<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, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
333-36217
333-36217-01
Commission file number
DIGITAL TELEVISION SERVICES, INC.
DTS CAPITAL, INC.
(Exact Name of Registrants as Specified in Their Respective Charters)
Delaware 06-1473713
Delaware 58-2332106
(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: (888) 438-7488
--------------
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___
The Registrants meet the conditions set forth in General Instruction H (1)(a)
and (b) of Form 10-Q and are therefore filing this form with reduced disclosure
format.
1
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DIGITAL TELEVISION SERVICES, INC.
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 1998
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998......................3
Consolidated Statements of Operations
Three months ended September 30, 1997 and 1998................................................4
Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1998.................................................5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1998.................................................6
Notes to Consolidated Financial Statements......................................................7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................13
Item 3 Quantitative and Qualitative Disclosures About Market Risk.....................................19
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K...............................................................20
Signatures.....................................................................................21
</TABLE>
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Digital Television Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,113,152 $ 4,762,877
Restricted cash 19,006,386 18,637,235
Accounts receivable, less allowance for doubtful
accounts of $191,000 and $183,000, respectively 1,859,622 3,271,923
Inventory 2,229,918 413,164
Prepaid expenses and other 92,605 540,752
------------- -------------
Total current assets 62,301,683 27,625,951
Restricted cash 18,020,702 --
Property and equipment, net 2,920,217 3,540,161
Intangible assets, net 170,808,421 336,810,192
Deferred taxes -- 13,296,554
Deposits and other 250,000 --
------------- -------------
Total assets $ 254,301,023 $ 381,272,858
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 14,950,430 $ 11,998,097
Accounts payable 1,427,852 1,279,086
Accrued interest 8,247,073 3,310,369
Accrued satellite programming and fees 3,068,085 6,830,572
Accrued expenses 4,357,395 7,556,967
Amounts due seller 27,971,199 --
------------- -------------
Total current liabilities 60,022,034 30,975,091
Long-term debt 177,641,876 187,804,744
Deferred taxes -- 66,874,500
------------- -------------
Total liabilities 237,663,910 285,654,335
------------- -------------
Commitments and contingent liabilities -- --
Stockholders' equity:
Common stock 21,370 1
Preferred stock 14,041 --
Additional paid-in capital 25,826,080 145,401,605
Accumulated deficit (9,224,378) (49,783,083)
------------- -------------
Total stockholders' equity 16,637,113 95,618,523
------------- -------------
Total liabilities and stockholders' equity $ 254,301,023 $ 381,272,858
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
3
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Digital Television Services, Inc.
Consolidated Statements of Operations
Three Months Ended September 30,
---------------------------------
1997 1998
------------ ------------
(unaudited)
Revenues:
Basic satellite service $ 9,310,293 $ 16,239,298
Premium services 1,822,215 2,411,461
Other 665,457 813,355
------------ ------------
Total revenues 11,797,965 19,464,114
Operating expenses:
Programming 5,336,764 8,622,804
General and administrative 3,327,258 4,081,085
Marketing and selling 4,284,229 7,892,055
Incentive compensation -- 75,000
Depreciation and amortization 3,893,304 9,652,185
------------ ------------
Loss from operations (5,043,590) (10,859,015)
Interest expense (4,950,753) (6,236,453)
Interest income 591,145 295,294
Other income (expenses), net (111,961) 19,417
------------ ------------
Net loss ($ 9,515,159) ($16,780,757)
============ ============
See accompanying notes to consolidated financial statements
4
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Digital Television Services, Inc.
Consolidated Statements of Operations
Nine Months Ended September 30,
---------------------------------
1997 1998
------------ ------------
(unaudited)
Revenues:
Basic satellite service $ 22,477,116 $ 44,556,030
Premium services 4,585,042 7,328,230
Other 1,749,077 2,799,301
------------ ------------
Total revenues 28,811,235 54,683,561
Operating expenses:
Programming 12,742,294 24,483,144
General and administrative 8,599,970 12,262,822
Marketing and selling 8,641,644 17,649,592
Incentive compensation -- 173,919
Depreciation and amortization 10,288,621 22,837,276
------------ ------------
Loss from operations (11,461,294) (22,723,192)
Interest expense (8,846,229) (18,693,648)
Interest income 630,916 1,136,990
Other expenses, net (91,503) (278,855)
------------ ------------
Net loss ($19,768,110) ($40,558,705)
============ ============
See accompanying notes to consolidated financial statements
5
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Digital Television Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1997 1998
------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 19,768,110) ($ 40,558,705)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 10,288,621 22,837,276
Accretion on discount of bonds and seller notes 815,910 1,094,092
Bad debt expense 479,595 985,319
Change in assets and liabilities:
Accounts receivable (1,731,526) (2,182,896)
Inventory (420,808) 1,816,754
Prepaid expenses and other (33,037) (464,153)
Accounts payable and accrued expenses 3,098,016 6,444,013
Accrued interest 2,753,059 (4,936,704)
------------- -------------
Net cash used by operating activities (4,518,280) (14,965,004)
------------- -------------
Cash flows from investing activities:
Acquisitions (88,745,395) (37,172,504)
Capital expenditures (1,339,466) (1,232,829)
Purchase of intangible assets (683,529) (5,588,721)
------------- -------------
Net cash used by investing activities (90,768,390) (43,994,054)
------------- -------------
Cash flows from financing activities:
Proceeds from subordinated notes offering 152,840,850 --
Proceeds from long-term debt 344,417 --
Repayments of long-term debt (6,080,000) (9,555,622)
Borrowings on bank credit facilities 72,769,409 14,000,000
Repayments of revolving credit facilities (82,169,409) (200,000)
Contributions by Parent -- 2,146,087
Restricted cash (36,544,197) 18,389,853
Capital lease repayments (52,908) (171,535)
Sale of Member Units 31,879,005 --
Capitalized financing costs (9,325,449) --
------------- -------------
Net cash provided by financing activities 123,661,718 24,608,783
------------- -------------
Net increase (decrease) in cash and cash equivalents 28,375,048 (34,350,275)
Cash and cash equivalents, beginning of year 1,595,955 39,113,152
------------- -------------
Cash and cash equivalents, end of period $ 29,971,003 $ 4,762,877
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
6
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Digital Television Services, Inc. ("DTS" or together with its wholly
owned subsidiaries, the "Company"), a Delaware corporation, is a successor to
Digital Television Services, LLC and DBS Holdings, L.P., originally formed on
January 30, 1996. The Company provides direct broadcast satellite television
("DBS") services to customers in certain rural areas which encompass portions of
eleven states. The Company completed its first acquisition of rights to provide
DBS services in March 1996 and has made a total of eighteen acquisitions as of
September 30, 1998.
DTS is a holding company which operates primarily through its wholly
owned subsidiaries. The principal wholly owned subsidiaries of DTS as of
September 30, 1998 consist of eleven entities (the "Operating Subsidiaries").
Until April 27, 1998 the sole member and manager of the Operating Subsidiaries
was DTS Management, LLC ("DTS Management"), which is a wholly owned subsidiary
of DTS. The Company's other wholly owned subsidiary, DTS Capital, Inc. ("DTS
Capital"), was formed in 1997 and currently has nominal assets and does not
conduct any operations. DTS Capital was formed to facilitate the issuance of
$155.0 million of 12.5% Series A Senior Subordinated Notes due 2007 (the "Series
A Notes") in July 1997 (see footnote 5 - Long-Term Debt).
On April 27, 1998, the Company merged (the "Merger") with Pegasus DTS
Merger Sub, Inc., a wholly owned subsidiary of Pegasus Communications
Corporation ("Pegasus"). In connection with the Merger, the stockholders of the
Company exchanged all of their outstanding capital stock for approximately 5.5
million shares of Pegasus' Class A Common Stock and, as a consequence, the
Company became a wholly owned subsidiary of Pegasus. Pegasus did not assume,
guarantee or otherwise have any liability for DTS' outstanding indebtedness or
any other liability of the Company or its subsidiaries. After the Merger, except
to the extent permitted under the terms of the Notes, the Company did not
assume, guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus or any of Pegasus' subsidiaries.
Effective with the Merger, a change of control occurred and, as a result,
the Company was required to make an offer to purchase the Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the date of the purchase. The Company entered into an agreement with CIBC
Oppenheimer Corp. ("CIBCC") under which CIBCC agreed to purchase the Notes
tendered in response to the offer to purchase the Notes.
Total consideration for the Merger was approximately $345.2 million, which
consisted of approximately 5.5 million shares of Pegasus' Class A Common Stock
(amounting to $119.4 million at a price of $21.71 per share), approximately
$158.9 million of net liabilities and approximately $66.9 million of a deferred
tax liability, primarily as a result of non-deductible amortization, of which
$53.6 million was allocated to DBS rights and $13.3 million was recorded as a
deferred tax asset. As a result of the Merger and Pegasus' use of the purchase
method of accounting to record the acquisition of the Company, the "push down"
effect of the purchase price increased the Company's intangible assets by
approximately $173.0 million. As a consequence, results prior to the Merger are
not comparable with those subsequent to the Merger.
7
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 1997 included in the Company's Form 10-K for the year then ended.
All intercompany transactions and balances have been eliminated.
3. Common Stock:
At December 31, 1997 common stock consists of the following:
<TABLE>
<S> <C>
DTS common stock, $0.01 par value; 10.0 million shares authorized;
2,137,049 shares issued and outstanding ........................... $21,370
=======
At September 30, 1998 common stock consists of the following:
DTS common stock, $0.01 par value; 10.0 million shares authorized;
100 shares issued and outstanding ................................. $ 1
=======
</TABLE>
The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions (see footnote 5 - Long-Term Debt).
4. Preferred Stock:
At December 31, 1997 preferred stock consists of the following:
<TABLE>
<S> <C>
DTS preferred stock, $0.01 par value; 10.0 million shares authorized;
1,404,056 issued and outstanding .................................. $14,041
=======
At September 30, 1998 preferred stock consists of the following:
DTS preferred stock, $0.01 par value; 10.0 million shares authorized;
no shares issued and outstanding .................................. $ --
=======
</TABLE>
The Company's ability to pay dividends on its Preferred Stock is subject to
certain restrictions (see footnote 5 - Long-Term Debt).
8
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Debt:
Long-term debt consists of the following:
December 31, 1997
------------------------------
Unamortized
Principal Discount
------------ ------------
Senior subordinated notes .. $155,000,000 $ 2,069,185
Credit facility ............ 15,500,000 --
Seller notes and commitments 26,544,998 2,675,149
Capital leases and other ... 291,642 --
------------ ------------
197,336,640 4,744,334
Less current maturities .... 16,315,333 1,364,903
------------ ------------
$181,021,307 $ 3,379,431
============ ============
September 30, 1998
------------------------------
Unamortized
Principal Discount
------------ ------------
Senior subordinated notes .. $155,000,000 $ 1,854,358
Credit facility ............ 29,300,000 --
Seller notes and commitments 19,032,976 1,795,883
Capital leases and other ... 120,106 --
------------ ------------
203,453,082 3,650,241
Less current maturities .... 13,069,206 1,071,109
------------ ------------
$190,383,876 $ 2,579,132
============ ============
Senior Subordinated Notes:
In July 1997, the Company completed a senior subordinated notes offering
(the "Notes Offering") in which it sold $155.0 million of its Series A Notes,
resulting in net proceeds to the Company of approximately $146.0 million. The
Company used the net proceeds to fund an interest escrow account for the first
four semi-annual interest payments on the Notes and to repay outstanding
indebtedness under the Credit Facility (as defined herein). This escrow account
is included as restricted cash on the Company's balance sheets.
In January 1998, the Company exchanged its Series A Notes for its 12.5%
Series B Senior Subordinated Notes due 2007 (the "Series B Notes" and, together
with the Series A Notes, the "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 all direct and indirect subsidiaries of DTS, except DTS Capital,
which is a co-issuer of the Notes and currently has nominal assets and does not
conduct any operations. DTS does not have assets or operations apart from the
assets and operations of its Operating Subsidiaries. Accordingly, separate
financial information for the Guarantors is not provided because management of
the Company has determined that such information would not be material to
investors.
9
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Debt (continued):
Credit Facility:
In July 1997, DTS entered into an amended and restated $70.0 million
six-year senior revolving credit facility and a $20.0 million six-year senior
term facility (collectively, the "Credit Facility"), which are collateralized by
substantially all of the assets of the Company. Interest on the Credit Facility
is, at the Company's option, at either the bank's base rate or the Eurodollar
Rate. The Credit Facility is subject to certain financial covenants as defined
in the loan agreement, including a debt to adjusted cash flow covenant. The
Credit Facility may be used to refinance certain existing indebtedness, finance
future acquisitions and for working capital, capital expenditures and general
corporate purposes.
Seller Notes and Commitments:
In connection with the acquisition of the Company's California DBS rights,
one of the Operating Subsidiaries entered into a promissory note in favor of the
seller. Pursuant to the note, the Operating Subsidiary is obligated to pay to
the seller the sum of (i) $480,000, payable in 24 equal monthly installments
commencing May 1, 1996, and (ii) an amount payable on October 1, 1998 equal to
the greater of $4.0 million or the Contingent Payment Amount. The Contingent
Payment Amount is determined by multiplying the number of DBS subscribers in the
Company's California territory as of October 1, 1998 by certain dollar amounts.
As of September 30, 1998, the Contingent Payment Amount is recorded as
approximately $8.3 million, which is based on projected subscriber levels at
October 1, 1998. The obligation of the Operating Subsidiary with respect to the
outstanding promissory note is collateralized by an irrevocable letter of credit
issued pursuant to the Credit Facility, which has been issued for the benefit of
the sellers. The note was paid in October 1998 with proceeds from Credit
Facility borrowings.
In connection with the acquisition of one of the Company's South Carolina
DBS rights, one of the Operating Subsidiaries entered into a promissory note in
favor of the seller in the amount of approximately $8.0 million, of which
approximately $3.3 million was paid in January 1997. The balance was paid in
January 1998.
In connection with the acquisition of the Company's Georgia DBS rights (the
"Georgia DBS Rights"), one of the Operating Subsidiaries issued three promissory
notes (the "Georgia Notes"), each of which represents a portion of the purchase
price for one of the Georgia DBS Rights. The Operating Subsidiary issued (i) a
promissory note in favor of the seller in the amount of approximately $850,000
("Georgia Note 1"), (ii) a promissory note in favor of the seller in the amount
of approximately $9.4 million ("Georgia Note 2"), and (iii) a promissory note in
favor of the seller in the amount of approximately $5.2 million ("Georgia Note
3"). The principal amount of the Georgia Note 1 was paid in January 1998. The
principal amount of each of the Georgia Note 2 and the Georgia Note 3 is payable
in annual installments beginning in January 1998 through January 2001. The
obligations of the Operating Subsidiary with respect to the outstanding Georgia
Notes are collateralized by two irrevocable letters of credit issued pursuant to
the Credit Facility, each of which has been issued for the benefit of the
sellers.
10
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Debt (continued):
Capital Leases and Other:
The capital leases and other represent notes payable to certain financial
institutions for certain property and equipment. The notes are payable in equal
monthly installments through May 2000.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, create liens and pay dividends.
6. Net Loss Per Share:
Calculation of Basic and Diluted Earnings Per Share:
The following table sets forth the computation of the number of shares used
in the computation of basic and diluted earnings per share:
Three Months Ended September 30,
-------------------------------
1997 1998
------------ ------------
Net loss .......................... ($ 9,515,159) ($16,780,757)
============ ============
Weighted average shares outstanding 100 100
============ ============
Nine Months Ended September 30,
-------------------------------
1997 1998
------------ ------------
Net loss .......................... ($19,768,110) ($40,558,705)
============ ============
Weighted average shares outstanding 100 100
============ ============
For the three and nine months ended September 30, 1997 and 1998, net loss
per share was determined by dividing net loss by applicable shares outstanding.
The total shares used for the calculation of basic and diluted net loss per
share are pro forma for the Merger and were the same as there were no securities
that have not been issued.
7. Acquisition:
On January 30, 1998, the Company acquired the rights to provide DIRECTV(R)
("DIRECTV") programming in certain rural areas of Georgia and the related assets
for total consideration of approximately $9.5 million, which consisted of $9.5
million in cash and $37,000 in assumed net liabilities.
11
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DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. 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, liquidity, cash flows or financial position of the
Company.
12
<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 12 - 21) of Pegasus' Proxy Statement dated April 14, 1998, filed
as part of Pegasus' Registration Statement on Form S-1, File No. 333-44929 (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 of 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. Unless otherwise defined, all defined terms used herein
have the same meaning as in the footnotes to the Consolidated Financial
Statements included herein.
General
The Company was formed on January 30, 1996, to acquire, own and manage
rights to distribute DIRECTV services to residential households and commercial
establishments in certain rural areas of the United States. On April 27, 1998,
the Company was acquired by Pegasus Communications Corporation ("Pegasus") for
total consideration of approximately $345.2 million, which consisted of
approximately 5.5 million shares of Pegasus' Class A Common Stock (amounting to
$119.4 million at a price of $21.71 per share), approximately $158.9 million of
net liabilities and approximately $66.9 million of a deferred tax liability.
Upon completion of the acquisition, the Company became a wholly owned subsidiary
of Pegasus. Pegasus has accounted for the acquisition as a purchase and applied
"push down" accounting, thereby adjusting the Company's accounting basis. The
effect of the change in accounting basis has been a $173.0 million increase in
intangible assets. Results prior to and subsequent to the acquisition of the
Company by Pegasus are not comparable.
As of September 30, 1998, the Company provided DIRECTV services to
approximately 163,400 subscribers in territories comprising approximately 1.8
million households in certain rural areas of eleven states in which the Company
holds the exclusive right to provide such services.
The Company's revenues are derived from monthly customer 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 research expenditures, (iii) general and
administrative expenses, and (iv) subscriber acquisition costs. Programming
expenses consist of amounts paid to program suppliers, digital satellite system
or DSS(R) ("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. General and administrative costs include
administrative costs associated with the Company's sales and subscriber service
operations.
13
<PAGE>
Costs associated with subscriber acquisition are a significant component of
the Company's operating expenses. These expenses include variable commission
expenses, fixed and variable promotional expenses, equipment subsidies and
marketing salaries and benefits. The Company's policy is to expense all
subscriber acquisition costs at the time the sale is made. The Company
anticipates that it will continue to incur a significant level of subscriber
acquisition costs in conjunction with the growth of its subscriber base, and
that these costs could increase as a result of increased competition and a
downward pressure on the retail price of satellite equipment sold. Potential
increases in subscriber acquisition costs as well as significant subscriber
growth is expected to have a short term negative impact on operating cash flow
of the Company. Subscriber acquisition costs charged to operations are excluded
from pre-marketing operating expenses.
Results of Operations
Three months ended September 30, 1998 compared to three months ended September
30, 1997
The Company's net revenues increased by approximately $7.7 million or 65%
for the three months ended September 30, 1998 as compared to the same period in
1997. The net revenues increased as a result of $3.1 million or 41% due to the
increased number of DBS subscribers in territories owned at the beginning of
1997 and $4.6 million or 59% resulted from acquisitions made in 1997 and 1998.
As of September 30, 1998, the Company had approximately 163,400 subscribers,
representing approximately a 9.1% penetration rate of households served,
compared to approximately 101,700 subscribers as of September 30, 1997, or a
6.3% penetration rate. Average monthly programming revenue per subscriber during
the three months ended September 30, 1998 was approximately $41.42 as compared
to approximately $36.93 during the same period in 1997. This increase resulted
primarily from an improved mix of premium package programming subscriptions.
The Company's total pre-marketing operating expenses increased by
approximately $5.4 million or 66% for the three months ended September 30, 1998
as compared to the same period in 1997. The pre-marketing operating expenses
increased as a result of a $2.2 million increase in operating expenses of the
Company's DBS operations due to a same territory increase in programming and
other operating costs (resulting from the increased number of DBS subscribers in
territories owned at the beginning of 1997) and a $3.2 million increase
attributable to territories acquired in 1997 and 1998. These costs increased in
direct proportion to the increase in the number of subscribers subscribing to
the Company's DIRECTV services.
DBS subscriber acquisition costs, which consist of regional sales costs,
advertising and promotion, and commissions and subsidies, totaled approximately
$6.9 million or $345 per gross subscriber addition for the three months ended
September 30, 1998 as compared to $4.7 million or $424 per gross subscriber
addition for the same period in 1997.
Incentive compensation through a plan that became applicable to the Company
on April 27, 1998, when Pegasus acquired the Company, amounted to $75,000 for
the three months ended September 30, 1998 as compared to no incentive
compensation for the same period in 1997. Incentive compensation is calculated
from increases in pro forma Location Cash Flow.
14
<PAGE>
Depreciation and amortization expense increased by approximately $5.8
million or 148% for the three months ended September 30, 1998 as compared to the
same period in 1997 as the Company increased its fixed and intangible asset base
as a result of the change in accounting basis on the acquisition of the Company
by Pegasus, nine other completed acquisitions during 1997 and an acquisition
completed in the first quarter of 1998.
As a result of these factors, the Company's loss from operations increased
by approximately $5.8 million for the three months ended September 30, 1998 as
compared to the same period in 1997.
Interest expense for the three months ended September 30, 1998, including
amortization of debt discount and debt issuance costs, totaled approximately
$6.2 million as compared to approximately $5.0 million for the same period in
1997. This increase was due primarily to interest associated with the Notes
issued in July 1997.
The Company reported a net loss of approximately $16.8 million for the
three months ended September 30, 1998 as compared to a net loss of approximately
$9.5 million for the same period in 1997. The $7.3 million change was the net
result of an increase in the loss from operations of approximately $5.8 million,
an increase in interest expense of approximately $1.3 million, a decrease in
interest income of $296,000 and a decrease in other expenses of $132,000.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
The Company's net revenues increased by approximately $25.9 million or 90%
for the nine months ended September 30, 1998 as compared to the same period in
1997. The net revenues increased as a result of $7.8 million or 30% due to the
increased number of DBS subscribers in territories owned at the beginning of
1997 and $18.1 million or 70% resulted from acquisitions made in 1997 and 1998.
As of September 30, 1998, the Company had approximately 163,400 subscribers,
representing approximately a 9.1% penetration rate of households served,
compared to approximately 101,700 subscribers as of September 30, 1997, or a
6.3% penetration rate. Average monthly programming revenue per subscriber during
the nine months ended September 30, 1998 was approximately $41.89 as compared to
approximately $37.04 during the same period in 1997. This increase resulted
primarily from an improved mix of premium package programming subscriptions.
The Company's total pre-marketing operating expenses increased by
approximately $18.2 million or 90% for the nine months ended September 30, 1998
as compared to the same period in 1997. The pre-marketing operating expenses
increased as a result of a $5.5 million increase in operating expenses of the
Company's DBS operations due to a same territory increase in programming and
other operating costs (resulting from the increased number of DBS subscribers in
territories owned at the beginning of 1997) and a $12.7 million increase
attributable to territories acquired in 1997 and 1998. These costs increased in
direct proportion to the increase in the number of subscribers subscribing to
the Company's DIRECTV services.
DBS subscriber acquisition costs, which consist of regional sales costs,
advertising and promotion, and commissions and subsidies, totaled approximately
$16.0 million or $317 per gross subscriber addition for the nine months ended
September 30, 1998 as compared to $9.8 million or $416 per gross subscriber
addition for the same period in 1997.
15
<PAGE>
Incentive compensation through a plan that became applicable to the Company
on April 27, 1998, when Pegasus acquired the Company, amounted to $174,000 for
the nine months ended September 30, 1998 as compared to no incentive
compensation for the same period in 1997. Incentive compensation is calculated
from increases in pro forma Location Cash Flow
Depreciation and amortization expense increased by approximately $12.5
million or 122% for the nine months ended September 30, 1998 as compared to the
same period in 1997 as the Company increased its fixed and intangible asset base
as a result of the change in accounting basis on the acquisition of the Company
by Pegasus, nine other completed acquisitions during 1997 and an acquisition
completed in the first quarter of 1998.
As a result of these factors, the Company's loss from operations increased
by approximately $11.3 million for the nine months ended September 30, 1998 as
compared to the same period in 1997.
Interest expense for the nine months ended September 30, 1998, including
amortization of debt discount and debt issuance costs, totaled approximately
$18.7 million as compared to approximately $8.8 million for the same period in
1997. This increase was primarily due to interest associated with the Notes
issued in July 1997.
The Company reported a net loss of approximately $40.6 million for the nine
months ended September 30, 1998 as compared to a net loss of approximately $19.8
million for the same period in 1997. The $20.8 million change was the net result
of an increase in the loss from operations of approximately $11.3 million, an
increase in interest expense of approximately $9.8 million, an increase in
interest income of $506,000 and an increase in other expenses of $187,000.
The Company generated a Consolidated Operating Cash Flow surplus pursuant
to the terms of the Notes Indenture of approximately $1.1 million for the nine
months ended September 30, 1998 compared with a deficit of $633,000 for the same
period in 1997. Operating Cash Flow performance increased between periods as a
result of increased subscriber levels.
Liquidity and Capital Resources
The Company has required significant capital since its formation in order
to acquire the rights to provide DIRECTV services, to implement the
infrastructure to support its operations and to increase its subscriber base.
The Company has financed acquisitions and its other capital needs through the
proceeds received from the private sale of equity securities, the issuance of
seller notes, through borrowings under the Credit Facility and issuance of the
Notes.
Pre-Marketing Location Cash Flow increased by approximately $2.2 million or
63% for the three months ended September 30, 1998 as compared to the same period
in 1997. Pre-Marketing Location Cash Flow increased as a result of $881,000 or
39% attributable to an increase in same territory Pre-Marketing Location Cash
Flow and $1.4 million or 61% attributable to territories acquired in 1997 and
1998.
Pre-Marketing Location Cash Flow increased by approximately $7.6 million or
88% for the nine months ended September 30, 1998 as compared to the same period
in 1997. Pre-Marketing Location Cash Flow increased as a result of approximately
$2.3 million or 30% attributable to an increase in same territory Pre-Marketing
Location Cash Flow and $5.3 million or 70% attributable to territories acquired
in 1997 and 1998.
16
<PAGE>
During the nine months ended September 30, 1998, $39.1 million of cash on
hand, together with $24.6 million of net cash provided by the Company's
financing activities, was used to fund operating activities of approximately
$15.0 million and investing activities of $44.0 million. Investing activities
consisted of (i) the acquisition of DBS assets for approximately $37.2 million,
(ii) costs related to the acquisition by Pegasus totaling $4.3 million, and
(iii) maintenance and other capital expenditures and intangibles totaling
approximately $2.5 million. Financing activities consisted of (i) the repayment
of approximately $9.8 million of long-term debt and revolving credit facilities,
(ii) borrowings on bank credit facilities totaling $14.0 million, (iii)
repayment of capital leases of $172,000, (iv) $2.1 million of contributions by
PCC, and (v) net restricted cash draws of approximately $18.4 million to pay
interest on the Notes. As of September 30, 1998, the Company's cash on hand,
including restricted cash of $18.6 million, approximated $23.4 million.
On July 30, 1997, the Company raised approximately $146.0 million, net of
underwriting discount and expenses, through the issuance of $155.0 million of
the Series A Notes, which were exchanged for the Series B Notes registered under
the Securities Act. The Notes are unconditionally guaranteed, on a senior
subordinated basis, as to payment of principal, premium, if any, and interest,
jointly and severally, by the Guarantors. The Guarantors consist of all of the
subsidiaries of the Company, except DTS Capital, which is a co-issuer of the
Notes and has no separate assets or operations. The Company does not have assets
or operations apart from the assets and operations of its subsidiaries.
Pre-Marketing Location Cash Flow is defined as net revenues less location
operating expenses before subscriber acquisition costs. Location Cash Flow is
defined as net revenues less location operating expenses. Although Pre-Marketing
Location Cash Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Pre-Marketing Location Cash Flow and Location Cash Flow are accepted within the
Company's business segments as generally recognized measures of performance and
are used by analysts who report publicly on the 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 measures for
determining the Company's operating performance or liquidity which is calculated
in accordance with generally accepted accounting principles.
Capital Expenditures
The Company's cash and financing needs for the remainder of 1998 and beyond
will be dependent on the Company's level of subscriber growth and the related
marketing costs to acquire new subscribers, and the working capital needs
necessary to support such growth. For the remainder of 1998, the Company has
principal repayment obligations on its Credit Facility, seller notes and
installment notes totaling approximately $8.5 million, and commitments under
various operating leases for office space and equipment. The Company expects to
make capital expenditures of approximately $400,000 during the remainder of
1998. Capital expenditures will be primarily for equipment and software
enhancements associated with the Company's centralized customer call center. The
Company plans to fund these obligations and operating cash requirements using
borrowings under the Credit Facility and cash generated from operations. There
can be no assurance that the Company's capital expenditure plans will not change
in the future.
17
<PAGE>
Other
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the Year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the "2000's" from dates in the "1900's." These problems may
also arise from additional sources, such as the use of special codes and
conventions in software utilizing the date field.
The Company has reviewed all of its systems as to the Year 2000 issue. The
Company's primary focus has been on its own internal systems. The Company is in
the process of replacing its corporate accounting system. This new system will
be in place by the end of 1998. However, if any necessary changes are not made
or completed in a timely fashion or unanticipated problems arise, the Year 2000
issue may take longer for the Company to address and may have a material impact
on the Company's financial condition and its results of operations.
The Company relies on outside vendors for the operation of its DBS
satellite control and billing systems, including DIRECTV, the NRTC and their
respective vendors. The Company has established a policy to ensure that these
vendors are currently in compliance with the Year 2000 issue or have a plan in
place to be in compliance with the Year 2000 issue by the first quarter of 1999.
In addition, the Company has had initial communications with certain of its
other significant suppliers, distributors, financial institutions, lessors and
parties with which it conducts business to evaluate their Year 2000 compliance
plans and state of readiness and to determine the extent to which the Company's
systems may be affected by the failure of others to remediate their own Year
2000 issues. To date, however, the Company has received only preliminary
feedback from such parties and has not independently confirmed any information
received from other parties with respect to the Year 2000 issue. As such, there
can be no assurance that such other parties will complete their Year 2000
conversion in a timely fashion or will not suffer a Year 2000 business
disruption that may adversely affect the Company's financial condition and its
results of operations.
Because the Company's Year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
yet completed the development of a comprehensive Year 2000-specific contingency
plan. However, as part of its Year 2000 contingency planning effort, information
received from external sources is examined for date integrity before being
brought into the Company's internal systems. If the Company determines that its
business or a segment thereof is at material risk of disruption due to the Year
2000 issue or anticipates that its Year 2000 conversion will not be completed in
a timely fashion, the Company will work to enhance its contingency plan. Costs
to be incurred beyond September 30, 1998 relating to the Year 2000 issue are not
expected to be significant.
The Company's ability to incur additional indebtedness is limited under
the terms of the Notes Indenture and the Credit Facility. These limitations
primarily 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 in excess of certain
agreed upon levels will require lender consent.
18
<PAGE>
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.
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. A majority of the
Company's indebtedness bears interest at a fixed rate.
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has reviewed the provisions of SFAS No. 132 and SFAS
No. 133 and the implementation of the above standards is not expected to have
any significant impact on its consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
19
<PAGE>
Part II. Other Information
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 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, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Digital Television Services, Inc. has duly caused this
Report to be signed on its behalf by the undersigned, thereto duly authorized.
<TABLE>
<S> <C>
Digital Television Services, Inc.
November 13, 1998 By: /s/ Robert N. Verdecchio
- -------------------------------------------- -----------------------------
Date Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DTS Capital, Inc. has duly caused this Report to be signed
on its behalf by the undersigned, thereto duly authorized.
<TABLE>
<S> <C>
DTS Capital, Inc.
November 13, 1998 By: /s/ Robert N. Verdecchio
- -------------------------------------------- -----------------------------
Date Robert N. Verdecchio
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
connsolidated balance sheets of Digital Television Services, Inc. as of December
31, 1997 and September 30, 1998 (unaudited) and the related consolidated
statements of operations and cash flows for the three and nine months ended
September 30, 1997 (unaudited) and September 30, 1998 (unaudited). This
information is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 4,762,877 4,762,877
<SECURITIES> 0 0
<RECEIVABLES> 3,454,923 3,454,923
<ALLOWANCES> 183,000 183,000
<INVENTORY> 413,164 413,164
<CURRENT-ASSETS> 27,625,951 27,625,951
<PP&E> 4,707,583 4,707,583
<DEPRECIATION> 1,167,422 1,167,422
<TOTAL-ASSETS> 381,272,858 381,272,858
<CURRENT-LIABILITIES> 30,975,091 30,975,091
<BONDS> 153,145,642 153,145,642
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 95,618,522 95,618,522
<TOTAL-LIABILITY-AND-EQUITY> 380,403,197 380,403,197
<SALES> 19,464,114 54,683,561
<TOTAL-REVENUES> 19,464,114 54,683,561
<CGS> 0 0
<TOTAL-COSTS> 30,323,129 77,406,753
<OTHER-EXPENSES> (314,711) (858,135)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,236,453 18,693,648
<INCOME-PRETAX> (16,780,757) (40,558,705)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (16,780,757) (40,558,705)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,780,757) (40,558,705)
<EPS-PRIMARY> (167,807.57) (405,587.05)
<EPS-DILUTED> (167,807.57) (405,587.05)
</TABLE>
