costs ($.5 million),
partially offset by increases in costs related to the SpeedChoice service ($1.1
million) and channel lease costs ($.6 million). The decreases were attributable
to the aforementioned decline in customers and the suspension of third party
installation activities in 1997. The increase in 1997 was primarily due to an
increase in costs associated with third party installations ($.6 million),
channel lease payments ($.3 million) and costs related to the SpeedChoice
service ($.3 million), offset by a decrease in programming ($.7 million) and
service call costs ($.3 million). The decreases were attributable to the
aforementioned decline in customers.
Selling, General and Administrative Costs
Selling, general and administrative costs increased 12% or $2.7 million
for the year ended December 31, 1998 and decreased 10% or $2.6 million for the
year ended December 31, 1997. Costs increased in 1998 from 1997 primarily due to
increased spending on SpeedChoice operations ($4.7 million), including salaries
and related costs ($2.1 million) and marketing ($2.0 million), partially offset
by decreases in analog video operations ($2.0 million), including decreased
salaries and related costs ($1.3 million) due to personnel reductions and
professional fees ($.3 million). Costs decreased in 1997 from 1996 primarily due
to the suspension of the growth of the analog business and is primarily
attributable to a decrease in salaries and related costs ($1.0 million) due to
personnel reductions, lower bad debt expenses ($.5 million) and a decrease in
rent and occupancy costs ($.7 million), partially offset by costs incurred for
the launch of the SpeedChoice service ($.5 million).
Depreciation and Amortization
Depreciation and amortization expense primarily includes depreciation of
wireless systems and equipment and amortization of frequency rights.
Depreciation and amortization expense increased for the year ended December 31,
1998 compared to 1997 primarily due to the acceleration of depreciation for
certain assets such as equipment recovered from customer premises upon
disconnection of their service. The year ended December 31, 1998 also includes
depreciation of amounts capitalized for SpeedChoice and DCTV equipment.
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, primarily equipment
recovered from customer premises upon disconnection of their service that was
recorded below the net book value of the equipment at the time of the
disconnect.
Impairment of long-lived assets
The Company periodically reviews the carrying value of the investment in
wireless systems and equipment, including frequency rights, intangible assets,
and the excess of purchase price over fair value of assets acquired for each
wireless communications system in order to determine whether an impairment may
exist. The Company considers relevant cash flow, estimated future operating
results, trends, management's strategic plans, competition and other available
information including the fair value of frequency rights owned, in assessing
whether the carrying value of the assets can be recovered.
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The Company reviewed its asset values as part of a recapitalization process
it undertook with certain of its bondholders and preferred stockholder (See
"Liquidity and Capital Resources") and as a result of the annual budget and
planning process of the Company whereby the Company revised its strategic
objectives to concentrate on the SpeedChoice services. As a result of this
review, the Company recorded a non-cash charge of $11.4 million for the year
ended December 31, 1998. Three components comprise this writedown. (i) Assets
related to the analog video customer base ($3.6 million). It has been determined
the cash flow from analog video operations will not be sufficient to cover the
book value of the analog customer base. (ii) Excess of cost over fair market
value related to the Sat-Tel Services, Inc. ("Sat-Tel") acquisition ($4.0
million). Sat-Tel was acquired to bring installation and service capacity in-
house and to secure third party video installation business for the Company.
During the fourth quarter the Company determined that it will not seek to
provide third party installation services. (iii) Frequency and transmit site
costs for non-launched systems ($3.8 million). The Company capitalized frequency
and transmit site costs for non-launched systems. A review of these systems
shows these costs are not recoverable.
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. Cable Equity
Partners, Inc. ("CEP") had filed a complaint against the Company and People's
Choice TV of Houston, Inc. ("PCTV Houston") in the state courts of Texas. The
complaint alleged causes of action based upon slander, libel and tortious
interference with contractual relations. CEP had claimed damages in excess of
$20 million. The Company and its counsel had vigorously defended against this
lawsuit. While the Company and its counsel believes that this lawsuit was
brought without merit, to avoid the risks inherent in a jury trial, the Company
elected to settle this lawsuit. The terms of the settlement provided for a
payment of $1.0 million cash to CEP and for CEP to receive 56,000 shares of
restricted Company common stock valued at $616,000. All of the cash settlement
amount was paid by the Company's insurance carrier.
Operating Loss
Operating loss was $64.3 million, $43.8 million and $50.8 million for the
years ended December 31, 1998, 1997 and 1996, respectively. Operating loss
increased in 1998 from 1997 primarily due to the 1998 impairment of long-lived
assets, the reduction in analog video customer revenues and increased costs
associated with the SpeedChoice operations partially offset by the savings
associated with the suspension of the development of the analog video business.
Operating loss decreased in 1997 compared to 1996 primarily due to the Company's
strategy not to further develop its analog business.
Cash flows used in operating activities were $17.7 million, $3.3 million
and $8.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase in 1998 from 1997 of $14.4 million is primarily due
to a decrease in earnings before interest, taxes, depreciation and amortization
("EBITDA") of $8.7 million adjusted for the asset impairment writedown, an
unfavorable net change in assets and liabilities of $2.7 million in 1998 as
compared to 1997, an increase in other expenses of $2.3 million consisting
primarily of costs associated with the Company's withdrawn recapitalization plan
(See "Liquidity and Capital Resources") and a reduction in interest income, net
of cash interest expense, of $.7 million. 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 EDITDA 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.
EBITDA should not be considered as an alternative to net income or any
other GAAP measure of performance or as an alternative indicator of the
Company's performance or to cash flows generated by operations, investing and
financing activity or as any alternative indicator of cash flows or measure of
liquidity. EBITDA is commonly used in the cable television and wireless
communications industries as a relevant measure of cash flow and performance and
is therefore useful to investors. EBITDA as calculated by the Company may not be
comparable to similarly titled measures reported by other companies since all
companies and analysts do not calculate it in the same manner.
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Gain (Loss) on Sales and Writedown of Assets
Gain (loss) on sales and writedown of assets for 1998 primarily includes a
$7.9 million gain on sale of service contracts and equipment in the Chicago
market partially offset by a $3.2 million writedown of certain assets to net
realizable value, which is based upon the most recent offer to purchase such
assets which are currently held for sale, and a $1.6 million write-off of non-
strategic frequency rights.
Gain (loss) on sales and writedown of assets for 1997 includes a $1.0
million writedown of certain assets to net realizable value, and a $.9 million
write-off 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 amount is primarily a writedown of notes receivable of $2.8
million. In 1994 the Company made a loan to the former principal stockholder of
Specchio Developers Investment Corp. ("SDIC") in return for a note that bears
interest at the prime rate plus 2%. This loan was collateralized by 180,000
shares of the Company's Common Stock received by such stockholder in a merger
transaction in which the Company acquired SDIC in May, 1994. This writedown
primarily relates to the writedown of this note to the fair market value of the
collateral received, which is the 180,000 shares of the Company's Common Stock.
Fair value was determined by using the closing stock price.
Interest Expense
Interest expense was $35.1 million, $31.6 million and $27.9 million for the
years ended December 31, 1998, 1997 and 1996, respectively. The increase in
interest expense from 1996 through 1998 was primarily a result of the accretion
of the Senior Discount Notes issued in May 1995. Non-cash interest expense
totaled $34.0 million, $30.2 million and $26.8 million for 1998, 1997 and 1996,
respectively, of which $34.0 million, $29.8 million and $26.1 million were
recorded on the Senior Discount Notes in 1998, 1997 and 1996, respectively.
Interest Income and Other
Interest income and other was $2.0 million, $5.3 million and $5.7 million
for the years ended December 31, 1998, 1997 and 1996, respectively. The decrease
in interest income from 1996 through 1998 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. Interest
income and other in 1998 also includes other expense of $1.9 million primarily
related to previously deferred costs associated with the Company's withdrawn
recapitalization plan of $2.2 million (See "Liquidity and Capital Resources").
The previously deferred $ 2.2 million has been expensed because the Company's
efforts to raise new capital are uncertain at this time.
Extraordinary Gain on Early Extinguishment 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.
Net Loss
Net loss was $94.0 million, $69.6 million and $75.9 million for the years
ended December 31, 1998, 1997 and 1996, 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.
Year 2000
The Year 2000 issue concerns the potential inability of information systems
and technology based operating systems to properly recognize and process date-
sensitive information beyond December 31, 1999. Systems that do not properly
recognize such information could generate erroneous data or fail.
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The Company has begun to implement a five step process in an attempt to
ensure its Year 2000 readiness. The first step involved creating awareness of
the Year 2000 problem, establishing a Year 2000 program team and developing an
overall strategy. The second step involves assessing the Year 2000 impact on the
Company, identifying core business areas, processes and systems ("systems"),
identifying the systems that are not Year 2000 compliant, and prioritizing their
conversion or replacement. Step three involves renovation of systems, including
converting, replacing, or eliminating selected platforms, applications, data
bases, and utilities that may be impacted by the Year 2000. The fourth step
involves validation of the Company's systems, including testing the performance,
functionality, and integration of converted or replaced systems. This step also
includes developing contingency plans for all critical systems. The final step
involves implementation of converted or replaced platforms, applications, data
bases, utilities, and interfaces, and the implementation of contingency plans,
if necessary. The Company has completed its awareness phase and almost 100% of
its assessment phase. The Company has commenced the renovation phase for many of
its systems.
Based on the review to date, the Company estimates the cost to resolve the
Year 2000 issue is less than $.4 million. This estimate includes amounts spent
to date, estimated costs to upgrade certain systems that have been identified as
non-compliant, and certain amounts for unexpected costs to resolve Year 2000
issues. In the event that the renovation, validation or implementation phases
require expenditures not currently foreseen or anticipated, the costs to resolve
the Year 2000 issues will increase.
The Company intends to develop contingency plans for its worst case
scenarios as part of the validation phase. At this time, the Company believes
that the most critical systems are its signal delivery and reception systems,
its Internet backbone and infrastructure system and its accounting and financial
reporting systems. The Company believes that the failure of these critical
systems because of Year 2000 issues is remote. The Company also believes that a
failure of its important, but less critical, environmental controls system,
sales and marketing support system and internal information system, is remote.
However, if such a failure were to occur in the case of the signal delivery and
reception system or the Internet backbone and infrastructure system, the Company
does not anticipate that it will be able to provide timely alternative or
replacement systems for these critical systems. This is primarily due to the
reliance by the Company on third party vendors for providing key components of
such systems. The Company has sought assurances from its vendors that their
products and services will be Year 2000 compliant, and received such assurances
from many of its vendors. However, if such vendors are not Year 2000 compliant,
the Company's business, financial condition and results of operations may be
adversely impacted.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities decreased to $55.4 million
at December 31, 1998 from $80.3 million at December 31, 1997, a decrease of
$24.9 million. This decrease is primarily attributable to cash used in operating
activities, investment in wireless systems and equipment, and repayment of notes
payable and preferred stock, and payment of preferred stock dividends, partially
offset by proceeds from sales of assets.
The wireless communications business is a capital intensive business. The
Company's operations require substantial capital investment for (i) the
acquisition or leasing of wireless frequency rights in certain markets, (ii) the
construction of headend/transmission facilities as well as customer service,
maintenance and installation facilities in several cities, (iii) the
installation of customers and (iv) the funding of initial start-up losses.
The Company anticipates that the development of its wireless communications
systems with the SpeedChoice and DCTV service 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, SpeedChoice services,
and increased costs for the more complex converter boxes and other equipment
which utilize the digital technology. The Company has approximately $55.4
million of cash, cash equivalents and marketable securities at December 31, 1998
and estimates that it will spend approximately $31.0 million in 1999 on
investments in wireless systems and equipment, expenditures for required debt
payments, and funding of operating losses. To fund such 1999 expenditures, the
Company anticipates using the Company's available cash, cash equivalents and
marketable securities. At the end of 1999, absent any new funding or
unanticipated expenditures, the Company expects to have $24.4 million in cash,
cash equivalents and marketable securities. This estimate is based on the
current business plan of the Company and may change due to revisions in the
Company's business plan or unexpected contingencies.
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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 1999 payments for converter boxes under the terms
described above have been included in the Company's estimates of capital
expenditures for 1999.
Consistent with its strategy of transitioning the business of the Company
from analog technology to digital technology, the Company is selling certain
service contracts and equipment by which the Company provides analog video
services to apartment complexes, condominiums and other multiple dwelling units.
These service contracts represent approximately 7,500 analog video customers. It
is uncertain whether a definitive agreement will be executed for any of the
service contracts.
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 2000 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
SpeedChoice 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.
Recapitalization Plan
---------------------
On April 24, 1998, the Company filed a Registration Statement on Form S-4
with the Securities and Exchange Commission relating to proposed exchange offers
being made by it to holders of its 13-1/8% Senior Discount Notes ("Senior
Discount Notes") and Preferred Stock. On terms set forth in the Prospectus that
is a part of the Registration Statement, PCTV had proposed to offer to exchange:
(i) up to $85,000,000 principal amount at maturity ($58,048,703 initial
accreted value) of its new 13-1/8% Senior Subordinated Discount Notes
due 2003 ("New Discount Notes"), 4,887,267 shares of the Company's
common stock, par value $.01 per share (the "Common Stock") and
$42,500,000 cash for all of its outstanding $332,000,000 principal
amount at maturity of its Senior Discount Notes (the "Debt Exchange
Offer"); and
(ii) up to $15,000,000 principal amount at maturity ($10,243,889 initial
accreted value) of its New Discount Notes and 2,597,054 shares of
Common Stock for all of its outstanding Preferred Stock (the
"Preferred Stock Exchange Offer").
Consummation of the Debt Exchange Offer was subject to a number of
conditions, including the condition that at least 95% in outstanding accreted
value of Senior Discount Notes being validly tendered and not withdrawn on the
expiration of the exchange offer. Consummation of the Preferred Stock Exchange
Offer was subject to a number of conditions, including the condition that 100%
of the outstanding shares of Preferred Stock being validly tendered and not
withdrawn on the expiration date of the exchange offer.
After the filing of the Registration Statement, a group of holders of the
Senior Discount Notes, including the largest holder of such notes, formed an
informal committee (the "Informal Committee") to negotiate with the Company with
respect to the Proposed Exchange Offers. The Informal Committee advised the
Company that its members held collectively approximately 63% of the face amount
of the Senior Discount Notes. The Company had numerous discussions with the
Informal Committee and the holders of the Preferred Stock with respect to the
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Proposed Exchange Offer and other potential recapitalization transactions.
These discussions extended over a period of 11 months. The Company was willing
to continue such discussions while there was a reasonable possibility that the
parties would reach a definitive agreement on an acceptable recapitalization
transaction. Because the Company was advised by the largest holder of the
Senior Discount Notes that such party was not presently willing to accept the
terms of the Proposed Exchange Offers or an acceptable alternative
recapitalization, the Company determined to withdraw the Registration Statement.
On March 17, 1999, the Company filed with the Securities and Exchange
Commission a request that the Commission terminate the Registration Statement.
The Commission has not yet advised the Company that such termination is
effective.
Additional Capital Requirements
-------------------------------
Based on its current business plan, the Company believes that it has
sufficient cash, cash equivalents and marketable securities to fund its
anticipated capital expenditures and operating losses through the end of fiscal
1999. To continue to develop its business thereafter, the Company anticipates
that it will need to (i) refinance its existing Senior Discount Notes and
Convertible Preferred Stock, and /or (ii) raise additional capital through new
financings and asset sales. The Indenture related to the Company's Senior
Discount Notes permits the Company to borrow approximately $25 million under a
Bank Credit Facility as defined in the Indenture. The Company is continually
reviewing its liquidity requirements and may seek to raise approximately $25
million of financing under such a facility. It is anticipated that such
financing would be fully secured by substantially all of the assets of the
Company. The Company has no offer sheets or other proposal from any party to
provide any or all of such financing. If additional financing was not available
to the Company, the Company would need to engage in asset sales to satisfy its
liquidity requirements. On December 1, 2000 the Company is required to make its
first interest payment in the amount of $21.8 million on the Senior Discount
Notes. Unless it receives additional financings, the Company does not expect
that it will have the cash resources at that time to make this payment. If the
Company does not have the cash resources to make the interest payment on such
date, the Company will need to seek extensions or waivers with respect to this
payment from the holders of the Senior Discount Notes. If the Company were not
able to obtain any such extensions or waivers, it is expected that the Company
would need to seek protection under the federal bankruptcy laws.
Income Tax Matters
The Company and its subsidiaries have net operating loss carryforwards
("NOLs") at December 31, 1998, for income tax purposes (subject to certain
limitations, including limitations on changes in control, and Internal Revenue
Service review) totaling approximately $170.6 million which expire in the years
2006 through 2018. Approximately $21.3 million of these NOLs at December 31,
1998 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, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," were
issued. Neither SFAS No. 130 or No. 131 currently impacts the Company's
financial statements. With respect to SFAS No. 130, the Company currently does
not have any transactions impacting comprehensive income, as defined. With
respect to SFAS No. 131, the Company operates in a single reportable segment of
wireless communications. Future operations of the Company may require
additional disclosures and discussions.
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Factors That May Affect Future Results and Performance
The Company's business is subject to a number of risks. In addition to
risks identified in other sections of this Report, certain risks are detailed in
this section.
Short Operating History; History of Losses; Unproven Business Model; No
Assurance of Profitability. The Company commenced operations in November 1988
and has incurred substantial net losses in each fiscal period since its
inception as a provider of wireless analog video services. From November 1988
through December, 1998 these net losses have totaled $350.1 million. The
Company currently intends to focus its business plan to provide SpeedChoice
service and DCTV service. As a result, the Company will increase its capital
expenditures and operating expenses in order to launch such services and the
Company expects to incur substantial operating and net losses for the
foreseeable future. The profit potential of the Company's business model is
unproven, and, to be successful, the Company must, among other things, develop
and market its services that are widely accepted by consumers and businesses at
prices that will yield a profit. The Company's SpeedChoice service has only
been launched in two of the Company's markets, and there can be no assurance
that it will achieve broad consumer or commercial acceptance. The success of
the Company's SpeedChoice and DigitalChoice TV services will depend upon the
willingness of subscribers to pay recurring monthly fees and upfront
installation fees for such services. The SpeedChoice service is currently
priced at a premium to many other online services, and there can be no assurance
that large numbers of subscribers will be willing to pay a premium for the
SpeedChoice service. Accordingly, it is difficult to predict whether the
Company's pricing level will prove to be viable, whether demand for the
Company's SpeedChoice service will materialize at the prices it expects to
charge or whether current or future pricing levels will be sustainable. If such
pricing levels are not achieved or sustained or if the Company's SpeedChoice
service does not achieve or sustain broad market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected. The Company's ability to generate future revenues will be dependent
on a number of factors, many of which are beyond the Company's control,
including the pricing of other Internet access and data transmission services,
and overall demand for the product. Because of the foregoing factors, among
others, the Company is unable to precisely forecast its revenues with any degree
of accuracy for any particular quarterly period. There can also be no assurance
that the Company will ever achieve profitability.
Limited Operations as an ISP. Although the Company has significant
experience owning and operating wireless analog video systems, the Company is no
longer investing in the further development of its wireless analog video
systems. The Company's current strategy is to focus on the opportunities
available to it as a provider of SpeedChoice and DCTV services. Prior to the
launch of SpeedChoice systems in Detroit and Phoenix, the Company had not
previously owned or operated any Internet access service. The amount of
revenues that the Company now receives from its two SpeedChoice systems is
immaterial at this time. Given the Company's limited operating history as an
ISP, there is no assurance that it will be able to develop, market, and expand
SpeedChoice systems to achieve positive operating cash flow and to compete
successfully in the ISP industry.
Unproven Network Scalability, Speed and Infrastructure. Due to the limited
deployment of the Company's SpeedChoice service, the ability of the wireless
frequencies to connect and manage a substantial number of online subscribers at
high transmission speeds is as yet uncertain. The Company faces risks related
to the ability of the wireless frequencies to be scaled up to their expected
subscriber levels while maintaining superior performance. While peak downstream
data transmission speeds across wireless frequencies approach 27 Mbps in each 6
MHz channel, the actual downstream data transmission speeds over the channels
could be significantly slower and will depend on a variety of factors, including
type and location of content, Internet traffic, the number of active subscribers
on a given spectrum segment, the number of 6 MHz channels allocated to carry the
SpeedChoice service, the capability of high-speed modems used and the capacity
and service quality of third-party Internet backbone providers. The initial
upstream transmission data carrier is a third-party telephone line capable of
speeds up to only 33.6 kilobits per second. Such speeds and reliance on a
third-party telephone line could place the Company at a competitive disadvantage
versus other high-speed data services. The actual data delivery speeds that can
be realized by subscribers may be significantly lower than peak data
transmission speeds due to the subscriber's hardware, operating system and
software configurations. To access the SpeedChoice service, subscribers need a
personal computer with at least a 66 MHz 486 or equivalent microprocessor and 16
megabytes of main memory. There can be no assurance that SpeedChoice will be
able to achieve or maintain such a high speed of data transmission, especially
as the number of the Company's subscribers grows, and the Company's failure to
achieve or
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maintain high-speed data transmission could significantly reduce consumer demand
for its services and have a material adverse effect on its business, operating
results and financial condition. The Company anticipates that future expansions
and adaptations of its network infrastructure may be necessary in order to
respond to growth in the number of customers served, increased demands to
transmit larger amounts of data and changes to its customers' product and
service requirements. The expansion and adaptation of the Company's network
infrastructure will require substantial financial, operational and managerial
resources. There can be no assurance that the Company will be able to expand or
adapt its network infrastructure to meet the industry's evolving standards or
its customers' growing demands and changing requirements on a timely basis, at a
commercially reasonable cost, or at all, or that the Company will be able to
deploy successfully any expanded and adapted network infrastructure.
Ability to Attract Internet Professionals; Management of Expanded
Operations; Dependence on Key Personnel. There is intense competition for
professionals with the skills and talents required to develop and operate the
SpeedChoice service. The Company has experienced difficulty in attracting and
retaining such professionals. In addition, in making a transition from a
wireless analog video business plan to a SpeedChoice and DCTV services business
plan, the Company may not be equipped to successfully manage any future periods
of rapid growth or expansion, which could be expected to place a significant
strain on the Company's managerial, operating, financial and other resources.
The Company is also highly dependent upon the efforts of its senior management
team, and the Company's future performance will depend, in part, upon the
ability of senior management to manage growth effectively, which will require
the Company to implement additional management information systems capabilities,
to develop further its operating, administrative, financial and accounting
systems and controls, and to maintain close coordination among engineering,
accounting, finance, marketing, sales and operations. The inability to attract
professionals, to manage the Company's expansion, or the loss of the services of
any of the Company's senior management team could have a material adverse effect
on the Company's business, operating results and financial condition.
Risk of System Failure. The Company's operations are dependent upon its
ability to support its network infrastructure and avoid damage from fires,
earthquakes, floods, power losses, telecommunications failures and similar
events. The occurrence of a natural disaster or other unanticipated problems at
the Company's Network Operations Center located in Chicago or at any of the
Company's POPs could cause interruptions in the services provided by the
Company. Additionally, failure of the Company's third-party backbone providers
to provide the data communications capacity required by the Company, as a result
of natural disaster, operational disruption or any other reason, could cause
interruptions in the services provided by the Company. Any damage or failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, operating results and financial
condition.
Risks Of Technological Change. The markets for consumer and business
Internet access services and online content are characterized by rapid
technological developments, frequent new product introductions and evolving
industry standards. The emerging nature of these products and services and
their rapid evolution will require that the Company continually improve the
performance, features and reliability of its network, Internet content, and
consumer and business services, particularly in response to competitive
offerings. There can be no assurance that the Company will be successful in
responding quickly, cost effectively and sufficiently to these developments.
There may be a time-limited market opportunity for the Company's SpeedChoice
services and there can be no assurance that the Company will be successful in
achieving widespread acceptance of its services before competitors offer
products and services with speed and performance similar or superior to the
Company's current offerings. In addition, the widespread adoption of new
Internet or telecommuting technologies or standards, wireless or otherwise,
could require substantial expenditures by the Company to modify or adapt its
network, products and services which could have a material adverse effect on the
Company's business, operating results and financial condition. In addition, new
Internet or telecommuting services or enhancements offered by the Company may
contain design flaws or other defects that could have a material adverse effect
on the Company's business, operating results and financial condition.
Dependence on Key Technology Suppliers. The Company currently depends on a
limited number of suppliers for certain key technologies used to build and
manage the SpeedChoice service. In particular, the Company depends on Hybrid
Networks, Inc. ("Hybrid") for its modems, Sun Microsystems, Inc. for high
availability servers, Cisco Systems, Inc. for network routing and switching
hardware, Digex Incorporated and GTE Internetworking for national backbone
access software, Microsoft for server and browser software, and Ascend
Communications, Inc. and 3Com Corp. for dial-up access concentrators. The
Company currently depends on three
26
<PAGE>
main suppliers to provide its DigitalChoice TV service. The Company depends on
General Instrument Corporation ("GIC") for digital headend equipment and
customer converter boxes, Thomcast Communications for digital transmitters and
Conifer for customer receive antennas. Except as described in the next
paragraph, the Company believes that there are alternative suppliers for each of
these technologies. However, is such suppliers were not available, it would take
a significant period of time to establish relationships with alternative
suppliers and substitute their technologies into the SpeedChoice and
DigitalChoice services. Except for an agreement to purchase GIC converter boxes,
the Company has not entered into any long-term supply contracts with any of
these suppliers. The Company places individual purchase orders with these
vendors at such times and in such amounts as required by the needs of the
Company's business. The loss of any of the Company's relationships with these
suppliers could have a material adverse effect on the Company's business,
operating results and financial condition.
Hybrid, the Company's sole source for it supply of high-speed modems, has
experienced financial difficulties. If Hybrid could not provide high speed
modems to the Company, the Company would only be able to provide its SpeedChoice
service to new customers so long as its inventory of high speed modems is not
depleted or a new supplier is found. While the Company is trying to locate
other potential providers of high speed modems, if Hybrid fails to continue to
provide high speed modems and if the Company is thereafter unable to
expeditiously locate a new provider, it will have material adverse effect on the
Company's business, operating results and financial condition.
Security Risks. Despite the implementation of security measures, the
Company's SpeedChoice service may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. ISPs have in the past experienced, and
may in the future experience, interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees or others. Unauthorized access could also potentially jeopardize the
security of confidential information stored in the computer systems of the
Company and its subscribers, which may result in liability of the Company to its
subscribers and also may deter potential subscribers. Although the Company
intends to continue to implement industry-standard security measures, such
measures have been circumvented in the past, and there can be no assurance that
measures implemented by the Company will not be circumvented in the future.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to the Company's subscribers,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
Risks Associated with the DigitalChoice TV Service. The Company's ability
to successfully market the DCTV service may be affected by a number of factors.
First, in any market in which the Company desires to provide the DCTV 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. Second, although the Company has sufficient capital
resources to launch one of its markets with digital video 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. Third, there can be no assurance that the implementation and
optimization of digital video technology in the Company's markets will not take
longer than anticipated. Fourth, 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 DCTV
product. There may be additional factors, that the Company is unaware of at
this time, that may negatively affect the Company's ability to implement and
successfully market the DCTV service in its markets.
Dependence Upon Wireless Frequency Agreements. The Company is dependent on
long-term leases with third parties for its wireless frequencies. Under FCC
rules, the terms of certain of the leases cannot exceed the term of the license
granted by the FCC to the lessor. While many of the Company's leases provide
for automatic renewals, or provide the Company a right of first refusal in the
event the lessor proposes to lease channels to a third party, there can be no
assurance that these leases will be renewed or extended beyond their current
terms or on terms satisfactory to the Company. Similarly, the failure by these
lessors to comply with the terms of their FCC authorizations or the FCC's rules
could result in the termination or forfeiture of their authorizations or denial
of their renewal by the FCC. Such terminations, forfeitures or denial of
renewal by the FCC or failure to obtain renewal of channel lease agreements
would likely have a negative impact on the Company's business and operations.
Historically, the Company has not experienced any forfeitures of wireless
frequency licenses or problems relating to frequency lease renewals which could
have a material impact on the Company's operations.
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market rate risk for changes in interest rates
relates primarily to the Company's investment portfolio and fixed rate debt
outstanding. The Company has not used derivative financial instruments in its
investment portfolio. The Company invests its excess cash in U.S. government
and Federal Agencies bonds and in high-quality corporate issuers. The Company
protects and preserves its invested funds by limiting default, market and
reinvestment risk. In addition, the Company has classified all its marketable
securities as "held to maturity" which does not expose the consolidated
statement of operations or balance sheets to fluctuations in interest rates.
Investments in fixed rate interest earning instruments carries a degree of
interest rate risk. Their fair market value may be adversely impacted due to a
rise in interest rates and the Company's future investment income may fall short
of expectations due to changes in interest rates. The Company may suffer losses
in principal if forced to sell securities which have declined in market value
due to changes in interest rates.
Market rate risk also relates to the Company's fixed rate debt with varying
maturities.
The table below presents the principal amounts, the fair market value, and
related weighted average interest rates by year of maturity for the Company's
investments in marketable securities and debt obligations.
<TABLE>
Fair
Market
1999 2000 2001 2002 2003 Thereafter Total Value (1)
------- ----- ----- ------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except for interest rates)
Assets:
Marketable Securities $32,370 -- -- -- -- -- $ 32,370 $32,391
Average Yield to Maturity 4.65% 4.65%
Liabilities:
Senior Discount Notes -- -- -- -- -- $332,000 $332,000 $53,100
Fixed Interest Rate 13.125% 13.125%
Notes Payable to FCC $ 713 $ 864 $ 962 $1,054 $1,156 $ 4,056 $ 8,806 (2)
Average Fixed Interest Rate 9.19% 9.36% 9.35% 9.35% 9.35% 9.31% 9.34%
Notes Payable to PCTV
Detroit $ 2,344 -- -- -- -- -- $ 2,344 (2)
Fixed Interest Rate 9.0% 9.0%
</TABLE>
(1) Quoted market prices as of December 31, 1998.
(2) No quoted market price exists for these debt instruments.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
Page No. in Form 10-K
---------------------
Report of Independent Public Accountants 30
Consolidated Balance Sheets December 31, 1997 and 1998 31
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1998 32
Consolidated Statements of Stockholders' Equity/(Deficit) for
Each of the Three Years in the Period Ended December 31, 1998 33
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998 34
Notes to Consolidated Financial Statements 36
29
<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, 1997 and
1998, and the related consolidated statements of operations, shareholders'
equity/(deficit) and cash flows for the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. As
discussed in Notes 1 and 3, the Company has significant amounts under its debt
agreements that become due in December 2000. Management is currently developing
plans to either restructure its debt agreements, raise additional capital or
sell assets in order for the Company to meet its obligations as they become due.
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, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Stamford, Connecticut
March 25, 1999
30
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
ASSETS 1997 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 31,756,014 $ 22,716,046
Marketable securities 48,519,444 32,686,215
Subscriber receivables, net of allowance
of $265,000 and $207,000 2,378,429 1,370,546
Notes and other receivables 441,335 2,659,374
Prepaid expenses and other assets 2,395,916 1,040,778
Investment in wireless systems and equipment, net 177,661,367 138,819,971
Financing costs, net of accumulated amortization
of $4,382,312 and $6,292,189 4,986,390 2,374,977
Excess of purchase price over fair market value of assets
acquired, net of accumulated amortization of $1,599,915 and
$1,542,446 10,985,486 6,333,881
------------ ------------
Total assets $279,124,381 $208,001,788
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Notes and other payables $256,465,030 $286,878,662
Accounts payable 4,476,400 1,970,840
Accrued expenses 4,363,357 4,095,183
Subscriber advance payments and deposits 2,500,002 1,379,146
Minority interest in consolidated subsidiaries 727,959 575,949
------------ ------------
Total liabilities 268,532,748 294,899,780
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 66,342,313 73,132,408
PCTV Detroit cumulative preferred stock 6,457,872 307,552
Stockholders' Deficit:
Preferred stock, $0.01 par value, 4,271,872 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.01 par value, 75,000,000 shares
authorized, 12,923,817 shares issued and
outstanding at December 31, 1997 and 1998 129,238 129,238
Additional paid-in capital 159,729,720 155,621,400
Warrants 3,756,840 3,756,840
Accumulated deficit (225,824,350) (319,845,430)
------------ ------------
Total stockholders' deficit (62,208,552) (160,337,952)
------------ ------------
Total liabilities and stockholders' deficit $279,124,381 $208,001,788
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
31
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues $ 33,424,512 $ 32,689,684 $ 25,185,182
------------ ------------ ------------
Costs and expenses:
Service costs 18,610,313 18,811,218 17,295,149
Selling, general and administrative 25,759,454 23,130,886 25,810,747
Depreciation and amortization 39,257,939 34,508,246 35,027,353
Impairment of long-lived assets -- -- 11,390,419
Non-cash settlement of lawsuit 616,000 -- --
------------ ------------ ------------
84,243,706 76,450,350 89,523,668
------------ ------------ ------------
Operating loss (50,819,194) (43,760,666) (64,338,486)
Gain (loss) on sales and writedown of assets (2,907,174) (389,521) 3,321,658
Interest expense:
Non cash (26,824,846) (30,151,132) (33,994,720)
Cash (1,066,523) (1,424,540) (1,114,198)
Interest income and other 5,672,691 5,314,240 1,977,656
Minority interest 114,228 56,602 152,010
------------ ------------ ------------
Loss before income taxes (75,830,818) (70,355,017) (93,996,080)
Income tax expense 56,500 52,000 25,000
------------ ------------ ------------
Loss before extraordinary gain (75,887,318) (70,407,017) (94,021,080)
Extraordinary gain on early extinguishment of debt -- 826,754 --
------------ ------------ ------------
Net loss (75,887,318) (69,580,263) (94,021,080)
Gain on extinguishment of preferred stock -- -- 3,075,160
Preferred dividends (6,122,764) (6,699,040) (7,183,480)
------------ ------------ ------------
Loss applicable to common shares $(82,010,082) $(76,279,303) $(98,129,400)
============ ============ ============
Basic and diluted loss per common share:
Loss before extraordinary gain $(6.26) $(5.86) $(7.59)
Extraordinary gain -- .06 --
------------ ------------ ------------
Net loss $(6.26) $(5.80) $(7.59)
============ ============ ============
Weighted average number of common shares outstanding 13,099,538 13,148,853 12,923,817
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
32
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, 1998
<TABLE>
<CAPTION>
Common Stock Par Value Additional
---------------------- Paid-In Accumulated
Shares Amount Capital Warrants Deficit
------ ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 12,841,203 $128,412 $172,415,949 $4,331,244 $ (80,356,769)
Net loss -- -- -- -- (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)
Net loss -- -- -- -- (94,021,080)
Gain on extinguishment of
Cumulative Preferred Stock -- -- 3,075,160 -- --
Dividends on Cumulative
Preferred Stock -- -- (393,385) -- --
Dividends on Convertible
Preferred Stock -- -- (6,790,095) -- --
----------- -------- ------------ ---------- -------------
Balance, December 31, 1998 12,923,817 $129,238 $155,621,400 $3,756,840 $(319,845,430)
=========== ======== ============ ========== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
33
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (75,887,318) $ (69,580,263) $(94,021,080)
Adjustments to reconcile net loss to net cash used in
operations -
Depreciation and amortization 39,257,939 34,508,246 35,027,353
Minority interest in subsidiaries (114,228) (56,602) (152,010)
Extraordinary gain on early extinguishment of debt -- (826,754) --
Stock issued in settlement of lawsuit 616,000 -- --
Impairment of long-lived assets -- -- 11,390,419
Amortization of original issue discount 26,125,506 29,801,500 33,994,720
Amortization of imputed discount on debt 699,340 349,632 --
(Gain) loss on sales and writedown of assets 2,907,174 389,521 (3,321,658)
Provision for losses on subscriber receivables 988,700 508,430 407,622
Changes in assets and liabilities
(Increase) decrease in subscriber receivables (1,749,222) (69,467) 547,882
(Increase) decrease in notes and other receivables (308,704) 342,176 12,076
Decrease in prepaid expenses and other assets 614,280 651,279 1,008,343
(Increase) decrease in organization and financing costs -- (931,879) 655,116
Increase (decrease) in accounts payable (1,320,309) 2,554,796 (2,505,560)
Decrease in accrued expenses (1,191,865) (875,552) (188,395)
Increase (decrease) in subscriber advance payments
and deposits 609,514 (41,547) (594,668)
------------- ------------- ------------
Net cash used in operating activities (8,753,193) (3,276,484) (17,739,840)
------------- ------------- ------------
Cash flows from investing activities:
Purchase of marketable securities (114,505,311) (114,074,942) (99,188,157)
Proceeds principally from maturity of marketable
securities 163,542,528 128,951,689 115,021,386
Proceeds from sales of assets 645,072 1,239,632 2,266,202
Proceeds from sale of service contracts and equipment -- 3,396,838 9,026,204
Acquisition of Sat-Tel Services, Inc. (3,440,400) -- --
Acquisition of Tilden and Anahuac frequencies (2,253,687) -- --
Sale of interest in Preferred Entertainment of Champaign 1,997,929 -- --
Acquisition of BTA/LMDS licenses (1,631,474) (213,284) (3,288,384)
Investment in wireless systems and equipment (12,771,773) (15,086,356) (7,551,875)
------------- ------------- ------------
Net cash provided by investing activities 31,582,884 4,213,577 16,285,376
------------- ------------- ------------
</TABLE>
34
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of notes payable (4,406,962) (9,658,377) (4,116,959)
Repayment of Cumulative Preferred Stock -- -- (3,075,160)
Buyout of minority interest (190,000) (302,000) --
Cumulative Preferred Stock dividends (170,492) (526,497) (393,385)
----------- ------------ -----------
Net cash used in financing activities (4,767,454) (10,486,874) (7,585,504)
----------- ------------ -----------
Net increase (decrease) in cash 18,062,237 (9,549,781) (9,039,968)
Cash and cash equivalents, beginning of year 23,243,558 41,305,795 31,756,014
----------- ------------ -----------
Cash and cash equivalents, end of year $41,305,795 $ 31,756,014 $22,716,046
=========== ============ ===========
Supplementary disclosures of cash flow information:
Cash paid for interest, net of amount capitalized $ 794,465 $ 1,364,041 $ 1,331,490
Cash received for interest $ 6,193,670 $ 4,844,438 $ 3,910,502
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
During 1996 in connection with the acquisition of Sat-Tel Services, Inc., the
Company issued a note payable in the amount of $1,250,000 and issued 27,614
shares of common stock.
During 1996, 1997 and 1998, the Company acquired frequency rights in exchange
for notes payable of $6,525,896, $1,891,000 and $536,000, respectively.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
35
<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 in large markets that provide (i) high speed Internet
access service and private data communications services, which are marketed
under the name SpeedChoice/TM/, and (ii) digital and analog video transmission
services. The digital video service is marketed under the name DigitalChoice/TM/
("DCTV"). The Company's markets are concentrated in the midwestern and the
southwestern regions of the United States. Currently, the Company provides
analog video transmission service in Chicago, Detroit, Houston, St. Louis, and
Tucson, and its SpeedChoice service in Detroit and Phoenix. The Company launched
the DCTV service in Phoenix in the first quarter of 1999. The Company intends to
launch the SpeedChoice two-way service in the Phoenix market in the second
quarter of 1999. The Company also leases wireless frequencies in Indianapolis,
Milwaukee and Salt Lake City. The Company leases between 21 and 33 wireless
frequencies in each of its nine primary markets. In total, the Company leases
the rights to 272 wireless frequencies in its nine primary markets, of which 227
are leased from third parties and 45 are leased from affiliates of the Company.
Because wireless communications depend on a direct line-of-sight between the
transmission site and the customer's location, the Company's ability to provide
its services to households and businesses in each of its markets is limited by
topography, foliage and the location of buildings and other obstructions. When
utilizing a single point of transmission, the Company believes that its wireless
transmissions will be receivable by 50% to 90% of the homes and businesses in a
given market.
The Company's strategy has been to focus on (i) further development of its
SpeedChoice service, (ii) the launch of its DCTV service in the Company's
Phoenix market, and (iii) further technical analysis of the potential use of the
Company's wireless spectrum for two-way transmission services. The Company first
began offering the SpeedChoice service in the Detroit market in October 1997,
and in the Phoenix market in March 1998. The Company launched its DCTV service
in Phoenix in the first quarter of 1999. The Company intends to launch its
SpeedChoice two-way service in the Phoenix market in the second quarter of 1999.
The Company is focusing on the SpeedChoice service because it offers greater
business opportunities at this time. The Company does not currently have plans
to launch DCTV in any of its other markets. Both the SpeedChoice service and
DCTV service 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
high-speed data communications services and video programming. The existing
analog video customer base will continue to decrease in 1999.
The Company has incurred significant operating losses since its inception
in 1993 and has negative stockholders' equity at December 31, 1998. Losses are
expected for at least the next year as the Company continues to develop its
wireless communications businesses. Although the Company has approximately
$55,400,000 in cash, cash equivalents and marketable securities at December 31,
1998, substantially more funding will be required for successful deployment of
its wireless communications businesses (See "Liquidity and Capital Resources")
and to meet its obligations. Debt and interest payments of $24,200,000 will be
due in December 2000. Without additional funding or the restructuring of its
debt agreements or obtaining waivers or extensions with respect to the payments
due its debt holders, the Company will not be able to meet these debt and
interest payments and the Company would need to seek protection under the
federal bankruptcy laws.
36
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2) Summary of Significant Accounting Policies:
Principles of consolidation--
The accompanying consolidated financial statements include the accounts of
the Company and all wholly-owned and majority-owned subsidiaries. All other
investments in a business are recorded using the equity method. All significant
intercompany transactions and balances have been eliminated.
Use of estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents--
The Company has classified marketable securities and time deposits as cash
equivalents if the original maturity of such investments is three months or less
at time of purchase.
Marketable securities--
Marketable securities consist of U.S. Government and Federal Agency bonds
and high quality corporate debt instruments which have an original maturity in
excess of three months at time of purchase. At December 31, 1997 and 1998 these
securities vary in maturity up to eight and four months, respectively. 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, 1998 and 1997 approximated the carrying value.
Financing costs--
Financing costs are being amortized over a five year period. Amortization
expense amounted to approximately $1,664,000, $1,677,000, and $1,956,000 in
1996, 1997 and 1998, 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.
Revenue recognition--
Subscription revenues are recognized in the period of service. Installation
revenue, the fee charged to a customer for having the Company's service
installed, is recorded at the time of installation, except when the fee charged
is billed in installments at which time it is recorded when received.
Installment billing primarily occurs with installation fees charged to
businesses, which is a small portion of the Company's revenues.
37
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
System launch expenses--
Administrative and marketing expenses incurred by systems during their
launch period are expensed as incurred.
Basic and diluted earnings per share--
The basic and diluted net loss per common share has been computed based on
the weighted average of common shares outstanding.
Recently issued accounting standards--
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," were
issued. Neither SFAS No. 130 or No. 131 currently impacts the Company's
financial statements. With respect to SFAS No. 130, the Company currently does
not have any transactions impacting comprehensive income, as defined. With
respect to SFAS No. 131, the Company operates in a single reportable segment of
wireless communications. Future operations of the Company may require
additional disclosures and discussions.
Reclassification--
Certain reclassifications have been made to prior year financial data to
conform to the current year presentation.
(3) Future Operations:
The wireless communications business is a capital intensive business. The
Company's operations require substantial capital investment for (i) the
acquisition or leasing of wireless frequency rights in certain markets, (ii) the
construction of headend/transmission facilities as well as customer service,
maintenance and installation facilities in several cities, (iii) the
installation of customers and (iv) the funding of initial start-up losses.
The Company anticipates that the development of its wireless communications
systems with the SpeedChoice and DCTV service 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, SpeedChoice services,
and increased costs for the more complex converter boxes and other equipment
which utilize the digital technology. The Company has approximately $55,400,000
of cash, cash equivalents and marketable securities at December 31, 1998
and estimates that it will spend approximately $31,000,000 in 1999 on
investments in wireless systems and equipment, expenditures for required debt
payments and funding of operating losses. To fund such 1999 expenditures, the
Company anticipates using the Company's available cash, cash equivalents and
marketable securities. At the end of 1999, absent any new funding or
unanticipated expenditures, the Company expects to have $24,400,000 in cash,
cash equivalents and marketable securities. This estimate is based on the
current business plan of the Company and may change due to revisions in the
Company's business plan or unexpected contingencies.
38
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
various markets 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.
Based on its current business plan, the Company believes that it has
sufficient cash and marketable securities to fund its anticipated capital
expenditures and operating losses through the end of fiscal 1999. To continue
to develop its business thereafter, the Company anticipates that it will need
to:
(i) refinance its existing debt with holders of its Senior Discount Notes
and its Convertible Preferred Stock, and /or
(ii) raise additional capital through new financings and asset sales.
On December 1, 2000 the Company is required to make its first interest
payment in the amount of $21,788,000 on the Senior Discount Notes. Unless it
receives additional financings, the Company does not expect that it will have
the cash resources at that time to make this payment. If the Company does not
have the cash resources to make the interest payment on such date, the Company
will need to seek extensions or waivers with respect to this payment from the
holders of the Senior Discount Notes. If the Company were not able to obtain
any such extensions or waivers, it is expected that the Company would need to
seek protection under the federal bankruptcy laws.
On April 24, 1998, the Company filed a Registration Statement on Form
S-4 with the Securities and Exchange Commission relating to proposed exchange
offers being made by it to holders of the Senior Discount Notes and Preferred
Stock. On terms set forth in the Prospectus that is a part of the Registration
Statement, PCTV had proposed to offer to exchange:
(i) up to $85,000,000 principal amount at maturity ($58,048,703 initial
accreted value) of its new 13-1/8% Senior Subordinated Discount Notes
due 2003 ("New Discount Notes"), 4,887,267 shares of the Company's
common stock, par value $.01 per share (the "Common Stock") and
$42,500,000 cash for all of its outstanding $332,000,000 principal
amount at maturity of its Senior Discount Notes (the "Debt Exchange
Offer"); and
(ii) up to $15,000,000 principal amount at maturity ($10,243,889 initial
accreted value) of its New Discount Notes and 2,597,054 shares of
Common Stock for all of its outstanding Preferred Stock (the
"Preferred Stock Exchange Offer").
Consummation of the Debt Exchange Offer was subject to a number of
conditions, including the condition that at least 95% in outstanding accreted
value of Senior Discount Notes being validly tendered and not withdrawn on the
expiration of the exchange offer. Consummation of the Preferred Stock Exchange
Offer was subject to a number of conditions, including the condition that 100%
of the outstanding shares of Preferred Stock being validly tendered and not
withdrawn on the expiration date of the exchange offer.
39
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
After the filing of the Registration Statement, a group of holders of the
Senior Discount Notes, including the largest holder of such notes, formed an
informal committee (the "Informal Committee") to negotiate with the Company with
respect to the Proposed Exchange Offers. The Informal Committee advised the
Company that its members held collectively approximately 63% of the face amount
of the Senior Discount Notes. The Company had numerous discussions with the
Informal Committee and the holders of the Preferred Stock with respect to the
Proposed Exchange Offer and other potential recapitalization transactions.
These discussions extended over a period of 11 months. The Company was willing
to continue such discussions while there was a reasonable possibility that the
parties would reach a definitive agreement on an acceptable recapitalization
transaction. Because the Company was advised by the largest holder of the
Senior Discount Notes that such party was not presently willing to accept the
terms of the Proposed Exchange Offers or an acceptable alternative
recapitalization, the Company determined to withdraw the Registration Statement.
The Company has been in negotiations with the holders of its Senior
Discount Notes and Convertible Preferred Stock over the past year. On March 17,
1999, the Company filed with the Securities and Exchange Commission a request
that the Commission terminate the Registration Statement. The Commission has
not yet advised the Company that the termination is effective.
The Indenture related to the Senior Discount Notes permits the Company to
borrow up to $25,000,000 under a Bank Credit Facility as defined in the
Indenture. The Company is continually reviewing its liquidity requirements and
may seek to raise up to $25,000,000 of financing under such a facility. It is
anticipated that such financing would be fully secured by substantially all of
the assets of the Company. The Company has no offer sheets or other proposal
from any party to provide any or all of such financing. If additional financing
was not available to the Company, the Company would need to engage in asset
sales to satisfy its liquidity requirements.
(4) Impairment of Long-lived Assets:
The Company periodically reviews the carrying value of the investment in
wireless systems and equipment, including frequency rights, intangible assets,
and the excess of purchase price over fair value of assets acquired for each
wireless communication system and other business units in order to determine
whether an impairment in the value of its long-lived assets may exist. The
Company considers relevant cash flow, estimated future operating results,
trends, management's strategic plans, competition, and other available
information including the fair value of frequency rights owned, in assessing
whether the carrying value of the assets can be recovered.
The Company reviewed its asset values as part of a recapitalization process
it undertook with certain of its bondholders and preferred stockholder (See
"Footnote 3") and as a result of the annual budget and planning process of the
Company. As a result of this review in the fourth quarter of 1998, the Company
recorded a non-cash charge of approximately $11,400,000 for the year ended
December 31, 1998 for three items as follows:
(i) Assets related to the analog video customer base ($3,600,000). It has
been determined the cash flow from analog video operations will not be
sufficient to cover the book value of the analog customer base.
(ii) Excess of cost over fair market value related to the Sat-Tel Services,
Inc. ("Sat-Tel") acquisition ($4,000,000). Sat-Tel was acquired to
bring installation and service capacity in-house and to secure third
party installation business for the Company. During the fourth quarter
the Company determined that it will not seek to provide this service.
40
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(iii) Frequency and transmit site costs for non-launched systems
($3,800,000). The Company capitalized frequency and transmit site
costs for non-launched systems. As a result of the strategic change
in the Company's business plan to focus on its SpeedChoice and DCTV
services, a review of these systems has demonstrated that these costs
are not recoverable.
(5) Acquisitions and Dispositions:
In July 1998, the Company sold service contracts and video equipment
related to providing analog video services to multiple dwelling unit ("MDUs")
properties in the Chicago market to OnePoint Communications Illinois, LLC for
$12,600,000. Net proceeds of approximately $9,000,000 have been received and
additional proceeds of up to $2,900,000, which is held in escrow and is
reflected as notes and other receivables in the accompanying balance sheet, is
due the Company upon the grant and transfer of certain licenses by the FCC. The
service contracts sold represent approximately 11,600 analog video customers.
The Company recorded a gain of $7,900,000 on this transaction. The Company is
also in the process of selling its MDU's in its other markets and recorded a
writedown to net realizable value of approximately $3,200,000, which was based
upon the most recent offer to purchase such assets which are currently held for
sale. Also during 1998, the Company recorded a write-off of approximately
$1,600,000 of non-strategic frequency rights. These gains and losses are
reflected in gain (loss) on sales and writedown of assets in the accompanying
statement of operations.
In December 1997, the Company sold service contracts and equipment, in St.
Louis, to ResNet Communications, LLC., representing approximately 8,800 MDUs
accounting for 3,900 analog video customers. The net proceeds were approximately
$3,400,000, resulting in a gain of approximately $1,000,000. Also during 1997,
the Company recorded a writedown of certain assets to net realizable value of
approximately $1,000,000 and a net loss of approximately $300,000 on non-
strategic frequency rights. These gains and losses are reflected in gain (loss)
on sales and writedown of assets in the accompanying statement of operations.
In September 1997, the Company closed on an 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 and 16 channels in Anahuac, Texas. In August 1997 and May 1998,
respectively, the Company returned the rights to these frequencies to the FCC,
resulting in losses of approximately $850,000 and $1,600,000, respectively.
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.
41
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In January 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 1997. 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.
Also during 1996, the Company recorded a writedown of notes receivable to
net realizable value of approximately $2,800,000. In 1994, the Company made a
loan to the former principal stockholder of SDIC in return for a note that bears
interest at the prime rate plus 2%. This loan was collateralized by 180,000
shares of the Company's Common Stock received by such shareholder in a merger
transaction in which the Company acquired SDIC on May 14, 1994. This writedown
primarily relates to the writedown of this note to the fair market value of the
collateral which is 180,000 shares of the Company's Common Stock. Fair market
value was determined by using the closing stock price. This loss is reflected in
gain (loss) on sales and writedown of assets in the accompanying statements of
operations.
(6) Investment in Wireless Systems and Equipment:
The investment in wireless systems and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1998
--------------------------------------
<S> <C> <C>
Inventory and construction in progress $ 7,857,585 $ 1,684,455
Property and equipment 105,762,165 70,003,058
Frequency rights 147,947,722 145,962,789
------------ ------------
261,567,472 217,650,302
Less--accumulated depreciation and amortization of
property and equipment (58,225,115) (43,695,477)
accumulated amortization of frequency rights (25,680,990) (35,134,854)
------------ ------------
$177,661,367 $138,819,971
============ ============
</TABLE>
<TABLE>
<CAPTION>
Depreciation and amortization is calculated on a straight-line basis over the
following useful lives:
<S> <C> <C>
Frequency rights 12 years
Wireless systems and equipment 3-10 years
Vehicles 5 years
Furniture and fixtures 5 years
Office equipment 5 years
Leasehold improvements Life of respective lease
</TABLE>
Wireless systems and equipment include the cost of initial customer
installations. These costs include reception equipment on customer premises and
related installation labor. Amortization is accelerated upon the disconnection
of specific customers.
42
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(7) Income Taxes:
The provision for income taxes for December 31, 1996, 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1996 1997 1998
------------------------------------------------------------
<S> <C> <C> <C>
Current state and local income taxes $56,500 $52,000 $25,000
======= ======= =======
</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,
--------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax (benefit) $(26,560,600) $(24,624,300) $(32,898,600)
State and local taxes, net of federal
expense 36,700 33,800 16,300
Losses not benefited 24,206,400 22,263,500 29,099,300
Other 2,374,000 2,379,000 3,808,000
------------ ------------ ------------
Income tax provision $ 56,500 $ 52,000 $ 25,000
============ ============ ============
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards
("NOLs") at December 31, 1998 for income tax purposes (subject to certain
limitations and Internal Revenue Service review) totaling approximately
$170,600,000 which expires in the years 2006 through 2018. Approximately
$21,300,000 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,
--------------------------------------------
1997 1998
--------------------------------------------
<S> <C> <C>
Depreciation and amortization $ 878,500 $ 578,830
Start up costs capitalized for tax 327,005 357,093
Amortization of discount on senior discount notes 24,595,410 36,493,576
Asset impairment and other writedowns 1,174,661 5,662,547
Other 3,389,494 4,788,681
Net operating loss carryforward for financial
reporting purposes 27,315,330 42,192,848
------------ ------------
Net deferred tax asset 57,680,400 90,073,575
Less: valuation reserve (57,680,400) (90,073,575)
------------ ------------
Net deferred tax asset recognized $ 0 $ 0
============ ============
</TABLE>
For the years ended December 31, 1997 and 1998, the Company has utilized NOLs
for financial reporting purposes of $62,600,00 and $51,811,000, respectively.
These NOLs were used to reduce the deferred tax liabilities related to the
acquisitions made by the Company.
43
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(8) Notes and Other Payables:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1998
----------------------------------------
<S> <C> <C>
13.125% senior discount notes due June 1, 2004 $332,000,000 $332,000,000
Less original issue discount ("OID") (a) (90,397,359) (56,402,639)
------------ ------------
241,602,641 275,597,361
------------ -----------
Notes payable, Federal Communications Commission, with
interest rates ranging from 8.625% - 9.5% and due dates
ranging from 2006-2008 (b) 8,416,653 8,806,154
Notes payable of PCTV Detroit (c) 6,070,190 2,343,500
Other, with interest rates ranging from 10.5% - 14.5% and due
dates ranging from 1999-2000, partially secured
by equipment 375,546 131,647
------------ ------------
$256,465,030 $286,878,662
============ ============
</TABLE>
(a) On May 19, 1995 the Company completed a public offering of $332,000,000
principal amount of 13.125% senior discount notes due 2004 and warrants for the
purchase of 473,764 shares of the Company's common stock. The Company received
net proceeds after underwriting discounts and other transaction expenses of
approximately $168,000,000. The notes were sold at a discount from the face
amount and will accrete in value until June 1, 2000 at a rate of 13.125% per
annum, compounded semi-annually. Cash interest will accrue at a rate of 13.125%
subsequent to June 1, 2000 and be payable in cash, thereafter, semi-annually on
June 1 and December 1, commencing on December 1, 2000.
The notes and warrants trade separately. Each warrant is exercisable for
1.427 shares of common stock at an exercise price of $31.90 per share. Such
warrants will expire on June 1, 2000. The warrants have a value of $3,756,840
based upon a valuation of the warrants and notes made at the date of issuance.
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 auctions for BTA authorizations, 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.
44
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(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%, which was
paid in August 1998; and (ii) notes payable in the amount of $2,150,000, plus
accrued interest of $194,000, 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, which was paid in September 1998.
Annual maturities of all debt are as follows:
Years ending December 31:
1999 $ 842,795
2000 3,210,569
2001 963,276
2002 1,054,254
2003 1,156,353
Thereafter 336,054,054
------------
343,281,301
OID (56,402,639)
-------------
$ 286,878,662
=============
The fair value of the senior discount notes at December 31, 1998, was
approximately $53,100,000 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.
(9) Preferred Stock:
In 1994 and 1995, the Company entered into a Stock Purchase Agreement (the
"Stock Purchase Agreement"), pursuant to which the Company agreed to sell to an
investor 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 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 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.
45
<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 October 27, 1999, dividends may only
be paid in cash, except that the Company, at its options, may postpone the cash
pay dividend date for six quarters. 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.
In August and November 1998, the Company closed on the purchase of 7,687.90
shares of Cumulative Preferred Stock of its Detroit subsidiary with a
liquidation value of $6,150,000. The purchase price was approximately $3,075,000
million. The excess carrying value of the Preferred Stock over the consideration
was credited to additional paid in capital.
(10) Employee Benefits:
During 1998 the Company maintained two 401(k) employee benefit plans
pursuant to which participants deferred 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 vested immediately
and 40% of up to 6% of employee salary, per employee in another plan which
vested over a period of seven years. During 1996, 1997 and 1998, the Company
incurred expenses of approximately $89,000, $83,000 and $56,000, respectively,
related to these plans. Beginning January 1999, the Company merged the two
plans. Under the new plan, the Company makes matching contributions up to 40% of
up to 6% of employee salary, per employee which vests over a period of five
years.
(11) Stock Options and Warrants:
On April 30, 1993, PCTV adopted a non-qualified stock option plan for
certain key employees (the "Key Employee Plan"), which is administered by two
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.
46
<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 two 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, 1996, 1997 and 1998, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
1996 1997 1998
-------------------------------------------------------------------------------------
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 653,275 $13.70 835,725 $13.67 1,332,225 $ 5.97
Granted 227,750 14.53 971,750 4.92 91,000 .62
Exercised -- -- -- -- -- --
Forfeited/canceled (45,300) 18.52 (475,250) 17.36 (69,000) 2.52
------- ------ --------- ------ --------- -----
Outstanding, end of year 835,725 $13.67 1,332,225 $ 5.97 1,354,225 $5.75
======= ====== ========= ====== ========= =====
Weighted average fair value of
options granted during year $ 9.82 $ 1.91 $ .54
====== ====== =====
Options exercisable at end of
year 535,266 452,516 769,017
======= ======== =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------------------------------------------
Options Outstanding Weighted Average Weighted
at Remaining Contract Life Average
Range of Exercises December 31, 1998 Price
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ .10 - $ .25 131,475 7.6 years $ .17
$ 1.38 - $ 4.00 713,625 8.3 years $ 3.01
$ 10.50 - $23.00 509,125 6.1 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>
1996 1997 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.8% to 6.6% 5.7% to 6.7% 4.7% to 5.6%
Expected lives 7 years 7 years 7 years
Expected dividend rate 0% 0% 0%
Expected volatility 58% 75% 106%
</TABLE>
47
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company accounts for stock options and warrants issued to employees
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 1996, 1997 and 1998 been determined
under the principles of SFAS No. 123, "Accounting for Stock Based Compensation",
net loss would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------------------------------------------------------------
Loss applicable to common
shares:
<S> <C> <C> <C>
As reported $(82,010,082) $(76,279,303) $(98,129,400)
Proforma $(82,857,841) $(77,141,030) $(99,042,487)
Basic and dilutive loss per
common share:
Loss before extraordinary
gain:
As reported $ (6.26) $ (5.86) $ (7.59)
Proforma $ (6.33) $ (5.93) $ (7.66)
Net loss:
As reported $ (6.26) $ (5.80) $ (7.59)
Proforma $ (6.33) $ (5.87) $ (7.66)
</TABLE>
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.
(12) Employment and Consultant Agreements:
PCTV has a written employment agreement with the CEO which provides for an
annual base salary of $300,000 and an annual bonus as determined by the Company.
The employment agreement expires on May 1, 2000 and automatically renews for
one-year periods unless the Company or executive provides the other of notice of
the intent not to renew. The agreement contains confidentiality and non-
competition provisions and requires the executive to devote full time to the
business of the Company. Pursuant to this agreement, if his employment is
terminated by the Company without cause, he is entitled to his base salary and
certain benefits for the greater of the reminder of the employment term or one
year from the date of the termination.
The Company has entered into change of control severance agreements with
seven 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.
48
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 8, 2000 and
automatically renews for one-year periods unless the Company or executive
provides the other of notice of the intent not to renew. The agreement contains
confidentiality and non-competition provisions, 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.
(13) Commitments and Contingencies:
Under various lease and rental agreements for offices, warehouses,
equipment and frequency licenses, the Company had expenses of approximately
$6,294,000, $5,926,000 and $6,320,000 in 1996, 1997 and 1998, respectively.
Future annual minimum payments under these non-cancelable agreements, including
only the initial terms for frequency licenses, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 5,419,000
2000 4,467,000
2001 4,408,000
2002 4,243,000
2003 3,808,000
Thereafter 6,321,000
-----------
$28,666,000
===========
</TABLE>
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.
(14) 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, 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
December 31, 1998
Allowance for Doubtful Accounts $265,000 $408,000 $ 466,000 $207,000
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
49
<PAGE>
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) 42 Chairman, Chief Executive Officer,
and Director
Charles F. Schwartz 43 Senior Vice President, Chief
Financial Officer and Chief of Staff
Todd A. Rowley 34 Senior Vice President--Market
Development
Peter Lynch 51 Senior Vice President--Operations
Donald E. Olander 39 Vice President, General Counsel and
Corporate Secretary
Michael F. Whalen, Jr. 33 Vice President--Finance and
Acquisitions
Victor Oristano 82 Vice Chairman and Director
Terry L. Scott(1)(2)(3) 48 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 three members of the Board of Directors of the Company.
All 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"). There are currently three Common Stock Directors, consisting of one
director who is serving for a term which expires in 2001, one director who is
serving for a term which expires in 2000, and one director who is serving for a
term which expires in 1999. All directors hold office until their successors
have been elected and qualified.
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. There are no nominees of the holders of the Preferred
Stock serving on the Board of Directors at this time. In addition to designating
two directors to the Board of Directors of the Company, the holders of the
Convertible Preferred Stock are entitled to vote with the holders of 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
50
<PAGE>
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.
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.
Terry L. Scott is currently Chairman of Terion, Inc., a privately held
company involved in data communications. In 1997, Mr. Scott served as Chairman
and Chief Executive Officer of Terion. From 1995 through 1996, Mr. Scott served
as President and Chief Executive Officer of Terion. 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 1998.
51
<PAGE>
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 Compensation Options(#)(1) Compensation(2)
- --------------------------- ------ -------- ----- ------------ ---------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 1998 $273,445 $0 $0 92,500 $2,398
Chairman and Chief Executive Officer 1997 $212,000 $0 $0 0 $1,900
1996 $212,000 $0 $0 0 $1,900
Peter Lynch 1998 $162,615 $0 $0 100,000 $1,714
Senior Vice President--Operations 1997 $143,000 $0 $0 55,000 $1,500
1996 $142,000 $0 $0 30,000 $1,500
Charles F. Schwartz 1998 $162,616 $0 $0 100,000 $1,106
Senior Vice President, Chief Financial 1997 $143,000 $0 $0 70,000 $ 900
Officer 1996 $139,000 $0 $0 30,000 $ 900
Todd A. Rowley 1998 $162,231 $0 $0 100,000 $ 751
Senior Vice President--Market Development 1997 $123,000 $0 $0 55,000 $ 600
1996 $121,000 $0 $0 30,000 $ 600
Donald E. Olander 1998 $137,712 $0 $0 90,000 $ 339
Vice President, General Counsel, Corporate 1997 $123,000 $0 $0 45,000 330
Secretary 1996 $121,384 $0 $0 15,000 330
</TABLE>
_______________
(1) The number of options granted for fiscal 1997 includes 25,000, 40,000,
35,000 and 30,000 options for Messrs. Lynch, Schwartz, Rowley and Olander,
respectively, which were issued pursuant to the Company's option exchange
and repricing program implemented in 1997. In January 1997, the 1993 Stock
Option Committee considered an option exchange and repricing program
whereby all holders of outstanding options issued under the Company's 1993
Stock Option Plan would have the opportunity to surrender outstanding
options for cancellation in exchange for new options. Half of the new
options would have an exercise price of $4.00 (the price of the Common
Stock on the date the exchange program was approved) and half of the new
options would have an exercise price of $11.50. All of the new options
would have a new three-year vesting schedule. On January 28, 1997, the 1993
Stock Option Committee approved the proposed option exchange and repricing
program, and the program was implemented thereafter. The options granted
for services performed in fiscal 1998 were granted on January 4, 1999.
(2) The items reported for fiscal 1998 are for life insurance premiums in the
amounts of $2,397, $1,313, $706, $350, and $339 and matching contributions
to the Company's 401(k) plan in the amounts of $0, $400, $400, $400 and $0
for Mr. Oristano, Mr. Lynch, Mr. Schwartz, Mr. Rowley and Mr. Olander,
respectively.
52
<PAGE>
The following table sets forth certain information regarding stock option
grants made to the named executive officers in 1998.
Option Grants in Last Fiscal Year (1)
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------
% of Total Potential Realizable Value
Options at Assumed Annual Rates of
Granted to Exercise Stock Price Appreciation
Options Employees Price Expiration for Option Term(2)
Name Granted (#) in Fiscal Year ($/Sh.) (4) Date 5%($) 10%($)
- ---- ---------- ------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 92,500(3) 8.9% .40625 1/04/09 $23,633 $59,889
Peter Lynch 100,000(3) 9.7% .40625 1/04/09 $25,549 $67,745
Charles F. Schwartz 100,000(3) 9.7% .40625 1/04/09 $25,549 $67,745
Todd A. Rowley 100,000(3) 9.7% .40625 1/04/09 $25,549 $67,745
Donald E. Olander 90,000(3) 8.7% .40625 1/04/09 $22,994 $58,270
</TABLE>
_______________
(1) Options were granted for services performed in 1998, but were granted on
January 4, 1999.
(2) 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.
(3) Incentive stock options vest at a rate of one-ninth, one-third, two-thirds,
eight-ninths and 100% on the first, second, third, fourth and fifth
anniversary of the grant, respectively.
(4) The closing price of the Common Stock on the day of the grant of all of the
options, January 4, 1999, was $.375.
53
<PAGE>
Option Exercises and Fiscal 1998 Year-End Value
The number of options exercised and the value realized from any such
exercise during fiscal 1998 and the number and value of options held at fiscal
year end for the named executive officers are set forth in the following table.
Aggregate Option Exercises and Fiscal Year-End Option Values
------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options at
End (#) Fiscal Year End ($)(1)
--------------------------------- --------------------------------
Shares Value
Acquired on Realized
Name Exercise(#) ($)(2) Exercisable Unexercisable (3) Exercisable Unexercisable
- ---- --------------- -------- ------------- ----------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Oristano 0 $0 205,000 92,500 $ 0 $0
Peter Lynch 0 $0 32,499 152,501 $ 0 $0
Charles F. Schwartz 0 $0 39,999 160,001 $ 0 $0
Todd A. Rowley 0 $0 70,164 150,836 $6,525 $0
Donald E. Olander 0 $0 30,000 120,000 $ 0 $0
</TABLE>
_______________
(1) Value of unexercised options is (i) the fair market value of the Common
Stock at fiscal 1998 year end ($.28125) 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.
(3) Includes option grants for services performed in fiscal 1998, which were
made on January 4, 1999.
Compensation of Directors
Directors, other than those who also are employees or consultants of the
Company, receive annual fees of $20,000 and are eligible to receive stock option
grants of the Company's Common Stock. The director is initially eligible for an
option grant of 10,000 shares of Common Stock to be made upon the director's
first election to the Company's Board of Directors, and thereafter for
additional grants of options. In addition, directors who are not also employees
or consultants of the Company receive a fee of $500 for attendance at each Board
meeting. Directors also are reimbursed for certain reasonable expenses incurred
in attending Board meetings. Mr. Scott has been issued options to purchase
10,000 shares of the Company Common Stock at a price of $3.125 (which are
currently 80% vested) and 40,000 shares of the Common Stock at a price of
$.40625 (which vest over the next five years). Other than these fees and awards,
no member of the Board receives any fees or other compensation for serving as a
director.
Compensation Committee Interlocks and Insider Participation
The following individuals serve as members of the Compensation Committee of
the Board of Directors: Matthew Oristano 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, as of May 1, 1998, Mr. Oristano receives an annual
base salary of $300,000 and he may receive
54
<PAGE>
an annual bonus to be determined by the Company's Compensation Committee. The
agreement has a term which expires on May 1, 2000. The agreement automatically
renews for one-year periods, unless the Company or Mr. Oristano provides the
other of notice of the intent not to renew. 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
greater of the remainder of the employment term or one year from the date of
termination.
The Company has entered into change of control severance agreements with
each of Mr. Matthew Oristano, Mr. Lynch, Mr. Schwartz, Mr. Rowley, and Mr.
Olander, and two other officers of the Company 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 communications
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. The agreement has a
term which expires on July 8, 2000. The agreement automatically renews for one-
year periods, unless the Company or Mr. Oristano provides the other of notice of
the intent not to renew. 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.
55
<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 10, 1999, 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 1998 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) 547,160 75% 15.0%
Blackstone Offshore Capital Partners II L.P. (1) 143,570 20% 4.0%
Blackstone Family Investment Partnership II
L.P. (1) 37,398 5% 1.0%
Wireless Holding LLC (2) 728,128 100% 20.0%
Murray Capital Management, Inc. (3) 728,128 100% 20.0%
Matthew Oristano (4) 1,350,200 10.5% 8.4%
Robert Fleming, Inc. (5) 1,222,350 9.5% 7.6%
Bay Harbour Management, L. C. (6) 845,595 6.5% 5.2%
Tower Investment Group, Inc. (7) 845,595 6.5% 5.2%
Steven A. Van Dyke (8) 845,595 6.5% 5.2%
Douglas P. Teitelbaum (9) 845,595 6.5% 5.2%
Dimensional Fund Advisors (10) 774,825 6.0% 4.8%
BCI Growth III, L.P. (11) 669,474 5.2% 4.1%
Victor Oristano (12) 540,378 4.2% 3.3%
Terry L Scott (13) 8,000 * *
Todd A. Rowley (13) 85,996 * *
Charles F. Schwartz (13) 56,665 * *
Peter Lynch (13) 46,665 * *
Donald Olander (13) 35,000 * *
All executive officers and directors as a group
(8 persons) (14) 2,173,500 16.9% 13.5%
</TABLE>
* Less than 1%
56
<PAGE>
(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 hold
limited member interests in Wireless Holding, LLC and as such, have shared
voting and dispositive power over the Convertible Preferred Stock.
(2) The principal address of Wireless Holding, LLC ("Wireless") is 110 East
59th Street, 24th Floor, New York, New York, 10022. Wireless, subject to
certain investor protection rights reserved by the members of BMAII, has
the power to vote and dispose of the Convertible Preferred Stock.
(3) The principal address of Murray Capital Management, Inc. ("Murray") is 110
East 59th Street, 24th Floor, New York, New York, 10022. Murray is the
sole managing member of Wireless, and subject to certain investor
protection rights reserved by the members of BMAII, has the power to vote
and dispose of the Convertible Preferred Stock.
(4) Includes (i) 10,000 shares of Common Stock which Matthew Oristano owns
directly, (ii) 936,327 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) 198,873
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.
(5) The address of Robert Fleming, Inc. is 320 Park Ave., New York, NY 10022.
(6) The address of Bay Harbour Management, L.C. ("Bay Harbour") is 777 South
Harbour Island Boulevard, Suite 270, Tampa, Florida 33602.
(7) The address of Tower Investment Group, Inc. ("Tower") is 777 South Harbour
Island Boulevard, Suite 270, Tampa, Florida 33602. Tower is the majority
shareholder of Bay Harbour and may be deemed the beneficial owner of the
shares.
(8) Mr. Van Dyke's address is 777 South Harbour Island Boulevard, Suite 270,
Tampa, Florida 33602. Mr. Van Dyke is a stockholder and president of Tower
and may be deemed the beneficial owner of the shares.
(9) Mr. Teitelbaum's address is 885 Third Avenue, 34th Floor, New York, NY
10022. Mr. Teitelbaum is a stockholder of Tower and may be deemed the
beneficial owner of the shares.
(10) The address of Dimensional Fund Advisors is 1299 Ocean Avenue, Santa
Monica, CA 90401.
(11) BCI Growth III, L.P.'s mailing address is c/o BCI Advisors, Inc.,
Glenpointe Centre West, Teaneck, New Jersey 07666.
(12) Includes (i) 61,000 shares of Common Stock which Victor Oristano and his
spouse own directly, (ii) 366,878 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.
(13) Includes shares of the Common Stock which the individuals have the option
to acquire within 60 days of the date hereof pursuant to stock option
agreements.
(14) Includes 583,997 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 792,003 additional shares which all
directors and executive officers have an option to acquire thereafter.
57
<PAGE>
ITEM 13. Certain Relationships and Related Transactions
Alda Channel Leases
Alda Wireless Holdings, Inc., Alda Tucson, Inc. and Alda Gold, Inc.
(together, the "Alda Companies"), which are controlled by Matthew Oristano,
lease to the Company the rights to approximately 56 wireless frequencies held by
such entities, 45 of which are in the Company's nine major markets. 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 provide no economic benefit to Mr. Oristano and
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.
58
<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. (f)
3.3 Bylaws of Registrant. (a)
10.1 Employment Agreement between Registrant and Mr. Matthew Oristano. (*)
10.2 Key Employee Stock Plan of Registrant. (a)
10.3 1993 Founders' Stock Option Plan of Registrant. (a)
10.4 1993 Stock Option Plan of Registrant. (a)
10.5 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)
10.6 ITFS Sub-Lease Agreement by and between the Community
Telecommunications Network, Eastern Cable Networks Corp and Eastern
Cable Networks of Michigan, Inc., as assigned to SpeedChoice of
Detroit, Inc. dated December 1, 1994, relating to the lease of fourteen
ITFS channels in Detroit, Michigan. (*)
10.7 Form of lease agreement used by Registrant for channel leases with Alda
Companies. (b)
10.8 Stockholders' Agreement, dated March 15, 1994, among the Registrant,
Wireless Cable of Indianapolis, Inc., Donald Boehm, Andrew V. Saban
and Cathy Schubert. (d)
10.9 Warrant to Purchase Common Stock of Registrant issued by Registrant to
the Bank of Montreal dated April 1993. (c)
10.10 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"). (e)
10.11 Stockholders Agreement, dated October 27, 1994, among Registrant, BCP
II, BOCP II, Matthew Oristano and Victor Oristano. (e)
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<PAGE>
10.12 Registration Rights Agreement among Registrant and BCP II and BOCP II.
(e)
10.13 Certificate of Designation of Convertible Cumulative Pay-in-Kind
Preferred Stock. (e)
10.14 Form of Indenture, dated May 19, 1995, between Registrant and Bank of
Montreal Trust Company as Trustee, relating to Senior Discount Notes. (g)
10.15 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. (h)
10.16 Asset Purchase and Sale Agreement, dated June 8, 1998, between Preferred
Entertainment, Inc., Registrant, and OnePoint Communications-Illinois,
LLC. (i)
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 the 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 the Registrant on July 2,
1993.
(d) Document incorporated by reference from Form 10-K for the fiscal year
ended December 31, 1993 filed by the Registrant on March 30, 1994.
(e) Document incorporated by reference from Form 8-K of Registrant dated
October 27, 1994.
(f) Document incorporated by reference from Form 10-K for the fiscal year
ended December 31, 1994 filed by the Registrant on April 3, 1995.
(g) Document incorporated by reference from Amendment No. 1 to Form S-3
Registration Statement No. 33-80928 filed by the Registrant on April 4,
1995.
(h) Document incorporated by reference from Amendment No. 3 to Form S-3
Registration Statement No 33-80928 filed by the Registrant on May 12,
1995.
(i) Document incorporated by reference from Form 10-Q for the fiscal quarter
ended September 30, 1998 filed by the Registrant on November 13, 1998.
(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.
60
<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, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Matthew Oristano Director and Chief Executive Officer March 25, 1999
- --------------------
Matthew Oristano
/s/ Victor Oristano Vice Chairman and Director March 25, 1999
- -------------------
Victor Oristano
/s/ Charles F. Schwartz Principal Financial and Accounting March 25, 1999
- ----------------------- Officer
Charles F. Schwartz
/s/ Terry L. Scott Director March 25, 1999
- ------------------
Terry L. Scott
61
<PAGE>
Exhibit 10.1
------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of May 1, 1998
(the "Effective Date"), by and between MATTHEW ORISTANO ("Employee") and
PEOPLE'S CHOICE TV CORP., a Delaware corporation (the "Company").
RECITALS:
---------
A. The Company is in the business of developing, owning and operating
wireless communications systems and conducting various other activities
associated therewith (the "Business").
B. The Company desires to employ Employee as Chairman and Chief Executive
Officer of the Company and Employee desires to be so employed by the Company, on
the terms and conditions set forth herein.
C. The Company desires to bind Employee to certain restrictive covenants
and Employee agrees to be so bound, on the terms and conditions set forth
herein.
AGREEMENT:
----------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment Term. Subject to the terms and conditions set forth
---------------
herein, including Sections 12 and 13, the Company will employ Employee and
Employee will serve as Chairman and Chief Executive Officer of the Company for a
two (2) year term commencing on May 1, 1998 and ending on May 1, 2000 (the
"Employment Term"). At the end of the Employment Term, this Agreement shall
automatically be renewed for additional one-year terms thereafter, unless either
the Company or Employee shall advise the other in writing ninety days or more
before the commencement of such renewal term that the Agreement is to be
terminated at the end of the current term.
2. Employment Duties.
-----------------
During the Employment Term, Employee will serve as Chairman and Chief
Executive Officer of the Company, subject to the terms of this Agreement and the
direction and control of the Company's Board of Directors. Employee shall,
during the Employment Term, perform such duties for the Company and its
Subsidiaries as are customarily performed by persons serving other companies in
a similar capacity (including supervising the activities of other executive
officers of the Company and acting as the person to whom such officers shall
directly report or indirectly report through. another executive officer
designated by Employee) or as may be assigned by the Company's Board of
Directors from time to time and serve the Company and its Subsidiaries
faithfully, diligently and competently and to the best of his ability. Except as
otherwise specifically provided herein, Employee shall devote full business time
to the performance of his duties required hereby and shall refer to the Company
all opportunities of which he becomes aware that relate to the Company's
business. During the Employment Term, Employee shall be entitled to reside
anywhere in the continental United States provided the place of his residence
does not adversely effect his performance hereunder.
3. Compensation. In exchange for Employee's services hereunder, the
------------
Company shall have the following compensation obligations, which shall be
cumulative:
(a) During the Employment Term, the Company shall pay to Employee as
salary for services rendered by Employee under this Agreement $300,000 per
annum, which may be (but is not required to be) increased from time to time by
the Compensation Committee with the approval of a majority of the disinterested
members of the Company's Board of Directors (the "Salary"). Such Salary shall be
payable in arrears not less frequently than monthly, but otherwise in accordance
with the Company's ordinary payment practices; and
<PAGE>
(b) After the end of each fiscal year of the Company during the
Employment Term, Employee shall be eligible for an annual performance bonus (the
"Bonus") up to an amount equal to 50% of the Salary, the nature and amount of
which shall be determined by and in the sole discretion of the Compensation
Committee, and subject to the approval of a majority of the disinterested
members of the Company's Board of Directors, after reviewing Employee's
performance, the Company's results of operations during and for such fiscal year
and such other matters deemed appropriate by the Compensation Committee;
notwithstanding anything else in this Agreement, the declaration and payment of
any Bonus to Employee shall be in the sole discretion of the Company and
Employee shall have no absolute right to a performance bonus in any year.
Any payments of Salary and Bonus made hereunder shall be treated as wages
for withholding and employment tax purposes. The Company shall make reasonable
efforts to accommodate Employee's request for deferral of any part of Employee's
compensation hereunder, including, but not limited to, the creation and funding
of a rabbi trust with respect to any such compensation deferral.
4. Insurance. During the Employment Term, the Company shall be entitled
---------
to obtain as the beneficiary "key man" or similar other life insurance on
Employee in an amount that the Company shall in its discretion deem necessary.
Employee shall cooperate with all requirements necessary for obtaining such
insurance, including, without limitation, submitting to any tests or physicals
reasonably required by the insurers in order to obtain such insurance.
5. Benefits.
--------
(a) Employee shall be entitled during the Employment Term to
participate in such employee benefit plans and programs, including, without
limitation, the Company's current automobile allowance program, life insurance
program which provides Employee with life insurance coverage in an amount equal
to three times his Salary and health insurance plans, as are maintained from
time to time for employees of the Company to the extent that his position,
tenure, compensation, age, health and other qualifications make him eligible to
participate (provided, that, notwithstanding cost issues, the Company shall
provide Employee with a minimum of $750,000 of life insurance coverage (the
"Mandatory Coverage"). Except for the Mandatory Coverage, the Company does not
promise the adoption or continuance of any particular plan or program during the
Employment Term, and Employee's (and his dependents') participation in any such
plan or program shall be subject to the provisions, rules, regulations and laws
applicable thereto.
(b) During the Employment Term, Employee shall be entitled to four (4)
weeks of paid vacation for each full twelve (12) month period during the
Employment Term, to be taken at times mutually acceptable to Employee and the
Company; accumulated and unused vacation time may not be carried beyond such
twelve (12) month period. Employee shall also be entitled to such paid holidays
as are observed by the Company from time to time.
6. Reimbursement of Expenses; Indemnification. Employee shall be
------------------------------------------
entitled to reimbursement for ordinary, necessary and reasonable out-of-pocket
trade or business expenses which Employee incurs in connection with performing
his duties under this Agreement, including reasonable travel, meal and home
relocation expenses. The reimbursement of all such expenses shall be subject to
the Company's policies regarding business expenses as in effect from time to
time. To the full extent permitted by applicable law, Employee also shall be
entitled to the indemnification and other rights available to officers of the
Company pursuant to Article Ninth of the Company's Certificate of Incorporation
dated April 22, 1993.
7. Restrictive Covenants. Employee acknowledges and agrees that (i)
---------------------
through his position as an employee of the Company, he will learn valuable trade
secrets and other proprietary information relating to the business, (ii)
Employee's services to the Company are unique in nature, and (iii) the Company
would be irreparably damaged if Employee were to provide services to any person
or entity in violation of the restrictions contained in this Agreement.
Accordingly, as an inducement to the Company to enter into this Agreement and in
consideration of his employment hereunder, Employee agrees that until the
Termination Date (as defined herein) and, with respect to all other areas in the
United States where the Company has or proposes to commence business activities
as of the
2
<PAGE>
Termination Date, for an additional twenty-four (24) months thereafter (such
periods being collectively referred to herein as the "Restricted Period"),
neither Employee nor any Affiliate of Employee (as defined below), shall,
directly or indirectly, either for himself or for any other person or entity:
(a) engage or participate in, or assist, advise or be connected with
(including as an employee, owner, partner, shareholder, officer, director,
advisor, consultant, agent or otherwise), or permit his name to be used by or
render services for, any person or entity engaged in a Competing Business (as
hereinafter defined); provided, however, that nothing in this Agreement shall
prevent Employee from acquiring or owning, as a passive investment, up to one
percent (1%) of the outstanding voting securities of an entity engaged in a
Competing Business which is publicly traded on any recognized national
securities market;
(b) take any action which might divert from the Company or an Affiliate
of the Company any business which is within the scope of the Company's or such
Affiliate's then business, including but not limited to the wireless video or
data communications business;
(c) solicit or attempt to solicit (i) any then subscriber or other
customer of the Company with whom the Employee had contact and/or knowledge as
of the Termination Date to purchase Competing Services from any person or entity
(other than the Company) or (ii) any then subscriber, customer, supplier,
licensor, licensee or other business relation of the Company with whom the
Employee had contact and/or knowledge as of the Termination Date to cease doing
business with the Company; or
(d) solicit or hire any director, officer, employee or agent of the
Company or any Affiliate of the Company to perform services for any entity other
than the Company and its Affiliates.
As used herein, the following terms shall have the meanings set forth below:
"Competing Business" means any company or person engaged in, or planning to
engage in, the business of providing pay or subscription television services
(whether through hard-wire, wireless or other transmissions), high speed
internet access, or other wireless data communications services to any customer.
"Competing Services" means products and services provided to customers or
subscribers of a Competing Business.
"Termination Date" means the date of termination in the case of a
termination of employment pursuant to Section. 12(a) or (c) hereof, the date the
Severance Period ends in the case or a termination of employment pursuant to
Section 12(b) hereof, the date the payment of Salary and Benefits is to cease in
the case of a termination of employment pursuant to Section 13(a) and (b), the
date the payment of Salary and benefits is to cease in the case of a termination
of the employment relationship pursuant to Section 13(c), and the date the
Employment Term ends in the case there is no termination of employment prior
thereto.
8. Disclosure of Confidential Information. Employee recognizes that he
--------------------------------------
possesses or as a result of his employment by the Company will gain possession
of Confidential Information (as defined below). Accordingly, as an inducement
for the Company to enter into this Agreement and in consideration of Employee's
employment, Employee agrees that:
(a) For the longest period permitted by law from the date of this
Agreement, Employee and each Affiliate of Employee shall hold in strictest
confidence and shall not, other than as required by law, without the prior
written consent of the Company, use for his own benefit or that of any third
party or intentionally or negligently disclose, in a manner which could be
harmful to the Company, to any person, firm or corporation except the Company,
an Affiliate of the Company or employees of the Company or an Affiliate of the
Company any Confidential Information (as defined below). For purposes of this
Agreement, intending that the term shall be broadly construed to include
anything protectible as a trade secret under applicable law, "Confidential
Information" shall mean all information, and all documents and other tangible
items which record information, relating to the creation and marketing by the
Company of products and services, from time to time, which at the time or times
3
<PAGE>
concerned is protectible as a trade secret under applicable law, and which has
been or is from time to time learned by, disclosed to or known by Employee
including, without limitation, the following especially sensitive types of
information relating to the creation and marketing of products and services of
the Company:
(i) product development and marketing plans and strategies;
(ii) budgetary and financial information;
(iii) business development or launch plans for new or existing
systems or services;
(iv) information concerning contractual relationships by and
among the Company, its vendors, licensors, program suppliers, employees or
subscribers or other customers; and
(v) information concerning the character and scope of business
or personal relationships between employees, directors, and consultants of the
Company.
As used herein, an "Affiliate" shall mean and include any person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified. "Control"
means the power, direct or indirect, to influence or cause the direction of the
management and policies of a person or entity through voting securities,
contract or otherwise;
(b) Employee and each Affiliate of Employee (and if deceased, his legal
representative, who shall be the person set forth as such in Section 14(a) until
written notice of a successor is delivered to the Company (the "Representative")
shall promptly following a request therefor from the Company return to the
Company, without retaining copies, all tangible items which are or which contain
Confidential Information, it being agreed by Employee on behalf of himself and
his heirs, successors and assigns that the Company shall be entitled to rely on
any action taken by Employee or the representative in connection with this
paragraph (b); and
(c) At the request of the Company made at any time or from time to time
hereafter, Employee and each Affiliate of Employee (and if deceased, the
Representative) shall make, execute and deliver all applications, papers,
assignments, conveyances, instruments or other documents and shall perform or
cause to be performed such other lawful acts as the Company may reasonably deem
necessary or desirable to implement any of the provisions of this Agreement, and
shall give testimony and cooperate with the Company, its Affiliates or its
representatives in any controversy or legal proceedings involving the Company,
its Affiliates or its representatives with respect to any Confidential
Information, provided that the Company shall promptly reimburse Employee and
each Affiliate thereof for his reasonable costs incurred in connection with the
foregoing, including but not limited to the reasonable costs and expenses of
legal counsel retained by Employee.
9. Inventions. Employee acknowledges that in his capacity as an
----------
employee of the Company, he may be involved in (i) the conception or making of
improvements, discoveries, inventions or the like (whether patentable or
unpatentable and whether or not reduced to practice), (ii) the authorship of
copyrightable works, or (iii) the development of trade secrets relating to the
Business. Employee acknowledges that all such intellectual property is the
exclusive property of the Company. Employee hereby waives any rights he may have
in or to such intellectual property, and Employee hereby assigns to the Company
all right, title and interest in and to such intellectual property. At the
Company's request and at no expense to Employee, Employee shall execute and
deliver all such papers, including, without limitation, any assignment
documents, and shall provide such cooperation as may be necessary or desirable,
or as the Company may reasonably request, in order to enable the Company to
secure and exercise its rights to such intellectual property.
10. Specific Performance. Employee agrees that any violation by him of
--------------------
Sections 7, 8 or 9 of this Agreement, as applicable, would be hiqhly injurious
to the Company and would cause irreparable harm to the Company. By reason of the
foregoing, Employee consents and agrees that if he violates any provision of
Sections 7, 8 or 9 of this Agreement the Company shall be entitled, in addition
to any other rights and remedies that it may have, to apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
relief in
4
<PAGE>
order to enforce, or prevent any continuing violation of, the provisions of such
Section. In the event Employee breaches a covenant contained in this Agreement,
the Restricted Period applicable to Employee with respect to such breached
covenant shall be extended for the period of such breach.
11. Enforcement Employee acknowledges that the territorial, time and
-----------
scope limitations set for in Section 7 and 8, as applicable, are reasonable and
are properly required for the protection of the Company and in the event that
any such territorial, time or scope limitation is deemed to be unreasonable by a
court of competent jurisdiction, the Company and Employee agree, and Employee
submits, to the reduction of any or all of said territorial, time or scope
limitations to such an area, period or scope as said court shall deem reasonable
under the circumstances.
12. Termination: Severance.
----------------------
(a) Notwithstanding the provisions of Section 1 and the other
provisions of this Agreement, Employee's employment with the Company may be
terminated at any time by a majority of the disinterested members of the
Company's Board of Directors for "cause", which shall include (i) Employee's
conviction for, or plea of nolo contendere to, a felony, (ii) Employee's
commission of an act involving self-dealing, fraud or personal profit materially
injurious to the Company, (iii) Employee's commission of an act of willful
misconduct or gross negligence in the conduct of his duties hereunder, (iv)
habitual absenteeism or tardiness on the part of Employee, (v) Employee's breach
or violation of any material internal policies or rules of the Company,
including those rules adopted by the Company concerning the purchase and sale of
the Company's common stock or other securities by employees of the Company, and
(vi) Employee's breach of any material provision of this Agreement. Any
termination by the Company under this Section l2(a) shall be in writing and
shall set forth the reason for such termination. In the event of termination
under this Section 12(a), the Company's obligations under this Agreement shall
cease and Employee shall forfeit all right to receive any compensation or
benefits under this Agreement, including, without limitation, any unearned or
unpaid Bonus, except that Employee shall be entitled to his Salary (under
Section 3(a)) and benefits (under Section 5) for services already performed as
of the date of termination of this Agreement. Without limitation, termination of
Employee pursuant to this Section 12(a) shall not relieve Employee of his
obligations under Sections 7, 8 or 9 hereof.
(b) Notwithstanding the provisions of Section 1 and the other
provisions of this Agreement, Employee's employment with the Company may be
terminated at any time for any reason or no reason by a majority of the
disinterested members (including Victor Oristano, who for purposes of this
Section 12(b) shall be considered to be "disinterested") of the Company's Board
of Directors without cause, provided that in the event of such a termination,
Employee shall be entitled to severance as follows: continuation of his Salary
(under Section 3(a)) and benefits (under Section 5) through the remainder of the
Employment Term (the "Severance Period"), provided that any such amount for
salary or benefit continuation shall be reduced by any amount received or earned
by Employee during the Severance Period pursuant to any employment, consulting
or similar other relationship between Employee and any other person (excluding
income that Employee derives from any company organized by Employee or a
relative of Employee). Notwithstanding the foregoing, in no case shall the
Severance Period be less than one year. Except as otherwise specifically
provided above, the Company's obligations under this Agreement shall cease upon
termination and Employee shall forfeit all rights to receive any other
compensation or benefits under this Agreement. Without limitation, a termination
of Employee pursuant to this Section 12(b) shall not relieve Employee of his
obligations under Sections 7, 8 or 9 hereof and Employee is further obligated
during the Severance Period to promptly notify Company of any employment,
consulting or other relationship that might result in the reduction of any
salary or benefit continuation payments hereunder and to provide to Company all
documents reasonably requested by it relating thereto. A material reduction by
the Company of Employee's authority and responsibilities hereunder or a material
demotion of the position of Employee within the Company, unless made with
Employee's consent or pursuant to Section 12(a) hereof, shall constitute a
constructive termination under this Section 12(b) and shall entitle Employee to
the above described severance. Any termination by the Company under this Section
12(b) shall be in writing.
(c) Unless sooner terminated by the Company, Employee shall be
obligated to fulfill the duties established hereby for the full Employment Term.
In the event Employee refuses or fails to do so, the
5
<PAGE>
Company's obligations under this Agreement shall cease and Employee shall
forfeit all right to receive any compensation or benefits under this Agreement,
including, without limitation, any unearned performance bonus, except that
Employee shall be entitled to his Salary (under Section 3(a)) and benefits
(under Section 5) for services already performed through the date of such
refusal or failure to perform by Employee. Without limitation, termination by
Employee pursuant to this Section 12(c) shall not relieve Employee of his
obligations under this Agreement, including Sections 7, 8 and 9 hereof, and
Company shall be entitled to pursue all remedies available under law or equity
for breach of this Agreement by Employee.
13. Death or Disability.
-------------------
(a) If Employee becomes permanently disabled (determined as provided
below) during the Employment Term, his employment may terminate at the election
of the Company as of the date such permanent disability is determined. Employee
shall be considered to be permanently disabled for purposes of this Agreement if
he is unable by reason of accident or illness (including mental illness) to
perform the material duties of his regular position with the Company and is not
expected to recover from his disability within a period of six (6) months from
the commencement of the disability. If at any time Employee claims or is claimed
by the Company to be permanently disabled, a physician acceptable to both
Employee, or the Representative, and the Company (which acceptances shall not be
unreasonably withheld) shall be retained by the Company and shall examine
Employee. Employee shall cooperate fully with the physician. If the physician
determines that Employee is permanently disabled, the physician shall deliver to
the Company a certificate certifying both that Employee is permanently disabled
and the date upon which the condition of permanent disability commenced. The
determination of the physician shall be conclusive.
(b) In the event of the permanent disability of Employee, Employee
shall be entitled to his Salary (under Section 3(a)) and benefits (under Section
5) for services performed through the date of his permanent disability and shall
also be entitled to his Salary (under Section 3(a)) and benefits (under Section
5) through the period ending two (2) years after the date of Employee's
permanent disability; provided, however, that any such amounts for Salary
continuation, at the option of the Company, may be reduced by any amount
received by Employee under any permanent disability insurance policy or other
benefit program such as Social Security. Without limitation, termination of
Employee pursuant to this Section 13 as a result of Employee's permanent
disability shall not relieve Employee o(Pounds) his obligations under Sections
7, 8 or 9 hereof.
(c) In the event of the death of Employee, Employee's estate or heirs
shall be entitled to his Salary (under Section 3(a)) and benefits (under Section
5) for services performed through the date of his death and shall also be
entitled to his Salary (under Section 3(a)) and benefits (under Section 5)
through the period ending two (2) years after the date of his death.
14. Miscellaneous.
-------------
(a) All notices hereunder shall be in writing and shall be deemed given
when delivered in person or when telecopied with hard copy to follow, or three
(3) business days after being deposited in the United States mail, postage
prepaid, registered or certified mail, or two (2) business days after delivery
to a nationally recognized express courier, expenses prepaid, addressed as
follows:
If to Employee:
Matthew Oristano
c/o People's Choice TV Corp.
Two Corporate Dr., Suite 249
Shelton, CT 06484
6
<PAGE>
If to the Representative:
Victor Oristano
110 North Beach Road
Hobe Sound, Florida 33455
If to the Company:
People's Choice TV Corp.
Two Corporate Dr., Suite 249
Shelton, CT 06484
Attention: Board of Directors
and/or at such other addresses and/or to such other addressees as may be
designated by notice given in accordance with the provisions hereof.
(b) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, successors and permitted assigns.
No party shall assign this Agreement or its rights hereunder without the prior
written consent of the other party hereto.
(c) This Agreement contains all of the agreements between the parties
with respect to the subject matter hereof and this Agreement supersedes all
other agreements, oral or written, between the parties hereto with respect to
the subject matter hereof. Employee and the Company are parties to a Severance
Agreement dated May 1, 1998 (the "Severance Agreement"). In the case of a
conflict between the terms of this Agreement and the Severance Agreement, then
the provisions of the agreement providing the maximum benefit to Employee shall
be controlling.
(d) No change or modification of this Agreement shall be valid unless
the same shall be in writing and signed any all of the parties hereto. No waiver
of any provisions of this Agreement shall be valid unless in writing and signed
by the waiving party. No waiver of any of the provisions of this Agreement shall
be deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver, unless so provided
in the waiver.
(e) If any provisions of this Agreement (or portions thereof) shall,
for any reason, be considered invalid or unenforceable by any court of competent
jurisdiction and such provision is not subject to revision pursuant to Section
11, such provisions (or portions thereof) shall be ineffective only to the
extent of such invalidity or unenforceability, and the remaining provisions of
this Agreement (or portions thereof) shall nevertheless be valid, enforceable
and of full force and effect. The Company's rights under this Agreement shall
not be exclusive and shall be in addition to all other rights and remedies
available at law or in equity, including but not limited to statutory rights
provided pursuant to legislation involving the protection of trade secrets.
(f) The section or paragraph headings or titles hereinbefore for
convenience of reference only and shall not be deemed a part of this Agreement.
(g) This Agreement may be executed in multiple counterparts, each of
which shall be deemed to be an original and all of which when taken together
shall constitute a single instrument.
(h) This Agreement shall be governed and controlled as to validity,
enforcement, interpretation, construction, effect and in all other respects by
the laws of the State of Connecticut applicable to contracts made in that State
(other than any conflict of laws rule which might result in the application of
the laws of any other jurisdiction). Employee hereby expressly submits and
consents in advance to the jurisdiction of the federal and state courts of the
State of Connecticut for all purposes in connection with any action or
proceeding arising out of or relating to this Agreement.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
PEOPLE'S CHOICE TV CORP.
By:_________________________________________
Charles F. Schwartz/Senior Vice President
MATTHEW ORISTANO
_____________________________________
Signature
8
<PAGE>
Exhibit 10.6
------------
ITFS SUB-LEASE AGREEMENT
------------------------
THIS SUB-LEASE AGREEMENT ("Agreement") is made this 1st day of December,
1994, by and between Community Telecommunications Network ("CTN"), a Michigan
non-profit corporation, and Eastern Cable Networks Corp. a Connecticut
corporation, and its wholly-owned subsidiary, Eastern Cable Networks of
Michigan, Inc., a Delaware corporation (jointly referred to as "Eastern").
WHEREAS CTN is a non-profit corporation formed by six (6) non-profit
educational entities ("Member Institutions"), each of which has been granted an
authorization (the "FCC Licenses") by the Federal Communications Commission
("FCC") to construct and operate Instructional Television Fixed Service ("ITFS")
channels established under Section 74.902(a) of the FCC Rules, 47 C.F.R.
(S)74.902(a), to deliver instructional and educational programming at various
locations in and around the Detroit, Michigan metropolitan area; and
WHEREAS the Member Institutions' transmission facilities are colocated at
the Greater Motower (the "Tower") situated in Royal Oak Township, Michigan and
(the "Transmitter Site"), pursuant to a lease (the "Transmitter :Lease") among
CTN and Greater Motower, Inc. (the "Tower Owner"), which provides, inter alia,
----- ----
for space on the Tower for antennas and related equipment, and for an associated
building the ("Building") for transmitters and related equipment, and
WHEREAS the Member Institutions believe that the integration of
instructional/ educational programming and entertainment programming may
stimulate additional consumer interest in the instructional/educational
programming and, in furtherance thereof, each Member Institution has leased to
CTN certain excess capacity on certain ITFS channels for the purpose of sub-
leasing said capacity to a third parry for the provision of audio and video
entertainment programming consistent with the policies, rules and regulations of
the FCC ("FCC Rules"); and
WHEREAS said excess capacity is sufficient that, in the aggregate, the
equivalent of seven (7) full-time and two (2) part-time channels presently can
be made available for sublease and, in addition, CTN contemplates that excess
capacity on additional ITFS channels may become available for sub-lease in the
future should the FCC award to one or more Member Institutions a license for up
to two additional ITFS channels to be colocated at the Tower; and
WHEREAS Eastern is desirous of sub-leasing said excess capacity in order
to distribute audio and video entertainment services in the Detroit metropolitan
area;
NOW THEREFORE, in consideration of the premises and of the mutual
promises, undertakings, covenants and conditions set forth herein, the parties
do hereby agree as follows:
1. Term of Agreement
-----------------
(A) Initial Term. Subject to the provisions for earlier termination contained
------------
in Paragraph 13 hereof, the term of this Agreement shall commence upon the date
of this Agreement (the "Start Date") and shall continue in full force and effect
for a period of five (5) years (said period is hereinafter referred to as the
"Initial Term").
(B) Renewal Term. This Agreement shall automatically and without further
-------------
notice be extended for one (1) additional term of five (5) years (hereinafter
referred to as the "Renewal Term") , on the fifth anniversary of the Agreement.
Eastern shall have the absolute right not to renew this Agreement by serving
written notice on CTN of its intent not to renew at least one (1) year prior to
the expiration date of the initial Term (hereinafter referred to as "Expiration
Date"). Nothing in this Subparagraph shall be construed to require any Member
Institution to seek renewal of its FCC License or to restrict its ability to
assign or transfer same, provided, however, that CTN shall not waive any of its
-----------------
rights under the ITFS Consortium Agreement (identified in Subparagraph 9(A) of
this Agreement) regarding the assignment or transfer of the Member Institutions'
FCC Licenses.
<PAGE>
(C) New Sub-Lease Agreement/Right of First Refusal. If Eastern desires to
-----------------------------------------------
seek a new sub-lease agreement to take effect at the expiration of the Renewal
Period, it shall enter into discussions and negotiations for a new agreement
with CTN no later than nine (9) months prior to the end of the Renewal Term. If
Eastern has done so, and the parties are unable to reach a new agreement, CTN
grants Eastern a limited right of first refusal with regard to any offer from a
third party relating to the sub-lease of excess capacity on the Member
Institutions' IFS channels which is acceptable to CTN, subject to the following
conditions:
(i) If, prior to the expiration of the Renewal Term, CTN receives an
acceptable offer from a third party, CTN shall give written notice (the "Offer
Notice") to Eastern of that fact (the Offer Notice shall identify the offeror
and describe the nature of the offer, including all material terms and
conditions). Eastern shall have a period of thirty (30) days after its receipt
of the Offer Notice (the "Exercise Period") within which to agree or decline to
meet the offer. Should Eastern decide to meet the offer, it shall notify CTN in
writing of its acceptance of the offer prior to the expiration of the Exercise
Period; the failure of Eastern to provide any response to CTN during the
Exercise Period shall be deemed to be a rejection of the offer. If Eastern
receives the Offer Notice less than thirty (30) days prior to the expiration of
the Renewal Term, Eastern may, at its sole option and subject to all of the
terms and conditions contained in this Agreement, extend the duration of this
Agreement for a period coterminous with the expiration of the Exercise Period.
If Eastern accepts the offer in a timely manner, the Agreement (subject to all
of the terms and conditions contained in this Agreement) shall remain in effect
for an additional ten (10) days, to enable the parties to finalize their new
agreement, based on essentially all of the material terms and conditions
contained in the third-party offer; the Agreement will expire at the end of that
ten (10) day period, regardless of whether a new agreement has been reached.
(ii) If, thirty (30) days prior to the expiration of the Renewal Term, the
parties have not reached a new agreement and Eastern has not previously received
an Offer Notice from CTN, Eastern may, at its sole option and subject to all of
the terms and conditions of this Agreement, extend the duration of this
Agreement for a period of no more than six (6) months beyond the expiration of
the Renewal Term (the "Extension Period") by providing written notice of such
extension to CTN. If Eastern chooses to extend the Agreement for the Extension
Period and, during either (a) the last thirty (30) days prior to the expiration
of the Renewal Term, or (b) the Extension Period, Eastern receives an Offer
Notice from CTN, its right of first refusal shall be governed by the same terms
and conditions as are set out in Subparagraph 1(c) (i); provided, however, that
-----------------
the Extension Period shall terminate the day after the earlier of (a) CTN's
receipt of an acceptance or a rejection of an offer, or (b) the expiration of
the Exercise Period without CTN receiving a timely acceptance of the offer set
out in the Offer Notice.
(iii) If Eastern does not give CTN written notification of its binding
agreement to accept an offer within the Exercise Period, CTN shall be free to
enter into the agreement with the third party under essentially the same
material terms and conditions offered to Eastern. Under no circumstances
shall Eastern's right to receive an Offer Notice extend beyond six (6) months
after the termination of the Renewal Term.
2. Facilities
----------
(A) Status of Stations. CTN represents that the status of each of the ITFS
------------------
channels on which excess capacity is being sub-leased under this Agreement is,
on the effective date of this Agreement, as follows:
(i) Channels B1, B2, and Dl: Licensed to Wayne State University ("WSU");
presently operating, complete with transmission equipment in accordance with its
FCC License and FCC Rules;
(ii) Channels B3-B4: Licensed to Macomb Intermediate School District;
presently operating, complete with transmission equipment in accordance with its
FCC License and FCC Rules; provided, however, that, pursuant to Subparagraphs 2
-----------------
(B) and 2 (C), Eastern shall purchase and install replacement transmission
equipment for Channel B4;
(iii) Channels Cl and C4: Licensed to Wayne County Regional Educational
Service Agency; presently operating, complete with transmission equipment in
accordance with its FCC License and FCC Rules; provided,
---------
<PAGE>
however, that, pursuant to Subparagraphs 2 (B) and 2 (C), Eastern shall purchase
- --------
and install replacement transmission equipment for Channels Cl and C4;
(iv) Channels D2-D4: Licensed to Detroit Educational Television Foundation
("DETV"), presently operating, complete with transmission equipment, in
accordance with its FCC License and FCC Rules;
(v) Channels C2 and C3: Licensed to Detroit Public Schools; subject to a
construction permit that will expire on December 21, 1994;
(vi) Channels Gl and G2: WSU and DETV are preparing applications to be
filed with the FCC requesting authority to construct and operate, respectively,
Channels Gl and G2;
(vii) Channels G3 and G4: Licensed to Oakland Intermediate School District;
presently operating complete with transmission equipment previously provided by
Eastern, in accordance with its FCC License and FCC Rules.
The parties acknowledge that it cannot presently be determined when the
applications for authority to operate channels Gl and G2 referenced in
Subparagraph 2(A) (vi) will be granted by the FCC. Once granted, channels Gl and
G2 shall be considered New Channels (as defined in Subparagraph 2(B)) and shall
be treated in the same manner as all other ITFS channels that are the subject of
this Agreement, including, but not limited to, Eastern's obligations set out in
Paragraph 2 regarding construction, operation and maintenance, and with the
payment schedules set forth in Paragraph 4. Additionally, Eastern shall
reimburse WSU and DETV for the reasonable legal and engineering expenses
incurred by each of them in preparing, filing and prosecuting the applications
for Channels G1 and G2 within thirty (30) days of Eastern's receipt of a request
for reimbursement.
(B) Transmission Facilities. CTN already has provided transmission equipment,
-----------------------
including, but not limited to, transmitters, antenna and waveguide (the
"Existing Channel Equipment"), for ITFS channels Bl, B2, B3, Dl, D2, D3 and D4
(the "Existing Channels"). Eastern shall purchase and install at its own expense
(i) such transmitters and associated equipment (the "New Channel Equipment") for
ITFS channels B4, Cl-C4 and G1-G4 (the "New Channels") as are necessary to place
the New Channels into operation; (ii) any equipment (the "Replacement
Equipment") needed now or in the future to modify or replace equipment used by
CTN and/or its Member Institutions in their ITFS operations that may be
necessary whether to (a) accommodate Eastern's presently proposed or future
activities under this Agreement, or (b) replace equipment that has failed or
otherwise is providing inadequate performance in the reasonable view of CTN,
including, but not limited to, equipment located at the Transmitter Site and at
CTN and/or its Member Institutions' receive sites; (iii) any additional
equipment (the "Ancillary Equipment") necessary to ensure the successful
transmission of the Member Institutions' programming once that programming has
been delivered by a technically appropriate means to the router or other
appropriate input point and to otherwise facilitate the integrated operation of
the subject ITFS stations for the benefit of both CTN's Member Institutions and
Eastern; and (iv) at up to one hundred and twenty-five (125) existing or future
Member Institutions' receive sites as may be specified by CTN, all receiving
equipment, including, but not limited to, the receive antenna, down-converter,
set-top box(es), and related cabling and hardware (the "Receive Site Equipment")
necessary to ensure that the signal exiting the Receive Site Equipment shall
have a signal-to-noise (S/N) ratio of no less than 45 dB; provided, however,
------------------
that Eastern shall not be required to bear the cost of (a) constructing
structures in excess of twenty (20) feet in height to support reception antennas
at any receive site, or (b) installing a reception antenna at any receive site
the cost of which to Eastern is in excess of XXX Dollars ($XXX). In the
aggregate, the Existing Channel Equipment, the New Channel Equipment, the
Replacement Equipment, the Ancillary Equipment, and the Receive Site Equipment
shall be known as the "ITFS Equipment." All ITFS Equipment purchased, installed
and/or maintained by Eastern pursuant to this Agreement shall provide a level of
signal quality that meets or exceeds the requirements of Section 73.687 of the
FCC Rules, as modified by Section 74.950 of the FCC Rules, in effect at the
Start Date and as may from time to time be modified or amended by the FCC,
whether each ITFS channel occupies a full 6 MHz of bandwidth or some lesser
amount by virtue of a compression technology of the sort identified in Paragraph
5 of this Agreement.
(C) New Channel Equipment Purchases and Construction. Eastern shall complete
------------------------------------------------
construction of all New Channels prior to the expiration of the relevant
existing FCC construction permit; provided, however, that Eastern
--------- -------
<PAGE>
shall order any ITFS equipment necessary for the construction of channels G1 and
G2 from the appropriate manufacturers within thirty (30) days after the FCC's
grant of the applications referenced in subparagraph 2 (A) (vi).
(D) Title to Equipment. CTN shall own and hold title, free of any liens,
------------------
security interests or other encumbrances, to the New Channel Equipment, the
Replacement Equipment, the Ancillary Equipment, and the Receive Site Equipment
immediately upon its purchase by Eastern. Notwithstanding the foregoing, CTN
shall permit Eastern to hold title to the antenna and waveguide that Eastern
intends to purchase from the Archdiocese of Detroit (or any substitutes or
replacements for such equipment purchased by Eastern) during the Initial Term
and any Renewal Term. Eastern shall not encumber said antenna or waveguide with
any liens or other security interests, except that CTN shall hold a security
interest in said equipment. In the event that Eastern is in default under this
Agreement and fails to cure that default within the period provided for in
Subparagraph 13 (A), CTN shall have the right to purchase said antenna and
waveguide from Eastern for the sum of One Dollar ($1.00).
(E) General Construction.
--------------------
(i) Prior to ordering any ITFS Equipment or any related switching or channel
mapping equipment, Eastern shall provide to CTN a written description of the
equipment it proposes to order and install for CTN's and/or the Member
Institutions' review and approval, which shall not be unreasonably withheld,
conditioned, or delayed. If Eastern receives no written response within thirty
(30) days of the date of such notification, its proposed equipment shall be
deemed approved. Eastern shall bear all costs associated with the engineering,
purchase, and installation of the New Channel Equipment, the Replacement
Equipment, the Ancillary Equipment, and the Receive Site Equipment. Eastern
shall reimburse CTN for its engineering expenses incurred in reviewing
construction proposals submitted by Eastern, up to a total of XXX Dollars
($XXX).
(ii) Eastern shall carry out such construction and installation in a good and
workmanlike manner and shall make every effort to minimize the disruption to the
ongoing operation of the Member Institutions' ITFS services that may be
necessitated by the installation of the New Channel Equipment, the Replacement
Equipment and/or Ancillary Equipment. No construction or installation work
contemplated by this Agreement shall begin until Eastern has submitted its
detailed plans to CTN for approval. If CTN does not give Eastern written
notification of any problems within thirty (30) days after CTN receives the
plans, the plans shall be deemed approved. Any unresolved disputes in this
matter shall be resolved by arbitration pursuant to Paragraph 16(G) below.
(F) Material Alterations. Any material alterations to the Tower, Building or
--------------------
other premises at the Transmitter Site or the ITFS Equipment necessary to
accommodate Eastern's activities permitted under this Agreement must first be
approved in writing by CTN; said approval shall not be unreasonably withheld,
conditioned or delayed. If Eastern should make any alterations to the subject
facilities without the prior written approval of CTN, Eastern shall, at CTN's
sole option upon the expiration or termination of this Agreement, return the
facilities to at least as good a condition as they were in prior to such
alterations, normal wear and tear excepted.
(G) Mechanic's Liens. Eastern shall discharge promptly any and all claims for
----------------
mechanic's liens or other encumbrances imposed on the subject facilities for
work Eastern has done and shall provide written proof of said discharge to CTN.
Further, Eastern shall indemnify and hold CTN, its Member Institutions,
licensees, and assigns, harmless from any and all expenses, including reasonable
attorney's fees, in connection with any such claim of lien.
(H) Maintenance, Repair and Operating Costs.
---------------------------------------
(i) Eastern shall bear the full cost of operation, maintenance and repair of
the Building, the ITFS Equipment, and the satellite receive facilities
identified in Subparagraph (N) of this Paragraph commencing December 1, 1994,
including, but not limited to, all rent, utilities, and HVAC maintenance.
Eastern shall immediately establish and submit to CTN for its approval a
maintenance schedule for the ITFS Equipment (which approval shall not be
unreasonably withheld, conditioned or delayed); said schedule may be modified
from time to time with CTN's and/or the Member Institutions' consent. Eastern
shall maintain on hand reasonably sufficient back-up equipment and supplies
(other than waveguides) to enable it to immediately repair or replace any ITFS
Equipment that has failed. In the event that CTN reasonably determines that the
ITFS Equipment or related facilities are not in good
<PAGE>
order and repair, CTN shall promptly notify Eastern in writing, specifying any
such failure to maintain or repair. Eastern shall use its best efforts to make
such necessary repairs or equipment replacement within ten (10) days of its
receipt of said notice. CTN shall retain the right to make any repairs or
equipment replacement that affect the utility or soundness of the ITFS Equipment
or related facilities or the quality of service provided to the Member
Institutions' subscribers. Any such repairs or replacement which Eastern refuses
to make and which must be made to protect the integrity of the facility or the
quality of service to the Member Institutions' subscribers, may be made by CTN,
and CTN shall be reimbursed by Eastern for all reasonable expenses incurred in
connection therewith within ten (10) days of Eastern's receipt of a demand for
reimbursement from CTN.
(ii) In the event of a contemporaneous interruption in service on a number of
ITFS channels used for the distribution of Member Institutions' programming,
such that despite CTN's best efforts to reassign the affected Member
Institutions' programming to other ITFS channels, a Member Institution's
scheduled programming will be interrupted, CTN shall have the right to require
Eastern to immediately surrender to CTN a sufficient amount of its leased
channel capacity to enable the affected Member Institutions to distribute their
programming until such time as the Member Institutions' channels have been
returned to service.
(iii) Eastern's responsibilities shall include the provision of qualified
technical personnel to ensure the proper operation of the facilities being used
by it at all times, including, but not limited to, full compliance with all FCC
Rules and relevant safety standards.
(I) Risk of Loss. Neither CTN nor its Member Institutions shall have
------------
responsibility for any loss or damage to the ITFS Equipment except that, to the
extent permitted by the laws of the State of Michigan, CTN shall be liable for
the loss or damage to the ITFS Equipment caused by any intentional or grossly
negligent act of CTN, its employees, agents, affiliates or representatives which
are directly responsible for such loss or damage, but only to the extent that
such loss or damage exceeds the maximum limits of the insurance policy covering
such losses that Eastern must maintain pursuant to Paragraph 12 of this
Agreement. In no event shall CTN or its Member Institutions be liable to Eastern
for any lost profits or other consequential damages.
(J) Encryption. Eastern will provide CTN with information relative to any
----------
encryption scheme it proposes to utilize and cooperate with CTN to ensure that
such encryption does not interfere with or degrade CTN's or any Member
Institution's use of the channels.
(K) Reception Equipment. Except as provided for in Subparagraph 2 (B), each
-------------------
party to this Agreement shall be responsible for the installation, maintenance
and operation of receiving equipment located at its respective subscriber
locations.
(L) Taxes. Eastern shall pay all taxes and other charges assessed against the
-----
ITFS Equipment incurred as the result of its use of those facilities, and, to
the extent permitted by law, shall be entitled to claim depreciation and
investment tax credits thereunder for income tax purposes.
(M) Facility Modification. If, during the course of this Agreement, Eastern
---------------------
desires to modify the licensed ITFS stations in order to better enable it to
distribute audio and video entertainment programming to its subscribers, CTN
shall, at Eastern's request, endeavor in good faith to obtain the consent of the
relevant Member Institution(s) to such modification. If the relevant Member
Institution consents, Eastern shall, under the Member Institution's direction
and control, prepare the necessary applications for FCC approval of the proposed
modifications and submit them to CTN and the Member Institution for their review
and approval. The Member Institution shall be responsible for the filing and
prosecution of such applications; Eastern shall provide such assistance as may
be requested by the Member Institution. Eastern shall be responsible for all
costs of preparing, filing and prosecuting the applications and the construction
of the modified facilities, including reimbursement of attorney's and consulting
engineer's fees and related expenses reasonably incurred by CTN and/or the
Member Institution in the preparation, review and prosecution of said
application(s); said reimbursement of CTN's and/or the Member Institutions(s')
expenses shall be made by Eastern within thirty (30) days of its receipt of a
request for same from CTN and/or the Member Institution.
<PAGE>
(N) Receive-Only Earth Station. Eastern shall be permitted to use CTN's
--------------------------
Simulsat receiving earth station located at the Transmitter Site so long as said
use does not interfere with the needs of CTN and/or its Member Institutions.
(O) Over-the-Air Reception. Eastern shall ensure that both the
-----------------------
receiving equipment it provides to its subscribers and the Receive Site
Equipment will provide the capability for both its subscribers and persons
viewing the Member Institutions' programming to also directly receive the
signals of local VHF and UHF television broadcast stations operating pursuant to
Part 73 of the FCC Rules without additional charge.
(P) Relocation of Eastern Transmission Facilities. Within the latter of
---------------------------------------------
(i) sixty (60) days of the Start Date, or (ii) fifteen (15) days after the
consummation of Eastern's acquisition of WHJ-878, WLK-238, WNTK-656 and WNEK-611
from TVCN of Michigan, Inc. (applications for consent to said acquisition
presently are pending before the FCC and Eastern shall use its best efforts to
obtain the requisite FCC consent as soon as practicable), Eastern shall, at
Eastern's sole expense, prepare and file an application requesting the FCC's
consent to the relocation of the transmission facilities of WHJ-878, WLK-238,
WNTK-656 and WNEK-611 from the Renaissance Center to be colocated with the
transmission facilities of the Member Institutions at the Transmitter Site. Said
relocation shall be conducted in the manner that is least disruptive to the
Member Institutions' ITFS operations. Throughout the term of this Agreement, CTN
shall permit Eastern at no additional cost: (i) to install in the Building such
transmission and ancillary equipment as Eastern shall deem necessary to receive
and, if necessary, decompress or descramble commercial programming from its
point of origin and to encode, address, compress, if necessary, and transmit
that programming to subscribers; (ii) to interconnect Eastern's facilities in
the Building to CTN's existing antenna system; and (iii) to otherwise perform
its obligations under this Agreement. Eastern shall reimburse CTN for all
attorneys' fees and engineering consultant fees reasonably incurred by CTN in
this process; said reimbursements shall be made by Eastern within thirty (30)
days of its receipt of a request for same from CTN.
(Q) Access to Facilities. Eastern shall have full and complete access to
--------------------
all facilities necessary for its maintenance and operation of the ITFS channels
that are the subject of this Agreement.
3. (3) Use of Air Time.
---------------
(A) Instructional Programming Schedule. Eastern acknowledges that, in the
----------------------------------
aggregate, the Member Institutions shall retain for their own current use no
less than five (5) full-time equivalent 6 MHz channels (six (6) channels at such
time as the license(s) for channels G1 and G2 are granted consistent with
Subparagraph 2(A) (vi)) and two (2) part-time channels during the hours of 8:00
a.m. through 6:00 p.m., Monday through Friday. CTN shall schedule Eastern use of
the excess capacity consistent with Section 74.931 of the FCC Rules, such that
each of the Member Institutions reserves on each of the channels that it holds
an FCC license to and that is the subject of this Agreement at least twenty (20)
hours per week between the hours of 8:00 a.m. and 10:00 p.m., Monday through
Saturday, excluding holidays and vacation periods, for the provision of that
Member Institution's instructional programming. Eastern further acknowledges
that each of the Member Institutions has, upon six (6) months' written notice to
CTN, the unilateral right to increase this reserved programming time up to a
total of forty (40) hours per week between the hours of 8:00 a.m. and 10:00
p.m., Monday through Saturday, on each channel for which it holds the FCC
license. In the event that CTN receives notice from a Member Institution of its
intent to expand its instructional program schedule on a particular channel
beyond the twenty (20)-hour-per week minimum, CTN will inform Eastern of that
fact in writing within ten (10) business days of its receipt of said notice.
(B) Responsibility for instructional Programming. CTN and/or the Member
---------------------------------------------
Institutions shall be solely responsible for the origination of program material
transmitted by the Member Institutions and for all costs associated with the
origination of such programs; provided, however, that Eastern shall enable any
--------- -------
receive site of CTN and/or the Member Institutions designated by CTN in writing
to receive any educational programming distributed by Eastern as part of its
commercial programming service; representative examples of such educational
program services are set out in Exhibit A.
(C) Eastern Time. Consistent with the provisions of Subparagraph 3 (A), CTN
------------
agrees to sub-lease to Eastern during the term of this Agreement, and Eastern
shall pay for pursuant to Paragraph 4 of this Agreement, sufficient
<PAGE>
excess channel capacity so that Eastern, through the use of either "channel
mapping" technology or "channel loading" techniques, has, at a minimum, the use
of the equivalent of seven (7) full-time and two (2) part-tine 6 MHz ITFS
channels for the provision of audio and video entertainment services, including
interactive services related thereto, of the sort identified in Exhibit B;
provided, however, that this amount may increase upon the FCC's grant of the
- -----------------
applications relating to channels G1 and G2 described in Subparagraph 2(A) (vi)
and the completion of construction thereof consistent with Subparagraphs 2(B)-
(E), in which case CTN shall sub-lease to Eastern during the term of this
Agreement, and Eastern shall pay for pursuant to Paragraph 4 of this Agreement,
sufficient excess channel capacity so that Eastern, through the use of either
"channel mapping" technology or "channel loading" techniques, has, at a minimum,
the use of the equivalent of eight (8) full-time and two (2) part-time 6 MHz
ITFS channels for the provision of audio and video entertainment services,
including interactive services related thereto, of the sort identified in
Exhibit B. The part-time channels shall consist of, at minimum, all weekend
hours and a substantial number of weekday prime-time hours. Additional capacity
may be provided pursuant to Paragraph 5 of this Agreement. The parties shall
jointly determine whether to employ "channel mapping" or "channel loading"
techniques to facilitate Eastern's use of the excess capacity, but CTN shall
have sole discretion in specifying from which channels the excess capacity shall
be drawn.
(D) Additional Airtime. In addition to the minimum excess capacity to be
-------------------
subleased by CTN to Eastern pursuant to Paragraph 3 (C) , CTN shall not
unreasonably refuse to make available for lease by Eastern any additional excess
capacity on any ITFS channel licensed to a Member Institution or on any virtual
channel created by the application of digital compression to any ITFS channel
licensed to a Member Institution. Eastern may, at its sole discretion, agree to
lease such additional excess capacity for all or part of such time as it is made
available by CTN by notifying CTN that it agrees to lease such additional excess
capacity and to pay the applicable monthly Per-Subscriber/Channel Fee provided
for in Subparagraph 4 (B), pro-rated in the event the additional excess capacity
is made available for less than the full calendar month.
(E) Control Over Programming. Except as set out herein, each party will be
------------------------
responsible for selecting, acquiring or producing the programming it will
transmit. Eastern shall use the leased channel capacity that is the subject of
this Agreement solely for the provision of audio and video entertainment
services, including interactive services related thereto, of the sort identified
in Exhibit B, and shall not transmit any programming that is obscene or indecent
or which otherwise is inconsistent with contemporary community standards or
federal, state or local laws. CTN agrees that the cable television program
services listed in Exhibit B hereto are suitable for transmission. Exhibit B may
be modified from time to time during the Initial Term and/or Renewal Term of
this Agreement by mutual consent of the parties, said consent not to be
unreasonably withheld. Other than is set out in Subparagraph (E) of this
Paragraph 3, neither party shall make any representations that it has any
control over, or relationship to, the programming transmitted by the other
party.
(F) Carriage of CTN Programming. CTN may, at its option but at no cost to
----------------------------
Eastern, require Eastern to distribute to its subscribers up to four (4)
channels of CTN's Member Institutions' educational programming. Eastern agrees
to permit its subscribers to view said educational programming, as part of its
basic tier of service, without charge to CTN and/or its Member Institutions, and
without additional charge to Eastern's subscribers; provided, however, that
--------- -------
Eastern shall not be required to authorize subscriber access to programming that
is obscene or indecent or which otherwise is inconsistent with contemporary
community standards or federal, state or local laws. Eastern's use of said
educational programming shall not reduce the number of full-time and part-time
channel equivalents that are to be made available to Eastern under this
Agreement. At no cost to CTN and/or its Member Institutions, Eastern shall
include in all of its Detroit system print and electronic program schedules and
guides a schedule of CTN/Member Institution programs as may be provided to
Eastern by CTN.
(G) Rescheduling of Time. From time-to-time the parties to this Agreement may
--------------------
reschedule their respective hours of use by mutual agreement; provided, however,
------------------
such rescheduling must meet all FCC requirements.
4. Eastern Payments.
-----------------
(A) Start Date Payment. On the Start Date, Eastern shall pay to CTN by
-------------------
certified or cashiers check or wire transfer the sum of XXXXXXXX Dollars ($XXX).
This payment shall consist of (i) XXXXX Dollars ($XXXX) as
<PAGE>
an "Initial Payment" and (ii) a lump sum payment of XXXX ($XXXX), which
represents the aggregate first year's "Monthly Minimum" payments of XXXX Dollars
($XXXX) per month, as is more fully set out in Subparagraph 4(C) (i). In
addition to the above-described payment, Eastern shall, no later than ninety
(90) days after the Start Date, pay to CTN the sum of XXXX Dollars ($XXXX).
(B) Per-Subscriber Fee. Eastern shall pay to CTN a monthly fee based on the
------------------
number of full-time and part-time 6 MHz channel equivalents made available to
Eastern, multiplied by the number of subscribers to whom Eastern provided
service during each month (the "Per-Subscriber/Channel Fee"). Until such time
as Eastern incorporates compression technology of the sort discussed in
Paragraph 5 of this Agreement, the Per-Subscriber/Channel Fee for each full-time
6 MHz channel equivalent made available to Eastern shall be XXX ($XXX) for each
of Eastern's subscribers. Beginning the month after Eastern converts the first
channel in its Detroit-area wireless cable system to compression, the Per-
Subscriber/Channel Fee for each full-time 6 MHz channel equivalent made
available to Eastern shall be XXXXX ($XXX) for each of Eastern's subscribers.
The Per-Subscriber/Channel Fee for each part-time 6 MHz channel equivalent made
available to Eastern shall be XXX ($XXX) for each of Eastern's subscribers.
Payment of the Per-Subscriber/Channel Fee for each month shall be paid by the
fifteenth (15th) day of the following month.
(C) Advances.
--------
(i) Monthly Minimum. In any month during the first year after the Start Date
----------------
in which the total payment due CTN under Subparagraph (B) of this Paragraph is
less than XXX Dollars ($XXX), Eastern shall pay to CTN the difference between
the payment due under Subparagraph (B) and XXXXX Dollars ($XXX) (the "Advance")
so that CTN shall receive from Eastern a total of no less than XXXX Dollars
($XXXX) per month (the "Monthly Minimum"). After the first year after the Start
Date, the Monthly Minimum shall increase according to the following schedule:
Year Two: $XXX
Year Three: $XXX
Year Four: $XXX
Year Five: $XXX
Year Six: $XXX
Year Seven: $XXX
Year Eight: $XXX
Year Nine: $XXX
Year Ten: $XXX
(ii) Recovery of Advances. The monthly Advance shall be paid by the fifteenth
---------------------
(15th) day of the following month. Eastern shall be entitled to recover the
total amount of any Advances made for any month during the period commencing
with the thirteenth (13th) month after the Start Date and ending with the
twenty-fourth (24th) month after the Start Date, but said recovery shall be only
in the form of credits against future payments owed to CTN, which shall be taken
solely in the manner and subject to the limitations set out below. Advances may
be recovered only in months in which Eastern's monthly subscriber count, as
calculated pursuant to Subparagraph (D) of this Paragraph, exceeds forty
thousand (40,000). In any such month, Eastern may apply as a credit, against the
amount due to CTN for that month under Subparagraph (C) (i), one-half (1/2) of
the amount due to CTN that is in excess of the amount that would have been due
to CTN if, in that month, Eastern's subscriber count had totaled forty thousand
(40,000). In the event of (i) the termination or expiration of this Agreement
for any reason, other than a termination by Eastern in the event of a breach by
CTN that has been adjudicated as pursuant to Subparagraph 16 (G); or (ii) the
assignment by Eastern of its rights and obligations billing, by Eastern's then
prevailing average monthly rate to individual subscribers in the Detroit
metropolitan area for the same service. The average monthly rate shall be the
arithmetic average of all rates to individual subscribers for that month.
(iv) Eastern shall, for a period of eighty-four (84) months after their
creation, keep, maintain and preserve complete and accurate records and accounts
including all invoices, correspondence, ledgers, financial and other records.
All such records shall be available for inspection and audit at Eastern's
offices at any time or times upon CTN's
<PAGE>
reasonable request. All information obtained by CTN during said audit shall be
maintained on a confidential basis. On each anniversary of the Start Date,
Eastern's chief financial officer shall provide to CTN a certification that
Eastern's payments for the preceding year were calculated in accordance with the
provisions of this Agreement. No more than once a calendar year, CTN may have a
certified public accounting firm selected by it perform a certified audit of all
of Eastern's financial records, subscriber records and payments. Within thirty
(30) days of receiving the results of such audit, Eastern shall pay to CTN any
amounts due and owing, plus interest calculated at a rate of one percent (1%)
per month, compounded monthly, from the date any unpaid amount became due and
owing. Within thirty (30) days of the conclusion of such audit, CTN shall
reimburse Eastern for any overpayment made by Eastern. Such audit shall be at
CTN's sole cost and expense, unless such audit concludes that Eastern has failed
to pay CTN under this Agreement pursuant to Subparagraph 7(A) (ii), neither
Eastern nor its assignee shall be entitled to recover any Advances that, at the
time of said termination, expiration or assignment, have not been recovered
pursuant to this Subparagraph. In the event of a termination by Eastern as the
result of a breach by CTN, Eastern shall not withhold any payments to CTN
otherwise due under this Agreement for the purpose of recovering any Advances
until after the adjudication of CTN's liability for the breach is final and no
longer subject to appeal or review.
(D) Subscriber Calculations. Eastern agrees that, for the purpose of computing
------------------------
the payments that it is to render to CTN under the formula set forth in
Subparagraph 4 (C) above, the following average subscriber mechanism shall
apply:
(i) Eastern shall pay CTN the per subscriber rate based upon the average
number of subscribers for each month the Agreement is in effect;
(ii) The average number of subscribers for any month for the purpose of
Subparagraph 4(C) shall equal the number of subscribers as of the last day of
the prior month, plus the number of subscribers as of the last day of the
current month, divided by two.
(iii) In those situations in which Eastern's service is sold/rented in bulk,
i.e., where a number of viewing units are grouped for billing purposes (such as
- ----
may be the case with hotels, apartments, condominiums, etc.), the number of
equivalent subscribers shall be determined by dividing the total monthly amount
billed as part of said bulk three percent (3%) or more of the amounts due CTN,
in which case Eastern shall pay the costs of such audit within thirty (30) days
of receiving a request for reimbursement from CTN.
(E) Transmitter Site Lease Payments. Beginning December 1, 1994, Eastern shall
--------------------------------
make timely payment to the Tower Owner of any and all payments due to the Tower
Owner under the Transmitter Lease. A copy of the Transmitter Lease is appended
hereto as Exhibit C.
(F) Earth Station Lease Payments. Eastern shall pay to CTN XXX Dollars ($XXX)
-----------------------------
per month for the use the receive-only earth station identified in Subparagraph
2 (N). Said payments shall be made in advance on the first of each month.
(G) Adjustments. Beginning on the fifth (5th) anniversary of the Start Date,
-----------
(i) the payments established in Subparagraph 4 (C) (i), and (ii) the limit on
Receive Site Equipment expenses set out in Subparagraph 2 (B), shall be adjusted
annually on the anniversary of the Start Date consistent with any increases or
decreases in the National Consumer Price Index. Any such changes shall be to the
nearest whole cent. Where payments cover a period of less than a full month, a
pro rata adjustment shall be made, with each day of a partial month counting as
one-thirtieth (1/30th) of the full month payment.
5. Compression.
------------
(A) Preliminary Considerations. Eastern shall, at its sole expense,
--------------------------
incorporate compression technology into all of the Member Institutions' ITFS
channels identified in Subparagraph 2(A) as soon as practicable, taking into
account considerations such as the technical state of the art, the expense
involved, and marketplace demand The parties recognize that such factors may
dictate the introduction of compression technology on a phased basis such that
only certain of the Member Institutions' ITFS channels are compressed initially.
The parties further
<PAGE>
recognize that the FCC has not yet adopted rules or policies governing the
leasing of excess capacity on ITFS channels that are digitally compressed, but
has indicated that it intends to do so at such time as digital compression
becomes viable; the parties shall utilize their best efforts, and CTN shall use
its best efforts to have the Member Institutions utilize their best efforts, to
secure any required FCC consent to the use of compression technology on the ITFS
channels licensed to the Member Institutions.
(B) Technical Issues. The parties recognize that the compression technology
----------------
that Eastern selects is likely to employ dynamic allocation technology and that,
as a result, the number of virtual video channels to be derived from a single 6
MHz channel can be varied from channel to channel and from time to time in order
to maximize channel capacity without undue degradation in video signal quality,
which, with regard to the channels used by the Member Institutions, shall at all
times be at least equivalent to that received at the receive sites of CTN's
Member Institutions using a full bandwidth channel, unless otherwise agreed to
in writing by CTN. Once Eastern begins the process of compressing any of the 6
MHz channels that are used by it (either owned or leased) in its Detroit-area
wireless cable system (including, but not limited to, those covered by the
following call signs: WHJ-876, WJM-22, WLK-238, WNTK-6S6 and WNEK-611), Eastern
shall adhere to the following schedule: beginning with the first (1st) channel
compressed by Eastern for its own use, and continuing with every third (3rd)
channel compressed for Eastern's use thereafter, Eastern shall simultaneously
compress one (1) channel designated by CTN that is used in whole or in part by a
Member Institution. No channel used in whole or in part by a Member Institution
shall be compressed by Eastern without CTN's prior written consent.
(C) Use of Compressed Channels. Any new channel capacity obtained by CTN
--------------------------
through compression technologies provided by Eastern may not be utilized by CTN
and/or its Member Institutions, or leased to others, for commercial operations
that are in competition with Eastern's provision of audio and video
entertainment programming.
6. Prosecution of Applications and Other Authorizations.
-----------------------------------------------------
(A) Applications. Each party shall use its best efforts to diligently prepare,
-------------
file and prosecute, as appropriate, before the FCC and other governmental
entities, all applications, application amendments and other filings necessary
to secure all approvals necessary to implement this Agreement.
(B) Further Efforts. Throughout the Initial Term and the Renewal Term of this
---------------
Agreement, CTN shall use its best efforts to ensure that its Member Institutions
obtain and maintain in force all FCC Licenses, permits and authorizations (and
renewals thereof) required in connection with the operation of the ITFS stations
as contemplated herein. Each party, to the extent requested by the other party,
shall use its best efforts to prevent any unauthorized individual or entity from
receiving the signals transmitted by the ITFS stations. Each party shall
promptly notify the other of any event of which it has knowledge which may
affect any of the ITFS licenses, permits or authorizations.
7. Transfer of Rights and Obligations.
----------------------------------
(A) By Eastern.
----------
(i) Eastern may, without CTN's consent, but subject to ten (10) days prior
written notice to CTN, assign or transfer its rights, benefits, duties and/or
obligations under this Agreement to an entity over which Eastern directly or
indirectly maintains de jure control over all aspects of the entity's
-------
activities, including the right to appoint a majority of the entity's board of
directors or similar governing body, and in which Eastern directly or indirectly
owns no less than 20% of the equity; provided, however, that Eastern Cable
------------------
Networks Corp. shall remain primarily obligated under this Agreement in the
event of such transfer or assignment.
(ii) Notwithstanding the provisions of Subparagraphs 7(A)(i) and (iii), Eastern
may, without CTN's consent, but subject to ten (10) days prior written notice to
CTN, enter into financing arrangement(s) with commercial lending institution(s)
pursuant to which some or all of Eastern's shareholders may pledge their stock
in Eastern to the lending institution(s), or Eastern may assign (subject to
commercially reasonable default provisions) its rights, title, interest and
obligations in this Agreement to the lending institution(s) as security for the
<PAGE>
performance by Eastern of its obligations under such financing arrangement(s).
(iii) Should Eastern seek to assign or transfer its rights, benefits, duties
and/or obligations under this Agreement to a third party not specified in
Subparagraphs 7(A) (i) or (ii), Eastern must obtain the prior written consent of
CTN, which shall not be unreasonably withheld, conditioned or delayed; provided,
---------
however, that, in addition to any financial, technical or legal considerations
- --------
that CTN reasonably may deem relevant in determining whether to consent to such
a proposed transaction, CTN may consider the overall character, integrity and/or
reputation of the third party.
(B) By CTN.
------
(i) CTN may, without Eastern's consent, but subject to ten (10) days prior
written notice to Eastern, transfer its rights, benefits, duties, or obligations
under this Agreement to one or more of its Member Institutions, or to another
entity formed by CTN or one or more of its Member Institutions, provided that
such Member Institution(s) or other entity has secured from the Member
Institutions leases of excess capacity enabling it or them to fully perform the
duties and obligations of CTN under this Agreement.
(ii) Should CTN seek to assign or transfer its rights, benefits, duties or
obligations to a third party not affiliated with CTN or one or more of its
Member Institutions to the extent set out in Subparagraph 7 (B) (i), and such
entity has secured from CTN and/or the Member Institutions leases of excess
capacity enabling it to fully perform the duties and obligations of CTN under
this Agreement, it must obtain the prior written consent of Eastern, which shall
not be unreasonably withheld, conditioned or delayed.
8. Channels In Service. Should Eastern desire to use any portion of the
--------------------
excess channel capacity for purposes other than the distribution of audio or
video entertainment programming to subscribers, it shall notify CTN in writing
of its intent prior to the initiation of any new service and shall include in
said notice (i) a complete description of the new service proposed to be offered
by Eastern, and (ii) an assessment of the potential impact of the proposed
service on the payments that otherwise would likely be due CTN under this
Agreement. Within sixty (60) days of its receipt of such notice, CTN shall
notify Eastern in writing whether it agrees to the initiation of the proposed
new service, which agreement shall not be unreasonably withheld, taking into
consideration (i) the anticipated impact of the new service on the payments that
would be due CTN, and (ii) whether the provision of the new service might
reflect adversely on CTN or one or more of its Member Institutions. If Eastern
receives a timely notice of objection to the proposed new service from CTN, the
parties will promptly enter into good-faith negotiations to resolve CTN's
objections and Eastern shall not initiate the new service without CTN's written
consent. If Eastern does not receive notice from CTN objecting to the proposed
new service within sixty (60) days of CTN's receipt of Eastern's notice, Eastern
may commence offering the proposed new service.
9. Representations and Warranties.
-------------------------------
The parties hereto represent and warrant to each other the following:
(A) Organization. CTN provides management services for the ITFS stations
-------------
operated by the Member Institutions, pursuant to an agreement dated October 13,
1987, entitled "ITFS Consortium Agreement." Further, CTN has entered into a
lease with each of the Member :Institutions (each of which is attached hereto as
Exhibits D through I), pursuant to which CTN leases excess capacity on the
Member Institutions' ITFS channels. CTN is duly organized and existing and in
good standing under the laws of the State of Michigan and has full power and
authority to carry out all of the transactions contemplated by this Agreement.
Eastern Cable Networks Corp. is a corporation duly organized and existing in
good standing under the laws of the State of Connecticut and has full power and
authority to own its property and to carry out all of the transactions
contemplated by this Agreement. Eastern Cable Networks of Michigan, Inc., is a
corporation duly organized and existing in good standing under the laws of the
State of Delaware, is authorized to do business in the State of Michigan, and
has full power and authority to own its property and to carry out all of the
transactions contemplated by this Agreement. All requisite corporate resolutions
and other authorizations necessary for the execution, delivery, performance and
satisfaction of this Agreement by the parties have been duly adopted and
complied with.
<PAGE>
(B) Compliance With The Law. CTN's Member Institutions' licenses covering
-----------------------
the channels from which excess capacity is being sub-leased to Eastern pursuant
to the terms of this Agreement are and will be in compliance with the
Communications Act of 1934, as amended, and the FCC Rules. CTN, its Member
Institutions, and Eastern shall comply with all laws, rules and regulations
governing the operation of the ITFS stations. Except as otherwise stated herein,
or as already received, no other consent, approval or authorization by any
governmental authority on the part of CTN is required in connection with the
transaction contemplated herein. All attendant contracts, undertakings, as well
as the carrying out of this Agreement, will not result in any violation or be in
conflict with any judgment, decree, order, statute, rule or regulation of any
governmental authority.
(C) Misrepresentation of Material Fact. No document or contract which has been
-----------------------------------
shown by one party hereto to the other and which in any way affects any of the
properties, assets or proposed business of them as relates to this Agreement,
and no certificate or statement furnished by either of them or on behalf of them
in connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein not misleading.
10. Proprietary Information. CTN and Eastern acknowledge that there may be
-------------------------
made available to it pursuant to this Agreement proprietary information relating
to the equipment or business practices associated with the use of the ITFS
stations by the other. Accordingly, CTN and Eastern covenant and agree that,
except as may be required for the performance of this Agreement and to the
extent permitted by the laws of the State of Michigan and the FCC Rules, neither
it nor any of their agents shall disclose such confidential information for any
reason whatsoever, without CTN's or Eastern's prior approval as the case may be.
Disclosure of information already in the public domain shall not constitute a
violation of this provision. Eastern acknowledges that CTN and/or its Member
Institutions must file a copy of this Agreement with the FCC.
11. Indemnification. Eastern shall protect, save and keep CTN, its Members
---------------
Institutions, and their respective governors, trustees, directors, officers,
employees, and agents, harmless and indemnify CTN, its Member Institutions, and
their respective governors, trustees, directors, officers, employees, and agents
against all claims, losses, costs, damages, suits, judgments, expenses and
liabilities of any kind, including any fines or administrative forfeitures
imposed by the FCC, as well as reasonable attorneys' fees, relating to Eastern's
use of the ITFS channels that are the subject of this Agreement or arising out
of any act or omission (whether or not the same shall constitute negligence or
willful misconduct) of Eastern, its agents or employees in connection with the
performance of this Agreement or activities carried out thereunder, including,
but not limited to, the duplication, distribution, broadcast, rebroadcast or
retransmission of any non-CTN program material in whole or in part pursuant to
this Agreement or out of any other breach of warranty, representation by Eastern
or in connection with or arising out of this Agreement whatsoever. To the extent
permitted by the laws of the State of Michigan, CTN shall protect, save and keep
Eastern harmless and indemnify Eastern against all claims, losses, costs,
damages, suits, judgments, expenses and liabilities of any kind arising directly
or indirectly out of the negligence or willful misconduct of CTN, its agents or
employees in connection with the performance of this Agreement.
12. Insurance. Eastern, at its own expense, shall procure and maintain
----------
continuously throughout the term of this Agreement comprehensive public
liability and property damage insurance covering all aspects of the
installation, operation and maintenance of equipment and Eastern's activities
contemplated by this Agreement, including, but not limited to, matters relating
to employees, contractors, workers' compensation, operation of equipment and
vehicles, business loss, and broadcast liability (including, but not limited to,
copyright infringement, defamation, invasions of privacy, unauthorized use of
titles, ideas or characters). The policies of insurance will be maintained with
an insurance company authorized to do business in the State of Michigan and
which is rated A+ or higher in the most recent rating by A. M. Best Company.
Coverage limits for all such policies shall be not less than One Million Dollars
($1,000,000) for any injuries to or death of any one person or Five Million
Dollars ($5,000,000) for any one incident. CTN and the Member Institutions shall
be named as additional insureds on all such policies. Eastern shall provide CTN
with certificates of insurance prior to commencement of construction and
operation of any facilities. Eastern shall notify CTN within ten (10) days of
the filing of any insurance claim or any legal or other action or proceeding
against Eastern involving or covered by any insurance policy upon which CTN or a
Member Institution is named as an additional insured.
<PAGE>
13. Termination.
-----------
(A) By Reason of Default. At the option of the non-defaulting party, this
---------------------
Agreement may be terminated upon a material breach or default that shall
continue uncured for a period of thirty (30) consecutive days after such party's
receipt of notice thereof from the non-defaulting party; provided, however, that
------------------
Eastern's failure to fulfill any of its obligations and/or meet any of the
deadlines set out in Subparagraph 2(C) shall constitute grounds for CTN to
immediately terminate this Agreement upon written notice to Eastern.
(B) By Reason of FCC Action. At the option of Eastern, this Agreement may be
------------------------
terminated in the event that, as a consequence of any action taken by the FCC or
a Member Institution, the amount of channel capacity now available to Eastern is
reduced by more than twenty percent (20%). Election to terminate under this
Subparagraph shall be made in writing to CTN by Eastern, setting forth the
effective date of such termination, which shall not be less than one hundred
eighty (180) days from said notice date.
(C) Bankruptcy. CTN shall have the right to terminate this Agreement
----------
immediately upon written notice to Eastern if Eastern or an affiliated person or
entity files or has filed against it a petition in bankruptcy, is adjudicated a
bankrupt, or files a proposal or petition, or otherwise seeks relief under or
pursuant to any bankruptcy, insolvency or reorganization statute or proceeding,
or becomes insolvent or makes an assignment for the benefit of creditors, or a
custodian, receiver or trustee is appointed (whether by a court or under a
contractual or other arrangement) for the party or for a substantial portion of
the party's business or assets.
14. Surviving Rights and Obligations. Notwithstanding anything to the contrary
---------------------------------
elsewhere in this Agreement regarding the effects of a termination or non-
renewal, the rights and obligations of the parties established by Paragraphs 11
and 12 shall survive, and such termination or non-renewal shall not affect nor
diminish the right or claims or remedies available in equity or at law to the
non-defaulting party arising by reason of a breach or default.
15. Noncompetition. During the Initial Term and any Renewal Terms of this
--------------
Agreement, (i) CTN shall not engage in the distribution of audio or video
entertainment programming, including interactive services related thereto, for
profit using any ITFS channels; and (ii) Eastern shall not engage in the
distribution of instructional or educational for-credit programming except as is
provided for in Subparagraph 3(F) of this Agreement.
16. Miscellaneous.
--------------
(A) Force Majeure. Notwithstanding anything contained in this Agreement to
-------------
the contrary, either party shall not be liable to the other for failure to
perform any obligation under this Agreement if prevented from doing so by reason
of fires, strikes, labor unrest, embargoes, civil commotion, rationing or other
orders, or acts of civil or military authorities, acts of God, acts or omissions
of carriers or other contingencies beyond the reasonable control of the parties,
and all requirements as to notice and other performance required hereunder
within a specified period shall be automatically extended to accommodate the
period of pendency of any such contingency which shall interfere with
performance.
(B) Notice. Any notice required to be given by either party to the other party
-------
shall be deemed to have been given on the date of receipt, if in writing, and
delivered by hand or mailed through the United States Postal Service, postage
prepaid and registered or certified, return receipt requested, addressed to the
other party at its last-known principal business address. Unless notified
otherwise, notice shall be as follows:
If to CTN: Patrick J. Gossman
Executive Director
Community Telecommunications Network
77 West Canfield
Detroit, Michigan 48202
<PAGE>
With a Copy to: Kent Voigt
President, CTN Board of Directors Macomb ISD
44001 Garfield Road
Clinton Township, Michigan 48038
Daniel J. Bernard, Esq.
Vice President and General Counsel
Wayne State University
4249 Faculty/Administration Bldg.
Detroit, Michigan 48202
Jeffrey H. Olson, Esq.
Paul, Weiss, Rifkind,
Wharton & Garrison
1615 L Street, NW., Suite 1300
Washington, D.C. 20036-5694
If to Eastern: Eastern Cable Networks Corp.
Eastern Cable Networks of Michigan, Inc.
700 Canal Street
Stamford, Connecticut 06902
Attn: Rick Perrone
With a Copy to: Paul J. Sinderbrand, Esq.
Sinderbrand & Alexander
888 Sixteenth Street, N.W., Suite 610
Washington, D.C. 20006-4103
(C) Announcements. No announcements, statements, press releases or similar
--------------
pronouncements shall be made or issued by Eastern which states, suggests or
infers that either CTN or any of the Member Institutions supports, endorses or
is in any way involved with any of Eastern's activities beyond the precise terms
of this Agreement.
(D) Severability of Provisions. If any provision of this Agreement is held to
---------------------------
be invalid, the remainder of this Agreement shall not be affected thereby unless
otherwise specified herein or unless it substantially interferes with the
accomplishment of the basic purposes of this Agreement.
(E) Entire Agreement. This Agreement states the entire Agreement as of this
----------------
date between Eastern and CTN with respect to the subject matter and supersedes
all preexisting oral, letter or other agreements or commitments with respect
thereto. This Agreement may be modified only by an agreement in writing executed
by all of the parties hereto. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
(F) Survival of Representations and Warranties. All representations,
------------------------------------------
warranties, covenants and agreements made by the parties hereto or in any
certificate to be delivered hereunder or made in writing in connection with the
transactions contemplated hereby shall survive the execution and delivery of
this Agreement and shall continue during the entire term of this Agreement.
(G) Arbitration. At the request of either party, any controversy arising out
-----------
of this Agreement shall be submitted to arbitration before the American
Arbitration Association whose venue shall be in Detroit, Michigan. Each party
shall pay its own expenses in the arbitration proceeding and the two parties
shall equally share the fees and expenses of the arbitrator and the Association.
(H) Payment of Expenses. Eastern shall reimburse CTN for its legal fees
--------------------
incurred after June 30, 1994, in
<PAGE>
connection with the negotiation and preparation of this Agreement, up to a
maximum of XXX Dollars ($XXX).
(I) Counterparts. This Agreement may be executed in one or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(J) Dealings with Third Parties. Neither party is, nor shall it hold itself
---------------------------
out to be, vested with any power or right to contractually bind or act on behalf
of the other. In particular, Eastern shall not be identified as licensee of the
ITFS stations and neither CTN nor its Member Institutions shall be held out as
responsible for or associated with Eastern's programming.
(K) Governing Law. This Agreement shall be under and in accordance with
-------------
the laws of the State construed of Michigan.
(L) Reformation. If Congress, the FCC, any court or any other governmental
-----------
authority with jurisdiction over the subject matter hereof should amend,
interpret or clarify the law, rules, regulations or policies applicable to this
Agreement in a manner that would adversely affect the ability of the parties to
perform their obligations under this Agreement, then the parties hereto shall
promptly negotiate in good faith to reform and amend this Agreement so as to
permit as nearly as reasonably possible the performance of their obligations
hereunder. Neither party shall take any action that contributes to such adverse
amendment, clarification or interpretation without the prior written consent of
the other party. Without limiting the generality of the foregoing, the parties
acknowledge that to the extent the provisions of Paragraph 3 (C) contemplate the
use of "channel loading" techniques, such provisions are subject to any future
Commission rule changes in accordance with Paragraph 29 of the FCC's Report and
----------
Order in MM Docket No. 93-106 (rel. July 9, 1994).
- -----
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
Witnessed By: COMMUNITY TELECOMMUNICATIONS NETWORK
- -------------------------
Signature
- -------------------------
Printed Name
By:
----------------------------------
Patrick J. Gossman
Executive Director
- -------------------------
Signature
- -------------------------
Printed Name
EASTERN CABLE NETWORKS CORP.
- -------------------------
Signature
- -------------------------
Printed Name
By:
----------------------------------
Richard Perrone
Chairman and Chief
Executive Officer
- -------------------------
Signature
- -------------------------
Printed Name
EASTERN CABLE NETWORKS OF
MICHIGAN, INC.
<PAGE>
- -------------------------
Signature
- -------------------------
Printed Name By:
--------------------------------
Richard Perrone
Chairman and Chief
Executive Officer
- -------------------------
Signature
- -------------------------
Printed Name
<PAGE>
Exhibit No. 21
Subsidiaries of Registrant
People's Choice TV of Tucson, Inc.
People's Choice TV of Houston, Inc.
People's Choice TV of St. Louis, Inc.
SpeedChoice of Phoenix, Inc.
Wireless Cable of Indianapolis, Inc.
SpeedChoice of Detroit, Inc.
People's Choice TV of Salt Lake City, Inc.
PCTV Gold, 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.
SpeedChoice Equipment, Inc.
Waverunner, Inc.
PCTV Development Co.
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