<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1996
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
Commission File Number 0-21389
-------
PEGASUS COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0374669
- ------------------------------- ---------------------
(State of other jurisdiction of (IRS Employer
incorporation of organization) Identification Number)
c/o Pegasus Communications Management Company,
5 Radnor Corporate Center; Suite 454, Radnor, PA 19087
- ------------------------------------------------ ---------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (610) 341-1801
-------------
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 for 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. Yes __X__ No _____
Number of shares of each class of the registrant's common stock outstanding as
of November 11, 1996:
Class A, Common Stock, $0.01 par value 4,471,437
Class B, Common Stock, $0.01 par value 4,581,900
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 1996
Page
----
Part I. Financial Information
Item 1 Combined Financial Statements
Combined Balance Sheets
December 31, 1995 and September 30, 1996 3
Combined Statements of Operations
Three months ended September 30, 1995 and 1996 4
Combined Statements of Operations
Nine months ended September 30, 1995 and 1996 5
Combined Statements of Cash Flows
Nine months ended September 30, 1995 and 1996 6
Notes to Combined Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. 13
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K. 18
Signature 19
2
<PAGE>
Pegasus Communications Corporation
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,974,747 $ 5,668,285
Restricted cash 9,881,198 --
Accounts receivable, less allowance for doubtful
accounts at December 31, 1995 and September 30,
1996 of $238,000 and $256,000, respectively 4,884,045 4,467,768
Program rights 931,664 1,451,077
Inventory 1,100,899 233,629
Deferred taxes 42,440 77,887
Prepaid expenses and other 329,895 1,480,774
------------- -------------
Total current assets 29,144,888 13,379,420
Property and equipment, net 16,571,538 26,015,359
Intangible assets, net 48,028,410 80,780,835
Program rights 1,932,680 2,227,268
Deposits and other 92,325 166,498
------------- -------------
Total assets $ 95,769,841 $ 122,569,380
============= =============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Notes payable $ 316,188 $ 51,666
Advances payable - related party 468,327 --
Current portion of long-term debt 271,934 376,127
Accounts payable 2,494,738 2,398,242
Accrued interest 5,173,745 3,190,440
Accrued expenses 1,712,603 4,767,734
Current portion of program rights payable 1,141,793 1,581,374
------------- -------------
Total current liabilities 11,579,328 12,365,583
------------- -------------
Long-term debt, net 82,308,195 117,240,865
Program rights payable 1,421,399 1,539,915
Deferred taxes 211,902 137,349
------------- -------------
Total liabilities 95,520,824 131,283,712
Commitments and contingent liabilities -- --
Total equity (deficiency):
Preferred stock -- --
Common stock 1,700 1,700
Additional paid-in capital 7,880,848 7,880,848
Retained earnings (deficit) 1,825,283 (3,203,594)
Partners' deficit (9,458,814) (13,393,286)
------------- -------------
Total equity (deficiency) 249,017 (8,714,332)
------------- -------------
Total liabilities and equity $ 95,769,841 $ 122,569,380
============= =============
</TABLE>
See accompanying notes to combined financial statements
3
<PAGE>
Pegasus Communications Corporation
Combined Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1995 1996
---------- -----------
(unaudited)
<S> <C> <C>
Revenues:
Broadcasting revenue,
net of agency commissions $ 3,355,005 $ 5,020,614
Barter programming revenue 1,315,140 1,337,643
Basic and satellite service 2,561,551 3,853,157
Premium services 436,671 540,565
Other 214,179 185,635
------------ ------------
Total revenues 7,882,546 10,937,614
------------ ------------
Operating expenses:
Barter programming expense 1,315,140 1,337,643
Programming 1,247,131 2,198,216
General and administrative 1,127,390 1,555,994
Technical and operations 666,517 815,158
Marketing and selling 764,771 1,518,797
Incentive compensation 87,788 175,625
Corporate expenses 411,983 365,072
Depreciation and amortization 2,313,046 3,574,631
------------ ------------
Loss from operations (51,220) (603,522)
Interest expense (2,619,964) (3,359,071)
Interest income 184,362 20,026
Other expenses, net 15,665 (14,952)
------------ ------------
Loss before income taxes
and extraordinary items (2,471,157) (3,957,519)
Provision for income taxes 10,000 22,756
------------ ------------
Loss before extraordinary items (2,481,157) (3,980,275)
Extraordinary gain (loss) from
extinguishment of debt, net 6,931,323 (250,603)
------------ ------------
Net income (loss) $ 4,450,166 ($4,230,878)
============ ============
Income (loss) per share:
Loss before extraordinary items ($0.47) ($0.76)
Extraordinary (loss) gain 1.32 (0.05)
------------ ------------
Net income (loss) $0.85 ($0.81)
============ ============
Weighted average shares outstanding
(see note 7) 5,235,833 5,235,833
============ ============
</TABLE>
See accompanying notes to combined financial statements
4
<PAGE>
Pegasus Communications Corporation
Combined Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Broadcasting revenue,
net of agency commissions $ 9,770,738 $14,347,439
Barter programming revenue 3,635,100 3,820,000
Basic and satellite service 7,362,475 9,964,424
Premium services 1,238,290 1,488,513
Other 477,751 499,477
------------ ------------
Total revenues 22,484,354 30,119,853
------------ ------------
Operating expenses:
Barter programming expense 3,635,100 3,820,000
Programming 3,883,754 5,862,461
General and administrative 3,021,519 4,053,184
Technical and operations 2,024,047 2,425,639
Marketing and selling 2,818,302 3,893,414
Incentive compensation 443,995 605,390
Corporate expenses 1,025,023 1,074,190
Depreciation and amortization 6,240,180 8,479,427
------------ ------------
Loss from operations (607,566) (93,851)
Interest expense (5,969,800) (8,929,328)
Interest income 184,362 171,513
Other expenses, net (68,633) (76,493)
------------ ------------
Loss before income taxes
and extraordinary items (6,461,637) (8,928,159)
Provision (benefit) for income taxes 30,000 (110,000)
------------ ------------
Loss before extraordinary items (6,491,637) (8,818,159)
Extraordinary gain (loss) from
extinguishment of debt, net 6,931,323 (250,603)
------------ ------------
Net income (loss) $ 439,686 ($ 9,068,762)
============ ============
Income (loss) per share:
Loss before extraordinary items ($1.24) ($1.68)
Extraordinary (loss) gain 1.32 (0.05)
------------ ------------
Net income (loss) $0.08 ($1.73)
============ ============
Weighted average shares outstanding
(see note 7) 5,235,833 235,833
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Pegasus Communications Corporation
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
1995 1996
---------------- ----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 439,686 ($ 9,068,762)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary (gain) loss on
extinguishment of debt, net (6,931,323) 250,603
Depreciation and amortization 6,240,180 8,479,427
Program rights amortization 1,140,261 1,063,439
Accretion on discount of bonds 294,066
Bad debt expense 140,309 (92,413)
Deferred income taxes 30,000 (110,000)
Payments of programming rights (1,006,527) (1,319,343)
Change in assets and liabilities:
Accounts receivable 148,338 (184,324)
Inventory (554,492) 867,270
Restricted cash (9,768,877) 9,875,818
Prepaid expenses and other (70,821) (1,152,317)
Accounts payable & accrued expenses (652,472) 3,495,061
Accrued interest 2,144,304 (2,292,849)
Deposits and other 463 (74,173)
------------ ------------
Net cash provided (used in) by operating activities (8,700,971) 10,031,503
Cash flows from investing activities:
Acquisitions -- (43,050,514)
Capital expenditures (2,063,765) (2,606,717)
Purchase of intangible assets (1,912,368) (843,210)
Other (1,200) --
------------ ------------
Net cash used for investing activities (3,977,333) (46,500,441)
Cash flows from financing activities:
Proceeds from long-term debt 82,439,688 247,736
Borrowings on revolving credit facility 2,591,335 40,400,000
Proceeds from long-term borrowings
from related parties 13,000 --
Repayments on revolving credit facility (51,762,444) (8,894,653)
Debt issuance costs (3,640,450) (1,383,670)
Capital lease repayments (159,374) (206,937)
Distributions to Parent (12,500,000) --
Proceeds from the issuance of common stock 4,000,000 --
------------ ------------
Net cash provided by financing activities 20,981,755 30,162,476
Net increase (decrease) in cash and cash equivalents 8,303,451 (6,306,463)
Cash and cash equivalents, beginning of period 1,380,029 11,974,747
============ ============
Cash and cash equivalents, end of period $ 9,683,480 $ 5,668,285
============ ============
</TABLE>
See accompanying notes to combined financial statements
6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries and affiliates stated below, the "Company"), a Delaware corporation
incorporated in May 1996, is a direct subsidiary of Pegasus Communications
Holdings, Inc. ("PCH" or the "Parent").
Pegasus Media & Communications, Inc. ("PM&C") is a diversified media
and communications company whose subsidiaries consist of Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT"), Pegasus
Broadcast Associates, L.P. ("PBA"), Pegasus Satellite Television, Inc. ("PST")
and MCT Cablevision, Limited Partnership ("MCT"). PBT operates broadcast
television stations affiliated with the Fox Broadcasting Company television
network ("Fox"). PCT, together with its subsidiary, Pegasus Cable Television of
Connecticut, Inc. ("PCT-CT") and MCT operate cable television systems that
provide service to individual and commercial subscribers in New England and
Puerto Rico, respectively. PST provides direct broadcast satellite service to
customers in the New England area. PBA holds a television station license which
simulcasts programming from a station operated by PBT.
On October 8, 1996, the Company completed an initial public offering
(the "Initial Public Offering") in which it sold 3,000,000 shares of its Class A
Common Stock to the public at a price of $14.00 per share resulting in net
proceeds to the Company of $38.1 million. The Company applied the net proceeds
from the Initial Public Offering as follows: (i) $17.9 million for the payment
of the cash portion of the purchase price of the Michigan/Texas DBS Acquisition,
(ii) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay the
indebtedness under the Credit Facility, (iv) $1.9 million to make a payment on
account of the Portland Acquisition, (v) $1.4 million for the payment of the
cash portion of the purchase price of the Management Agreement Acquisition, and
(vi) $1.4 million for the Towers Purchase. The Management Agreement Acquisition
and the Towers Purchase were accounted for using the pooling of interest method.
On October 31, 1994, the limited partnerships, which owned and operated
PCH's broadcast television, cable and satellite operations, restructured and
transferred their assets to the PM&C's subsidiaries, PBT, PCT and PST,
respectively. This reorganization has been accounted for as if a pooling of
interests had occurred.
Pegasus Towers L.P. ("Towers"), an affiliated entity of Pegasus, owns
and operates television and radio transmitting towers located in Pennsylvania
and Tennessee.
Pegasus Communications Management Company ("PCMC"), an affiliated
entity of Pegasus, provides certain management and accounting services to its
affiliates.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying unaudited combined financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The combined financial statements
include the accounts of Pegasus, PM&C, PBT, PCT, PST, PBA, MCT, Towers and PCMC
and their subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
The unaudited consolidated financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation of financial position and results of
operations for the interim period.
7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and disclosure of contingencies. Actual results could differ from
those estimates.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at lower of cost or market on a
first-in, first-out basis.
Revenue:
The Company operates in three industry segments: broadcast television
("TV"), direct broadcast satellite television ("DBS") and cable television
("Cable"). The Company recognizes revenue in its TV operations when advertising
spots are broadcast. The Company recognizes revenue in its DBS and Cable
operations when video and audio services are provided.
Programming:
The Company obtains a portion of its programming, including presold
advertisements, through its network affiliation agreement with Fox and also
through independent producers. The Company does not make any direct payments for
this programming. For running network programming, the Company receives payments
from Fox. For running independent producers' programming, the Company receives
no direct payments. Instead, the Company retains a portion of the available
advertisement spots to sell for its own account. Barter programming revenue and
the related expense are recognized when the presold advertisements are
broadcasted. These amounts are presented gross as barter programming revenue and
expense in the accompanying consolidated statements of operations.
Cash, Cash Equivalents and Restricted Cash:
Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. The Company has cash balances
in excess of the federally insured limits at various banks.
3. Common Stock:
On July 7, 1995, as part of a plan of reorganization, the Company agreed to
exchange 161,500 shares of Class A Common Stock for all of the existing common
stock outstanding of the Company, all outstanding shares of PST and a 99%
limited partnership interest in PBA. The Company also acquired all of the
outstanding interests of MCT for nominal consideration. Additionally, the
Company issued 8,500 shares of Class B Common stock on July 7, 1995 in
connection with the note offering (see footnote 4).
8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
3. Common Stock (continued):
At December 31, 1995 and September 30, 1996, common stock consists of
the following:
<TABLE>
<CAPTION>
<S> <C>
Pegasus Class A common stock, $0.01 par value; 230,000 shares
authorized; 161,500 issued and outstanding . . . . . . . . . . . $1,615
Pegasus Class B common stock, $0.01 par value; 20,000 shares
authorized; 8,500 issued and outstanding . . . . . . . . . . . . 85
---------
Total common stock . . . . . . . . . . . . . . . . . . . . . . $1,700
=========
</TABLE>
Pro forma, as if the Initial Public Offering, the exchange of the PM&C
Class B Shares for shares of the Company's Class A Common Stock (the "Registered
Exchange Offer") and the issuance of Class A Common Stock in transaction
occuring concurrently with the Initial Public Offering had happened at
September 30, 1996, common stock consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Pro Forma
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 4,663,229 issued and outstanding . . . . . . . . . $46,632
Pegasus Class B common stock, $0.01 par value; 15.0 million shares
authorized; 4,581,900 issued and outstanding . . . . . . . . . 45,819
-----------
Total common stock . . . . . . . . . . . . . . . . . . . . . . $92,451
===========
</TABLE>
The pro forma data above assume that the Registered Exchange Offer has
been consummated and that all holders of the PM&C Class B Shares accept the
offer. If all Holders do not accept this offer, the actual pro forma data would
differ from that set forth herein.
4. Long-Term Debt:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
---------------- -----------------
<S> <C> <C>
Series B Notes payable by PM&C, due 2005, interest at (in thousands)
12.5%, payable semi-annually in arrears on January 1,
and July 1, net of unamortized discount of
$3,804,546 and $3,510,480 as of December 31, 1995 and
September 30, 1996, respectively........................ $81,195 $81,490
Senior seven year revolving credit facility dated August
29, 1996, interest at the Company's option at either
the bank's prime rate, plus an applicable margin or
LIBOR, plus an applicable margin (8.25% at September
30, 1996).............................................. - 31,600
Mortgage payable, due 2000, interest at 8.75%.............. 518 503
Other...................................................... 761 3,849
---------------- -----------------
82,474 117,442
Less current maturities................................... 240 365
---------------- -----------------
Long-term debt............................................ $82,234 $117,077
================ =================
</TABLE>
On July 7, 1995, the Company sold 85,000 units consisting of
$85,000,000 12.5% Series A Senior Subordinated Notes due 2005 (the "Series A
Notes") and 8,500 shares of Class B Common stock. All of the Series A Notes were
exchanged for the Series B Notes which have substantially identical terms. The
net proceeds from the sale were used to (i) repay approximately $38.6 million in
loans and other obligations, (ii) repurchase $26.0 million of notes for
approximately $13.0 million resulting in an extraordinary gain of $10.2 million,
net of expenses of $2.8 million, (iii) make a $12.5 million distribution to PCH,
(iv) escrow $9.7 million for the purpose of paying interest on the Notes, (v)
pay $3.3 million in fees and expenses and (vi) fund proposed acquisitions.
9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
4. Long-Term Debt (continued):
Credit Facility
On August 29, 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility, which is collateralized by substantially all of the
assets of PM&C. On the same date, the Company had drawn $8.8 million to repay
all amounts outstanding under the $10.0 million senior collateralized five-year
revolving credit facility and approximately $22.8 million to fund the
acquisition of Dom's Tele-Cable, Inc. ("Dom's").
5. Commitments and Contingent Liabilities:
Legal Matters:
The operations of the Company are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities, including
the Connecticut Department of Public Utility Control ("DPUC"). During 1994, the
DPUC ordered a reduction in the rates charged by PCT-CT for its basic cable
service tier and equipment charges and refunds for related overcharges, plus
interest, retroactive to September 1, 1993 requiring PCT-CT to issue refunds
totaling $141,000. In December 1994, the Company filed an appeal with the FCC.
In March 1995, the FCC granted a stay of the DPUC's rate reduction and refund
order pending the appeal. The FCC has not ruled on the appeal and the outcome
cannot be predicted with any degree of certainty. The Company believes it will
prevail in its appeal. In the event of an adverse ruling, the Company expects to
make refunds in kind rather than in cash.
The Company is currently contesting a claim for unpaid premiums on its
workers insurance policy assessed by the state insurance fund of Puerto Rico.
Based upon current information available, the Company's liability related to the
claim is estimated to be less than $200,000.
From time to time the Company is also involved with claims that arise
in the normal course of business. In the opinion of management, the ultimate
liability with respect to the above claims will not have a material adverse
effect on the combined operations, cash flows or financial position of the
Company.
6. Acquisitions:
On January 29, 1996, PCH acquired 100% of the outstanding stock of
Portland Broadcasting, Inc. ("PBI"), a wholly owned subsidiary of Bride
Communications, Inc. ("BCI") which owns the tangible assets of WPXT, Portland,
Maine. PCH immediately transferred ownership of PBI to the Company. The
aggregate purchase price of PBI amounted to $11.7 million of which $4.2 million
was allocated to fixed and tangible assets and $7.5 million to goodwill. On
September 20, 1996, PCH acquired the FCC license and Fox Affiliation Agreement
of WPXT for aggregate consideration of $3.0 million.
Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc. and certain of its affiliates for approximately $5.0
million in cash, except for the FCC license and Fox affiliation agreement.
Additionally, WTLH License Corp., an unrestricted subsidiary of the Company,
entered into a put/call agreement regarding the FCC license and Fox affiliation
agreement with General Management Consultants, Inc. ("GMC"), the licensee of
WTLH, Tallahassee, Florida. As a result of entering into the put/call agreement,
the Company recorded $3.1 million in intangible assets and long term debt
representing the FCC license and Fox affiliation agreement and the related
contingent liability. The aggregate purchase price of the principal assets of
WTLH, Inc. amounted to $8.1 million of which $2.2 million was allocated to fixed
and tangible assets and $5.9 million to various intangible assets. The Company
programs WTLH under a Time Brokerage Agreement with GMC.
10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. Acquisitions (continued):
In addition, the Company granted the owners of WTLH a warrant to
purchase $1.0 million of stock at the initial public offering price. The warrant
expires 120 days after the effective date of the registration statement relating
to the Company's initial public offering.
Effective September 1, 1996, the Company acquired all of the assets of
Dom's for approximately $25.0 million in cash and $1.4 million in assumed
liabilities. Dom's operates cable systems serving ten communities contiguous to
the Company's Mayaguez, Puerto Rico cable system. The aggregate purchase price
of the principal assets of Dom's amounted to $26.4 million of which $4.7 million
was allocated to fixed and tangible assets and $21.7 million to various
intangible assets.
The following summary, prepared on a pro forma basis, combines the
results of operations as if the above stations and cable system had been
acquired as of the beginning of the periods presented, after including the
impact of certain adjustments, such as the Company's reduced commission rate,
payments to related parties, amortization of intangibles, interest expense and
related income tax effects. The pro forma information does not purport to be
indicative of what would have occurred had the acquisitions been made on those
dates or of results which may occur in the future. This pro forma does not
include the Michigan/Texas DBS Acquisition, the Ohio DBS acquisition or the New
Hampshire sale, all which did not occur as of September 30, 1996.
Nine Months Ended
September 30,
-----------------
(in thousands, except earnings per share) (unaudited)
1995 1996
---------- ---------
Net Revenues . . . . . . . . . . . . $32,756 $34,844
=========== ==========
Operating income (loss) . . . .. . . $1,277 $330
=========== ==========
Net loss . . . . . . . . . . . . . . . $(6,803) $(10,240)
=========== ==========
Net loss per share . . . . . . . . . $ (1.30) $(1.96)
=========== ==========
7. Other Events:
Additional Acquisitions and Sale
On May 30, 1996, PCH entered into an agreement with Harron
Communications Corp., under which the Company acquired the rights to provide
DIRECTV programming in certain rural areas of Michigan and Texas and the related
assets in exchange for approximately $17.9 million in cash and $11.9 million of
the Company's Class A Common Stock. This transaction was completed on October 8,
1996.
On November 6, 1996, the Company entered into an agreement with State
Cable TV Corp. to sell substantially all assets of its New Hampshire cable
system for approximately $7.1 million in cash. The Company anticipates
recognizing a gain in the transaction. This transaction is expected to be
completed in the first quarter of 1997.
On November 8, 1996, the Company acquired, from Horizon Infotech, Inc.,
a division of Chillicothe Telephone Company, the rights to provide DIRECTV
programming in certain rural areas of Ohio and the related assets in exchange
for approximately $12.0 million in cash.
11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Other Events (continued):
Pro Forma Income (Loss) Per Share
Historical earnings per share has not been provided since it is not
meaningful due to the combined presentation of Pegasus. Pro forma earnings per
share has been presented as if Pegasus operated as a consolidated entity for the
year ended December 31, 1995 and the nine months ended September 30, 1996.
The pro forma income (loss) per share has been calculated based upon
5,235,833 shares outstanding and has been retroactively applied. The pro forma
share information does not include 3.0 million shares issued in the Initial
Public Offering or the 852,110 shares issued in connection with the
Michigan/Texas DBS Acquisition. The pro forma average shares consists of the
following:
<TABLE>
<CAPTION>
Class A Class B Total
------- ------- -----
<S> <C> <C> <C>
o Exchange for 161,500 Class A shares of PM&C . . . . 3,380,435 3,380,435
o Exchange for 8,500 Class B shares of PM&C . . . . . 191,792 191,792
o Exchange for 5,000 shares of Parent non-voting
common stock . . . . . . . . . . . . . . . . . . 263,606 263,606
o Exchange for certain assets and liabilities of
PCMC at an initial public offering price of $14
per share . . . . . . . . . . . . . . . . . . . 1,400,000 1,400,000
============= ============ ============
455,398 4,780,435 5,235,833
============= ============ ============
</TABLE>
12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is a diversified media and communications company operating
in three business segments: TV, DBS and Cable. The Company owns and operates
five Fox affiliated television stations. The principal tangible assets of two of
such stations were acquired in the first quarter of 1996. DBS operations consist
of providing DIRECTV service in certain areas of New England, Michigan and Texas
in which the Company holds the exclusive right to provide such services. The
Company acquired the exclusive rights for providing DIRECTV services in Michigan
and Texas in October 1996. Its cable operations consist of systems in New
England and Puerto Rico. The Company acquired an additional Puerto Rico cable
system effective September 1, 1996.
TV revenues are derived from the sale of broadcast air time to local
and national advertisers. DBS revenues are derived from monthly customer
subscriptions, pay-per-view services, Digital Satellite System ("DSS") equipment
rentals, leases and installation charges. Cable revenues are derived from
monthly subscriptions, pay-per-view services, subscriber equipment rentals, home
shopping commissions, advertising time sales and installation charges.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions, and ratings and research expenditures, (iii)
technical and operations costs and (iv) general and administrative expenses. TV
programming expenses include the amortization of long-term program rights
purchases, music license costs and "barter" programming expenses which represent
the value of broadcast air time provided to TV program suppliers in lieu of
cash. DBS programming expenses consist of amounts paid to program suppliers, DSS
authorization charges and satellite control fees, each of which is paid on a per
subscriber basis, and DIRECTV royalties which are equal to 5% of program service
revenues. Cable programming expenses typically consist of amounts paid to
program suppliers on a per subscriber basis.
Location Cash Flow is defined as net revenues less location operating
expenses. Although Location Cash Flow is not a measure of performance under
generally accepted accounting principles, the Company believes that Location
Cash Flow is accepted within the Company's business segments as generally
recognized measures of performance and are used by analysts who report publicly
on performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for income
from operations, net income, net cash provided by operating activities or any
other measure for determining the Company's operating performance or liquidity
which is calculated in accordance with generally accepted accounting principles.
Discussion and Analysis of Operating Results
Three months ended September 30, 1996 compared to three months ended September
30, 1995
The Company's net revenues increased by approximately $3.1 million or
39% for the three months ended September 30, 1996 as compared to the same period
in 1995 as a result of (i) a $1.7 million or 37% increase in TV revenues of
which $225,000 or 13% was due to ratings growth which the Company was able to
convert into higher revenues and $1.5 million or 87% resulting from acquisitions
made in the first quarter of 1996, (ii) a $608,000 or 143% increase in revenues
from the increased number of DBS subscribers, (iii) a $482,000 or 48% increase
in Puerto Rico cable revenues due primarily to acquisitions effective September
1, 1996, (iv) a $228,000 or 13% increase in New England cable revenues due
primarily to rate increases and new combined service packages, and (v) a $8,000
increase in Tower rental income.
13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - (Continued)
The Company's total location operating expenses increased by
approximately $2.3 million or 34% for the three months ended September 30, 1996
as compared to the same period in 1995 as a result of (i) a $1.1 million or 34%
increase in TV operating expenses as the net result of a $22,000 or 1% decrease
in same station direct operating expenses and a $1.1 million increase
attributable to stations acquired in the first quarter of 1996, (ii) a $818,000
or 280% increase in operating expenses generated by the Company's DBS operations
due to an increase in programming costs of $401,000, royalty costs of $42,000,
marketing increases of $246,000, customer support charge increases of $98,000
and other DIRECTV costs such as security, authorization fees and telemetry and
tracking charges totaling $31,000, all generated from the increased number of
DBS subscribers, (iii) a $226,000 or 37% increase in Puerto Rico cable operating
expenses as the net result of a $22,000 or 4% decrease in same system direct
operating expenses and a $248,000 increase attributable to the system acquired
effective September 1, 1996, (iv) a $124,000 or 14% increase in New England
cable operating expenses due primarily to increases in programming costs
associated with the new combined service packages, and (v) a $3,000 increase in
Tower administrative expenses.
As a result of these factors, Location Cash Flow increased by $748,000
or 27% for the three months ended September 30, 1996 as compared to the same
period in 1995 as a result of (i) a $593,000 or 44% increase in TV Location Cash
Flow of which $252,000 or 42% was due to an increase in same station Location
Cash Flow and $341,000 or 58% was due to an increase attributable to stations
acquired in the first quarter of 1996, (ii) a $210,000 decrease in DBS Location
Cash Flow due to increased marketing costs, (iii) a $256,000 or 65% increase in
Puerto Rico cable Location Cash Flow of which $20,000 or 8% was due to an
increase in same system Location Cash Flow and $236,000 or 92% was due to an to
the system acquired effective September 1, 1996, (iv) a $104,000 or 12% increase
in New England cable Location Cash Flow, and (v) a $5,000 increase in Tower
Location Cash Flow.
As a result of these factors, incentive compensation which is
calculated from increases in Location Cash Flow increased by approximately
$87,000 for the three months ended September 30, 1996 as compared to the same
period in 1995 due mainly to the increases in revenues.
Corporate expenses decreased by $47,000 or 11% for the three months
ended September 30, 1996 as compared to the same period in 1995.
Depreciation and amortization expense increased by approximately $1.3
million for the three months ended September 30, 1996 as compared to the same
period in 1995 as the Company increased its fixed and intangible assets as a
result of three completed acquisitions during 1996.
As a result of these factors, income from operations decreased by
approximately $552,000 for the three months ended September 30, 1996 as compared
to the same period in 1995.
Interest expense increased by approximately $739,000 or 28% for the
three months ended September 30, 1996 as compared to the same period in 1995 as
a result of an increase in debt associated with the Company's 1996 acquisitions.
The Company's net loss increased by $8.7 million for the three months
ended September 30, 1996 as compared to the same period in 1995 and was the net
result of a decrease in income from operations of approximately $553,000, an
increase in interest expenses of $739,000, a decrease in extraordinary items of
$7.2 million from extinguishment of debt, an increase in the provision for
income taxes of $13,000 and a decrease in other expenses of approximately
$194,000.
14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - (Continued)
Nine months ended September 30, 1996 compared to nine months ended September 30,
1995
The Company's net revenues increased by approximately $7.6 million or
34% for the nine months ended September 30, 1996 as compared to the same period
in 1995 as a result of (i) a $4.8 million or 35% increase in TV revenues of
which $942,000 or 20% was due to ratings growth which the Company was able to
convert into higher revenues and $3.9 million or 80% resulting from acquisitions
made in the first quarter of 1996, (ii) a $1.6 million or 173% increase in
revenues from the increased number of DBS subscribers, (iii) a $521,000 or 17%
increase in Puerto Rico cable revenues due primarily to acquisitions effective
September 1, 1996, (iv) a $638,000 or 13% increase in New England cable revenues
due primarily to rate increases and new combined service packages, and (v) a
$28,000 increase in Tower rental income.
The Company's total location operating expenses increased by
approximately $4.7 million or 30% for the nine months ended September 30, 1996
as compared to the same period in 1995 as a result of (i) a $2.7 million or 27%
increase in TV operating expenses as the net result of a $47,000 or 1% decrease
in same station direct operating expenses and a $2.6 million increase
attributable to stations acquired in the first quarter of 1996, (ii) a $1.5
million or 159% increase in operating expenses generated by the Company's DBS
operations due to an increase in programming costs of $857,000, royalty costs of
$87,000, marketing increases of 246,000, customer support charge increases of
$119,000 and other DIRECTV costs such as security, authorization fees and
telemetry and tracking charges totaling $169,000, all generated from the
increased number of DBS subscribers, (iii) a $212,000 or 11% increase in Puerto
Rico cable operating expenses as the net result of a $36,000 or 2% decrease in
same system direct operating expenses and a $248,000 increase attributable to
the system acquired effective September 1, 1996, (iv) a $313,000 or 12% increase
in New England cable operating expenses due primarily to increases in
programming costs associated with the new combined service packages, and (v) a
$2,000 decrease in Tower administrative expenses.
As a result of these factors, Location Cash Flow increased by $3.0
million or 42% for the nine months ended September 30, 1996 as compared to the
same period in 1995 as a result of (i) a $2.1 million or 60% increase in TV
Location Cash Flow of which $942,000 or 45% was due to an increase in same
station Location Cash Flow and $1.2 million or 55% was due to an increase
attributable to stations acquired in the first quarter of 1996, (ii) a $191,000
increase in DBS Location Cash Flow, (iii) a $309,000 or 27% increase in Puerto
Rico cable Location Cash Flow of which $73,000 or 24% was due to an increase in
same system Location Cash Flow and $236,000 or 76% was due to the system
acquired effective September 1, 1996, (iv) a $325,000 or 14% increase in New
England cable Location Cash Flow, and (v) a $30,000 increase in Tower Location
Cash Flow.
As a result of these factors, incentive compensation which is
calculated from increases in Location Cash Flow increased by approximately
$161,000 for the nine months ended September 30, 1996 as compared to the same
period in 1995 due mainly to the increases in revenues.
Corporate expenses increased by $49,000 or 5% for the nine months ended
September 30, 1996 as compared to the same period in 1995 primarily due to the
initiation of public reporting requirements for PM&C.
Depreciation and amortization expense increased by approximately $2.2
million for the nine months ended September 30, 1996 as compared to the same
period in 1995 as the Company increased its fixed and intangible assets as a
result of three completed acquisitions during 1996.
As a result of these factors, income from operations increased by
approximately $513,000 for the nine months ended September 30, 1996 as compared
to the same period in 1995.
15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - (Continued)
Interest expense increased by approximately $3.0 million or 50% for the
nine months ended September 30, 1996 as compared to the same period in 1995 as a
result of a combination of the Company's issuance of Notes on July 7, 1995 and
an increase in debt associated with the Company's 1996 acquisitions. A portion
of the proceeds from the issuance of the Notes was used to retire floating debt
on which the effective interest rate was lower than the 12.5% interest rate
under the Notes.
The Company's net loss increased by $9.5 million for the nine months
ended September 30, 1996 as compared to the same period in 1995 and was the net
result of an increase in income from operations of approximately $513,000, an
increase in interest expenses of $3.0 million, a decrease in extraordinary items
of $7.2 million from extinguishment of debt, a decrease in the provision for
income taxes of $140,000 and a decrease in other expenses of approximately
$21,000.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash
provided by its TV and Cable operations and credit available under its credit
facilities. Additionally, the Company had $9.9 million in a restricted cash
account at December 31, 1995 that was used to pay interest on the Company's
Notes in January and July 1996. The Company's principal uses of its cash have
been to fund acquisitions, to meet its debt service obligations, to fund
investments in its TV and cable technical facilities and fund investments in
cable and DSS equipment that is rented or leased to subscribers.
During the nine months ended September 30, 1996, net cash provided by
operations was approximately $10.0 million, which together with $12.0 million of
cash on hand and $30.2 million of net cash provided by the Company's financing
activities was used to fund investing activities of $46.5 million. Investment
activities consisted of (i) the acquisitions of PBI and WTLH for approximately
$17.1 million, (ii) the purchase of Dom's for $26.0 million, (iii) the purchase
of the PCT-CT office facility and headend facility for $201,000, (iv) the fiber
upgrade in PCT-CT amounting to $323,000, (iii) the purchase of DSS units used as
rental and lease units amounting to $832,000 and (iv) maintenance and other
capital expenditures and intangibles totaling approximately $2.4 million. As of
September 30, 1996, the Company's cash on hand approximated $5.7 million.
The Company entered into a seven-year, senior collateralized revolving
credit facility (the "Credit Facility") for $50.0 million. The amount of the
Credit Facility will reduce quarterly beginning March 31, 1998. As of September
30, 1996, $31.6 had been drawn to retire the prior credit facility and to fund
the acquisition of Dom's. The Company believes that following the acquisitions
of Dom's, WTLH and WPXT it will have adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. However,
there can be no assurance that the future cash flows of the Company will be
sufficient to meet all of the Company's obligations and commitments.
On October 8, 1996, the Company completed an initial public offering in
which it sold 3,000,000 shares of its Class A Common Stock to the public at a
price of $14.00 per share. The proceeds were used to complete various
acquisitions, pay down debt totaling $3.0 million and $522,000 for general
corporate purposes (see note 1).
The Company closely monitors conditions in the capital markets to
identify opportunities for the effective and prudent use of financial leverage.
In financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness which could result in increased debt service requirements. The
Company is currently contemplating issuing additional securities (which may
include convertible or nonconvertible debt securities or preferred stock, common
stock, warrants to purchase common stock, or a combination thereof) to refinance
existing debt, to fund expansion and future acquisitions and/or to fund general
corporate purposes. There can be no assurance that such financing can be
completed on terms satisfactory to the Company or at all. The Company's ability
to incur additional indebtedness
16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS - (Continued)
is limited under the terms of the indenture ("the Indenture") and the Credit
Facility. These limitations take the form of certain leverage ratios and are
dependent upon certain measures of profitability. Under terms of the Credit
Facility, capital expenditures and business acquisitions that do not meet
certain criteria will require lender consent. The Company may also issue
additional equity to fund future expansion and acquisition requirements.
Capital Expenditures
The Company expects to incur capital expenditures in the aggregate of
$14.7 million in 1996 and 1997 in comparison to $2.6 million in 1995. With the
exception of the recurring renewal and refurbishment expenditures of
approximately $1.6 million per year, these capital expenditures are
discretionary and nonrecurring in nature. The Company believes that substantial
opportunities exist for it to increase Location Cash Flow through the
implementation of several significant capital improvement projects. In addition
to recurring renewal and refurbishment expenditures, the Company's capital
expenditure plans for 1996 and 1997, currently include (i) TV expenditures of
approximately $6.1 million for broadcast television transmitter, tower and
facility constructions and upgrades, (ii) DBS expenditures of approximately $4.1
million for DSS equipment purchases for lease and rental to the Company's
DIRECTV subscribers and certain subscriber acquisition costs, and (iii) Cable
expenditures of approximately $1.3 million for the interconnection of the Puerto
Rico Cable systems and fiber upgrades in Puerto Rico and New England. Beyond
1997, the Company expects its ongoing capital expenditures to consist primarily
of renewal and refurbishment expenditures totaling approximately $1.6 million
annually. For the nine month period ended September 30, 1996, the Company
incurred $2.6 million in capital expenditures. There can be no assurance that
the Company's capital expenditure plans will not change in the future,
especially if future acquisitions are made.
Other
As a holding company, Pegasus' ability to pay dividends is dependent
upon the receipt of dividends from direct and indirect subsidiaries. Under the
terms of the Indenture relating to PM&C's Series B Notes, PM&C is prohibited
from paying dividends prior to July 1, 1998. The payment of dividends subsequent
to July 1, 1998 will be subject to the satisfaction of certain financial
conditions set forth in the Indenture, and will also be subject to lender
consent under the terms of the Credit Facility.
PM&C's ability to incur additional indebtedness is limited under the
terms of the Indenture and the Credit Facility. These limitations take the form
of certain leverage ratios and are dependent upon certain measures of operating
profitability. Under the terms of the Credit Facility, capital expenditures and
business acquisitions that do not meet certain criteria will require lender
consent.
The Company's revenues vary throughout the year. As is typical in the
TV industry, the Company's first quarter generally produces the lowest revenues
for the year, and the fourth quarter generally produces the highest revenues for
the year. The Company's operating results in any period may be affected by the
incurrence of advertising and promotion expenses that do not necessarily produce
commensurate revenues in the short-term. The impact of such advertising and
promotion may or may not be realized in future periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of the
Company's indebtedness bear interest at a fixed rate.
The Company has reviewed the provisions of Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in debt and
Equity securities," and No. 121, "Accounting for the Impairment of long-lived
Assets and for long-lived Assets to Be Disposed Of," and believes that future
implementation of the above standards will not have a material impact on the
Company.
17
<PAGE>
Part II. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 22, 1996, the Company filed a Form 8-K dated
October 8, 1996 reporting under Item 2 the acquisition of DBS
territories in certain rural areas of Texas and Michigan and
related assets from Harron Communications Corp. in exchange
for $11.9 million of Class A Common Stock (valued at the price
to the public of $14.00 per share in the Initial Public
Offering) and approximately $17.9 million in cash. The Form
8-K contained financial statements relating to this
acquisition.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pegasus Communications Corporation
Date November 14, 1996 By /s/ Robert N. Verdecchio
----------------- ---------------------------
Robert N. Verdecchio
Sr. Vice-President and Chief Financial Officer
19
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