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, 1998
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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
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(State or other jurisdiction of incorporation (I.R.S. employer
of organization) identification No.)
2 Corporate Drive, Shelton, CT 06484
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(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: 12,923,817 shares as of August 12, 1998.
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, 1997 2
and June 30, 1998
Consolidated Statements of Operations for the Three and
Six Month Periods Ended June 30, 1997 and 1998 3
Consolidated Statements of Stockholders'
Deficit for the Six Month Periods Ended
June 30, 1997 and 1998 4
Consolidated Statements of Cash Flows for the Six Month
Periods Ended June 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PART II OTHER INFORMATION
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Items 1-5. OTHER INFORMATION 12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 12
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PEOPLE'S CHOICE TV CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1997 1998
------------- -------------
ASSETS
Cash and cash equivalents $ 31,756,014 $ 23,740,782
Marketable securities 48,519,444 46,065,774
Subscriber receivables, net of allowance for doubtful accounts
of $265,000 and $233,000 2,378,429 2,131,636
Notes and other receivables 441,335 2,006,473
Prepaid expenses and other assets 3,077,795 3,146,653
Investment in wireless systems and equipment, at cost, net of
accumulated depreciation and amortization of $83,906,105
and $96,559,891 177,661,367 164,176,683
Financing costs net of accumulated
amortization of $4,382,312 and $5,180,805 4,304,511 3,486,361
Excess of purchase price over fair market value of assets acquired
net of accumulated amortization of $1,599,915 and $1,914,551 10,985,486 10,670,851
------------ ------------
Total assets $279,124,381 $255,425,213
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Liabilities:
Notes and other payables $256,465,030 $272,618,406
Accounts payable 4,476,400 3,332,552
Accrued expenses 4,363,357 5,155,355
Subscriber advance payments and deposits 2,500,002 2,391,587
Minority interest in consolidated subsidiaries 727,959 721,139
------------ ------------
Total liabilities 268,532,748 284,219,039
Commitments and Contingencies
Convertible Pay-In-Kind Preferred Stock,
liquidation preference $100 per share 66,342,313 69,649,013
Detroit subsidiary cumulative preferred stock 6,457,872 6,457,872
Stockholders' Deficit:
Preferred stock, $0.01 par value 4,306,535 shares authorized, --- ---
no shares issued and outstanding
Common stock, $0.01 par value, 75,000,000 shares
authorized, 12,923,817 shares issued and
outstanding at December 31, 1997 and June 30, 1998 129,238 129,238
Additional paid-in capital 159,729,720 156,040,272
Warrants 3,756,840 3,756,840
Accumulated deficit (225,824,350) (264,827,061)
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Total stockholders' deficit (62,208,552) (104,900,711)
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Total liabilities and stockholders' deficit $ 279,124,381 $ 255,425,213
============= =============
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,
---------------------------- ----------------------------
1997 1998 1997 1998
---- ---- ---- ----
Revenues $ 8,830,026 $ 7,019,170 $ 17,374,174 $ 14,017,848
------------ ------------ ------------ ------------
Costs and expenses:
Operating costs and expenses 10,532,928 11,099,746 21,437,571 21,730,229
Depreciation and amortization 7,875,503 7,741,096 15,915,958 15,113,964
------------ ------------ ------------ ------------
18,408,431 18,840,842 37,353,529 36,844,193
------------ ------------ ------------ ------------
Operating loss (9,578,405) (11,821,672) (19,979,355) (22,826,345)
Gain (loss) on sales and writedown of assets (64,603) (1,200,064) 103,322 (1,054,662)
Interest expense:
Non Cash (7,425,881) (8,311,232) (14,760,149) (16,438,151)
Cash (368,951) (341,356) (724,921) (679,056)
Interest income and other 1,298,075 966,782 2,684,097 2,000,682
Minority interest 19,854 5,466 48,249 6,821
------------ ------------ ------------ ------------
Loss before income tax (16,119,911) (20,702,076) (32,628,757) (38,990,711)
Income tax expense 16,500 5,000 27,000 12,000
------------ ------------ ------------ ------------
Loss before extraordinary gain (16,136,411) (20,707,076) (32,655,757) (39,002,711)
Extraordinary gain on early extinguishment of
debt 826,754 -- 826,754 --
------------ ------------ ------------ ------------
Net loss (15,309,657) (20,707,076) (31,829,003) (39,002,711)
Preferred dividends (1,676,971) (1,829,932) (3,265,336) (3,689,448)
------------ ------------ ------------ ------------
Loss applicable to common shares $(16,986,628) $(22,537,008) $(35,094,339) $(42,692,159)
============ ============ ============ ============
Basic and diluted loss per common share:
Loss before extraordinary gain $ (1.35) $ (1.74) $ (2.73) $ (3.30)
Extraordinary gain .06 -- .06 --
------------ ------------ ------------ ------------
Net loss $(1.29) $(1.74) $(2.67) $(3.30)
============ ============ ============ ============
Weighted average number of common
shares outstanding 13,145,250 12,923,817 13,149,427 12,923,817
============ ============ ============ ============
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' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(Unaudited)
Common Stock Additional
Par Value Paid-In Accumulated
Shares Amount Capital Warrants Deficit
-------------- ------------- ------------- ----------- --------------
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)
========== ======== ============ =========== =============
Balance, December 31, 1997 12,923,817 $129,238 $159,729,720 $3,756,840 $(225,824,350)
Net loss -- -- -- -- (39,002,711)
Dividends on Cumulative
Preferred Stock -- -- (382,748) -- --
Dividends on Convertible
Preferred Stock -- -- (3,306,700) -- --
---------- -------- ------------ ----------- -------------
Balance, June 30, 1998 12,923,817 $129,238 $156,040,272 $3,756,840 $(264,827,061)
========== ======== ============ ========== =============
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,
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1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(31,829,003) $(39,002,711)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation and amortization 15,915,958 15,113,964
Minority interest in subsidiaries (48,249) (6,821)
Extraordinary gain on early extinguishment of debt (826,754)
Amortization of original issue discount 14,410,517 16,438,151
Amortization of imputed discount on debt 349,632 --
(Gain) loss on sales and writedown of assets (103,322) 1,054,662
Provision for losses on subscriber receivables 273,050 160,766
Changes in assets and liabilities-
Decrease in subscriber receivables 461,560 86,028
Decrease in notes and other receivables 259,688 5,920
(Increase) decrease in prepaid expenses and other assets 174,571 (269,890)
Decrease in accounts payable (285,076) (1,084,293)
Increase (decrease) in accrued expenses (555,931) 805,682
Decrease in subscriber advance payments and deposits (514,398) (108,415)
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Net cash used in operating activities (2,317,757) (6,806,957)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (45,011,696) (52,374,023)
Proceeds principally from maturity of marketable securities 77,561,712 54,827,693
Proceeds from sales of assets 842,722 522,093
Acquisition of BTA/LMDS licenses (213,284) (711,264)
Investment in wireless systems and equipment (5,961,731) (2,269,380)
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Net cash provided by (used in) investing activities 27,217,723 (4,881)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable (7,943,540) (820,646)
Buyout of minority interest (2,000) --
Dividends in Cumulative Preferred Stock -- (382,748)
------------ ------------
Net cash used in financing activities (7,945,540) (1,203,394)
------------ ------------
Net increase (decrease) in cash 16,954,426 (8,015,232)
Cash and cash equivalents, beginning of year 41,305,795 31,756,014
------------ ------------
Cash and cash equivalents, end of period $ 58,260,221 $ 23,740,782
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest, net of amount capitalized $ 580,404 $ 544,749
Cash received for interest $ 2,481,217 $ 1,938,366
Supplemental disclosures of noncash investing and financing activities:
During 1997 and 1998, the Company acquired frequency rights in exchange for a note payable in the amount of
$1,707,000 and $536,000, 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 June 30, 1998, the consolidated
statements of operations for the three and six months ended June 30, 1997 and
1998 and the consolidated statements of stockholders' deficit and cash flows for
the six months ended June 30, 1997 and 1998 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, 1997 and 1998 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, 1997 included in the
Company's filing on Form 10-K. The results of operations for the three and six
month periods ended June 30, 1997 and 1998 are not necessarily indicative of the
operating results for the full year.
(2) Basic and Diluted Earnings per Share:
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share". There was no effect on earnings per
share for the three and six month periods ended June 30, 1997 and 1998. The
basic and diluted net loss per common share has been computed based on the
weighted average of common shares outstanding.
(3) Commitments and Contingencies:
There are certain claims against the Company which are incidental to the
ordinary course of business. In the opinion of management, the ultimate
resolution of these claims will not have a material effect on the financial
statements.
(4) Local Multipoint Distribution Service ("LMDS") Auction:
On February 18, 1998, the FCC commenced an auction in the LMDS. LMDS
operates at a higher frequency than MDS and has a shorter transmission range,
requiring the use of multiple cells in order to serve an entire market. Within
each of the 493 Basic Trading Areas ("BTA's") auctioned there are two frequency
blocks, an "A block" and a substantially smaller "B block" of spectrum. The
Company participated in the auction and was high bidder on the Phoenix, Arizona
"B block" license and the Prescott, Arizona "A block" license. The total
payment required to the FCC for the two licenses is $3.2 million. The Company
has made the initial 20% payment for the two licenses. The remaining amount
owed for the licenses will be paid when the licenses are granted.
(5) Exchange Offers:
On April 24, 1998, the Company filed a registration statement with the
Securities and Exchange Commission relating to exchange offers being made by it
to holders of its 13 1/8% Senior Discount Notes due 2004 ("Old Discount Notes")
and Convertible Cumulative Pay-in-Kind Preferred Stock (the "Preferred Stock").
On terms set forth in the prospectus that is a part of the registration
statement, PCTV has offered to exchange (i) up to $85.0 million principal amount
at maturity ($58.0 million initial accreted value) of its new 13-1/8% Senior
Subordinated Discount Notes due 2003 ("New Discount Notes"), 4,887,267 shares of
PCTV's Common Stock, par value $.01 per share (the "Common Stock") and $42.5
million cash for all of its outstanding $332.0 million principal amount at
maturity ($258.0 million accreted value at June 30, 1998) of its Old Discount
Notes (the "Debt Exchange Offer"); and (ii) up to $15.0 million principal amount
at maturity ($10.2 million initial accreted value) of its New Discount Notes and
2,597,054 shares of Common Stock for all of its outstanding Preferred Stock (the
"Preferred Stock Exchange Offer"). After the consummation of the exchange
offers, PCTV would have 20,408,138 shares of Common Stock outstanding.
Consummation of the exchange offers are subject to a number of conditions,
including, but not limited to, minimum participation levels, receipt of a new
senior secured credit facility, and stockholder approvals. The Company cannot
predict at this time whether the proposed Debt Exchange Offer and Preferred
Stock Exchange
6
Offer will be successfully consummated. The primary benefit of the successful
consummation of the exchange offers would be to significantly de-leverage the
Company's balance sheet thereby enhancing the Company's financial flexibility in
pursuing its strategic business plan.
(6) Dispositions:
In January 1996, the Company acquired rights to non-strategic wireless
frequencies and certain other assets, including leases for 16 channels in
Anahuac, Texas. In May 1998, the Company requested of the lessor to be released
under the various lease agreements and for the rights to these frequencies to be
returned to the FCC, resulting in a loss of approximately $1.6 million.
(7) Subsequent Events:
On July 2, 1998, the Company closed on a previously announced sale of its
service contracts and video equipment related to providing analog video services
to multiple dwelling unit properties in Chicago to OnePoint Communications, Inc.
for $13.0 million. Net proceeds of approximately $9.3 million has been received
on the transaction. Additional proceeds of up to $3.1 million is due the
Company upon the grant of certain licenses by the FCC ($2.9 million held in an
escrow account) and upon receipt of certain consents ($.2 million). The service
contracts sold represent approximately 12,500 analog video customers.
On July 17, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") delisted the
Company's Common Stock from the Nasdaq SmallCap Market as a result of the
Company's failure to satisfy a certain market capitalization maintenance
standard and independent director requirement. The Company's Common Stock is
currently quoted on the OTC Bulletin Board.
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 compressed digital
video service and/or develop a high- speed data communications service, 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 data communications
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, 1997.
RESULTS OF OPERATIONS:
Strategic Direction
- -------------------
The Company's strategy has been to focus on (i) further development of its
high-speed data communications service marketed under the name SpeedChoice/TM/
(described below under "Liquidity and Capital Resources"), (ii) preparations for
the launch of digital video technology in the Company's Phoenix market, and
(iii) further technical analysis of the potential use of the Company's wireless
spectrum, subject to regulatory approvals, for two-way data communications
services. The Company first began offering the SpeedChoice high-speed data
7
communications service in the Detroit market in October 1997 and in the Phoenix
market in March 1998. With respect to the Company's proposed digital video
system, the Company is currently working to resolve certain technical issues
relating to the desired performance of the system. The Company now expects the
launch of a compressed digital video service to occur in the second half of
1998. When the Company offers this service in a market, it anticipates that it
will offer the service in conjunction with the offering of the SpeedChoice
service. Both the SpeedChoice service and digital 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
high-speed data communications services.
Revenues
- --------
Revenues decreased $1.8 million or 20.5% from the three month period ended
June 30, 1997 to 1998 and $3.4 million or 19.3% from the six month period ended
June 30, 1997 to 1998. The decrease for the three and six month periods is
principally attributable to a lower customer count ($1.3 million and $2.4
million for the three and six month periods, respectively) resulting from the
Company's suspension of the growth of its analog video customer base and lower
third party installation revenues ($.4 million and $.7 million for the three and
six month periods, respectively). Third party installation revenue resulted
from the Company performing installation services for another company that
provides a video service outside of our service area. This installation
activity stopped in the fourth quarter of 1997. The decrease in customer count
was also affected by the sale of 8,800 multiple dwelling units in December 1997
which accounted for 3,900 customers. This sale of MDU's accounts for $.4
million and $.8 million, respectively, of the decrease in 1998 revenues compared
to 1997 attributable to the decrease in customer count. Customer count
decreased from 75,200 at June 30, 1997 to 62,400 at June 30, 1998, or 17.0%.
Customer count was 67,300 at December 31, 1997. As customers disconnected their
service in the normal course of business due to moving, changing video services
or other reasons, the Company did not actively pursue replacing these customers.
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses increased $.6 million or 5.4% from the three
month period ended June 30, 1997 to 1998 and $.3 million or 1.4 % from the six
month period ended June 30, 1997 to 1998 primarily due to costs incurred for the
launch of the high-speed data communications service ($1.5 million and $2.9
million for the three and six month periods, respectively). Partially
offsetting these increases are lower costs associated with suspending the growth
of the analog video customer base, primarily programming costs ($.4 million and
$.6 million for the three and six month periods, respectively), and salaries and
related benefits ($.3 million and $1.1 million for the three and six month
periods, respectively). In addition, there was a decrease in costs associated
with third party installations ($.3 million and $.5 million for the three and
six month periods, respectively). Costs of third-party installation resulted
from the Company performing installation services for another company that
provides a video service outside of our service area. This installation
activity stopped in the fourth quarter of 1997. The high-speed data
communications service costs incurred in 1998 are those expenditures related to
the launch of the Company's SpeedChoice service.
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, 1997 to 1998 principally due to a decrease in
amounts capitalized due to the Company's suspending the growth of its analog
video 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 begin to increase as a result of capital expenditures
for the high-speed data communications and digital video technology.
Operating Loss
- --------------
Operating loss increased to $11.8 million from $9.6 million and to $22.8
million from $20.0 million for the three and six months ended June 30, 1998 from
the comparable period of the prior year principally due to the aforementioned
decrease in revenues and increased operating costs, partially offset by
decreases in depreciation and amortization. Cash flows from operating
activities decreased to ($6.8) million from ($2.3) million primarily due to
8
a decline in earnings before interest, taxes, depreciation and amortization
("EBITDA") of $3.6 million and interest income, net of cash interest expense of
$.6 million. EBITDA should not be considered as an alternative to net income or
any other GAAP measure of performance or as an alternative indicator of the
Company's performance or to cash flows generated by operating, investing and
financing activities or as any alternative indicator of cash flows or measure of
liquidity. EBITDA is commonly used in the cable television and wireless
communications industries as a relevant measure of cash flow and performance and
therefore useful to investors. EBITDA as calculated by the Company may not be
comparable to similarly titled measures reported by other companies since all
companies and analysts do not calculate EBITDA in the same manner.
Gain (Loss) on Sales and Writedown of Assets
- --------------------------------------------
Gain (loss) on sales and writedown of assets for the 1998 period includes a
$1.6 million write-off of non-strategic frequency rights, partially offset by a
$.4 million gain on sale of a non-strategic frequency.
Gain (loss) on sales and writedown of assets for the 1997 period includes a
$.6 million gain on sale of a non-strategic frequency, offset by a $.5 million
writedown of notes receivable and other assets. In 1994 the Company made a loan
for $3.5 million to a majority stockholder of Specchio Developers Investment
Corp. ("SDIC") in return for a note that bears interest at the prime rate plus
2%. This loan was collateralized by 180,000 shares of the common stock of the
Company received by him in a merger transaction in which the Company acquired
SDIC on May 14, 1994. This write-down primarily relates to the write-down of
this note to the fair market value of the collateral received, which is the
Company's Common Stock. Fair market value was determined by using the closing
stock price.
Interest Expense
- ----------------
Interest expense was $8.7 million and $17.1 million for the three and six
months ended June 30, 1998 compared to $7.8 million and $15.5 million in the
corresponding 1997 periods. The increase in interest expense from 1997 to 1998
was a result of the accretion of the Senior Discount Notes. Non-cash interest
expense totaled $8.3 million and $16.4 million for the three and six month
periods ended June 30, 1998 compared to $7.4 million and $14.8 million in the
corresponding 1997 periods.
Interest Income and Other
- -------------------------
Interest income and other was $1.0 million and $2.0 million for the three
and six months ended June 30, 1998 compared to $1.3 million and $2.7 million in
the corresponding 1997 periods. The decrease in the 1998 periods compared to
1997 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.
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 six month periods ended June 30, 1998, the Company
incurred net losses of approximately $20.7 million and $39.0 million compared to
$15.3 million and $31.8 million for the comparable 1997 periods. These net
losses are principally attributable to the significant expenses incurred in
connection with the development of the Company's business. The Company expects
to continue to incur net losses while it develops and expands its wireless
communications systems.
Year 2000
- ---------
The Company is currently in the process of evaluating its information
technology infrastructure for the Year 2000 compliance. The Company is
utilizing both internal and external resources to identify, correct or
reprogram, and test the systems to ensure compliance. The Company does not
expect that the cost to modify its information technology infrastructure to be
Year 2000 compliant will be material to its financial condition or results
9
of operations. The Company expects its Year 2000 project to be completed on a
timely basis. However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be converted on a timely
basis. A failure to convert successfully by another company could have an
adverse effect on the Company's systems. All significant software systems
utilized by the Company are provided under current licenses by third party
firms. The Company believes that these firms have Year 2000 compliance programs
in place.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash, cash equivalents and marketable securities decreased to $69.8 million
at June 30, 1998 from $80.3 million at December 31, 1997, a decrease of $10.5
million. This decrease is primarily attributable to cash used in operating
activities, investment in wireless systems and equipment, repayment of notes
payable and payment of preferred stock dividends, 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.
The Company launched a high-speed data communications service in the Detroit
market in October 1997 and in the Phoenix market in March 1998. The service is
being marketed under the name SpeedChoice/TM/. At this time, the SpeedChoice
service does not have a material number of customers. The Company's ability to
further develop the SpeedChoice 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 service 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
service; and fourth, because the Company has never previously operated any data
communications 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 service.
With respect to the Company's proposed digital video system, the Company is
currently working to resolve certain technical issues relating to the desired
performance of the system. The Company now expects to launch the digital video
service in Phoenix in the second half of 1998. When the Company offers this
service, it anticipates that it will offer the service in conjunction with the
offering of the SpeedChoice service. As disclosed previously, based on its
expected transition to a digital video service, the Company does not plan to add
to its analog customer base.
The Company anticipates that the development of its wireless communications
systems with high-speed data communications service and digital video technology
will involve capital expenditures higher than those involved in implementing
analog technology because of the costs associated with the addition of a new
product line, high-speed data communications, and increased costs for the more
complex converter boxes and other equipment which utilize the digital
technology. The Company estimates that it will spend $15.6 million in 1998 on
capital expenditures. The Company has spent $3.0 million of this $15.6 million
in the six months ended June 30, 1998. Also in 1998, the Company will make $7.4
million in expenditures for debt payments of which $.8 million has been spent in
the six months ended June 30, 1998. To fund such 1998 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 General Instruments
Corporation ("GIC") pursuant to which the Company is obligated to purchase
50,000 converter boxes over the three year life of the contract. The Company
can cancel its minimum purchase obligation by paying a per box cancellation fee.
The Company's anticipated 1998 payments for converter boxes under the terms
described above have been included in the Company's estimates of capital
expenditures for 1998. 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.
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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, and Phoenix 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 250
properties containing 51,000 individual units located in Houston, Phoenix and
Chicago, which represents approximately 17,000 analog video customers. On July
2, 1998, the Company closed on the sale of its Chicago service contracts
representing approximately 12,500 customers for $13.0 million to OnePoint
Communications, Inc. Net proceeds of approximately $9.3 million has been
received on the transaction. Additional proceeds of up to $3.1 million is due
the Company upon the grant of certain licenses by the FCC ($2.9 million held in
an escrow account) and upon receipt of certain consents ($.2 million). The
service contracts sold represent approximately 12,500 analog video customers.
The Company also has a letter of intent with OnePoint Communications to sell its
Phoenix service contracts representing 825 customers for $1.0 million. The
Company is also in discussions to sell its Houston service contracts. It is
uncertain whether a definitive agreement will be executed or whether any such
transaction will be completed for the Phoenix or Houston service contracts.
The level of capital expenditures incurred for customer installations is
primarily variable and dependent on the customer installation activities of the
Company. Therefore, actual customer installation expenditures may be more or
less than the Company's estimate. Further significant capital expenditures for
customer installations are expected to be incurred by the Company in 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
internet and digital markets and slow down its system expansion activities in
its operating markets.
The Company has experienced negative cash flow from operations in each year
since its formation and, the Company expects to continue to experience negative
consolidated cash flow from operations due to operating costs associated with
its system development, expansion and acquisition activities. Until sufficient
cash flow is generated from operations, the Company will have to utilize its
current capital resources and external sources of funding to satisfy its capital
needs. The development of wireless communications systems in the Company's
major markets referred to above in subsequent years, the development of the
Company's other markets, acquisitions of additional wireless frequency rights
and wireless communications systems and the Company's general corporate
activities will require the Company to secure significant additional financing
in the future and there can be no assurance that such financing will be
available when required.
On April 24, 1998, the Company filed a registration statement with the
Securities and Exchange Commission relating to exchange offers being made by it
to holders of its 13 1/8% Senior Discount Notes due 2004 ("Old Discount Notes")
and Convertible Cumulative Pay-in-Kind Preferred Stock (the "Preferred Stock").
On terms set forth in the prospectus that is a part of the registration
statement, PCTV has offered to exchange (i) up to $85.0 million principal amount
at maturity ($58.0 million initial accreted value) of its new 13-1/8% Senior
Subordinated Discount Notes due 2003 ("New Discount Notes"), 4,887,267 shares of
PCTV's Common Stock, par value $.01 per share (the "Common Stock") and $42.5
million cash for all of its outstanding $332.0 million principal amount at
maturity ($258.0 million accreted value at June 30, 1998) of its Old Discount
Notes (the "Debt Exchange Offer"); and (ii) up to $15.0 million principal amount
at maturity ($10.2 million initial accreted value) of its New Discount Notes and
2,597,054 shares of Common Stock for all of its outstanding Preferred Stock (the
"Preferred Stock Exchange Offer"). After the consummation of the exchange
offers, PCTV would have 20,408,138 shares of Common Stock outstanding.
Consummation of the exchange offers are subject to a number of conditions,
including, but not limited to, minimum participation levels, receipt of a new
senior secured credit facility, and stockholder approvals. The Company cannot
predict at this time whether the proposed Debt Exchange Offer and Preferred
Stock Exchange Offer will be successfully consummated. The primary benefit of
the successful consummation of the exchange offers would be to significantly de-
leverage the Company's balance sheet thereby enhancing the Company's financial
flexibility in pursuing its strategic business plan.
On July 17, 1998, the Nasdaq Stock Market, Inc. ("Nasdaq") delisted the
Company's Common Stock from the Nasdaq SmallCap Market as a result of the
Company's failure to satisfy a certain market capitalization maintenance
standard and independent director requirement. The Company's Common Stock is
currently quoted on the OTC Bulletin Board.
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PART II OTHER INFORMATION
Item 1- Legal Proceedings
Wireless Enterprises, Inc. and Indianapolis Wireless, L.P. had filed a
complaint against the Company in U.S. District Court in Connecticut. The
complaint alleged causes of action based on fraud, tortious interference with
contract, negligence, breach of good faith, and unfair trade practices. The
complaint alleged 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 alleged that by taking
such actions the Company breached certain obligations to the plaintiffs. The
complaint sought money damages and injunctive relief. While the Company had
vigorously defended itself against this lawsuit and believed that it would be
successful in its defense, to avoid the further costs of protracted litigation,
the Company agreed to a settlement of this lawsuit. To settle all claims made
by the plaintiffs in this lawsuit, the Company agreed to make a total payment of
$275,000 to the plaintiffs, which amount was paid on August 6, 1998.
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
None
Pursuant to the requirements to the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized
PEOPLE'S CHOICE TV CORP.
------------------------
(Registrant)
Date: August 12, 1998 By /s/ Charles F. Schwartz
-----------------------------
Name: Charles F. Schwartz
Senior Vice President and
Chief Financial Officer
and Principal Accounting
Officer
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