<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 March 31, 1999
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Commission File Number: 0-21920
People's Choice TV Corp.
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(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
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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: 12,956,291 shares as of May 12, 1999.
<PAGE>
PEOPLE'S CHOICE TV CORP.
------------------------
INDEX
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PART I FINANCIAL INFORMATION PAGE(S)
- ---------------------------- -------
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 2
Consolidated Statements of Operations for the Three
Month Periods Ended March 31, 1998 and 1999 3
Consolidated Statements of Stockholders'
Deficit for the Three Month Periods Ended
March 31, 1998 and 1999 4
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 1998 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7-11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 12
PART II OTHER INFORMATION
- -------------------------
Items 1-5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 13
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PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 22,716,046 $ 7,975,337
Marketable securities 32,686,215 37,777,341
Subscriber receivables, net of allowance for doubtful accounts
of $207,000 and $233,000 1,370,546 1,170,290
Notes and other receivables 2,659,374 3,005,993
Prepaid expenses and other assets 1,040,778 1,712,037
Investment in wireless systems and equipment, at cost, net of accumulated
depreciation and amortization of $78,830,331 and $82,230,442 138,819,971 136,263,634
Financing costs, net of accumulated amortization of $6,292,189 and $6,709,390 2,374,977 1,957,776
Excess of purchase price over fair market value of assets acquired,
net of accumulated amortization of $1,542,446 and $1,640,900 6,333,881 6,235,427
------------- -------------
Total assets $ 208,001,788 $ 196,097,835
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Notes and other payables $ 286,878,662 $ 295,949,567
Accounts payable 1,970,840 843,916
Accrued expenses 4,095,183 4,713,659
Subscriber advance payments and deposits 1,379,146 1,368,244
Minority interest in consolidated subsidiaries 575,949 535,980
------------- -------------
Total liabilities 294,899,780 303,411,366
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 73,132,408 74,896,932
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 issued and
outstanding at December 31, 1998 and March 31, 1999 129,238 129,238
Additional paid-in capital 155,621,400 153,850,051
Warrants 3,756,840 3,756,840
Accumulated deficit (319,845,430) (340,254,144)
------------- -------------
Total stockholders' deficit (160,337,952) (182,518,015)
------------- -------------
Total liabilities and stockholders' deficit $ 208,001,788 $ 196,097,835
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
2
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PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenues $ 6,998,678 $ 5,598,817
------------ ------------
Costs and expenses:
Operating costs and expenses 10,630,483 11,315,160
Depreciation and amortization 7,372,868 5,207,287
------------ ------------
18,003,351 16,522,447
------------ ------------
Operating loss (11,004,673) (10,923,630)
Gain on sales and writedown of assets, net 145,402 80,565
Interest expense:
Non cash (8,126,919) (9,270,417)
Cash (337,700) (252,674)
Interest income 933,499 617,161
Other income (expense) 100,401 (694,688)
Minority interest 1,355 39,969
------------ ------------
Loss before income tax (18,288,635) (20,403,714)
Income tax expense 7,000 5,000
------------ ------------
Net loss (18,295,635) (20,408,714)
Preferred dividends (1,859,516) (1,771,349)
------------ ------------
Loss applicable to common shares $(20,155,151) $(22,180,063)
============ ============
Basic and diluted loss per common share: $ (1.53) $ (1.72)
============ ============
Weighted average number of common
shares outstanding 13,144,761 12,923,817
============ ============
</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 THREE MONTHS ENDED MARCH 31, 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 -- -- -- -- (18,295,635)
Dividends on Cumulative
Preferred Stock -- -- (244,826) -- --
Dividends on Convertible
Preferred Stock -- -- (1,614,690) -- --
---------- -------- ------------ ---------- -------------
Balance, March 31, 1998 12,923,817 $129,238 $157,870,204 $3,756,840 $(244,119,985)
========== ======== ============ ========== =============
Balance, December 31, 1998 12,923,817 $129,238 $155,621,400 $3,756,840 $(319,845,430)
Net Loss -- -- -- -- (20,408,714)
Dividends on Cumulative
Preferred Stock -- -- (6,825) -- --
Dividends on Convertible
Preferred Stock -- -- (1,764,524) -- --
---------- -------- ------------ ---------- -------------
Balance, March 31, 1999 12,923,817 $129,238 $153,850,051 $3,756,840 $(340,254,144)
========== ======== ============ ========== =============
</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>
Three Months Ended
March 31,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,295,635) $(20,408,714)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation and amortization 7,372,868 5,207,287
Minority interest in subsidiaries (1,355) (39,969)
Amortization of original issue discount 8,126,919 9,270,417
Gain on sales and writedown of assets (145,402) (80,565)
Provision for losses on subscriber receivables 80,126 143,156
Changes in assets and liabilities-
Decrease in subscriber receivables 131,995 57,100
Increase in notes and other receivables (285,854) (346,619)
Increase in prepaid expenses and other assets (127,429) (671,259)
Decrease in accounts payable (869,162) (1,126,924)
Increase in accrued expenses 295,476 618,476
Decrease in subscriber advance payments and deposits (48,318) (10,902)
------------ ------------
Net cash used in operating activities (3,765,771) (7,388,516)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (16,653,941) (40,912,169)
Proceeds principally from maturity of marketable securities 17,978,073 35,821,043
Proceeds from sales of assets 338,384 94,868
Acquisition of BTA/LMDS licenses (711,264) --
Investment in wireless systems and equipment (797,710) (2,149,597)
------------ ------------
Net cash provided by (used in) investing activities 153,542 (7,145,855)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (412,050) (199,513)
Dividends in Cumulative Preferred Stock (244,826) (6,825)
------------ ------------
Net cash used in financing activities (656,876) (206,338)
------------ ------------
Net decrease in cash (4,269,105) (14,740,709)
Cash and cash equivalents, beginning of year 31,756,014 22,716,046
------------ ------------
Cash and cash equivalents, end of period $ 27,486,909 $ 7,975,337
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest, net of amount capitalized $ 275,991 $ 200,795
Cash received for interest $ 934,133 $ 462,296
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.
</TABLE>
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 March 31, 1999, the consolidated
statements of operations for the three months ended March 31, 1998 and 1999 and
the consolidated statements of stockholders' deficit and cash flows for the
three months ended March 31, 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 March 31, 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 month
periods ended March 31, 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) Subsequent Events:
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.
As a condition and inducement to Sprint entering into the Merger Agreement,
Matthew Oristano, the Company's Chairman and Chief Executive Officer, and
members of Mr. Oristano's family and family trusts and foundations
(collectively, the "Oristano Stockholders"), who beneficially own or have the
power to vote shares of the Common Stock representing 13.1% of the outstanding
Common Stock of the Company, entered into an agreement with Sprint (the
"Stockholder and Option Agreement") pursuant to which the Oristano Stockholders,
among other things, have granted an option in favor of Sprint with respect to
the Common Stock held by the Oristano Stockholders, subject to certain terms and
conditions. In addition, Sprint has granted a put right to the Oristano
Stockholders with respect to the Common Stock held by the Oristano Stockholders,
subject to certain terms and conditions.
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
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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.
As a condition and inducement to Sprint entering into the Merger Agreement,
Matthew Oristano, the Company's Chairman and Chief Executive Officer, and
members of Mr. Oristano's family and family trusts and foundations
(collectively, the "Oristano Stockholders"), who beneficially own or have the
power to vote shares of the Common Stock representing 13.1% of the outstanding
Common Stock of the Company, entered into an agreement with Sprint (the
"Stockholder and Option Agreement") pursuant to which the Oristano Stockholders,
among other things, have granted an option in favor of Sprint with respect to
the Common Stock held by the Oristano Stockholders, subject to certain terms and
conditions. In addition, Sprint has granted a put right to the Oristano
Stockholders with respect to the Common Stock held by the Oristano Stockholders,
subject to certain terms and conditions.
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
7
<PAGE>
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 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 $1.4 million or 20% from the three month period ended
March 31, 1998 to 1999. The decrease is principally attributable to a lower
video customer count ($2.1 million) 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
$1.1 million of the decline in revenues from 1998 to 1999. This is partially
offset by increased SpeedChoice revenue ($.5 million) and higher rates charged
on the video service ($.3 million). Video customer count decreased from 65,100
at March 31, 1998 to 43,500 at March 31, 1999, or 33%. Video customer count was
45,700 at December 31, 1998. 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 in
keeping with its previously announced strategy of discontinuing investment in
its analog video service.
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses increased $.7 million or 6% from the three
month period ended March 31, 1998 to 1999 primarily due to increased costs for
the SpeedChoice service ($1.3 million) and increased channel lease and transmit
site rental costs ($.3 million), partially offset by decreased programming costs
($.9 million) due to suspending the growth of the analog video customer base.
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 month
period ended March 31, 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 $10.9 million from $11.0 million for the three
months ended March 31, 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 $(7.4) million from $(3.8) million primarily
due to a decline in earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $2.1 million, costs associated with the withdrawn
recapitalization plan ($.7 million), and interest income, net of cash interest
expense of $.2 million. Also, the net change in assets and liabilities was
unfavorable in 1999 compared to 1998 ($.6 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.
Interest Expense
- ----------------
Interest expense was $9.5 million for the three months ended March 31, 1999
compared to $8.5 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 $9.3 million for the three
month period ended March 31, 1999 compared to $8.1 million in the corresponding
1998 period.
8
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Interest Income
- ---------------
Interest income was $.6 million for the three months ended March 31, 1999
compared to $.9 million in the corresponding 1998 period. The decrease from
March 31, 1998 to 1999 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 1999 period includes $.7 million of expense
related to the Company's withdrawn recapitalization plan. The 1998 income
amount primarily includes fees charged for use of frequencies related to the
sale of MDU's.
Net Loss
- --------
For the three month period ended March 31, 1999, the Company incurred net
losses of approximately $20.4 million compared to $18.3 million for the
comparable 1998 period. 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 is implementing 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 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 has begun to discuss 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,
9
<PAGE>
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.
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 $45.8 million
at March 31, 1999 from $55.4 million at December 31, 1998, a decrease of $9.6
million. This decrease is primarily attributable to cash used in operating
activities and investment in wireless systems 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 $45.8
million of cash, cash equivalents and marketable securities at March 31, 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. To fund such 1999 expenditures, the
Company anticipates using the Company's available cash, cash equivalents and
marketable securities. Of this amount, the Company has spent $9.6 million as of
March 31, 1999. 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 Company's estimates of capital
expenditures for 1999. The Company has purchased approximately 10,000 converter
boxes as of March 31, 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 7,400 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
10
<PAGE>
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.
11
<PAGE>
ITEM 3. 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 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 $37,720 -- -- -- -- -- $ 37,720 $37,656
Average Yield to Maturity 5.25% 5.25%
Liabilities:
Senior Discount Notes -- -- -- -- -- $332,000 $332,000 $99,600
Fixed Interest Rate 13.125% 13.125%
Notes Payable to FCC $ 567 $ 865 $ 962 $1,054 $1,156 $ 4,056 $ 8,660 (2)
Average Fixed Interest Rate 9.40% 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 March 31, 1999.
(2) No quoted market price exists for these debt instruments.
12
<PAGE>
PART II OTHER INFORMATION
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
None
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: May 12, 1999 By /s/ Charles F. Schwartz
--------------------------
Name: Charles F. Schwartz
Senior Vice President and
Chief Financial Officer
And Principal Accounting Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,975,337
<SECURITIES> 37,777,341
<RECEIVABLES> 1,403,290
<ALLOWANCES> 233,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 218,494,076
<DEPRECIATION> 82,230,442
<TOTAL-ASSETS> 196,097,835
<CURRENT-LIABILITIES> 0
<BONDS> 295,949,567
75,204,484
0
<COMMON> 129,238
<OTHER-SE> (182,647,253)
<TOTAL-LIABILITY-AND-EQUITY> 196,097,835
<SALES> 0
<TOTAL-REVENUES> 5,598,817
<CGS> 0
<TOTAL-COSTS> 4,495,108
<OTHER-EXPENSES> 6,820,052
<LOSS-PROVISION> 143,156
<INTEREST-EXPENSE> 9,523,091
<INCOME-PRETAX> (20,403,714)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (20,408,714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,408,714)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> 0.00
</TABLE>
