-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQaHYeSY+C8yQYQZSPiyg4qKDHzTSA7krKOFefcSFd6Up1bLKJRwRSmR7iT7Zxba Y6d4uwNISvEQxNyFj0HHQQ== 0000950109-97-006946.txt : 19971117 0000950109-97-006946.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950109-97-006946 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES CHOICE TV CORP CENTRAL INDEX KEY: 0000903275 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 061366643 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21920 FILM NUMBER: 97718125 BUSINESS ADDRESS: STREET 1: 2 CORPORATE DRIVE STE 249 CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 2039257900 MAIL ADDRESS: STREET 2: TWO CORPORATE DR SUITE 249 CITY: SHELTON STATE: CT ZIP: 06484 10-Q 1 FORM 10-Q SECURITIES & EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1997 ------------------ Commission File Number: 0-21920 People's Choice TV Corp. -------------------------------------------- (Exact name of Registrant as specified in its Charter) Delaware 06-1366643 - ------------------------------- --------------- (State or other jurisdiction of incorporation (I.R.S. employer of organization) identification No.) 2 Corporate Drive, Shelton, CT 06484 - --------------------------------------- ---------- (Address of principal executive offices) (Zip code) The Company's telephone number, including area code: (203) 925-7900 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X --- -- YES NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value: 12,923,817 shares as of November 11, 1997. PEOPLE'S CHOICE TV CORP. ------------------------ INDEX -----
PART I FINANCIAL INFORMATION PAGE(S) - ---------------------------- ------- Item 1. FINANCIAL STATEMENTS Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 2 Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 1996 and 1997 3 Consolidated Statements of Stockholders' Equity for the Nine Month Periods Ended September 30, 1996 and 1997 4 Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 1996 and 1997 5 Notes to Consolidated Financial Statements 6-7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-12 PART II OTHER INFORMATION - ------------------------- Items 1-5. OTHER INFORMATION 13 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13 SIGNATURES 14 - ----------
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
December 31, September 30, 1996 1997 ------------- ------------- ASSETS Cash and cash equivalents $ 41,305,795 $ 21,910,682 Marketable securities 63,396,191 59,999,418 Subscriber receivables, net of allowance for doubtful accounts of $379,500 and $302,700 2,935,364 2,291,094 Notes and other receivables 1,146,928 606,922 Prepaid expenses and other assets 3,629,195 3,384,947 Investment in wireless systems and equipment, at cost, net of accumulated depreciation and amortization of $55,697,972 and $77,161,000 196,322,563 187,828,092 Organization and financing costs net of accumulated amortization of $2,705,560 and $3,962,234 5,731,263 4,599,589 Excess of purchase price over fair market value of assets acquired net of accumulated amortization of $905,010 and $1,442,598 11,680,391 11,142,803 ------------ ------------ Total assets $326,147,690 $291,763,547 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and other payables $234,430,828 $249,695,944 Accounts payable 1,928,429 3,519,024 Accrued expenses 5,152,177 4,319,923 Subscriber advance payments and deposits 2,662,183 2,644,660 Minority interest in consolidated subsidiaries 1,086,562 1,031,268 ------------ ------------ Total liabilities 245,260,179 261,210,819 Commitments and Contingencies Convertible Pay-In-Kind Preferred Stock, liquidation preference $100 per share 60,169,770 64,740,558 PCTV Detroit cumulative preferred stock 6,628,365 7,022,156 Stockholders' Equity: Preferred stock, $0.01 par value, 4,353,074 shares authorized, no shares issued and outstanding -- -- Common stock, $0.01 par value, 75,000,000 shares authorized, 12,924,817 and 12,923,817 shares issued and outstanding at December 31, 1996 and September 30, 1997, respectively 129,248 129,238 Additional paid-in capital 166,447,375 161,464,181 Warrants 3,756,840 3,756,840 Accumulated deficit (156,244,087) (206,560,245) ------------ ------------ Total stockholders' equity/(deficit) 14,089,376 (41,209,986) ------------ ------------ Total liabilities and stockholders' equity $326,147,690 $291,763,547 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 2 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 1996 1997 1996 1997 ---- ---- ---- ---- Revenues $ 8,074,685 $ 7,830,748 $ 25,213,563 $ 25,204,922 ------------ ------------ ------------ ------------ Costs and expenses: Operating costs and expenses 10,386,899 10,303,583 33,505,783 31,741,154 Non-cash settlement of lawsuit 616,000 -- 616,000 -- Depreciation and amortization 8,522,296 8,190,093 25,471,116 24,106,050 ------------ ------------ ------------ ------------ 19,525,195 18,493,676 59,592,899 55,847,204 ------------ ------------ ------------ ------------ Operating loss (11,450,510) (10,662,928) (34,379,336) (30,642,282) Loss on sales and writedown of assets (948,870) (1,316,676) (1,167,654) (1,213,354) Interest expense: Non cash (6,845,449) (7,609,206) (19,828,112) (22,369,355) Cash (278,024) (353,979) (718,352) (1,078,900) Interest income and other 1,255,187 1,465,590 4,229,280 4,149,686 Minority interest 27,570 5,044 85,617 53,293 ------------ ------------ ------------ ------------ Loss before income tax (18,240,096) (18,472,155) (51,778,557) (51,100,912) Income tax expense 12,000 15,000 35,000 42,000 ------------ ------------ ------------ ------------ Loss before extraordinary gain (18,252,096) (18,487,155) (51,813,557) (51,142,912) Extraordinary gain on early extinguishment of debt -- -- -- 826,754 ------------ ------------ ------------ ------------ Net loss (18,252,096) (18,487,155) (51,813,557) (50,316,158) Preferred dividends (1,547,432) (1,699,243) (4,540,406) (4,964,579) ------------ ------------ ------------ ------------ Loss applicable to common shares $(19,799,528) $(20,186,398) $(56,353,963) $(55,280,737) ============ ============ ============ ============ Loss per common share: Loss before extraordinary gain $ (1.51) $ (1.54) $ (4.31) $ (4.27) Extraordinary gain -- -- -- .07 ------------ ------------ ------------ ------------ Net loss $ (1.51) $ (1.54) $ (4.31) $ (4.20) ============ ============ ============ ============ Weighted average number of common shares outstanding 13,096,204 13,147,929 13,086,411 13,149,163 ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. 3 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (Unaudited)
Common Stock Additional Par Value Paid-In Accumulated Shares Amount Capital Warrants Deficit ------ ------ ------- -------- ------- Balance, December 31, 1995 12,841,203 $ 128,412 $172,415,949 $ 4,331,244 $ (80,356,769) Net loss -- -- -- -- (51,813,557) Issuance of common stock in acquisition 27,614 276 445,000 -- -- Stock options expired -- -- (906,250) -- -- Dividends on Cumulative Preferred Stock -- -- (397,659) -- -- Dividends on Convertible Preferred Stock -- -- (4,142,747) -- -- ------------- ------------- ------------ ------------- ------------- Balance, September 30, 1996 12,868,817 $ 128,688 $167,414,293 $ 4,331,244 $(132,170,326) ============= ============= ============ ============= ============= Balance, December 31, 1996 12,924,817 $ 128,248 $166,447,375 $ 3,756,840 $(156,244,087) Net loss -- -- -- -- (50,316,158) Dividends on Cumulative Preferred Stock -- -- (393,791) -- -- Dividends on Convertible Preferred Stock -- -- (4,570,788) -- -- Other (1,000) (10) (18,615) -- -- ------------- ------------- ------------ ------------- ------------- Balance, September 30, 1997 12,923,817 $ 129,238 $161,464,181 $ 3,756,840 $(206,560,245) ============= ============= ============ ============= =============
The accompanying notes to consolidated financial statements are an integral part of these statements. 4 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ----------------------------------- 1996 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (51,813,557) $ (50,316,158) Adjustments to reconcile net loss to net cash used in operations- Depreciation and amortization 25,471,116 24,106,050 Minority interest in subsidiaries (85,617) (53,293) Extraordinary gain on early extinguishment of debt -- (826,754) Stock to be issued in settlement of lawsuit 616,000 -- Amortization of original issue discount 19,303,607 22,019,723 Amortization of imputed discount on debt 524,505 349,632 Loss on sales and writedown of assets 1,167,654 1,213,354 Provision for losses on subscriber receivables 773,500 436,343 Changes in assets and liabilities- (Increase) decrease in subscriber receivables (934,607) 207,927 (Increase) decrease in notes and other receivables (23,253) 255,339 (Increase) decrease in prepaid expenses and other assets 1,791,518 (32,107) Increase in organization and financing costs -- (125,000) Increase (decrease) in accounts payable (1,679,252) 1,590,596 Decrease in accrued expenses (864,775) (638,754) Decrease in subscriber advance payments and deposits (79,193) (17,523) ------------- ------------- Net cash used in operating activities (5,832,354) (1,830,625) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (100,888,107) (89,421,502) Proceeds principally from maturity of marketable securities 115,212,807 92,818,265 Proceeds from sales of assets 606,663 806,857 Acquisition of Sat-Tel Services, Inc. (3,440,400) -- Acquisition of Tilden and Anahuac frequencies (2,253,687) -- Sale of interest in Preferred Entertainment of Champaign 1,931,262 -- Acquisition of BTA licenses (1,620,083) (213,284) Investment in wireless systems and equipment (10,811,179) (12,907,137) ------------- ------------- Net cash used in investing activities (1,262,724) (8,916,801) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable (4,060,715) (8,645,687) Buyout of minority interest (184,000) (2,000) ------------- ------------- Net cash used in financing activities (4,244,715) (8,647,687) ------------- ------------- Net decrease in cash (11,339,793) (19,395,113) Cash and cash equivalents, beginning of year 23,243,558 41,305,795 ------------- ------------- Cash and cash equivalents, end of period $ 11,903,765 $ 21,910,682 ============= ============= SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 494,457 $ 970,970 Cash received for interest $ 4,700,316 $ 3,595,987
Supplemental disclosures of noncash investing and financing activities: During 1996 in connection with the acquisition of Sat-Tel Services, Inc., the Company issued a note payable in the amount of $1,250,000 and issued 27,614 shares of common stock. During 1996 and 1997, the Company acquired frequency rights in exchange for a note payable in the amount of $6,480,000 and $1,891,000, respectively. The accompanying notes to consolidated financial statements are an integral part of these statements. 5 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) The consolidated balance sheet as of September 30, 1997, the consolidated statements of operations for the three and nine months ended September 30, 1996 and 1997 and the consolidated statements of stockholders' equity and cash flows for the three and nine months ended September 30, 1996 and 1997 have been prepared by People's Choice TV Corp. (the "Company" or "PCTV") and are unaudited. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows at September 30, 1996 and 1997 have been made and all such adjustments are of a normal recurring nature. The accounting policies followed during the interim periods reported on are in conformity with generally accepted accounting principles and are consistent with those applied for annual periods. Certain prior period amounts have been reclassified to conform with current period presentation. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements for the year ended December 31, 1996 included in the Company's filing on Form 10-K. The results of operations for the three and nine month periods ended September 30, 1996 and 1997 are not necessarily indicative of the operating results for the full year. (2) Earnings per share: The net loss per share has been computed based on the weighted average of common shares outstanding. The 1996 and 1997 shares include common equivalent shares issuable upon exercise of certain outstanding stock options and the Bank of Montreal warrant. The Company has determined there will be no effect of applying the principles of Statement of Financial Accounting Standards No. 128, "Earnings per Share." (3) Acquisitions and Dispositions: On September 3, 1997, the Company closed on a previously announced asset exchange transaction with CS Wireless Systems, Inc. ("CS") by which the Company agreed to exchange certain wireless frequencies and equipment in Kansas City for certain of CS's wireless frequencies and equipment in Salt Lake City. The agreement covers 21 wireless frequencies in Kansas City, 28 wireless frequencies in Salt Lake City , and the Basic Trading Area ("BTA") licenses for both markets. In January 1996, the Company acquired rights to non-strategic wireless frequencies and certain other assets, including leases for 20 channels in Tilden, Illinois. In August 1997, the Company returned the rights to these frequencies to the FCC, resulting in a loss of approximately $850,000. In January 1996, Preferred Entertainment of Champaign, of which Specchio Development Investment Corp. had a two thirds partnership interest, was sold for approximately $2,200,000. The Company's share of the proceeds, after payment of all outstanding liabilities, was approximately $2,000,000, resulting in a gain on sale of approximately $200,000. On January 26, 1996, the Company acquired Sat-Tel Services Inc. ("Sat- Tel"), its exclusive installation and technical service company. The purchase price was $5,000,000, which consisted of $3,750,000 in cash (which included repayment of two promissory notes in the amount of $410,000 to the shareholders) and a note payable in the amount of $1,250,000, paid January 26, 1997, with an interest rate of 5.5% per year. Also, at closing, the Company repaid $1,500,000 of bank debt that was owed by Sat-Tel. As additional consideration, 27,614 common shares valued at approximately $445,000 were issued to the former owners in April 1996. The acquisition was accounted for as a purchase transaction and, accordingly, the purchase price was allocated to the fair value of assets acquired and liabilities assumed. Approximately $4,700,000 of the purchase price has been allocated to excess of purchase price over fair market value of assets acquired. The Company believes the acquisition will reduce its installation expenses because the Company will no longer be paying an outside contractor to perform installation services. 6 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) (4) Extraordinary Gain on Early Extinguishment of Debt: In accordance with a purchase agreement dated May 31,1995 between Wireless Cable of Indianapolis, Inc. ("WCI"), a majority-owned subsidiary of the Company, and Broadcast Cable, Inc. ("BC"), WCI issued a promissory note to BC in the amount of $6,726,754, due the later of May 31, 1997 or upon completion of certain events relating to frequencies acquired. In May 1997, the Company repaid $5,900,000 in settlement of the note, resulting in a gain of $826,754. (5) Commitments and Contingencies: Except as discussed below, the Company is not a party to any litigation that could have a material adverse effect on its business, results of operations or financial condition. On February 27, 1996, Wireless Enterprises, Inc. and Indianapolis Wireless, L. P. filed a complaint against the Company in U.S. district court in Connecticut. The complaint alleges causes of action based on fraud, tortious interference with contract, negligence, breach of good faith, and unfair trade practices. The complaint alleges that the Company took certain actions with respect to the Detroit market that deprived plaintiffs of the opportunity to acquire certain wireless cable frequencies in that market. The complaint alleges that by taking such actions the Company breached certain obligations to the plaintiffs. The complaint seeks money damages and injunctive relief. The Company has retained counsel and the discovery process is proceeding. Although there can be no assurance as to the ultimate outcome, the Company believes it has meritorious defenses in this action and intends to defend vigorously against this action. The Company believes that the eventual outcome of this action will not have a material adverse effect on the consolidated financial condition of the Company. (6) Subsequent Event: On November 11, 1997, the Company signed a definitive asset sale agreement to sell certain service contracts and equipment, covering approximately 9,800 individual units located in the St. Louis market, to ResNet Communications, LLC., representing approximately 4,300 analog video customers. The proceeds from this sale will be approximately $3,800,000 less commissions. The sale is expected to close in December 1997 subject to certain conditions. 7 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS All statements contained herein that are not historical facts, including but not limited to, statements regarding anticipated future capital requirements, the Company's ability to obtain additional debt, equity, or other financing, the Company's ability to successfully launch a digital wireless cable television system and/or develop a high speed internet access business, and the Company's ability to generate cash from system operations or sale of assets are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital on terms satisfactory to the Company to allow the Company to continue to develop its business; competitive factors, such as the introduction of new technologies and competitors into the subscription television business or internet access business; pricing pressures which could affect demand for the Company's service; changes in labor, equipment and capital costs; future acquisitions or strategic joint ventures; general business and economic conditions; and the other risk factors described in other parts of this report and in the Company's other reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the corresponding discussion and analysis included in the Company's Report on Form 10-K for the year ended December 31, 1996. RESULTS OF OPERATIONS: Strategic Direction - ------------------- During 1997, the Company's strategy has been to continue conservation of capital pending (i) the launch of the Company's high speed internet access product marketed under the name SpeedChoice(TM) (described below under "Liquidity and Capital Resources") and (ii) the implementation of digital video compression technology. The Company first began offering the SpeedChoice(TM) high speed internet service in the Detroit market in late October 1997 and cannot at this time assess the market's interest in this product. With respect to the Company's proposed digital video system, the Company's main vendor, NextLevel Systems, Inc. ("NSI"), is currently working to resolve certain system integration problems with respect to the digital head-end and converter boxes. Based on its own analysis and advice from its equipment vendors, the Company believes that these system integration issues will be resolved. The Company now expects the launch of a compressed digital video product to occur in 1998. When the Company offers this product in a market, it anticipates that it will offer the product in conjunction with the offering of the SpeedChoice(TM) service. The Company believes that the implementation of digital video compression technology will expand its video product offering, and, in conjunction with the offering of the SpeedChoice(TM) service, will enhance the Company's ability to attract and retain customers. Both the SpeedChoice(TM) service and digitally compressed video are new products for the Company and there can be no assurance that the Company will be able to attract and retain the customer base necessary to compete successfully with existing competitors or new entrants in the market for video programming and internet access services. Revenues - -------- Revenues decreased $.2 million or 3.0% from the three month period ended September 30, 1996 to 1997 and $8,600, or less than 1%, from the nine month period ended September 30, 1996 to 1997. The decrease in the three and nine month periods is principally attributable to a lower customer count and lower installation revenue resulting from the Company's suspension of the growth of its analog customer base, partially offset by an increase in average revenue per customer for both periods and by higher third party installation revenues for the nine months. Customer count decreased from 77,500 at September 30, 1996 to 72,800 at September 30, 1997, or 6.1%. Customer count was 75,200 at June 30, 1997. 8 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) Operating Costs and Expenses - ---------------------------- Operating costs and expenses decreased $83,300 or less than 1% from the three month period ended September 30, 1996 to 1997 and $1.8 million or 5.3% from the nine month period ended September 30, 1996 to 1997 primarily due to the Company suspending the growth of its analog customer base. The decrease for the three month period is primarily due to a decrease in programming costs, rent and occupancy costs and bad debt expense, substantially offset by increases in channel lease fees, recruiting costs and costs associated with third party installations. The decrease for the nine month period is primarily due to a decrease in salaries and related benefits due to personnel reductions, rent and occupancy costs, programming costs and bad debt expense, partially offset by increases in legal fees, costs associated with third party installations and channel lease fees. Non-cash Settlement of Lawsuit - ------------------------------ Amount represents the value of 56,000 shares of restricted Company common stock issued as part of the settlement of a lawsuit. Depreciation and Amortization - ----------------------------- Depreciation and amortization expense primarily includes depreciation and amortization of wireless systems and equipment and amortization of frequency rights. Depreciation and amortization expense decreased from the three and nine month periods ended September 30, 1996 to 1997 principally due to a decrease in amounts capitalized due to the Company's suspending the growth of its analog customer base. Excess direct costs of obtaining customers over installation revenues are capitalized and amortized over a three year period, or the life of the customer if shorter. Operating Loss - -------------- Operating loss decreased to $10.7 million from $11.5 million and to $30.6 million from $34.4 million for the three and nine months ended September 30, 1997, respectively, from the comparable period of the prior year principally due to decreases in operating costs and expenses and depreciation and amortization. The 1996 periods also included the non-cash settlement of the lawsuit. Cash flows from operating activities improved to $(1.8) million from $(5.8) million primarily due to improvement in earnings before interest, taxes, depreciation and amortization of $1.8 million, excluding the non-cash settlement of the lawsuit, and due to a favorable net change in assets and liabilities of $3.0 million. Loss on Sales and Writedown of Assets - ------------------------------------- Loss on sales and writedown of assets for the 1997 period includes a $.9 million writeoff of non-strategic frequency rights, and a $.6 million writedown of notes receivable and other assets to net realizable value, partially offset by a $.4 million gain on sale of a non-strategic frequency. Loss on sales and writedown of assets for the 1996 period includes a $1.4 million writedown of a note receivable and other assets to net realizable value, partially offset by a $.2 million gain on sale of Champaign and a $.2 million gain on sale of non-strategic wireless cable frequency rights in Tulsa, Oklahoma. 9 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) Interest Expense - ---------------- Interest expense was $8.0 million and $23.4 million for the three and nine months ended September 30, 1997 compared to $7.1 million and $20.5 million in the corresponding 1996 periods. The increase in interest expense from 1996 to 1997 was primarily a result of the accretion of the Senior Discount Notes. Non-cash interest expense totaled $7.6 million and $22.4 million for the three and nine month periods ended September 30, 1997 compared to $6.8 million and $19.8 million in the corresponding 1996 periods. Interest Income and Other - ------------------------- Interest income and other was $1.5 million and $4.1 million for the three and nine months ended September 30, 1997 compared to $1.3 million and $4.2 million in the corresponding 1996 periods. Interest income decreased $.4 million and $.9 million from the three and nine months ended September 30, 1996 to 1997 primarily due to a reduction in cash available for investment. The Company expects interest income to continue to decrease as the cash balance available for investment decreases. Extraordinary Gain on Early Extinguishment of Debt - -------------------------------------------------- This amount represents a net gain on early extinguishment of a $6.7 million note for which the Company repaid $5.9 million. Net Loss - -------- For the three and nine month periods ended September 30, 1997, the Company incurred net losses of approximately $18.5 million and $50.3 million, respectively, compared to $18.3 million and $51.8 million for the comparable 1996 periods. These net losses are principally attributable to the significant expenses incurred in connection with the development of the Company's business. The Company expects to continue to incur net losses while it develops and expands its wireless communications systems. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash, cash equivalents and marketable securities decreased to $81.9 million at September 30, 1997 from $104.7 million at December 31, 1996, a decrease of $22.8 million. This decrease is primarily attributable to cash used in operating activities, investment in wireless systems and equipment, and repayment of notes payable, partially offset by proceeds from sales of assets. The wireless communications business is a capital intensive business. The Company's operations require substantial capital investment for (i) the acquisition or leasing of wireless frequency rights in certain markets, (ii) the construction of headend/transmission facilities as well as customer service, maintenance and installation facilities in several cities, (iii) the installation of customers, and (iv) the funding of initial start-up losses. 10 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) In late October 1997, the Company launched a high speed internet access service in the Detroit market. The service is being marketed under the name SpeedChoice(TM). At this time, the SpeedChoice(TM) service does not have a material number of customers. The Company's ability to further develop the SpeedChoice(TM) service may be affected by a number of factors: first, the Company has never operated such a service and the technology may not perform adequately when material levels of customers are receiving the service; second, the Company does not know whether there will be sufficient customer interest in this product at a sufficient price to create a successful business model; third, competition from cable modem, T-1, ADSL, other wireless frequencies and other new technologies and telecommunications services providers may prevent the Company from successfully developing further the SpeedChoice(TM) service; and fourth, because the Company has never previously operated any internet access system, there may be other financial, marketing, technological, customer service, billing, operational or management issues that prevent the Company from successfully developing further the SpeedChoice(TM) service. During 1997, the Company's strategy has been to continue conservation of capital pending (i) the launch of the Company's high speed internet access product (described above) and (ii) the implementation of digital video compression technology. The Company's main vendor, NSI, is currently working to resolve certain system integration problems with respect to the digital head-end and converter boxes for its proposed digital video system. Based on its own analysis and advice from its equipment vendors, the Company believes that these system integration issues will be resolved. The Company now expects the launch of a compressed digital video product to occur in 1998. When the Company offers this product, it anticipates that it will offer the product in conjunction with the offering of the SpeedChoice(TM) product in the same market. As disclosed previously, based on its expected transition to a compressed digital video product, the Company does not plan to add to its analog customer base. The Company anticipates that the development of its wireless communications systems with digital compression technology will involve capital expenditures higher than those involved in implementing analog technology because of the increased costs for the more complex converter boxes and other equipment which utilize the digital technology. The Company estimates that it will spend $17.0 million in 1997 on capital expenditures, including $1.2 million on the Company's launch of the SpeedChoice(TM) service. The Company has spent $13.1 million of this $17.0 million in the nine months ended September 30, 1997. Also in 1997, the Company will make $9.6 million in expenditures for required debt payments of which $8.6 million has been spent in the nine months ended September 30, 1997. To fund such 1997 capital expenditures and debt payments, the Company anticipates using the Company's available cash and marketable securities. The Company has entered into an agreement with NSI pursuant to which the Company would purchase from NSI up to 300,000 digital converter boxes. The Company is obligated to purchase 200,000 converter boxes over the three year life of the contract. The Company can cancel its minimum purchase obligation by paying a per box cancellation fee. The Company's anticipated 1997 payments for converter boxes under the terms described above have been included in the Company's estimates of capital expenditures for 1997. As described above, the Company is working with NSI to resolve certain system integration problems with respect to the digital converter boxes and the digital head-end facility. Based on the Company's review of these issues and advice from NSI, the Company believes that these system integration issues will be resolved. If the system integration issues were not resolved, the Company may seek to terminate its purchase contract with NSI and seek other remedies, but the success of such actions cannot be determined at this time. The Company believes that it will be able to recover its remaining investment in analog converter boxes through sales of such boxes to wireless cable system operators who intend to implement digital service at a later date than the Company. 11 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) Consistent with its strategy of transitioning the business of the Company from analog technology to digital technology, the Company is proposing to sell certain service contracts and equipment by which the Company provides wireless cable television service to apartment complexes, condominiums and other multiple dwelling units in its Chicago, Houston, Phoenix and St. Louis markets. All of the service contracts that are for sale concern properties that are served through the use of analog technology. These service contracts cover approximately 270 properties containing approximately 59,000 individual units located in Houston, St. Louis, Phoenix and Chicago, which represents approximately 21,500 analog video customers. On November 11, 1997, the Company signed a definitive asset sale agreement to sell approximately 9,800 individual units located in St. Louis to ResNet Communications, LLC., representing approximately 4,300 analog video customers. The proceeds from this sale will be approximately $3.8 million less commissions. The sale is expected to close in December 1997 subject to certain conditions. The Company has received offers for the service contracts in the remaining markets, but has not accepted any offer at this time. The Company cannot determine at this time whether it will be ultimately successful in completing any sale of these remaining service contracts for a price and on other terms acceptable to the Company. The level of capital expenditures incurred for customer installations is primarily variable and dependent on the customer installation activities of the Company. Therefore, actual customer installation expenditures may be more or less than the Company's estimate. Further significant capital expenditures for customer installations are expected to be incurred by the Company in 1998 and subsequent years. If the Company does not have adequate liquidity to fund its desired capital expenditure plans, the Company may delay the launch of new markets and slow down its system expansion activities in its operating markets. The Company has experienced negative cash flow from operations in each year since its formation and, the Company expects to continue to experience negative consolidated cash flow from operations due to operating costs associated with its system development, expansion and acquisition activities. Until sufficient cash flow is generated from operations, the Company will have to utilize its current capital resources and external sources of funding to satisfy its capital needs. The development of wireless communications systems in the Company's major markets referred to above in subsequent years, the development of the Company's other markets, acquisitions of additional channel rights and wireless communications systems and the Company's general corporate activities will require the Company to secure significant additional financing in the future and there can be no assurance that such financing will be available when required. Prior to October 2, 1997, the common stock of the Company was listed on the Nasdaq National Market (NNM). Prior to that date, the Company's listing on the NNM had been under review by Nasdaq as a result of the Company's inability to meet a net tangible asset listing requirement. The Company had requested and received from Nasdaq a temporary exception while it sought to satisfy that listing criteria. After working towards satisfying that requirement, the Company determined that it could not satisfy that listing requirement within the time frame requested by Nasdaq. Based on the new maintenance listing criteria that will become effective on February 23, 1998, the Company requested that Nasdaq move the listing of the Company's common stock from the NNM to the Nasdaq SmallCap Market. Nasdaq agreed to list the Company's common stock on the Nasdaq SmallCap Market as of October 2, 1997, and the listing on that market commenced as of that date. Continued listing on the Nasdaq SmallCap Market will be subject to the Company's continued satisfaction of the maintenance listing criteria for such market. 12 PART II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement regarding computation of per share earnings is not required because the relevant computation can be determined from the material contained in the Financial Statements included herein. (27) Financial Data Schedule (b) Reports on Form 8-K On July 15, 1997, the Company filed a Current Report on Form 8-K dated July 15, 1997 discussing matters relating to the listing of the Company's Common Stock on the Nasdaq National Market System. 13 Pursuant to the requirements to the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned thereunto duly authorized PEOPLE'S CHOICE TV CORP. ------------------------ (Registrant) Date: November 11, 1997 By /s/ Charles F. Schwartz -------------------------- Name: Charles F. Schwartz Senior Vice President and Chief Financial Officer and Principal Accounting Officer 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 21,910,682 59,999,418 2,593,794 302,700 0 0 264,989,092 77,161,000 291,763,547 0 249,695,944 71,762,714 0 129,238 (41,339,224) 291,763,547 0 25,204,922 0 14,312,987 17,428,167 436,343 23,448,255 (51,100,912) 42,000 (51,142,912) 0 826,754 0 (50,316,158) (4.20) 0.00
-----END PRIVACY-ENHANCED MESSAGE-----