<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
Commission File Number: 0-21920
People's Choice TV Corp.
------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 06-1366643
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. employer
of organization) identification No.)
2 Corporate Drive, Shelton, CT 06484
------------------------------ -----
(Address of principal executive offices) (Zip code)
The Company's telephone number, including area code: (203) 925-7900
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
X
--- --
YES NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value: 12,931,848 shares as of August 9, 1999.
<PAGE>
PEOPLE'S CHOICE TV CORP.
INDEX
PART I FINANCIAL INFORMATION PAGE(S)
- ---------------------------- -------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1999 2
Consolidated Statements of Operations for the Three and Six
Month Periods Ended June 30, 1998 and 1999 3
Consolidated Statements of Stockholders'
Deficit for the Six Month Periods Ended
June 30, 1998 and 1999 4
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1998 and 1999 5
Notes to Consolidated Financial Statements 6-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8-12
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 13
PART II OTHER INFORMATION
- -------------------------
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS 14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 14
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<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 22,716,046 $ 13,981,517
Marketable securities 32,686,215 25,729,624
Subscriber receivables, net of allowance for doubtful accounts
of $207,000 and $209,000 1,370,546 1,180,402
Notes and other receivables 2,659,374 483,742
Prepaid expenses and other assets 1,040,778 1,335,771
Investment in wireless systems and equipment, at cost, net of
accumulated depreciation and amortization of $78,830,331
and $85,814,235 138,819,971 134,246,661
Financing costs, net of accumulated amortization of $6,292,189 and $7,126,592 2,374,977 1,540,574
Excess of purchase price over fair market value of assets acquired,
net of accumulated amortization of $1,542,446 and $1,739,354 6,333,881 6,136,973
------------ -------------
Total assets $208,001,788 $184,635,264
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Notes and other payables $286,878,662 $305,190,788
Accounts payable 1,970,840 1,184,754
Accrued expenses 4,095,183 3,989,432
Subscriber advance payments and deposits 1,379,146 1,351,479
Minority interest in consolidated subsidiaries 575,949 467,337
------------ -------------
Total liabilities 294,899,780 312,183,790
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 73,132,408 76,745,950
PCTV Detroit subsidiary cumulative preferred stock 307,552 307,552
Stockholders' Deficit:
Preferred stock, $0.01 par value, 4,253,896 shares authorized,
no shares issued and outstanding -- --
Common stock, $0.01 par value, 75,000,000 shares
authorized, 12,923,817 shares and 12,931,848 shares issued and
outstanding at December 31, 1998 and June 30, 1999, respectively 129,238 129,318
Additional paid-in capital 155,621,400 150,342,331
Warrants 3,756,840 3,756,840
Accumulated deficit (319,845,430) (358,830,517)
------------ -------------
Total stockholders' deficit (160,337,952) (204,602,028)
------------ -------------
Total liabilities and stockholders' deficit $208,001,788 $184,635,264
============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
2
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 7,019,170 $ 5,395,408 $ 14,017,848 $ 10,994,225
------------ ------------ ------------ ------------
Costs and expenses:
Operating costs and expenses 11,099,746 11,377,936 21,730,229 22,693,096
Depreciation and amortization 7,741,096 5,207,377 15,113,964 10,414,664
------------ ------------ ------------ ------------
18,840,842 16,585,313 36,844,193 33,107,760
------------ ------------ ------------ ------------
Operating loss (11,821,672) (11,189,905) (22,826,345) (22,113,535)
Gain (loss) on sales and writedown of assets, net (1,200,064) 2,069,262 (1,054,662) 2,149,827
Interest expense:
Non cash (8,311,232) (9,480,664) (16,438,151) (18,751,081)
Cash (341,356) (259,360) (679,056) (512,034)
Interest income 1,004,799 532,859 1,938,298 1,150,020
Other income (expense) (38,017) (313,208) 62,384 (1,007,896)
Minority interest 5,466 68,643 6,821 108,612
------------ ------------ ------------ ------------
Loss before income tax (20,702,076) (18,572,373) (38,990,711) (38,976,087)
Income tax expense 5,000 4,000 12,000 9,000
------------ ------------ ------------ ------------
Net loss (20,707,076) (18,576,373) (39,002,711) (38,985,087)
Preferred dividends (1,829,932) (1,855,919) (3,689,448) (3,627,268)
------------ ------------ ------------ ------------
Loss applicable to common shares $(22,537,008) $(20,432,292) $(42,692,159) $(42,612,355)
============ ============ ============ ============
Basic and diluted loss per common share: $ (1.74) $ (1.57) $ (3.30) $ (3.29)
============ ============ ============ ============
Weighted average number of common
shares outstanding 12,923,817 12,978,353 12,923,817 12,951,236
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
3
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
Par Value Paid-In Accumulated
Shares Amount Capital Warrants Deficit
------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 12,923,817 $ 129,238 $159,729,720 $ 3,756,840 $(225,824,350)
Net loss -- -- -- -- (39,002,711)
Dividends on Cumulative
Preferred Stock -- -- (382,748) -- --
Dividends on Convertible
Preferred Stock -- -- (3,306,700) -- --
---------- ----------- ------------ ------------- -------------
Balance, June 30, 1998 12,923,817 $ 129,238 $156,040,272 $ 3,756,840 $(264,827,061)
========== =========== ============ ============= =============
Balance, December 31, 1998 12,923,817 $ 129,238 $155,621,400 $ 3,756,840 $(319,845,430)
Net loss -- -- -- -- (38,985,087)
Dividends on Cumulative
Preferred Stock -- -- (13,726) -- --
Dividends of Convertible
Preferred Stock -- -- (3,613,542) -- --
Common Shares Cancelled (180,000) (1,800) (1,674,450) -- --
Exercise of Stock Options and Warrants 188,031 1,880 22,649 -- --
---------- ----------- ------------ ------------- -------------
Balance, June 30, 1999 12,931,848 $ 129,318 $150,342,331 $ 3,756,840 $(358,830,517)
========== =========== ============ ============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
4
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(39,002,711) $(38,985,087)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation and amortization 15,113,964 10,414,664
Minority interest in subsidiaries (6,821) (108,612)
Amortization of original issue discount 16,438,151 18,751,081
(Gain) loss on sales and writedown of assets 1,054,662 (2,149,827)
Provision for losses on subscriber receivables 160,766 237,797
Changes in assets and liabilities-
(Increase) decrease in subscriber receivables 86,028 (47,653)
(Increase) decrease in notes and other receivables 5,920 (356,078)
Increase in prepaid expenses and other assets (269,890) (294,993)
Decrease in accounts payable (1,084,293) (786,086)
Increase (decrease) in accrued expenses 805,682 (105,752)
Decrease in subscriber advance payments and deposits (108,415) (27,666)
------------ ------------
Net cash used in operating activities (6,806,957) (13,458,212)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (52,374,023) (52,456,070)
Proceeds principally from maturity of marketable securities 54,827,693 59,412,661
Proceeds from sales of assets 522,093 183,633
Proceeds from sale of service contracts and equipment -- 2,837,046
Acquisition of BTA/LMDS licenses (711,264) --
Investment in wireless systems and equipment (2,269,380) (4,825,435)
------------ ------------
Net cash provided by (used in) investing activities (4,881) 5,151,835
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (820,646) (438,955)
Proceeds from the exercise of stock options and warrants -- 24,529
Dividends on Cumulative Preferred Stock (382,748) (13,726)
------------ ------------
Net cash used in financing activities (1,203,394) (428,152)
------------ ------------
Net decrease in cash (8,015,232) (8,734,529)
Cash and cash equivalents, beginning of year 31,756,014 22,716,046
------------ ------------
Cash and cash equivalents, end of period $ 23,740,782 $ 13,981,517
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest, net of amount capitalized $ 544,749 $ 515,226
Cash received for interest $ 1,938,366 $ 1,154,802
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
During 1998 the Company acquired frequency rights in exchange for a note payable
in the amount of $536,000.
The accompanying notes to consolidated financial statements
are an integral part of these statements
5
<PAGE>
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated balance sheet as of June 30, 1999, the consolidated
statements of operations for the three and six months ended June 30, 1998 and
1999 and the consolidated statements of stockholders' deficit and cash flows for
the six months ended June 30, 1998 and 1999 have been prepared by People's
Choice TV Corp. (the "Company" or "PCTV") and are unaudited. In the opinion of
management, all adjustments necessary to present fairly the financial position,
results of operations and cash flows at June 30, 1998 and 1999 have been made
and all such adjustments are of a normal recurring nature. The accounting
policies followed during the interim periods reported on are in conformity with
generally accepted accounting principles and are consistent with those applied
for annual periods. Certain prior period amounts have been reclassified to
conform with current period presentation. It is suggested that these
consolidated financial statements be read in conjunction with the consolidated
financial statements for the year ended December 31, 1998 included in the
Company's filing on Form 10-K. The results of operations for the three and six
month periods ended June 30, 1998 and 1999 are not necessarily indicative of the
operating results for the full year.
(2) 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.
(3) Commitments and Contingencies:
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.
(4) Merger Agreement:
On April 12, 1999, the Company entered into an agreement and plan of
merger (the "Merger Agreement"), with Sprint Corporation ("Sprint") and MM
Acquisition Corp., a wholly owned subsidiary of Sprint ("Merger Sub"). Pursuant
to the terms and subject to the conditions of the Merger Agreement, Merger Sub
will merge with and into the Company (the "Merger"), with the Company as
surviving corporation. As a result of the Merger, each outstanding share of
common stock of the Company (other than shares owned by Sprint, Merger Sub or
held by the Company as treasury stock or shares with respect to which the
holders have perfected appraisal rights under Delaware law) will be converted
into the right to receive $10.00 per share in cash. If prior to the consummation
of the merger, Sprint purchases common stock of the Company at a price higher
than $10.00 per share, then the consideration paid for all shares will be at the
higher price.
Sprint currently owns 4,804,231 shares (37.2%) of the Company's common
stock and 621,104 shares (83.3%) of the Company's preferred stock.
On July 7, 1999, at a special meeting of PCTV's Stockholders, the
Company's common and preferred stockholders approved the Merger Agreement.
Consummation of the merger remains subject to customary closing conditions,
including receipt of approval from the Federal Communications Commission. As
part of the merger, Sprint will acquire all of the frequency licenses and leases
the Company holds. If the merger has not closed by December 31, 1999, the merger
agreement may be terminated by Sprint or the Company unless the terminating
party has defaulted under the agreement. There can be no assurance this merger
will be completed.
6
<PAGE>
(5) Notes and Other Receivable:
In June 1999, the FCC granted and transferred certain licenses related
to the July 1998 sale of service contracts and video equipment related to
providing analog video services to multiple dwelling unit properties ("MDU's")
in the Chicago market to OnePoint Communications - Illinois, LLC. This resulted
in: (i) the release of $2.8 million that was held in escrow that was reflected
as notes and other receivables in the accompanying balance sheet and (ii) the
recording of a gain of $.3 million reflected in gain (loss) on sales and
writedown of assets in the accompanying statement of operations.
(6) Common Stock:
In May 1999, the Bank of Montreal exercised its warrant for 155,557
shares of the Company's Common Stock at an exercise price of $.01 per share.
In June 1999, the Company cancelled 180,000 shares of the Company's
Common Stock that was held as collateral for a loan. 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. The collateral had previously been written down to
fair market value, which was the closing stock price. The fair market value of
the Common Stock increased substantially during the quarter ending June 30, 1999
resulting from the pending merger with Sprint. The release of the collateral and
subsequent cancellation of the Common Stock in June 1999 resulted in the Company
recording a reversal of a previously reported loss of $1.7 million reflected in
gain (loss) on sales and writedown of assets in the accompanying statement of
operations.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's opinions only as of the date thereof. 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 Company's Report on Form 10-K for the year ended December 31,
1998.
Merger Agreement
On April 12, 1999, the Company entered into an agreement and plan of
merger (the "Merger Agreement"), with Sprint Corporation ("Sprint") and MM
Acquisition Corp., a wholly owned subsidiary of Sprint ("Merger Sub"). Pursuant
to the terms and subject to the conditions of the Merger Agreement, Merger Sub
will merge with and into the Company (the "Merger"), with the Company as
surviving corporation. As a result of the Merger, each outstanding share of
common stock of the Company (other than shares owned by Sprint, Merger Sub or
held by the Company as treasury stock or shares with respect to which the
holders have perfected appraisal rights under Delaware law) will be converted
into the right to receive $10.00 per share in cash. If prior to the consummation
of the merger, Sprint purchases common stock of the Company at a price higher
than $10.00 per share, then the consideration paid for all shares will be at the
higher price.
Sprint currently owns 4,804,231 shares (37.2%) of the Company's common
stock and 621,104 shares (83.3%) of the Company's preferred stock.
On July 7, 1999, at a special meeting of PCTV's Stockholders, the
Company's common and preferred stockholders approved the Merger Agreement.
Consummation of the merger remains subject to customary closing conditions,
including receipt of approval from the Federal Communications Commission. As
part of the merger, Sprint will acquire all of the frequency licenses and leases
the Company holds. If the merger has not closed by December 31, 1999, the merger
agreement may be terminated by Sprint or the Company unless the terminating
party has defaulted under the agreement. There can be no assurance this merger
will be completed.
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the corresponding
discussion and analysis included in the Company's Report on Form 10-K for the
year ended December 31, 1998.
RESULTS OF OPERATIONS:
Strategic Direction
The Company's strategy has been to focus on (i) further development of
its high speed internet access services and private data communications
services, which are marketed under the name SpeedChoice, (ii) the launch of its
digital video transmission service in the Company's Phoenix market, which is
marketed under the name DigitalChoice TV ("DCTV"), 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 the SpeedChoice two-way service in the Phoenix market in the second quarter
of 1999. 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.
8
<PAGE>
Revenues
Revenues decreased $1.6 million or 23% from the three month period ended
June 30, 1998 to 1999 and $3.0 million or 22% for the six month period ended
June 30, 1999. The decrease for the three and six month periods is principally
attributable to a lower video customer count ($2.2 million and $4.3 million for
the three and six month periods, respectively) resulting from the Company's
suspension of the growth of its analog video customer base and the sale of
certain service contracts and equipment related to providing analog video
service to multiple dwelling units ("MDU"s) in July 1998 which accounted for
11,600 customers and $1.1 million and $2.2 million for the three and six month
periods, respectively of the decline in revenues from 1998 to 1999. This is
partially offset by increased SpeedChoice revenue ($.6 million and $1.1 million
for the three and six months, respectively) and higher rates charged on the
video service ($.1 million and $.3 million for the three and six months,
respectively). Video customer count decreased from 62,400 at June 30, 1998 to
39,800 at June 30, 1999, or 36%. Video customer count was 45,700 at December 31,
1998. As analog video 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 in keeping with its previously
announced strategy of discontinuing investment in its analog video service.
Operating Costs and Expenses
Operating costs and expenses increased $.3 million or 3% from the three
month period ended June 30, 1998 to 1999 and $1.0 million or 4% for the six
month period ended June 30, 1998 to 1999 primarily due to increased costs for
the SpeedChoice service ($1.0 million and $2.4 million for the three and six
month periods, respectively) and increased channel lease and transmit site
rental costs ($.6 million and $.9 million for the three and six month periods,
respectively), partially offset by decreased programming costs ($1.0 million and
$1.8 million for the three and six month periods, respectively) due to
suspending the growth of the analog video customer base and a reduction in
professional fees ($.2 million and $.3 million for the three and six month
periods, respectively).
Depreciation and Amortization
Depreciation and amortization expense primarily includes depreciation
and amortization of wireless systems and equipment and amortization of frequency
rights. Depreciation and amortization expense decreased from the three and six
month periods ended June 30, 1998 to 1999 principally due to the investment in
analog technology being substantially depreciated at the end of 1998.
Operating Loss
Operating loss decreased to $11.2 million from $11.8 million and to
$22.1 million from $22.8 million for the three and six months ended June 30,
1999 from the comparable period of the prior year. The aforementioned decrease
in revenues and increase in operating costs and expenses was offset by decreased
depreciation and amortization expense. Cash flows from operating activities
decreased to $(13.5) million from $(6.8) million primarily due to a decline in
earnings before interest, taxes, depreciation and amortization ("EBITDA") of
$4.0 million, costs associated with the withdrawn recapitalization plan ($1.0
million), and a decline in interest income, net of cash interest expense of $.6
million. Also, the net change in assets and liabilities was unfavorable in 1999
compared to 1998 ($1.1 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.
Gain (Loss) on Sales and Writedown of Assets
Gain (loss) on sales and writedown of assets for 1999 includes a $1.7
million recovery of a note receivable that had been written off in prior periods
and a $.3 million gain on sale of service contracts and equipment in the Chicago
market.
9
<PAGE>
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. The collateral had
previously been written down to fair market value, which was the closing stock
price. The fair market value of the Common Stock increased substantially during
the quarter ending June 30, 1999 resulting from the pending merger with Sprint.
The release of the collateral and subsequent cancellation of the Common Stock in
June 1999 resulted in the Company recording a reversal of a previously reported
loss of $1.7 million.
Gain (loss) on sales and writedown of assets for 1998 includes a $1.6
million write-off of non-strategic frequency rights, partially offset by a $.4
million gain on sale of a non-strategic frequency.
Interest Expense
Interest expense was $9.7 million and $19.3 million for the three and
six months ended June 30, 1999 compared to $8.7 million and $17.1 million in the
corresponding 1998 period. The increase in interest expense from 1998 to 1999
was a result of the accretion of the Senior Discount Notes. Non-cash interest
expense totaled $9.5 million and $18.8 million for the three and six month
periods ended June 30, 1999 compared to $8.3 million and $16.4 million in the
corresponding 1998 period.
Interest Income
Interest income was $.5 million and $1.2 million for the three and six
months ended June 30, 1999 compared to $1.0 million and $1.9 million in the
corresponding 1998 period. The decrease from the 1998 periods to the 1999
periods 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.
Other Income (Expense)
Other income (expense) for the three and six months ended June 30, 1999
includes $.2 million and $1.0 million, respectively, of expense related to the
Company's withdrawn recapitalization plan and $.2 million for each period of
expense related to the Company's pending merger with Sprint partially offset by
fees charged for use of frequencies related to the sale of MDU's of $.1 million
and $.2 million for the three and six month periods, respectively. The three and
six months ended June 30, 1998 include fees charged for use of frequencies
related to the sale of MDU's offset by miscellaneous non-operating expenses.
Net Loss
For the three and six month periods ended June 30, 1999, the Company
incurred net losses of approximately $18.6 million and $39.0 million compared to
$20.7 million and $39.0 million for the comparable 1998 periods. These net
losses are principally attributable to the significant expenses incurred in
connection with the development of the Company's business. The Company expects
to continue to incur net losses while it develops and expands its wireless
communications systems.
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.
The Company has implemented 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 involved 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 the systems,
including converting, replacing, or eliminating certain platforms, applications,
databases, 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
10
<PAGE>
or replaced systems. The final step involves implementation of converted or
replaced platforms, applications, databases, utilities, and interfaces, and the
implementation of contingency plans, if necessary. The Company has completed its
awareness phase and its assessment phase. The Company is currently in the
process of completing its renovation phase and has commenced the validation
phase for all of its systems. The Company has commenced its implementation phase
on certain discrete items within its systems.
Based on the review to date, the Company estimates the cost to resolve
the Year 2000 issue is less than $.4 million. The estimate includes amounts
spent to date, estimated costs to upgrade certain systems that have been
identified as non-compliant, and certain amounts of 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 is developing 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 approximately 90% 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. As to vendors for which the Company has
not received a survey response, the Company does not believe that the failure of
these vendors to be Year 2000 compliant will have a material adverse affect on
the Company.
Liquidity and Capital Resources
Upon completion of the merger with Sprint, the business plan of the
Company may change. The discussion that follows is based on the current business
plan of the Company.
Cash, cash equivalents and marketable securities decreased to $39.7
million at June 30, 1999 from $55.4 million at December 31, 1998, a decrease of
$15.7 million. This decrease is primarily attributable to cash used in operating
activities and investment in wireless systems and equipment, partially offset
by proceeds from sale of service contracts and equipment.
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 $39.7 million of cash, cash equivalents and marketable securities
at June 30, 1999 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, of which the Company has spent
$15.7 million as of June 30, 1999. 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.
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
11
<PAGE>
Company's estimates of capital expenditures for 1999. The Company has purchased
approximately 10,000 converter boxes as of June 30, 1999.
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.
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) complete the sale of the Company to Sprint, or (ii)
refinance its existing Senior Discount Notes and Convertible Preferred Stock,
and /or (iii) 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 or completes the merger with Sprint, 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.
12
<PAGE>
ITEM 3. QUANTITIVE 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 sheet 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>
<CAPTION>
Fair
Market
1999 2000 2001 2002 2003 Thereafter Total Value (1)
---- ---- ---- ---- ---- ---------- ----- ---------
(In thousands, except for interest rates)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Marketable Securities $21,460 $4,000 -- -- -- -- $ 25,460 $ 25,473
Average Yield to Maturity 5.57% 5.63% 5.58%
Liabilities:
Senior Discount Notes -- -- -- -- -- $332,000 $332,000 $318,720
Fixed Interest Rate 13.125% 13.125%
Notes Payable to FCC $ 386 $ 865 $ 962 $1,054 $1,156 $ 4,056 $ 8,479 (2)
Average Fixed Interest Rate 9.39% 9.36% 9.35% 9.35% 9.35% 9.31% 9.34%
Notes Payable of PCTV
Detroit -- $2,344 -- -- -- -- $ 2,344 (2)
Fixed Interest Rate 9.0% 9.0%
</TABLE>
(1) Quoted market prices as of June 30, 1999.
(2) No quoted market price exists for these debt instruments.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
A special meeting of the stockholders of the Company was held on July
7, 1999. At the special meeting stockholders approved an Agreement and Plan of
Merger, dated as of April 12, 1999, among Sprint Corporation, MM Acquisition
Corp., a wholly-owned subsidiary of Sprint, and the Company, and the merger
contemplated by such agreement (the "Proposal"). The Proposal was approved at
the special meeting with votes cast in the following manner:
Votes For Votes Against Abstain
--------- ------------- -------
13,138,146 4,650 2,060
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statements regarding computation of per share earnings is not
required because the relevant computation can be determined
from the material contained in the Financial Statements
included herein.
(27) Financial Data Schedule
(b) Reports on Form 8-K
(i) On April 15, 1999 the Company filed a Form 8-K dated April 11,
1999 relating to the Company's execution of a merger agreement
with Sprint Corporation and the Company's adoption of a rights
plan.
(ii) On May 3, 1999 the Company filed a Form 8-K dated April 29,
1999 relating to an increase in the consideration to be paid
pursuant to the Company's merger agreement with Sprint
Corporation.
Pursuant to the requirements to the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by
the undersigned thereunto duly authorized
PEOPLE'S CHOICE TV CORP.
-----------------------
(Registrant)
Date: August 9, 1999 By /s/ Charles F. Schwartz
--------------------------
Name: Charles F. Schwartz
Senior Vice President and
Chief Financial Officer
And Principal Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,981,517
<SECURITIES> 25,729,624
<RECEIVABLES> 1,389,402
<ALLOWANCES> 209,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 220,060,896
<DEPRECIATION> 85,814,235
<TOTAL-ASSETS> 184,635,264
<CURRENT-LIABILITIES> 0
<BONDS> 305,190,788
129,318
77,053,502
<COMMON> 0
<OTHER-SE> (204,731,346)
<TOTAL-LIABILITY-AND-EQUITY> 184,635,264
<SALES> 0
<TOTAL-REVENUES> 10,994,225
<CGS> 0
<TOTAL-COSTS> 9,056,146
<OTHER-EXPENSES> 13,636,950
<LOSS-PROVISION> 237,797
<INTEREST-EXPENSE> 19,263,115
<INCOME-PRETAX> (38,976,087)
<INCOME-TAX> 9,000
<INCOME-CONTINUING> (38,985,087)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (38,985,087)
<EPS-BASIC> (3.29)
<EPS-DILUTED> 0.00
</TABLE>
