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, 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 August 8, 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 June 30, 1997 2 Consolidated Statements of Operations for the Three and Six Month Periods Ended June 30, 1996 and 1997 3 Consolidated Statements of Stockholders' Equity for the Six Month Periods Ended June 30, 1996 and 1997 4 Consolidated Statements of Cash Flows for the Six Month Periods Ended June 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 8-11 PART II OTHER INFORMATION ------------------------- Items 1-5. OTHER INFORMATION 12 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12 SIGNATURES 13 ---------- PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, June 30, 1996 1997 ------------------ ----------------- ASSETS Cash and cash equivalents $ 41,305,795 $ 58,260,221 Marketable securities 63,396,191 30,846,185 Subscriber receivables, net of allowance for doubtful accounts of $379,500 and $347,000 2,935,364 2,200,753 Notes and other receivables 1,146,928 602,573 Prepaid expenses and other assets 3,629,195 3,255,856 Investment in wireless systems and equipment, at cost, net of accumulated depreciation and amortization of $55,697,972 and $70,029,158 196,322,563 189,514,339 Organization and financing costs net of accumulated amortization of $2,705,560 and $3,542,157 5,731,263 4,894,666 Excess of purchase price over fair market value of assets acquired net of accumulated amortization of $905,010 and $1,285,280 11,680,391 11,300,120 ------------ ------------ Total assets $326,147,690 $300,874,713 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes and other payables $234,430,828 $242,604,634 Accounts payable 1,928,429 1,643,353 Accrued expenses 5,152,177 4,402,746 Subscriber advance payments and deposits 2,662,183 2,147,785 Minority interest in consolidated subsidiaries 1,086,562 1,036,313 ------------ ------------ Total liabilities 245,260,179 251,834,831 Commitments and Contingencies Convertible Pay-In-Kind Preferred Stock, liquidation preference $100 per share 60,169,770 63,174,021 PCTV Detroit cumulative preferred stock 6,628,365 6,889,449 Stockholders' Equity: Preferred stock, $0.01 par value, 4,368,603 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 June 30, 1997, respectively 129,248 129,238 Additional paid-in capital 166,447,375 163,163,424 Warrants 3,756,840 3,756,840 Accumulated deficit (156,244,087) (188,073,090) ------------ ------------ Total stockholders' equity/(deficit) 14,089,376 (21,023,588) ------------ ------------ Total liabilities and stockholders' equity $326,147,690 $300,874,713 ============ ============ 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, ------------------------------ ------------------------------ 1996 1997 1996 1997 ---- ---- ---- ---- Revenues $ 8,590,408 $ 8,830,026 $ 17,138,878 $ 17,374,174 ------------ ------------ ------------ ------------ Costs and expenses: Operating costs and expenses 11,233,905 10,532,928 23,118,884 21,437,571 Depreciation and amortization 8,470,575 7,875,503 16,948,820 15,915,958 ------------ ------------ ------------ ------------ 19,704,480 18,408,431 40,067,704 37,353,529 ------------ ------------ ------------ ------------ Operating loss (11,114,072) (9,578,405) (22,928,826) (19,979,355) Gain (loss) on sales and writedown of assets 124,597 (64,603) (218,784) 103,322 Interest expense: Non Cash (6,562,155) (7,425,881) (12,982,663) (14,760,149) Cash (204,968) (368,951) (440,328) (724,921) Interest income and other 1,441,955 1,298,075 2,974,093 2,684,097 Minority interest 30,084 19,854 58,047 48,249 ------------ ------------ ------------ ------------ Loss before income tax (16,284,559) (16,119,911) (33,538,461) (32,628,757) Income tax expense (benefit) (4,000) 16,500 23,000 27,000 ------------ ------------ ------------ ------------ Loss before extraordinary gain (16,280,559) (16,136,411) (33,561,461) (32,655,757) Extraordinary gain on early extinguishment of debt -- 826,754 -- 826,754 ------------ ------------ ------------ ------------ Net loss (16,280,559) (15,309,657) (33,561,461) (31,829,003) Preferred dividends (1,527,781) (1,676,971) (2,992,974) (3,265,336) ------------ ------------ ------------ ------------ Loss applicable to common shares $(17,808,340) $(16,986,628) $(36,554,435) $(35,094,339) ============ ============ ============ ============ Loss per common share: Loss before extraordinary gain $ (1.36) $ (1.35) $ (2.79) $ (2.73) Extraordinary gain -- .06 -- .06 ------------ ------------ ------------ ------------ Net loss $ (1.36) $ (1.29) $ (2.79) $ (2.67) ============ ============ ============ ============ Weighted average number of common shares outstanding 13,094,174 13,145,250 13,081,453 13,149,427 ============ ============ ============ ============ 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, 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 -- -- -- -- (33,561,461) Issuance of common stock in acquisition 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) ========== ============= ============= ============= ============= Balance, December 31, 1996 12,924,817 $ 128,248 $ 166,447,375 $ 3,756,840 $(156,244,087) Net loss -- -- -- -- (31,829,003) Dividends on Cumulative Preferred Stock -- -- (261,085) -- -- Dividends on Convertible Preferred Stock -- -- (3,004,251) -- -- Other (1,000) (10) (18,615) -- -- ---------- ------------- ------------- ------------- ------------- Balance, June 30, 1997 12,923,817 $ 129,238 $ 163,163,424 $ 3,756,840 $(188,073,090) ========== ============= ============= ============= ============= 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, --------------------------------- 1996 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(33,561,461) $(31,829,003) Adjustments to reconcile net loss to net cash used in operations- Depreciation and amortization 16,948,820 15,915,958 Minority interest in subsidiaries (58,047) (48,249) Extraordinary gain on early extinguishment of debt -- (826,754) Amortization of original issue discount 12,632,993 14,410,517 Amortization of imputed discount on debt 349,670 349,632 (Gain) loss on sales and writedown of assets 218,784 (103,322) Provision for losses on subscriber receivables 509,500 273,050 Changes in assets and liabilities- (Increase) decrease in subscriber receivables (390,910) 461,560 (Increase) decrease in notes and other receivables (106,489) 259,688 Decrease in prepaid expenses and other assets 1,996,167 174,571 Decrease in accounts payable (1,764,167) (285,076) Decrease in accrued expenses (1,128,180) (555,931) Decrease in subscriber advance payments and deposits (120,791) (514,398) ------------ ------------ Net cash used in operating activities (4,474,111) (2,317,757) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (56,023,222) (45,011,696) Proceeds principally from maturity of marketable securities 57,768,982 77,561,712 Proceeds from sales of assets 429,817 842,722 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 BTA licenses -- (213,284) Investment in wireless systems and equipment (9,199,150) (5,961,731) ------------ ------------ Net cash (used in) provided by investing activities (10,750,816) 27,217,723 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable (3,629,399) (7,943,540) Buyout of minority interest (34,000) (2,000) ------------ ------------ Net cash used in financing activities (3,663,399) (7,945,540) ------------ ------------ Net increase (decrease) in cash (18,888,326) 16,954,426 Cash and cash equivalents, beginning of year 23,243,558 41,305,795 ------------ ------------ Cash and cash equivalents, end of period $ 4,355,232 $ 58,260,221 ============ ============ SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 317,594 $ 580,404 Cash received for interest $ 3,097,803 $ 2,481,217 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 1997, the Company acquired frequency rights in exchange for a note payable in the amount of $1,707,000. 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 June 30, 1997, the consolidated statements of operations for the three and six months ended June 30, 1996 and 1997 and the consolidated statements of stockholders' equity and cash flows for the three and six months ended June 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 June 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 six month periods ended June 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: 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 $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, 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 statements of the Company. 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 a high speed internet access system, 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 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 expects to implement digital video compression technology in one of its markets in 1997. The Company believes that the implementation of digital video compression technology will expand its video product offering (possibly beyond the number of channels 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 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 $.2 million or 2.8% from the three month period ended June 30, 1996 to 1997 and $.2 million or 1.4% from the six month period ended June 30, 1996 to 1997. This increase is principally attributable to an increase in average revenues per customer and third party installation revenues, offset by a lower customer count resulting from the Company's suspension of the growth of its analog customer base. Customer count decreased from 79,300 at June 30, 1996 to 75,200 at June 30, 1997, or 5.2%. Customer count was 76,600 at March 31, 1997. Operating Costs and Expenses ---------------------------- Operating costs and expenses decreased $.7 million or 6.2% from the three month period ended June 30, 1996 to 1997 and $1.7 million or 7.3% from the six month period ended June 30, 1996 to 1997 primarily due to the Company suspending the growth of its analog customer base which caused a decrease in expenses, primarily salaries and related benefits due to personnel reductions, rent and occupancy costs, programming costs, and bad debt expense. Partially offsetting these decreases were increases in professional fees, due to costs associated with digital compression, internet testing and legal, and costs associated with third party installations. 8 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) Depreciation and Amortization ----------------------------- Depreciation and amortization expense primarily includes depreciation and amortization of wireless systems and equipment and amortization of frequency rights. Depreciation and amortization expense decreased from the three and six month periods ended June 30, 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. The Company expects that depreciation and amortization expense will increase when the company resumes a customer growth strategy. Operating Loss -------------- Operating loss decreased to $9.6 million from $11.1 million and to $20.0 million from $22.9 million for the three and six months ended June 30, 1997, respectively, from the comparable period of the prior year principally due to decreases in operating costs and expenses and depreciation and amortization. Cash flows from operating activities improved to $(2.3) million from $(4.5) million primarily due to improvement in earnings before interest, taxes, depreciation and amortization of $1.9 million. Also, the net change in assets and liabilities was favorable in 1997 compared to 1996. Gain (Loss) on Sales and Writedown of Assets -------------------------------------------- Gain (loss) on sales and writedown of assets for the 1997 period includes a $575,000 gain on sale of a non-strategic frequency, offset by a $472,000 writedown of notes receivable and other assets. Gain (loss) on sales and writedown of assets for the 1996 period includes a $518,000 writedown of a note receivable to net realizable value, partially offset by a $200,000 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 $7.8 million and $15.5 million for the three and six months ended June 30, 1997 compared to $6.8 million and $13.4 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 $7.4 million and $14.8 million for the three and six month periods ended June 30, 1997 compared to $6.6 million and $13.0 million in the corresponding 1996 periods. Interest Income and Other ------------------------- Interest income and other was $1.3 million and $2.7 million for the three and six months ended June 30, 1997 compared to $1.4 million and $3.0 million in the corresponding 1996 periods. The decrease in the 1997 periods compared to 1996 is 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. Minority Interest ----------------- Amounts represent primarily the minority interest in the Company's Indianapolis system and Albuquerque joint venture. 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. 9 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) Net Loss -------- For the three and six month periods ended June 30, 1997, the Company incurred net losses of approximately $15.3 million and $31.8 million, respectively, compared to $16.3 million and $33.6 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 cable systems. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Cash, cash equivalents and marketable securities decreased to $89.1 million at June 30, 1997 from $104.7 million at December 31, 1996, a decrease of $15.6 million. This decrease is primarily attributable to cash used in operating activities, repayment of notes payable and investment in wireless systems and equipment, partially offset by proceeds from sales of assets. 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 1997, the Company's strategy is to continue conservation of capital pending the implementation of digital video compression technology which is expected to take place in one of its markets during the second half of 1997. Pursuant to this strategy, the Company does not plan to add to its analog customer base. 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 converter boxes and other equipment which utilize the digital technology. The Company estimates that it will spend $20.7 million in 1997 on capital expenditures, including $1.2 million on the Company's proposed launch of a high speed internet access service. The Company has spent $6.2 million of this $20.7 million in the six months ended June 30, 1997. Also in 1997, the Company will make $9.6 million in expenditures for required debt payments of which $7.9 million has been spent in the six months ended June 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 recently received the necessary digital authorizations from the Federal Communications Commission to allow it to provide a high speed internet access service in the Detroit market. The Company has received delivery of the necessary head-end equipment necessary to provide such service and plans to launch such a system in Detroit in 1997. The Company's ability to launch a high speed internet access system may be affected by a number of factors: first, the Company has never launched or operated such a system and the technology may not perform adequately when placed into 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 ISDN, T-1, ADSL, other wireless frequencies and other new technologies and telecommunications services providers may prevent the Company from successfully launching a high speed internet access system; and fourth, because the Company has never launched or 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 launching and operating such a service. There may be additional factors, that the Company is unaware of at this time, that may affect the Company's ability to launch a high speed internet access system in one of its markets in 1997 or at any time. 10 PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Continued) The Company has entered into an agreement with NextLevel Systems, Inc. ("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. 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. 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 160 properties containing 30,000 individual units located in Houston, St. Louis and Phoenix, and approximately 170 properties containing 30,000 individual units located in Chicago. The Company has entered into a letter of intent to sell the Houston, St. Louis and Phoenix contracts. The completion of such a sale is dependent on the execution of a definitive sale agreement, receipt of certain consents, and other closing conditions. The marketing process for the Chicago service contracts is now being conducted. The Company cannot determine at this time whether it will be ultimately successful in completing any sale of these 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 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 financing will be available when required. The Company currently has negative tangible net assets as calculated pursuant to Nasdaq National Market System ("NMS") listing criteria. Because of its negative tangible net assets, the Company is not currently in compliance with all applicable NMS listing criteria. The Company had requested that Nasdaq grant the Company a waiver with respect to the net tangible asset requirement so that the Company's Common Stock could remain listed on the NMS. Nasdaq has granted the Company a temporary exception from the tangible net asset requirement. The temporary exception, which was granted by a panel authorized by the Nasdaq Board of Governors after a hearing on June 26, 1997, is subject to certain conditions. In the event that the Company is unable to meet the conditions, the Company expects that its Common Stock will be delisted from the NMS. Removal of the Company's Common Stock from inclusion in the NMS or the ineligibility of the Company's Common Stock to be listed on the Nasdaq SmallCap Market may make it more difficult to sell the Common Stock or obtain timely and accurate quotations as to offers to purchase and sell the Common Stock. In addition, the absence of a listing for the Common Stock on the Nasdaq NMS or the Nasdaq SmallCap Market could result in a decline in the trading volume of the Common Stock and could depress the price of the Common Stock. 11 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 May 29, 1997, the Company filed a Current Report on Form 8-K dated May 28, 1997 discussing matters relating to the listing of the Company's Common Stock on the Nasdaq National Market System. 12 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 8, 1997 By /s/ Charles F. Schwartz ----------------------------- Name: Charles F. Schwartz Senior Vice President and Chief Financial Officer and Principal Accounting Officer 13