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, 1996
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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: 12,868,817 shares as of August 7, 1996.
PEOPLE'S CHOICE TV CORP.
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INDEX
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PART I FINANCIAL INFORMATION
- ---------------------------- PAGE(S)
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Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1995
and June 30, 1996 2
Consolidated Statements of Operations for the Three
and Six Month Periods Ended June 30, 1995 and 1996 3
Consolidated Statements of Stockholders'
Equity for the Six Month Periods Ended
June 30, 1995 and 1996 4
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1995 and 1996 5-6
Notes to Consolidated Financial Statements 7-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 10-12
PART II OTHER INFORMATION
- -------------------------
Items 1-5. OTHER INFORMATION 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
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PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1995 1996
------------ ------------
ASSETS
Cash and cash equivalents $ 23,243,558 $ 4,355,232
Marketable securities 112,433,408 110,687,648
Subscriber receivables, net of
allowance for doubtful accounts
of $651,300 and $380,900 2,447,297 2,056,251
Notes and other receivables 4,073,719 3,585,609
Prepaid expenses and other assets 7,394,211 5,515,376
Investment in wireless systems and
equipment, at cost, net of
accumulated depreciation and
amortization of $33,662,121
and $47,879,238 208,578,950 203,504,915
Organization and financing costs
net of accumulated
amortization of $1,790,017 and
$2,053,137 7,406,205 6,576,005
Excess of purchase price over fair
market value of assets acquired
net of accumulated amortization
of $360,998 and $656,191 7,515,329 11,951,901
------------ ------------
Total assets $373,092,677 $348,232,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and other payables $202,317,369 $ 214,840,312
Accounts payable 4,131,968 1,511,497
Accrued expenses 6,098,976 5,544,638
Subscriber advance payments and
deposits 2,052,969 1,959,577
Minority interest in
consolidated subsidiaries 1,297,188 1,205,141
------------ -------------
Total liabilities 215,898,470 225,061,165
Commitments and Contingencies
(Note 4) --- ---
Convertible Pay-In-Kind Preferred
Stock, liquidation preference $100
per share 54,577,371 57,305,392
PCTV Detroit cumulative preferred
stock 6,098,000 6,362,953
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
4,427,064 shares authorized,
no shares issued and
outstanding --- ---
Common stock, $0.01 par value,
75,000,000 shares authorized,
12,841,203 shares and
12,868,817 shares issued
and outstanding at
December 31, 1995
and June 30, 1996,
respectively 128,412 128,688
Additional paid-in capital 172,415,949 168,961,725
Warrants 4,331,244 4,331,244
Accumulated deficit (80,356,769) (113,918,230)
------------ -------------
Total stockholders'
equity 96,518,836 59,503,427
Total liabilities and ------------ -------------
stockholders' equity $373,092,677 $ 348,232,937
============ =============
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 Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1995 1996 1995 1996
------------- ------------- -------------- -------------
REVENUES $ 5,572,232 $ 8,590,408 $ 11,045,492 $ 17,138,878
------------ ------------ ------------- ------------
COSTS AND EXPENSES:
Operating costs and expenses 9,951,624 11,233,905 19,185,167 23,118,884
Depreciation and amortization 3,881,193 8,470,575 8,093,321 16,948,820
------------ ------------ ------------- ------------
13,832,817 19,704,480 27,278,488 40,067,704
------------ ------------ ------------- ------------
Operating loss (8,260,585) (11,114,072) (16,232,996) (22,928,826)
GAIN (LOSS) ON SALES AND
WRITEDOWN OF ASSETS (Note 3) --- 124,597 --- (218,784)
INTEREST EXPENSE:
Omni and BCI (30,204) --- (81,161) ---
Non Cash (2,699,365) (6,562,155) (2,699,365) (12,982,663)
Cash (92,952) (204,968) (237,584) (440,328)
INTEREST INCOME AND OTHER 1,557,459 1,441,955 1,700,757 2,974,093
EQUITY INTEREST IN PREFERRED
ENTERTAINMENT, INC. (869,396) --- (1,714,770) ---
MINORITY INTEREST (34,878) 30,084 19,850 58,047
------------ ------------ ------------- ------------
Loss before income tax (10,429,921) (16,284,559) (19,245,269) (33,538,461)
Income tax expense (benefit) 132,387 (4,000) 178,700 23,000
------------ ------------ ------------- ------------
Loss before extraordinary gain (10,562,308) (16,280,559) (19,423,969) (33,561,461)
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT --- --- 1,197,424 ---
------------ ------------ ------------- ------------
Net loss (10,562,308) (16,280,559) (18,226,545) (33,561,461)
Preferred dividends (1,253,029) (1,527,781) (1,877,802) (2,992,974)
------------ ------------ ------------- ------------
Loss applicable to common shares $(11,815,337) $(17,808,340) $ (20,104,347) $(36,554,435)
============ ============ ============= ============
Loss per common share:
Loss before extraordinary gain $(1.16) $(1.36) $(2.10) $(2.79)
Extraordinary gain --- --- .12 ---
------------ ------------ ------------- ------------
Net loss $(1.16) $(1.36) $(1.98) $(2.79)
============ ============ ============= ============
Weighted average number of common
shares outstanding 10,180,008 13,094,174 10,157,694 13,081,453
============ ============ ============= ============
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 SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Unaudited)
Common Stock Additional
Par Value Paid-In Accumulated
Shares Amount Capital Warrants Deficit
---------------------------- ---------- -------- -----------
Balance, December 31, 1994 9,758,208 $ 97,582 $110,020,895 $(27,121,626)
Net loss --- --- --- (18,226,545)
Issuance of common stock in
exchange 187,143 1,872 3,312,416 ---
Exercise of stock options 12,950 129 180,566 ---
Issuance of warrants in
debt offer --- --- --- $ 3,756,840 ---
Dividends on Convertible
Preferred Stock --- --- (1,877,802) --- ---
---------- ------------ ------------ ------------ --------------
Balance, June 30, 1995 9,958,301 $ 99,583 $111,636,075 $ 3,756,840 $ (45,348,171)
========== ============ ============ ============= ===============
Balance, December 31, 1995 12,841,203 $ 128,412 $172,415,949 $ 4,331,244 $ (80,356,769)
Net Loss --- --- --- --- (33,561,461)
Issuance of common stock
in acquisition (Note 3) 27,614 276 445,000 --- ---
Stock options expired --- --- (906,250) --- ---
Dividends on Cumulative
Preferred Stock --- --- (264,953) --- ---
Dividends on Convertible
Preferred Stock --- --- (2,728,021) --- ---
------------ ------------ ------------ ------------ -------------
Balance, June 30, 1996 12,868,817 $ 128,688 $168,961,725 $ 4,331,244 $(113,918,230)
============ ============ ============ ============ =============
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)
Six Months Ended
June 30,
1995 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(18,226,545) $(33,561,461)
Adjustments to reconcile net loss to
net cash used in operations-
Depreciation and amortization 8,093,321 16,948,820
Minority interest in subsidiaries (19,850) (58,047)
Equity interest in Preferred
Entertainment, Inc. 1,714,770 ---
Extraordinary gain on early
extinguishment of debt (1,197,424) ---
Amortization of original issue
discount 2,641,089 12,632,993
Amortization of imputed discount
on debt 58,276 349,670
Loss on sales and writedown of
assets --- 218,784
Provision for losses on subscriber
receivables 770,800 509,500
Changes in assets and liabilities-
Increase in subscriber
receivables (469,082) (390,910)
Increase in notes and other
receivables (1,928,375) (106,489)
(Increase) decrease in prepaid
expenses and other assets (404,089) 1,996,167
Increase in organization and
financing costs (749,320) ---
Decrease in accounts payable (1,019,381) (1,764,167)
Decrease in accrued expenses (1,443,254) (1,128,180)
Increase (decrease) in
subscriber advance payments
and deposits 176,845 (120,791)
Decrease in due to affiliates (706,583) ---
------------ ------------
Net cash used in operating
activities (12,708,802) (4,474,111)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities --- (56,023,222)
Proceeds principally from maturity of
marketable securities 2,495,920 57,768,982
Purchase of wireless systems and
equipment from Broadcast Cable,
Inc. (3,773,246) ---
Proceeds from sales of assets --- 429,817
Acquisition of Sat-Tel Services, Inc. --- (3,436,166)
Acquisition of Tilden and Anahuac
frequencies --- (2,253,687)
Sale of interest in Preferred
Entertainment of Champaign --- 1,962,610
Acquisition of Casa Grande frequencies (1,200,000) ---
Investment in wireless systems and
equipment (17,141,069) (9,199,150)
Issuance of additional notes receivable
from affiliates (186,278) ---
Repayment of notes receivable from
affiliates and related parties 162,463 ---
------------ ------------
Net cash used in investing
activities (19,642,210) (10,750,816)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 107,000 ---
Repayment of notes payable (7,199,208) (3,629,399)
5
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Six Months Ended
June 30,
1995 1996
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Proceeds from the issuance of senior
discount notes, net 168,078,682 --
Buyout of minority interest --- (34,000)
Proceeds from the issuance of
convertible preferred stock, net 40,000,000 --
Proceeds from the exercise of stock
options 180,694 --
------------ -----------
Net cash provided by (used in)
financing activities 201,167,168 (3,663,399)
------------ ------------
Net increase (decrease) in
cash 168,816,156 (18,888,326)
Cash and cash equivalents, beginning of
year 5,106,343 23,243,558
------------ ------------
Cash and cash equivalents, end of period $173,922,499 $ 4,355,232
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest, net of
amount capitalized $ 475,301 $ 317,594
Cash received for interest 1,402,848 3,097,803
Supplemental disclosures of noncash investing and financing
activities:
During 1995 the Company acquired frequency rights in exchange for
7,143 shares of common stock. In addition, the $4,500,000 BCI note
payable was exchanged for 180,000 shares of the Company's common
stock. In connection with the acquisition of Broadcast Cable Inc.,
the Company issued a $6,727,000 promissory note. In May 1995, the
Company issued warrants valued at $3,757,000 in connection with the
issuance of senior discount notes.
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.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated balance sheet as of June 30, 1996, the consolidated
statements of operations for the three and six months ended June 30, 1995 and
1996 and the consolidated statements of stockholders' equity and cash flows for
the six months ended June 30, 1995 and 1996 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, 1995 and 1996 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, 1995 included in the
Company's filing on Form 10-K/A. The results of operations for the three and six
month periods ended June 30, 1995 and 1996 are not necessarily indicative of the
operating results for the full year.
(2) Marketable Securities:
The Company has classified marketable securities and time deposits as cash
equivalents if the original maturity investments is three months or less at time
of purchase.
Marketable securities consist of US Treasury Bills and Federal Agency bonds
which vary in maturity from four to twelve months. The Company has classified
these securities as held-to-maturity and they are recorded at amortized cost.
(3) Acquisitions and Dispositions:
In January 1996, the Company acquired rights to wireless frequencies and
certain other assets in the Tilden, Illinois and Anahuac, Texas markets for a
purchase price of approximately $2,300,000. The Company acquired leases for 20
and 16 channels in Tilden and Anahuac, respectively.
In January 1996, Preferred Entertainment of Champaign ("Champaign"), of which
Specchio Development Investment Corp. ("SDIC") 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
$700,000, resulting in a gain on sale of approximately $165,000.
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 due January 26, 1997 with an interest
rate of 5.5% per year, which can be exchanged for 69,145 common shares of the
Company at the option of the note holder. This election shall be made prior to
the one year anniversary of the note subject to certain conditions. 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 $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.
On August 29, 1995 the Company closed on an acquisition transaction with
Eastern Cable Networks Corp. and affiliates ("ECN") by which the Company
acquired the rights to 26 wireless cable frequencies in the Detroit market and
certain other related assets. The 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.
Prior to September 8, 1995 the Company owned 22.2% of the Preferred
Entertainment, Inc. ("PEI") Common Stock. On September 8, 1995, PCTV and PEI
closed on a merger transaction pursuant to which PCTV acquired PEI through a
merger in which PEI became an indirect wholly-owned subsidiary of PCTV.
Pursuant to the merger agreement, PCTV acquired each share of PEI Common Stock
that it did not already own. 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.
7
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summarized below are the pro forma unaudited results of operations for the six
months ended June 30, 1995 assuming the ECN and PEI acquisitions had occurred on
January 1, 1995. Adjustments have been made for depreciation and amortization
of the fair value write-up of assets acquired, interest expense on debt issued
in the ECN acquisition, the elimination of the equity in the net loss of PEI
recorded by the Company in 1995 and dividends on the preferred stock issued in
the ECN acquisition. The pro forma loss per common share assumes shares issued
in connection with the PEI acquisition had been outstanding since January 1,
1995.
Six Months Ended
June 30, 1995
----------------
Revenues $ 15,916,000
Loss before extraordinary gain (28,429,000)
Net loss (27,232,000)
Pro forma loss applicable to common
shares (29,470,000)
Net loss per common share:
Loss before extraordinary gain $ (2.37)
Extraordinary gain .09
------------
Net loss $ (2.28)
============
Pro forma weighted average number of
common shares outstanding 12,918,000
============
Included in the pro forma net loss are PEI costs in the amount of $250,000
associated with the acquisition of PEI for 1995.
On May 31, 1995, the Company closed on an acquisition transaction with
Broadcast Cable, Inc., ("BC") by which the Company acquired all of the capital
stock of BC. BC has the rights to 12 wireless cable frequencies in the
Indianapolis market and the rights to wireless cable frequencies in other
markets in Indiana. 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.
During 1996, the Company recorded a further writedown to net realizable value
of the underlying collateral on the non-recourse note receivable from Michael J.
Specchio that was payable May 14, 1996, resulting in a loss of $517,500. The
Company has possession of the collateral and is currently negotiating settlement
of the obligation.
In April 1996, the Company sold wireless cable frequency rights in Tulsa,
Oklahoma resulting in a gain of $180,000.
In July 1996, the Company agreed to exchange its wireless cable frequencies
in Kansas City for CS Wireless Systems, Inc.'s wireless cable frequencies in
Salt Lake City. The agreement covers 24 wireless cable frequencies in Kansas
City, 28 wireless cable frequencies in Salt Lake City, and the Basic Trading
Area (BTA) licenses for both markets. Subject to due diligence, the transaction
is expected to close by November 1996.
In July 1996, the Company entered into an agreement with Wireless
Entertainment Systems, Inc., and its subsidiary, Valley of Sun Wireless TV,
Inc., ("Wireless") to purchase wireless cable assets in the Globe, Arizona
market for a purchase price of $5.0 million and other considerations. The
assets principally consist of rights to 8 wireless cable frequencies and leases
with applicants for an additional 20 wireless cable frequencies. The purchase
price consists of: (1) restricted stock of the Company with a value of $3.0
million; (2) a promissory note in the amount of $2.0 million, payable in cash
or additional restricted stock of the Company, and (3) warrants to purchase
89,286 shares of the Company's stock. Subject to due diligence, the
transaction is expected to close September 1996.
8
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Commitments and Contingencies:
On March 28, 1996, the FCC auction for MMDS and/or MDS authorizations for
Basic Trading Areas ("BTA") came to a conclusion. The BTA authorizations will
allow the Company to expand its existing coverage of MDS and MMDS channels
throughout the geographic boundaries of the BTA, to license unallocated MDS or
MMDS channels in the Company's BTA's and to implement technological advances.
The Company purchased 28 BTA authorizations which contain 12,054,005 television
households, including each of the BTA authorizations for the Company's nine
primary markets. The purchase price was $12,895,000; however, the Company
qualifies for a 15% discount resulting in a net purchase price of $10,960,000.
The payment terms require (i) a 20% downpayment ($2,192,000), (ii) payments of
interest on the remaining principal amount during the two years after the
auction closes, and (iii) beginning two years after the auction closes,
amortization of the remaining principal amount ($8,768,000) and interest over an
eight year period. The interest rate is 2.5% plus the rate of the effective ten-
year U.S. Treasury obligation at the time the BTA authorization is issued. The
Company has placed the initial 10% downpayment of $1,096,000 on deposit with the
FCC. The remaining 10% downpayment will be required with the granting of the BTA
authorizations which is expected to take place during the second half of 1996.
The Company is subject to claims and contingencies related to taxes,
litigation and other matters arising out of the normal course of business. The
City of Tucson has notified the Company that it believes that People's Choice TV
Tucson, Inc., ("PCTV Tucson") is subject to the telecommunications tax which
accrues at two percent (2%) of gross revenues for sales within the City of
Tucson, Arizona. The City of Tucson has recently concluded an audit covering the
period March 1, 1992 through April 30, 1996 resulting in taxes due of
approximately $220,000, including interest and penalties. The Company and PCTV
Tucson do not believe PCTV Tucson is subject to the tax and intend to vigorously
contest this matter. If PCTV Tucson is deemed subject to the tax, it would be
their intent to add the tax to subscriber billings, except PCTV Tucson would not
be able to recover the amount of tax accrued to that date.
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.
Cable Equity Partners, Inc. ("CEP") has filed a complaint against the Company
and People's Choice TV of Houston, Inc. The complaint was filed in the state
court of Texas. The complaint alleges causes of action based upon slander,
libel, and tortious interference with contractual relations. The complaint
relates to certain oral and written commentary the Company provided to an
investment banking firm with respect to a private placement memorandum prepared
by CEP for an offering of notes and warrants by CEP. CEP alleges that the
commentary the Company provided to the investment banking firm constituted
slander, libel and tortious interference with contractual relations. CEP claims
damages in excess of $20 million. The Company has retained counsel and has
filed an answer denying all of the allegations in the complaint. 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.
Wireless Enterprises, Inc. and Indianapolis Wireless, L.P. have filed a
complaint against the Company in U.S. district court in Connecticut. The
complaint alleges causes of action based on fraud, tortious interference with
contract, negligence, breach of good faith, and unfair trade practices. The
complaint alleges that the company took certain actions with respect to the
Detroit market that deprived plaintiffs of the opportunity to acquire certain
wireless cable frequencies in that market. The complaint alleges that by taking
such actions the Company breached certain obligations to the plaintiffs. The
complaint seeks money damages and injunctive relief. The Company has retained
counsel and has filed a motion to dismiss all of the actions stated in the
complaint. 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.
9
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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/A for the year ended
December 31, 1995.
RESULTS OF OPERATIONS:
Strategic Direction
- -------------------
During 1996, the Company's strategy is to conserve capital pending the
implementation of digital video compression technology. Pursuant to this
strategy, the Company does not plan to further develop its analog customer base.
The Company believes that the implementation of digital video compression
technology will expand its video product offering (possibly beyond the number
available from the Company's hardwire cable competitors) and enhance its ability
to attract and retain customers and at such time the Company expects to resume a
strong customer growth strategy. There can be no assurance that PCTV will be
able to attract and retain the customer base necessary to compete successfully
with existing competitors or new entrants in the market for subscription
television services.
Revenues
- --------
Revenues increased $3.0 million or 54% from the three month period ended June
30, 1995 to 1996, and $6.1 million or 55% from the six month period ended June
30, 1995 to 1996, primarily due to the acquisitions of the Chicago and Detroit
systems in late 1995, the addition of customers in the Phoenix and Houston
systems, and the reduction in prior year revenue related to delinquent accounts
in the Houston system. Customer count has increased from 54,400 at June 30, 1995
to 79,300 at June 30, 1996, an increase of 46%. The Chicago and Detroit
acquisitions accounted for approximately 21,200 customers at June 30, 1996.
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses increased $1.3 million or 13% from the three
month period ended June 30, 1995 to 1996, and $3.9 million or 21% from the six
month period ended June 30, 1995 to 1996, primarily due to the acquisitions of
the Chicago and Detroit systems and the addition of customers in the Phoenix and
Houston systems, partially offset by lower salaries and related benefits due to
headcount reductions in the Houston system and costs incurred in the prior year
related to delinquent accounts in the Houston system.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense includes depreciation and amortization
of wireless systems and equipment and amortization of frequency rights.
Depreciation and amortization expense increased from the three and six month
periods ended June 30, 1995 to 1996 principally due to the acquisition of the
Chicago and Detroit systems, to the installation of receiving equipment for new
customers in the Company's other operating systems and to amortization of debt
acquisition costs. The Company's direct costs of obtaining customers exceeds
installation revenue. These excess costs are capitalized and amortized over a
three year period, or the life of the customer if shorter. The Company expects
that depreciation and amortization expense will continue to increase in the
foreseeable future.
Operating Loss
- --------------
Operating loss increased to $11.1 million from $8.3 million and to $22.9
million from $16.2 million for the three and six months ended June 30, 1996,
respectively, from the comparable period of the prior year principally due to
increases in depreciation and amortization expense partially offset by the net
increase in revenues compared to operating costs. Cash flows from operating
activities improved to $(4.5) million from $(12.7) million primarily due to an
improvement in earnings before interest, taxes, depreciation and amortization of
$2.2 million and due to an increase in interest income of $1.3 million in 1996
compared to 1995. Also prepaid expenses and other assets decreased in 1996 as
compared to 1995, and notes and other receivables and organization and financing
costs increased in 1995 as compared to 1996.
10
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gain (loss) on Sales and Writedown of Assets
- --------------------------------------------
Gain (loss) on sales and writedown of assets primarily includes a $517,500
writedown of a note receivable to net realizable value, offset by a $165,000
gain on sale of Champaign and a $180,000 gain on sale of wireless cable
frequency rights in Tulsa, Oklahoma.
Interest Expense
- ----------------
Interest expense was $6.8 million and $13.4 million for the three and six
months ended June 30, 1996, compared to $2.8 million and $3.0 million in the
corresponding 1995 periods. The increase in interest expense from 1995 to 1996
was primarily a result of the issuance of the Senior Discount Notes in May 1995.
Non-cash interest expense totaled $6.6 million and $13.0 million for the three
and six month periods ended June 30, 1996 of which $6.4 million and $12.6
million was recorded on the Senior Discount Notes.
Interest Income and Other
- -------------------------
Interest income was $1.4 million and $3.0 million for the three and six months
ended June 30, 1996 compared to $1.6 million and $1.7 million in the
corresponding 1995 periods, respectively. Interest income increased in 1996
compared to 1995 primarily as a result of the investment of the net proceeds
from the issuance of the Senior Discount Notes in May 1995. Interest income will
decrease in future periods as these proceeds continue to be used by the Company.
Other income was slightly higher in 1995 as compared to 1996.
Equity Interest in Preferred Entertainment, Inc.
- ------------------------------------------------
Equity interest in operations includes (i) the Company's pro rata share of the
net loss of PEI's operations for the three and six months ended June 30, 1995
and (ii) amortization of excess purchase price over fair market value of net
assets acquired. The Company acquired PEI on September 8, 1995. The Company's
statement of operations includes the results of PEI from the date of
acquisition.
Minority Interest
- -----------------
Amounts represent primarily the minority interest in the Company's
Indianapolis system.
Extraordinary Gain on Early Extinguishment of Debt
- --------------------------------------------------
Amount represents a net gain on early extinguishment of a $4.5 million note in
exchange for 180,000 common shares of the Company's stock.
Net Loss
- --------
For the three and six month periods ended June 30, 1996, the Company incurred
net losses of approximately $16.3 million and $33.6 million, respectively,
compared to $10.6 million and $18.2 million for the comparable 1995 periods.
These net losses are principally attributable to the significant expenses
incurred in connection with the development of the Company's business, which is
described above.
11
PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, cash equivalents and marketable securities decreased to $115.0 million
at June 30, 1996 from $135.7 million at December 31, 1995, a decrease of $20.7
million. This decrease is primarily attributable to cash used in operating
activities, the acquisition of Sat-Tel, the acquisition of the Tilden and
Anahuac frequencies, repayment of notes payable, investment in wireless systems
and equipment partially offset by cash received on the sale of our interest in
Preferred Entertainment of Champaign.
The wireless cable business is a capital intensive business. The Company's
operations require substantial capital investment for (i) the acquisition or
leasing of wireless cable channel 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.
During 1996, the Company's strategy is to conserve capital pending the
implementation of digital video compression technology. Pursuant to this
strategy, the Company does not plan to materially increase its number of
customers in 1996. In 1996, the Company has spent $9.2 million for capital
expenditures other than acquisitions compared to $17.1 million in 1995. To fund
such capital expenditures for the remainder of 1996, the Company anticipates
using the Company's available cash and marketable securities ($115.0 million at
June 30, 1996).
The level of capital expenditures incurred for customer installations is
variable and directly 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 1997 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.
A substantial portion of the costs of acquiring wireless cable channel rights
and establishing analog headend/transmission facilities for the Chicago,
Detroit, Houston, Phoenix, St. Louis and Tucson Systems have already been paid.
The Company estimates that the launch of a wireless cable system using analog
technology in a major market for which it controls channel rights currently
involves the expenditure of approximately $3.0 million for headend/transmission
equipment and approximately $1.0 million for certain start-up expenditures which
must be made by the Company before it can commence the delivery of programming
to its customers. Installation costs per customer generally are incurred shortly
before or after a customer signs up for the Company's wireless cable service.
The Company anticipates that the development of its wireless cable systems with
digital technology will involve capital expenditures higher than those involved
in implementing analog technology because of the increased costs for the more
complex headend/transmission facilities, converter boxes and other equipment
which utilize the digital technology. 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.
The Company has experienced negative cash flow from operations in each year
since its formation, and although more mature individual systems of the Company
may generate positive cash flow from operations, the Company expects to continue
to experience negative consolidated cash 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 or external sources of funding to
satisfy its capital needs. The development of wireless cable 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 cable 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 financings will be available when required.
12
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(2) Not Applicable
(4) Not Applicable
(10) Not Applicable
(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.
(15) Not Applicable
(18) Not Applicable
(19) Not Applicable
(20) Not Applicable
(23) Not Applicable
(24) Not Applicable
(25) Not Applicable
(27) Financial Data Schedule
(28) Not Applicable
(b) Reports on Form 8-K
None
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: August 7, 1996 By /s/ Charles F. Schwartz
------------------------
Name: Charles F. Schwartz
Senior Vice President and
Chief Financial Officer
and Principal Accounting Officer
14