<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
------------------
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 or other jurisdiction of (IRS Employer
incorporation or 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, 1997:
Class A, Common Stock, $0.01 par value 5,739,842
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, 1997
Page
Part I. Financial Information ----
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1996 and September 30, 1997 3
Consolidated Statements of Operations
Three months ended September 30, 1996 and 1997 4
Consolidated Statements of Operations
Nine months ended September 30, 1996 and 1997 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 21
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K 22
Signature 23
2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,582,369 $ 34,210,959
Restricted cash -- 1,181,306
Accounts receivable, less allowance for doubtful
accounts of $243,000 and $346,000, respectively 9,155,545 10,577,322
Program rights 1,289,437 1,588,392
Inventory 697,957 759,638
Deferred taxes 1,290,397 1,290,397
Prepaid expenses and other 851,592 1,250,836
------------ ------------
Total current assets 21,867,297 50,858,850
Property and equipment, net 24,115,138 27,423,266
Intangible assets, net 126,236,128 237,511,764
Program rights 1,294,985 1,747,621
Deposits and other 166,498 199,404
------------ ------------
Total assets $173,680,046 $317,740,905
============ ============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Notes payable $ 48,610
Current, portion of long-term debt 315,223 $ 4,894,945
Accounts payable 5,075,981 5,705,241
Accrued interest 5,592,083 3,456,814
Accrued expenses 3,803,993 3,738,944
Current portion of program rights payable 601,205 897,687
------------ ------------
Total current liabilities 15,437,095 18,693,631
Long-term debt, net 115,211,610 152,423,965
Program rights payable 1,365,284 1,242,102
Deferred taxes 1,339,859 1,389,859
------------ ------------
Total liabilities 133,353,848 173,749,557
Commitments and contingent liabilities -- --
Minority interest -- 3,000,000
Series A preferred stock -- 108,677,500
Common stockholders' equity:
Class A common stock 46,632 53,425
Class B common stock 45,819 45,819
Additional paid-in capital 57,736,011 57,017,011
Accumulated deficit (17,502,264) (24,802,407)
------------ ------------
Total common stockholders' equity 40,326,198 32,313,848
------------ ------------
Total liabilities and stockholders' equity $173,680,046 $317,740,905
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
Three Months Ended September 30,
-------------------------------
1996 1997
----------- -----------
(unaudited)
Revenues:
Basic and satellite service $3,853,157 $13,419,852
Premium services 540,565 1,182,984
Broadcasting revenue,
net of agency commissions 5,020,614 5,504,782
Barter programming revenue 1,337,643 1,453,300
Other 185,635 366,347
----------- -----------
Total revenues 10,937,614 21,927,265
----------- -----------
Operating expenses:
Programming 2,198,216 6,760,400
Barter programming expense 1,337,643 1,453,300
Technical and operations 815,158 956,255
Marketing and selling 1,518,797 2,975,156
General and administrative 1,555,994 3,055,522
Incentive compensation 175,625 223,236
Corporate expenses 365,072 505,279
Depreciation and amortization 3,574,631 7,306,149
----------- -----------
Loss from operations (603,522) (1,308,032)
Interest expense (3,359,071) (4,264,459)
Interest income 20,026 137,035
Other expenses, net (14,952) (214,847)
----------- -----------
Loss before income taxes (3,957,519) (5,650,303)
Provision for income taxes 22,756 --
----------- -----------
Loss before extraordinary items (3,980,275) (5,650,303)
Extraordinary loss from
extinguishment of debt, net (250,603) --
----------- -----------
Net loss (4,230,878) (5,650,303)
Preferred dividends -- 3,365,000
----------- -----------
Net loss applicable to common shares ($4,230,878) ($9,015,303)
=========== ===========
Loss per common share:
Loss before extraordinary items ($0.76) ($0.91)
Extraordinary loss (0.05) --
----------- -----------
Net loss ($0.81) ($0.91)
=========== ===========
Weighted average shares outstanding 5,239,430 9,902,363
=========== ===========
Sce accompanying notes to consolidated financial statements
4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1996 1997
---------- -----------
(unaudited)
<S> <C> <C>
Revenues:
Basic and satellite service $9,964,424 $32,008,696
Premium services 1,488,513 3,116,253
Broadcasting revenue,
net of agency commissions 14,347,439 16,950,204
Barter programming revenue 3,820,000 4,507,600
Other 499,477 954,076
---------- -----------
Total revenues 30,119,853 57,536,829
---------- -----------
Operating expenses:
Programming 5,862,461 15,916,313
Barter programming expense 3,820,000 4,507,600
Technical and operations 2,425,639 2,814,922
Marketing and selling 3,893,414 7,429,814
General and administrative 4,053,184 8,341,570
Incentive compensation 605,390 744,242
Corporate expenses 1,074,190 1,408,954
Depreciation and amortization 8,479,427 18,160,442
---------- -----------
Loss from operations (93,852) (1,787,028)
Interest expense (8,929,328) (10,288,211)
Interest income 171,513 828,388
Other expenses, net (76,493) (454,612)
Gain on sale of cable system -- 4,451,320
---------- -----------
Loss before income taxes (8,928,160) (7,250,143)
Provision (benefit) for income taxes (110,000) 50,000
---------- -----------
Loss before extraordinary items (8,818,160) (7,300,143)
Extraordinary loss from
extinguishment of debt, net (250,603) --
---------- -----------
Not loss (9,068,763) (7,300,143)
Preferred dividends -- 8,677,500
---------- -----------
Net loss applicable to common shares ($9,068,763) ($15,977,643)
========== ===========
Loss; per common share:
Loss before extraordinary items ($1.68) ($1.64)
Extraordinary loss (0,05) --
---------- -----------
Net loss ($1.73) ($1.64)
========== ===========
Weighted average shares outstanding 5,237,590 9,755,882
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1997
----------- ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($9,068,763) ($7,300,143)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Extraordinary loss on
extinguishment of debt, net 250,603 --
Depreciation and amortization 8,479,427 18,160,442
Program rights amortization 1,063,439 1,214,289
Accretion on discount of bonds 294,066 295,486
Gain on sale of cable system -- (4,451,320)
Bad debt expense (92,413) 812,308
Deferred income taxes (110,000) 50,000
Change in assets and liabilities:
Accounts receivable (184,324) (2,139,807)
Inventory 867,270 57,455
Prepaid expenses and other (1,152,317) (158,952)
Accounts payable and accrued expenses 3,495,062 411,099
Accrued interest (2,292,849) (2,135,269)
Deposits and other (74,173) (32,906)
----------- ------------
Net cash provided by operating activities 1,475,028 4,782,682
----------- ------------
Cash flows from investing activities:
Acquisitions (43,050,514) (99,305,168)
Capital expenditures (2,606,717) (8,375,393)
Purchase of intangible assets (843,210) (6,583,738)
Cash acquired from acquisitions 164,221
Paymments of programming rights (1,319,343) (1,792,580)
Proceeds from sale of cable system -- 6,945,270
----------- ------------
Net cash used for investing activities (47,819,784) (108,947,388)
----------- ------------
Cash flows from financing activities:
Proceeds from long-term debt 247,736 --
Repayments of long-term debt -- (241,764)
Borrowings on revolving credit facilities 40,400,000 69,726,250
Repayments of revolving credit facilities (8,894,653) (30,126,250)
Restricted cash 9,875,818 (1,181,306)
Debt issuance costs (1,383,670) (3,961,383)
Capital lease repayments (206,937) (234,331)
Proceeds from issuance of Series A preferred stock -- 100,000,000
Underwriting and preferred offering costs -- (4,187,920)
----------- ------------
Net cash provided by financing activities 40,038,294 129,793,296
----------- ------------
Net increase (decrease) in cash and cash equivalents (6,306,462) 25,628,590
Cash and cash equivalents, beginning of year 11,974,747 8,582,369
----------- ------------
Cash and cash equivalents, end of period $5,668,285 $34,210,959
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries stated below, the "Company"), is a diversified media and
communications company, incorporated under the laws of the State of Delaware
in May 1996. Pegasus' subsidiaries are Pegasus Media & Communications, Inc.
("PM&C"), Pegasus Satellite Holdings, Inc. ("PSH"), Pegasus Towers, Inc.
("Towers") and Pegasus Communications Management Company ("PCMC").
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"), MCT Cablevision, L.P. ("MCT") and
Pegasus Cable Television of San German, Inc. ("PCT-SG"). PBT owns and operates
broadcast television ("TV") stations affiliated with the Fox Broadcasting
Company ("Fox"), United Paramount Network ("UPN") and The WB Television
Network ("WB") television networks. PCT, together with its subsidiaries,
Pegasus Cable Television of Connecticut, Inc. ("PCT-CT"), MCT and PCT-SG
operate cable television ("Cable") systems that provide service to individual
and commercial subscribers in New England and Puerto Rico. PBA holds a
television station license which simulcasts programming from a station
operated by PBT. On July 9, 1997, PM&C transferred the stock of PST, which
provides direct broadcast satellite ("DBS") services to customers in the New
England area, to a newly formed subsidiary of PM&C, PST Holdings, Inc.
("PSTH"), and PSTH transferred the PST stock to PSH (the "PST/PSH Exchange").
In exchange, PSTH received preferred equity in PSH. This transaction has no
direct effect on the financial position of the Company or the results of its
operations or its cash flows.
Prior to October 21, 1997, PSH was a DBS holding company whose
subsidiaries provided DBS services to customers in certain rural areas, which,
pro forma for the five acquisitions which occurred in October and November
1997 (see Note 7), encompassed portions of twenty-seven states. On October 21,
1997, all of the assets of PSH were conveyed to PM&C in the Subsidiaries
Combination (as defined) (see Note 8).
Towers owns and operates transmitting towers located in Pennsylvania
and Tennessee.
PCMC provides certain management and accounting services.
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 per share, resulting in net
proceeds to the Company of $38.1 million.
On January 27, 1997, the Company completed a unit offering (the "Unit
Offering") in which it sold 100,000 shares of 12 3/4% Series A Cumulative
Exchangeable Preferred Stock (the "Series A Preferred Stock") and Warrants to
purchase 193,600 shares of Class A Common Stock at an exercise price of $15
per share, to the public at a price of $1,000 per unit, resulting in net
proceeds to the Company of $95.8 million. The Company applied the net proceeds
from the Unit Offering as follows: (i) $30.1 million to the repayment of all
outstanding indebtedness under the PM&C Credit Facility (as defined) and
expenses related thereto and (ii) $56.5 million for the payment of the cash
portion of the purchase price for the acquisition of DBS assets from nine
independent DIRECTV providers. The remaining net proceeds were used for
working capital, general corporate purposes and to finance other acquisitions.
7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying unaudited consolidated 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 financial
statements include the accounts of Pegasus and all of its subsidiaries. All
intercompany transactions and balances have been eliminated.
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, in all material respects, of
the financial position of the Company and the results of its operations and
its cash flows for the interim period.
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 the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market
on a first-in, first-out basis.
Revenue:
The Company operates in two industry segments: multichannel
television (DBS and Cable) and broadcast television (TV). The Company
recognizes revenue in its multichannel operations when video and audio
services are provided. The Company recognizes revenue in its broadcast
operations when advertising spots are broadcast.
Barter Programming:
The Company obtains a portion of its TV programming, including
pre-sold advertisements, through its network affiliation agreements with Fox,
UPN and WB, 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, UPN and WB. For running independent
producers' programming, the Company receives no direct payments. Instead, the
Company retains a portion of the available advertisement spots to sell on its
own account. Barter programming revenue and the related expense are recognized
when the pre-sold advertisements are broadcast. These amounts are presented
gross as barter programming revenue and expense in the accompanying
consolidated statements of operations.
Advertising Costs:
Advertising costs are charged to operations in the period incurred.
Cash and Cash Equivalents:
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.
8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (continued):
Restricted Cash:
The Company has restricted cash held in escrow of approximately $1.2
million at September 30, 1997 to collateralize an outstanding letter of
credit.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base,
and their dispersion across different businesses and geographic regions.
3. Common Stock:
On December 30, 1996, Pegasus, through a registered exchange offer,
exchanged all of PM&C's Class B Common Stock for 191,775 shares in the
aggregate of Pegasus' Class A Common Stock.
Under the terms of the Series A Preferred Stock (see Note 4),
Pegasus' ability to pay dividends on its Common Stock is subject to certain
restrictions.
<TABLE>
At December 31, 1996, common stock consists of the following:
<S> <C>
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
================
At September 30, 1997, common stock consists of the following:
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 5,342,389 issued and outstanding . . . . . . . . . $53,425
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. . . . . . . . . . . . . . . . . . . . . . . $99,244
================
</TABLE>
4. Redeemable Preferred Stock:
As a result of the Unit Offering described in Note 1, and dividends
declared on the Series A Preferred Stock by the Board of Directors on June 25,
1997, paid on July 1, 1997, the Company has outstanding 105,490 shares of
Series A Preferred Stock with a liquidation preference of $1,000 per share
(the "Liquidation Preference"). Cumulative dividends, at a rate of 12 3/4% per
annum of the Liquidation Preference per share, are payable semi-annually on
each January 1 and July 1, beginning July 1, 1997. Dividends may be paid, on
any dividend payment date occurring on or prior to January 1, 2002, at
Pegasus' option, either in cash or by the issuance of additional shares of
Series A Preferred Stock having an aggregate Liquidation Preference equal to
the amount of such dividends. Subject to certain conditions, the Series A
Preferred Stock is exchangeable in whole, but not in part, at the option of
the Company, on any dividend payment date for Pegasus' 12 3/4% Senior
Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange
Notes would contain substantially the same redemption provisions, restrictions
and other terms as the Series A Preferred Stock. Pegasus is required to redeem
all of the Series A Preferred Stock outstanding on January 1, 2007 at a
redemption price equal to the Liquidation Preference thereof, plus accrued
dividends.
9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Redeemable Preferred Stock (continued):
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
The computation of fully diluted net loss per share was antidilutive
in each of the periods presented; therefore, the amounts reported for primary
and fully diluted loss are the same. Net loss per common share was determined
by dividing net loss, as adjusted, by applicable shares outstanding. The net
loss was adjusted by the aggregate amount of dividends on the Company's Series
A Preferred Stock.
5. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following: December 31, September 30,
1996 1997
------------ ------------
<S> <C> <C>
Series B Notes payable by PM&C, due 2005, interest at 12.5%,
payable semi-annually in arrears on January 1 and July
1, net of unamortized discount of $3,412,222 and
$3,116,736 as of December 31, 1996 and September 30,
1997, respectively .................................... $ 81,587,778 $ 81,883,264
Senior seven-year revolving credit facility, interest at the
Company's option at either the bank's prime rate, plus
an applicable margin or LIBOR, plus an applicable
margin ................................................ 29,600,000 --
Senior seven-year term loan, interest at the Company's
option at either the bank's prime rate, plus an
applicable margin or LIBOR, plus an applicable margin
(9.15625% at September 30, 1997) ...................... -- 40,000,000
Senior six-year revolving credit facility, interest at the
Company's option at either the bank's prime rate, plus
an applicable margin or LIBOR, plus an applicable
margin (8.90625% at September 30, 1997)
-- 29,200,000
Mortgage payable, due 2000, interest at 8.75% .............. 498,468 483,036
Note payable, due 1998, interest at 10% .................... 3,050,000 3,050,000
Sellers' notes, various maturities and interest rates ...... 277,130 2,061,842
Capital leases and other ................................... 513,457 640,768
------------ ------------
115,526,833 157,318,910
Less current maturities .................................... 315,223 4,894,945
------------ ------------
Long-term debt ............................................. $115,211,610 $152,423,965
============ ============
</TABLE>
10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Long-Term Debt (continued):
In July 1995, PM&C sold 85,000 units consisting of $85.0 million in
aggregate of 12 1/2% Series A Senior Subordinated Notes due 2005 (the "Series
A Notes" and, together with the Series B Notes, the "Notes") and 8,500 shares
of Class B Common Stock of PM&C (the "Note Offering"). The PM&C Class B Shares
were subsequently exchanged for an aggregate of 191,775 shares of Pegasus'
Class A Common Stock (see Note 3). In November 1995, PM&C exchanged its Series
A Notes for the Series B Notes. The Series B Notes have substantially the same
terms and provisions as the Series A Notes. The Series B Notes are guaranteed
on a full, unconditional, senior subordinated basis, jointly and severally by
a majority of the wholly owned direct and indirect subsidiaries of PM&C. The
Company's indebtedness contains certain financial and operating covenants,
including restrictions on the Company to incur additional indebtedness, create
liens and to pay dividends.
In August 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility (the "PM&C Credit Facility"), which is
collateralized by substantially all of the assets of PM&C. Outstanding
balances under the PM&C Credit Facility were repaid from the proceeds of the
Unit Offering. The PM&C Credit Facility is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant.
In July 1997, PSH entered into a $130.0 million credit facility (the
"PSH Credit Facility"), which is collateralized by substantially all of the
assets of PSH and its subsidiaries. The facility consists of a $40.0 million
seven-year senior term loan and a $90.0 million six-year senior revolving
credit facility. Subsequent to September 30, 1997, the Company had drawn an
additional $25.0 million in connection with various DBS acquisitions. On
October 21, 1997, outstanding balances under the PSH Credit Facility were
repaid from the proceeds of the Senior Notes Offering (as defined), and
commitments under the PSH Credit Facility were terminated.
In October 1997, PM&C received a commitment letter for a fully
underwritten, $180.0 million six-year, secured, reducing revolving credit
facility (the "New Credit Facility"). Upon the closing of the New Credit
Facility, outstanding balances under the PM&C Credit Facility, if any, will be
repaid, and commitments under the PM&C Credit Facility will be terminated. The
New Credit Facility will be subject to certain financial covenants as defined
in the loan agreement, including a debt to adjusted cash flow covenant. The
New Credit Facility will be used to finance future acquisitions, working
capital, capital expenditures and for general corporate purposes.
6. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse effect
on the consolidated operations, cash flows or financial position of the
Company.
7. Acquisitions and Disposition:
Effective January 31, 1997, the Company sold substantially all the
assets of its New Hampshire cable system (the "New Hampshire Cable Sale") to
State Cable TV Corporation for approximately $6.9 million in cash, net of
certain selling costs. The Company recognized a gain on the transaction of
approximately $4.5 million.
On January 31, 1997 the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Indiana and the related assets in exchange for approximately $8.8 million in
cash and $5.6 million of the Company's Class A Common Stock.
On February 14, 1997 the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Mississippi and the related assets in exchange for approximately
$14.8 million in cash.
11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Acquisitions and Disposition (continued):
As of March 10, 1997 the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Arkansas, Virginia and West Virginia and the related assets in
exchange for approximately $10.4 million in cash, $201,000 in assumed
liabilities, $3.0 million in preferred stock of a subsidiary of Pegasus and
warrants to purchase a total of 283,969 shares of the Company's Class A Common
Stock. The $3.0 million in preferred stock of a subsidiary of Pegasus has been
accounted for as a minority interest.
As of April 9, 1997 the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Georgia and the related assets in exchange for approximately $3.3 million in
cash, $143,000 in assumed liabilities and $500,000 of the Company's Class A
Common Stock; and a $600,000 obligation, payable over four years, for
consultancy and non-compete agreements.
As of May 9, 1997 the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Colorado, Florida, Maryland, Minnesota, Nevada, New Hampshire, Oklahoma,
Texas, Virginia, Washington, Wisconsin and Wyoming and the related assets in
exchange for approximately $18.6 million in cash, $501,000 in assumed
liabilities, a $350,000 note due January 1998 and $200,000 of the Company's
Class A Common Stock; and $600,000 in cash for consultancy and non-compete
agreements.
As of July 9, 1997 the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Ohio and Texas and the related assets in exchange for approximately $17.4
million in cash and $503,000 in assumed liabilities.
As of August 8, 1997 the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Indiana, Minnesota and South Dakota and the related assets in
exchange for approximately $15.5 million in cash, $464,000 in assumed
liabilities and a $988,000 note due January 1998; and $750,000 in cash for
endorsement and non-compete agreements.
As of September 8, 1997 the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Illinois, Minnesota and Utah and the related assets in exchange for
approximately $9.1 million in cash and $165,000 in assumed liabilities.
As of October 8, 1997 the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Alabama and Texas and the related assets in exchange for
approximately $24.7 million in cash and a $2.2 million note, payable over four
years; and $1.1 million in cash for consultancy and non-compete agreements.
Effective October 31, 1997 the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets in exchange for approximately $6.4
million in cash and $6.7 million of the Company's Class A Common Stock.
As of November 7, 1997 the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Utah and Wyoming and the related assets in exchange for
approximately $4.4 million in cash and a $500,000 note due November 2000.
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above DBS territories and cable
system had been acquired/sold 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/disposition been made on those dates or of results which may
occur in the future. The pro forma information does not include the five DBS
Acquisitions (three in October 1997 and two in November 1997) which occurred
subsequent to September 30, 1997.
12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Acquisitions and Disposition (continued):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(in thousands, except earnings per share) (unaudited)
1996 1997
---- ----
<S> <C> <C>
Net revenues ............................ $ 52,931 $ 68,080
======== ========
Operating loss .......................... ($ 5,901) ($ 19)
======== ========
Net loss ................................ ($17,873) ($11,811)
Less: Preferred stock dividends ......... (9,563) (9,563)
======== ========
Net loss available to common stockholders ($27,436) ($21,374)
======== ========
Net loss per common share ............. ($ 2.76) ($ 2.15)
======== ========
</TABLE>
8. Other Events:
On August 1, 1997, the Company launched TV station WPME, which is
affiliated with UPN. WPME is in the Portland, Maine Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA").
WPME's offices, studio and transmission facilities are co-located with WPXT, a
TV station in the Portland market the Company has owned and operated since
January 1996.
On October 17, 1997, the Company launched TV station WGFL, which is
affiliated with WB. WGFL is in the Gainesville, Florida DMA and is being
operated under a LMA.
On October 21, 1997, the Company completed a senior notes offering
(the "Senior Notes Offering") in which it sold $115.0 million of 9.625% Senior
Notes (the "Senior Notes"), resulting in net proceeds to the Company of
approximately $110.8 million. The Company applied or intends to apply the net
proceeds from the Senior Notes Offering as follows: (i) $94.2 million to the
repayment of all outstanding indebtedness under the PSH Credit Facility and
(ii) $16.6 for the payment of the cash portion of the purchase price for the
pending acquisition of DBS assets from various independent DBS providers. The
remaining net proceeds, if any, together with cash on hand and available
borrowing under the PM&C Credit Facility, as described in Note 5, will be used
for working capital, general corporate purposes and to finance other
acquisitions.
Prior to October 21, 1997, the Company had two principal operating
subsidiaries: PM&C and PSH. Upon consummation of the Senior Notes Offering,
PM&C acquired the assets of PSH (the "Subsidiaries Combination"), which assets
consisted of the stock of its subsidiaries that hold the rights to all of the
Company's DBS territories. As a result of the Subsidiaries Combination, PM&C
is the direct or indirect parent of all of the Company's subsidiaries that
operate the Company's TV, DBS and cable businesses.
9. Other Information (unaudited):
As defined in the Certificate of Designation governing the Series A
Preferred Stock, and the indenture governing the Senior Notes, the Company is
required to provide Adjusted Operating Cash Flow data for Pegasus and its
Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating
Cash Flow is defined as, "for the four most recent fiscal quarters for which
internal financial statements are available, Operating Cash Flow of such
Person and its Restricted Subsidiaries less DBS Cash Flow (Satellite Segment
Operating Cash Flow) for the most recent four-quarter period plus DBS Cash
Flow for the most recent quarterly period, multiplied by four." Operating Cash
Flow is income from operations before income taxes, depreciation and
amortization, interest expense, extraordinary items and non-cash corporate
expenses and incentive compensation. Restricted Subsidiaries carries the same
meaning as in the Certificate of Designation. Pro forma for the nineteen DBS
Acquisitions occurring in the first three quarters of 1997 and the disposition
of the New Hampshire cable system, as if such acquisitions/disposition
occurred on October 1, 1996, Adjusted Operating Cash Flow would have been
approximately $30.8 million.
13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Other Information (unaudited - continued):
Four Quarters
Ended
September 30,
(in thousands) 1997
-----------------
Net revenues $ 75,346
Direct operating expenses, excluding incentive
compensation and corporate expenses 49,858
--------
Income from operations before incentive
compensation, corporate expenses and
depreciation and amortization 25,488
Corporate expenses 1,764
--------
Operating cash flow 23,724
Less DBS cash flow, last four quarters (6,186)
Plus DBS cash flow, last quarter annualized 10,048
========
Adjusted operating cash flow $ 27,586
========
14
<PAGE>
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company, as well as assumptions made by and information
currently available to the Company's management. When used in this Report, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see the information contained in
the section captioned "Risk Factors" (pages 14-19) of Pegasus' Prospectus
dated March 26, 1997, filed as part of Pegasus' Registration Statement in Form
S-1, File No. 333-23595 (the "Prospectus"), which section is incorporated by
reference herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
General
The Company is a diversified media and communications company
operating in two business segments: multichannel television and broadcast
television. Pegasus Multichannel Television includes DBS and cable businesses.
As of September 30, 1997, DBS operations consisted of providing DIRECTV(R)
("DIRECTV") services in certain rural areas of twenty-five states in which the
Company holds the exclusive right to provide such services. Its cable
operations consist of systems in New England (Connecticut and Massachusetts)
and Puerto Rico. The Company sold its New Hampshire cable system effective
January 31, 1997. Pegasus Broadcast Television owns and operates five TV
stations affiliated with FOX and operates one affiliated with UPN and another
affiliated with WB. It has entered into an agreement to operate an additional
TV station which will be affiliated with WB and is to commence operations in
1998.
Multichannel revenues are derived from monthly customer
subscriptions, pay-per-view services, subscriber equipment rentals, home
shopping commissions, advertising time sales and installation charges.
Broadcast revenues are derived from the sale of broadcast air time to local
and national advertisers.
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. Multichannel 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 DBS program service revenues. Broadcast 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 television program suppliers in lieu of cash.
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 a generally
recognized measure of performance and is used by analysts who report publicly
on the performance of companies operating in such segments. Nevertheless, this
measure 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.
15
<PAGE>
Results of Operations
Three months ended September 30, 1997 compared to three
months ended September 30, 1996
The Company's net revenues increased by approximately $11.0 million
or 100% for the three months ended September 30, 1997 as compared to the same
period in 1996. Multichannel Television net revenues increased $10.4 million
or 232% and Broadcast Television net revenues increased $612,000 or 9%. The
net revenues increased as a result of (i) a $9.6 million or 925% increase in
DBS revenues of which $738,000 or 8% was due to increased revenue per
subscriber and the increased number of DBS subscribers in territories owned at
the beginning of 1996 and $8.8 million or 92% resulting from acquisitions made
subsequent to the third quarter of 1996, (ii) a $819,000 or 24% increase in
Cable revenues which was the net result of a $262,000 or 11% increase in same
system revenues due primarily to rate increases and new combined service
packages, a $1.0 million increase due to the system acquired effective
September 1, 1996 and a $478,000 reduction due to the sale of the Company's
New Hampshire cable system effective January 31, 1997, (iii) a $597,000 or 9%
increase in TV revenues of which $544,000 or 91% was due to ratings growth
which the Company was able to convert into higher revenues and $53,000 or 9%
was due to a new station launched on August 1, 1997, and (iv) a $15,000
increase in Tower rental income.
The Company's total location operating expenses increased by
approximately $7.8 million or 105% for the three months ended September 30,
1997 as compared to the same period in 1996. Multichannel Television location
operating expenses increased $7.4 million or 251% and Broadcast Television
location operating expenses increased $399,000 or 9%. The location operating
expenses increased as a result of (i) a $7.0 million or 628% increase in
operating expenses generated by the Company's DBS operations due to a same
territory increase in programming and other operating costs totaling $515,000,
all generated from the increased number of DBS subscribers in territories
owned at the beginning of 1996 and a $6.5 million increase attributable to
territories acquired subsequent to the third quarter of 1996, (ii) a $405,000
or 22% increase in Cable operating expenses as the net result of a $89,000 or
7% increase in same system direct operating expenses due primarily to
increases in programming costs associated with the new combined service
packages, a $564,000 increase attributable to the system acquired effective
September 1, 1996 and a $248,000 reduction due to the sale of the Company's
New Hampshire cable system effective January 31, 1997, (iii) a $398,000 or 9%
increase in TV operating expenses as the result of a $283,000 or 6% increase
in same station direct operating expenses and a $115,000 increase attributable
to the new station launched on August 1, 1997, and (iv) a $1,000 increase in
Tower administrative expenses. The Company no longer requires new DBS
customers to sign a one-year programming contract and, as a result, subscriber
acquisition costs, which are currently being capitalized and amortized over a
twelve-month period, will be charged to operations in the period incurred.
This change will become effective October 1, 1997.
As a result of these factors, Location Cash Flow increased by $3.2
million or 92% for the three months ended September 30, 1997 as compared to
the same period in 1996. Multichannel Television Location Cash Flow increased
$3.0 million or 195% and Broadcast Television Location Cash Flow increased
$213,000 or 11%. Location Cash Flow increased as a result of (i) a $2.6
million increase in DBS Location Cash Flow of which $223,000 or 9% was due to
an increase in same territory Location Cash Flow and $2.4 million or 91% was
attributable to territories acquired subsequent to the third quarter of 1996,
(ii) a $414,000 or 26% increase in Cable Location Cash Flow which was the net
result of a $173,000 or 15% increase in same system Location Cash Flow, a
$471,000 increase due to the system acquired effective September 1, 1996 and a
$230,000 reduction due to the sale of the Company's New Hampshire cable system
effective January 31, 1997, (iii) a $199,000 or 10% increase in TV Location
Cash Flow as the net result of a $261,000 or 13% increase in same station
Location Cash Flow and a $62,000 decrease attributable to the new station
launched on August 1, and (iv) a $14,000 increase in Tower Location Cash Flow.
Incentive compensation, which is calculated from increases in Pro
forma Location Cash Flow, increased by approximately $48,000 or 27% for the
three months ended September 30, 1997 as compared to the same period in 1996.
Corporate expenses increased by $140,000 or 38% for the three months
ended September 30, 1997 as compared to the same period in 1996 primarily due
to increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
16
<PAGE>
Depreciation and amortization expense increased by approximately $3.7
million or 104% for the three months ended September 30, 1997 as compared to
the same period in 1996 as the Company increased its fixed and intangible
asset base as a result of five completed acquisitions during 1996 and nineteen
completed acquisitions in the first three quarters of 1997.
As a result of these factors, the Company's loss from operations
increased by $704,000 for the three months ended September 30, 1997 as
compared to the same period in 1996.
Interest expense increased by approximately $905,000 or 27% for the
three months ended September 30, 1997 as compared to the same period in 1996
as a result of an increase in debt associated with the Company's acquisitions.
The Company reported a net loss of approximately $5.6 million for the
three months ended September 30, 1997 as compared to a net loss of
approximately $4.2 million for the same period in 1996. The $1.4 million
change was the net result of an increase in the loss from operations of
approximately $704,000, an increase in interest expense of $905,000, a
decrease in the provision for income taxes of $23,000, an increase in other
expenses of approximately $84,000 and a decrease in the extraordinary loss on
extinguishment of debt of $251,000.
Nine months ended September 30, 1997 compared to nine months ended September 30,
1996
The Company's net revenues increased by approximately $27.4 million
or 91% for the nine months ended September 30, 1997 as compared to the same
period in 1996. Multichannel Television net revenues increased $24.1 million
or 206% and Broadcast Television net revenues increased $3.3 million or 18%.
The net revenues increased as a result of (i) a $20.8 million or 798% increase
in DBS revenues of which $2.3 million or 11% was due to increased revenue per
subscriber and the increased number of DBS subscribers in territories owned at
the beginning of 1996 and $18.5 million or 89% resulting from acquisitions
made subsequent to the third quarter of 1996, (ii) a $3.3 million or 37%
increase in Cable revenues which was the net result of a $564,000 or 8%
increase in same system revenues due primarily to rate increases and new
combined service packages, a $3.9 million increase due to the system acquired
effective September 1, 1996 and a $1.1 million reduction due to the sale of
the Company's New Hampshire cable system effective January 31, 1997, (iii) a
$3.3 million or 18% increase in TV revenues of which $1.9 million or 58% was
due to ratings growth which the Company was able to convert into higher
revenues, $1.3 million or 40% was the result of acquisitions made in the first
quarter of 1996 and $53,000 or 2% was due to the new station launched on
August 1, 1997, and (iv) a $29,000 increase in Tower rental income.
The Company's total location operating expenses increased by
approximately $19.0 million or 95% for the nine months ended September 30,
1997 as compared to the same period in 1996. Multichannel Television location
operating expenses increased $17.1 million or 235% and Broadcast Television
location operating expenses increased $1.8 million or 14%. The location
operating expenses increased as a result of (i) a $15.4 million or 651%
increase in operating expenses generated by the Company's DBS operations due
to a same territory increase in programming and other operating costs totaling
$1.9 million, all generated from the increased number of DBS subscribers in
territories owned at the beginning of 1996 and a $13.6 million increase
attributable to territories acquired subsequent to the third quarter of 1996,
(ii) a $1.7 million or 34% increase in Cable operating expenses as the net
result of a $183,000 or 5% increase in same system direct operating expenses
due primarily to increases in programming costs associated with the new
combined service packages, a $2.1 million increase attributable to the system
acquired effective September 1, 1996 and a $616,000 reduction due to the sale
of the Company's New Hampshire cable system effective January 31, 1997, (iii)
a $1.8 million or 14% increase in TV operating expenses as the result of a
$552,000 or 5% increase in same station direct operating expenses, a $1.2
million increase attributable to stations acquired in the first quarter of
1996 and a $115,000 increase attributable to the new station launched on
August 1, 1997, and (iv) a $5,000 increase in Tower administrative expenses.
17
<PAGE>
As a result of these factors, Location Cash Flow increased by $8.5
million or 84% for the nine months ended September 30, 1997 as compared to the
same period in 1996. Multichannel Television Location Cash Flow increased $7.0
million or 159% and Broadcast Television Location Cash Flow increased $1.5
million or 26%. Location Cash Flow increased as a result of (i) a $5.3 million
or 2,311% increase in DBS Location Cash Flow of which $417,000 or 8% was due
to an increase in same territory Location Cash Flow and $4.9 million or 92%
was attributable to territories acquired subsequent to the third quarter of
1996, (ii) a $1.6 million or 40% increase in Cable Location Cash Flow which
was the net result of a $381,000 or 11% increase in same system Location Cash
Flow, a $1.8 million increase due to the system acquired effective September
1, 1996 and a $513,000 reduction due to the sale of the Company's New
Hampshire cable system effective January 31, 1997, (iii) a $1.5 million or 26%
increase in TV Location Cash Flow as the net result of a $1.4 million or 30%
increase in same station Location Cash Flow, a $186,000 increase attributable
to stations acquired in the first quarter of 1996 and a $62,000 decrease
attributable to the new station launched on August 1, 1997, and (iv) a $24,000
increase in Tower Location Cash Flow.
Incentive compensation, which is calculated from increases in Pro
forma Location Cash Flow, increased by approximately $139,000 or 23% for the
nine months ended September 30, 1997 as compared to the same period in 1996.
Corporate expenses increased by $335,000 or 31% for the nine months
ended September 30, 1997 as compared to the same period in 1996 primarily due
to increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $9.7
million or 114% for the nine months ended September 30, 1997 as compared to
the same period in 1996 as the Company increased its fixed and intangible
asset base as a result of five completed acquisitions during 1996 and nineteen
completed acquisitions in the first three quarters of 1997.
As a result of these factors, the Company's loss from operations
increased by $1.7 million for the nine months ended September 30, 1997 as
compared to the same period in 1996.
Interest expense increased by approximately $1.4 or 15% for the nine
months ended September 30, 1997 as compared to the same period in 1996 as a
result of an increase in debt associated with the Company's acquisitions.
The Company reported a net loss of $7.3 million for the nine months
ended September 30, 1997 as compared to a net loss of approximately $9.1
million for the same period in 1996. The $1.8 million change was the net
result of an increase in the loss from operations of approximately $1.7
million, an increase in interest expense of $1.4 million, an increase in the
provision for income taxes of $160,000, a decrease in other expenses of
approximately $279,000, a decrease in the extraordinary loss on extinguishment
of debt of $251,000 and a gain on the sale of the New Hampshire cable system
of approximately $4.5 million.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash
provided by its TV and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. 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 to fund investments in multichannel customer premises
equipment.
18
<PAGE>
During the nine months ended September 30, 1997, net cash provided by
operating activities was approximately $4.8 million, which together with $8.6
million of cash on hand, $6.9 million of net proceeds from the sale of the New
Hampshire cable system and $129.8 million of net cash provided by the
Company's financing activities was used to fund other investing activities of
$115.9 million. Financing activities consisted of raising $95.8 million in net
proceeds from the Unit Offering, borrowing $69.2 million under the PSH Credit
Facility, repayment of $29.6 million of indebtedness under the PM&C Credit
Facility, net repayment of approximately $476,000 of other long-term debt,
placing $1.2 million in restricted cash to collateralize a letter of credit
and the incurrence of approximately $4.0 million in debt issuance costs
associated with the PSH Credit Facility. Investing activities, net of the
proceeds from the sale of the New Hampshire cable system, consisted of (i) the
acquisition of DBS assets from an independent DIRECTV provider on January 31,
1997 for approximately $8.8 million, (ii) the acquisition of DBS assets from
an independent DIRECTV provider on February 14, 1997 for approximately $14.8
million, (iii) the acquisition of DBS assets from two independent DIRECTV
providers effective March 10, 1997 for approximately $10.4 million, (iv) the
acquisition of DBS assets from an independent DIRECTV provider effective April
9, 1997 for approximately $3.3 million, (v) the acquisition of DBS assets from
four independent DIRECTV providers effective May 9, 1997 for approximately
$19.2 million, (vi) the acquisition of DBS assets from two independent DIRECTV
providers effective July 9, 1997 for approximately $17.4 million, (vii) the
acquisition of DBS assets from four independent DIRECTV providers effective
August 8, 1997 for approximately $16.3 million, (viii) the acquisition of DBS
assets from four independent DIRECTV providers effective September 8, 1997 for
approximately $9.1 million, (ix) broadcast television transmitter, tower and
facility constructions and upgrades totaling approximately $4.2 million, (x)
the interconnection and expansion of the Puerto Rico cable systems amounting
to approximately $1.3 million, (xi) DBS subscriber acquisition costs, which
are being amortized over a twelve-month period, of approximately $4.2 million,
(xii) payments of programming rights amounting to $1.8 million, and (xiii)
maintenance and other capital expenditures and intangibles totaling
approximately $5.3 million. As of September 30, 1997, the Company's cash on
hand approximated $34.2 million.
On January 27, 1997, the Company completed the Unit Offering in which
it sold 100,000 units, resulting in net proceeds to the Company of $95.8
million. The Company applied the net proceeds from the Unit Offering to
complete various acquisitions, pay down indebtedness and expenses related
thereto totaling approximately $30.1 million and for working capital and
general corporate purposes (see Note 1).
On July 9, 1997, PSH entered into a $130.0 million credit facility
(see Note 5). As of October 21, 1997, the Company had drawn $94.2 million
under the PSH Credit Facility in connection with various DBS acquisitions. On
October 21, 1997, outstanding balances under the PSH Credit Facility were
repaid from the proceeds of the Senior Notes Offering, and commitments under
the PSH Credit Facility were terminated.
On October 21, 1997, the Company completed the Senior Notes Offering
in which it sold $115.0 million of 9.625% Senior Notes, resulting in net
proceeds to the Company of approximately $110.8 million. The Company applied
or intends to apply the net proceeds from the Senior Notes Offering as
follows: (i) $94.2 million to the repayment of all outstanding indebtedness
under the PSH Credit Facility and (ii) $16.6 for the payment of the cash
portion of the purchase price for the pending acquisition of DBS assets from
various independent DBS providers. The remaining net proceeds, if any,
together with cash on hand and available borrowing under the PM&C Credit
Facility, will be used for working capital, general corporate purposes and to
finance other acquisitions.
Also in October 1997, PM&C received a commitment letter for a fully
underwritten, $180.0 million six-year, secured, reducing revolving credit
facility (see Note 5). Upon the closing of the New Credit Facility,
outstanding balances under the old PM&C Credit Facility, if any, will be
repaid, and commitments under the PM&C Credit Facility will be terminated. The
New Credit Facility will be subject to certain financial covenants as defined
in the loan agreement, including a debt to adjusted cash flow covenant. The
New Credit Facility will be used to finance future acquisitions, working
capital, capital expenditures and for general corporate purposes.
19
<PAGE>
The Company believes that it has adequate resources to meet its
working capital, maintenance capital expenditure and debt service obligations.
The Company believes that cash on hand, together with available borrowings
under the PM&C Credit Facility, the New Credit Facility and future
indebtedness which may be incurred by the Company and its subsidiaries will
give the Company the ability to fund acquisitions and other capital
requirements in the future. 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.
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. There can be no assurance that such debt financing can be
completed on terms satisfactory to the Company or at all. The Company may also
issue additional equity to fund its future expansion and acquisition
requirements.
Capital Expenditures
The Company's capital expenditures aggregated $6.3 million in 1996.
The Company expects recurring renewal and refurbishment capital expenditures
to total approximately $2.0 million per year. In addition to these maintenance
capital expenditures, the Company's 1997 capital projects include (i) DBS
expenditures of approximately $230 per new subscriber, for the first three
quarters of 1997, (ii) cable expenditures of approximately $1.3 million for
the completion of the interconnection of the Puerto Rico cable systems and
fiber upgrades in Puerto Rico and New England, and (iii) approximately $6.5
million to $7.5 million of TV expenditures for broadcast television
transmitter, tower and facility constructions and upgrades. The Company no
longer requires new DBS customers to sign a one-year programming contract and,
as a result, subscriber acquisition costs, which are currently being
capitalized and amortized over a twelve-month period, will be charged to
operations in the period incurred. This change will become effective October
1, 1997. The Company launched two new TV stations, WPME on August 1, 1997 and
WGFL on October 17, 1997 and its plans are to commence operations of an
additional station in 1998. For the nine month period ended September 30,
1997, the Company incurred $8.4 million in capital expenditures. There can be
no assurance that the Company's capital expenditure plans will not change in
the future.
Other
As a holding company, Pegasus' ability to pay dividends is dependent
upon the receipt of dividends from its direct and indirect subsidiaries. Under
the terms of the indenture relating to the PM&C Notes (the "Indenture"), 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 PM&C Credit Facility. Under
the terms of the New Credit Facility, PM&C will be restricted from paying
dividends. In addition, Pegasus' ability to pay dividends and incur
indebtedness is subject to certain restrictions contained in the Certificate
of Designation governing the Series A Preferred Stock.
PM&C's ability to incur additional indebtedness is limited under the
terms of the Indenture and the PM&C Credit Facility. PM&C's ability to incur
additional indebtedness will be limited under the terms of the New Credit
Facility. These limitations take the form of certain leverage ratios and are
dependent upon certain measures of operating profitability. Under the terms of
both the PM&C Credit Facility and the New 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
broadcast television 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 until
the impact of such advertising and promotion is realized in future periods.
20
<PAGE>
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.
In March 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." This statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This statement is effective for financial
statements issued for periods ending after December 15, 1997, earlier
application is not permitted. This statement requires restatement of all
prior-period EPS data presented. The Company does not expect that the
implementation of this standard will have a significant effect on its
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and in its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This statement
is effective for financial statements issued for periods beginning after
December 15, 1997. This statement requires an enterprise to classify items of
other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial position. The Company does not expect that the
implementation of this standard will have a significant effect on its
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the way public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographical areas and major
customers. This statement is effective for financial statements issued for
periods beginning after December 15, 1997. The Company does not expect that
the implementation of this standard will have a significant effect on its
consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
21
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended September 30, 1997.
22
<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 13, 1997 By /s/ Robert N. Verdecchio
- - ---------------------- ----------------------------
Robert N. Verdecchio
Senior Vice President, Chief Financial Officer
and Assistant Secretary
(Principal Accounting and Financial Officer)
23
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 34,210,959 34,210,959
<SECURITIES> 0 0
<RECEIVABLES> 10,923,322 10,923,322
<ALLOWANCES> 346,000 346,000
<INVENTORY> 759,638 759,638
<CURRENT-ASSETS> 50,858,850 50,858,850
<PP&E> 50,488,811 50,488,811
<DEPRECIATION> 23,065,545 23,065,545
<TOTAL-ASSETS> 317,740,905 317,740,905
<CURRENT-LIABILITIES> 18,693,631 18,693,631
<BONDS> 81,883,264 81,883,264
108,677,500 108,677,500
0 0
<COMMON> 99,244 99,244
<OTHER-SE> 35,214,604 35,214,604
<TOTAL-LIABILITY-AND-EQUITY> 317,740,905 317,740,905
<SALES> 21,927,265 57,536,829
<TOTAL-REVENUES> 21,927,265 57,536,829
<CGS> 0 0
<TOTAL-COSTS> 23,235,297 59,323,857
<OTHER-EXPENSES> 77,812 (4,825,096)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,264,459 10,288,211
<INCOME-PRETAX> (5,650,303) (7,250,143)
<INCOME-TAX> 0 50,000
<INCOME-CONTINUING> (5,650,303) (7,300,143)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,650,303) (7,300,143)
<EPS-PRIMARY> (0.91) (1.64)
<EPS-DILUTED> (0.91) (1.64)
</TABLE>
