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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number 0-21389
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PEGASUS COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0374669
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(State of other jurisdication of (IRS Employer
incorporation of organization) Identification Number)
c/o Pegasus Communications Management Company,
5 Radnor Corporate Center, Suite 454, Radnor, PA 19087
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (610) 341-1801
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Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Title of each class
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Common Stock, Class A; $0.01 par value
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock (Common Stock, Class A) held
by non-affiliates of the Registrant as of the close of business on March 21,
1997 was approximately $57.1 million based on the closing sale price of the
Class A Common Stock on the Nasdaq National Market. (Reference is made to the
paragraph captioned "Calculation of Aggregate Market Value of Nonaffiliate
Shares" of Part II, Item 5 herein for a statement of assumptions upon which this
calculation is based).
Number of shares of each class of the Registrant's common stock outstanding
as of March 21, 1997:
Class A, Common Stock, $0.01 par value 5,164,608
Class B, Common Stock, $0.01 par value 4,581,900
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Prospectus dated March 26, 1997, filed as part
of the Registrant's Registration Statement on Form S-1, File No. 333-23595 (the
"Prospectus") are incorporated by reference into Part I of this Report on Form
10-K.
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PEGASUS COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
Page
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PART I
Item 1. Business................................................................................... 1
Item 2. Properties ................................................................................ 13
Item 3. Legal Proceedings.......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........................................ 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 15
Item 6. Selected Historical Consolidated Financial Data............................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 19
Item 8. Financial Statements and Supplementary Data................................................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 25
PART III
Item 10. Executive Officers and Directors of the Registrant ........................................ 26
Item 11. Executive Compensation..................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 31
Item 13. Certain Relationships and Related Transactions............................................. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 34
PEGASUS COMMUNICATIONS CORPORATION
PART I
For definitions of certain terms used in this Report, the section captioned
"Prospectus Summary -- Glossary of Defined Terms" (pages 10-13) of the
Prospectus is incorporated herein by reference.
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 the Prospectus, which 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.
ITEM 1: BUSINESS
GENERAL
Pegasus Communications Corporation ("Pegasus," and together with its direct
and indirect subsidiaries, the "Company") is a diversified media and
communications company whose subsidiaries operate in two media segments:
multichannel television and broadcast television. Pegasus Multichannel provides
DBS and Cable television to 92,000 subscribers in twelve states and Puerto Rico
in franchise areas that include 1.5 million households and 149,000 businesses.
Pegasus Broadcast owns and operates five television stations affiliated with FOX
and has entered into agreements to operate two additional TV stations in two of
these markets in 1997. See footnote 16 to the Company's Consolidated Financial
Statements, included herein, for financial results by business segment. The
Company has grown through the acquisition and operation of media and
communications properties characterized by clearly identifiable "franchises" and
significant operating leverage, which enables increases in revenues to be
converted into disproportionately greater increases in Location Cash Flow.
The Company's operating strategy is to generate consistent revenue growth and
to convert this revenue growth into disproportionately greater increases in
Location Cash Flow. The Company seeks to achieve revenue growth (i) in DBS by
identifying market segments in which DIRECTV programming will have strong
appeal, developing marketing and promotion campaigns to increase consumer
awareness of and demand for DIRECTV programming within those market segments and
building distribution networks consisting of consumer electronics and satellite
equipment dealers, programming sales agents and the Company's own direct sales
force, and, (ii) in Cable by increasing the number of its subscribers and
revenue per subscriber through improvements in signal reception, the quality and
quantity of its programming, line extensions and rate increases and (iii) in TV
by attracting a dominant share of the viewing of underserved demographic groups
it believes to be attractive to advertisers and by developing aggressive sales
forces capable of "overselling" its stations' share of those audiences. The
Company seeks to convert increases in revenues into disproportionately greater
increases in Location Cash Flow through the use of incentive plans, which reward
employees in proportion to annual increases in Location Cash Flow, coupled with
rigorous budgeting and strict cost controls.
The Company's acquisition strategy is to identify media and communications
businesses in which significant increases in Location Cash Flow may be realized
and where the ratio of required investment to potential Location Cash Flow is
low. The Company seeks to acquire (i) new DIRECTV services territories in order
to capitalize on operating efficiencies and economies of scale and (ii) new
television and cable properties at attractive prices for which the Company can
improve its operating results.
1
MULTICHANNEL TELEVISION
DBS -- DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
United States television households in 1994. DIRECTV currently offers in excess
of 175 channels of near laser disc quality video and CD quality audio
programming and transmits via three high-power Ku band satellites, each
containing 16 transponders. As of December 31, 1996, there were over 2.3 million
DIRECTV subscribers. DIRECTV expects to have approximately ten million
subscribers by the year 2000.
The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the size
of a standard VCR and a remote control, all of which are used with standard
television sets. Each DSS receiver includes a "smart card" which is uniquely
addressed to it. The smart card, which can be removed from the receiver,
prevents unauthorized reception of DIRECTV services and retains billing
information on pay-per-view usage, which information is sent at regular
intervals from the DSS receiver telephonically to DIRECTV's authorization and
billing system. DSS units also enable subscribers to receive United States
Satellite Broadcasting Company, Inc. ("USSB") programming. USSB is a DBS service
whose programming consists of 25 channels of video programming transmitted via
five transponders it owns on DIRECTV's first satellite. USSB primarily offers
Time Warner and Viacom satellite programming services, such as multiple channels
of HBO and Showtime, which are not available through DIRECTV but which are
generally complementary to DIRECTV programming.
THE COMPANY'S DBS OPERATIONS
The Company owns, through agreements with the NRTC, the exclusive right to
provide DIRECTV services in certain rural areas of Arkansas, Connecticut,
Indiana, Massachusetts, Michigan, Mississippi, New Hampshire, New York, Ohio,
Texas, Virginia and West Virginia. The Company's New England DBS service area
encompasses all of its New England Cable systems except for its systems in
central Massachusetts. Its Michigan DBS service area covers nine counties in the
Flint, Saginaw and thumb regions of Michigan, its Texas DBS service area covers
seven counties approximately 45 miles south of the Dallas/Fort Worth metroplex,
its Ohio DBS service area covers 11 counties in southern Ohio, its Indiana DBS
service area covers seven counties in Indiana, its Mississippi service area
covers eight counties in Mississippi, its Arkansas service area covers Garland
County in central Arkansas, and its Virginia/West Virginia service area covers
five counties in southwestern Virginia and the southern portion of West
Virginia.
Homes Average
Not Homes Monthly
Total Passed Passed Penetration Revenue
DIRECTV Homes in by by Total ------------------------------ Per
Territory Territory Cable(1) Cable(2) Subscribers(3) Total Uncabled Cabled Subscriber(4)
---------------------- ----------- --------- ----------- -------------- ------- ---------- ------- -------------
Owned:
Western New
England ............. 288,273 41,465 246,808 6,969 2.4% 13.1% 0.6%
New Hampshire ........ 167,531 42,075 125,456 4,210 2.5% 8.1% 0.6%
Martha's Vineyard and
Nantucket ........... 20,154 1,007 19,147 818 4.1% 61.4% 1.0%
Michigan ............. 241,713 61,774 179,939 7,326 3.0% 8.7% 1.1%
Texas ................ 149,530 54,504 95,026 5,735 3.8% 7.6% 1.7%
Ohio ................. 167,558 32,180 135,378 5,477 3.3% 12.1% 1.2%
Indiana .............. 131,025 34,811 96,214 6,479 4.9% 12.6% 2.2%
Mississippi .......... 101,799 38,797 63,002 6,705 6.6% 14.6% 1.6%
Arkansas ............. 36,458 2,408 34,050 1,734 4.8% 34.4% 2.7%
Virginia/West Virginia . 92,097 10,015 82,082 5,830 6.3% 45.8% 1.5%
----------- --------- ----------- -------------- ------- ---------- --------
Total .............. 1,396,138 319,036 1,077,102 51,283 3.7% 12.0% 1.2% $41.45
=========== ========= =========== ============== ======= ========== ======== -------------
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(1) Based on NRTC estimates of primary residences derived from 1990 U.S. census
data and after giving effect to a 1% annual housing growth rate and seasonal
residence data obtained from county offices. Does not include business
locations. Includes approximately 24,400 seasonal residences.
2
(2) Based on NRTC estimates of primary residences derived from 1990 U.S. census
data and after giving effect to a 1% annual housing growth rate and seasonal
residence data obtained from county offices. Does not include business
locations. Includes approximately 92,400 seasonal residences.
(3) As of February 7, 1997.
(4) Based upon 1996 revenues and weighted average 1996 subscribers.
BUSINESS STRATEGY
As the exclusive provider of DIRECTV services in its purchased territories,
the Company provides a full range of services, including installation,
authorization and financing of equipment for new subscribers as well as billing,
collections and customer service support for existing subscribers. The Company's
operating strategy in DBS is to (i) establish strong relationships with
retailers, (ii) build its own direct sales and distribution channels, (iii)
develop local and regional marketing and promotion to supplement DIRECTV's
national advertising, and (iv) offer equipment rental, lease and purchase
options.
The Company anticipates continued growth in subscribers and operating
profitability in DBS through increased penetration of DIRECTV territories it
currently owns and additional acquisitions. The Company's New England DBS
Territory achieved positive Location Cash Flow in 1995, its first full year of
operations. The Company's DIRECTV subscribers currently generate revenues of
approximately $41 per month at an average gross margin of 34%. The Company's
remaining expenses consist of marketing costs incurred to build its growing base
of subscribers and overhead costs which are predominantly fixed. As a result,
the Company believes that future increases in its DBS revenues will result in
disproportionately greater increases in Location Cash Flow.
The Company also believes that there is an opportunity for additional growth
through the acquisition of DIRECTV territories held by other NRTC members. NRTC
members are the only independent providers of DIRECTV services. Approximately
220 NRTC members collectively own DIRECTV territories consisting of
approximately 7.7 million television households in predominantly rural areas of
the United States, which the Company believes are among the most likely to
subscribe to DBS services. These territories comprise 8% of United States
television households, but represent approximately 23% of DIRECTV's existing
subscriber base. As the only publicly held, independent provider of DIRECTV
services, the Company believes that it is well positioned to achieve economies
of scale through the acquisition of DIRECTV territories held by other NRTC
members.
DIRECTV PROGRAMMING
DIRECTV programming includes (i) cable networks, broadcast networks and audio
services available for purchase in tiers for a monthly subscription, (ii)
premium services available a la carte or in tiers for a monthly subscription,
(iii) sports programming (including regional sports networks and seasonal
college and major professional league sports packages) available for a yearly,
seasonal or monthly subscription and (iv) movies and events available for
purchase on a pay-per-view basis. Satellite and premium services available a la
carte or for a monthly subscription are priced comparably to cable. Pay-per-view
movies are generally $2.99 per movie. Movies recently released for pay-per-view
are available for viewing on multiple channels at staggered starting times so
that a viewer generally would not have to wait more than 30 minutes to view a
particular pay-per-view movie.
DISTRIBUTION, MARKETING AND PROMOTION
In general, subscriptions to DIRECTV programming are offered through
commissioned sales representatives who are also authorized by the manufacturers
to sell DSS units. DIRECTV programming is offered (i) directly through national
retailers (e.g. Sears, Circuit City and Best Buy) selected by DIRECTV, (ii)
through consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming, (iii) through satellite dealers and consumer electronics dealers
authorized by five regional sales management agents ("SMAs") selected by
DIRECTV, (iv) through members of the NRTC who, like the Company, have agreements
with the NRTC to provide DIRECTV services, and (v) by AT&T, which has the
exclusive right to market, except in NRTC territories, DIRECTV services to all
residential customers. All programming packages currently must be authorized by
the Company in its service areas.
The Company markets DIRECTV programming services and DSS units in its
distribution area in two separate but overlapping ways. In residential market
segments where authorized DSS dealers offer the purchase, inventory and sale of
the DSS unit, the Company seeks to develop close, cooperative relationships
3
with these dealers and provides marketing, subscriber authorization,
installation and customer service support. In these circumstances, the dealer
earns a profit on the sale of the DSS unit and from a commission payable by the
Company for the sale of DIRECTV programming, while the Company may receive a
profit from a subscriber's initial installation and receives the programming
service revenues payable by the subscriber. Many DSS dealers are also authorized
to offer the Company's lease program.
In addition, the Company has developed a network of its own sales agents
("Programming Sales Agents") from among local satellite dealers, utilities,
cable installation companies, retailers and other contract sales people or
organizations. Programming Sales Agents earn commissions on the lease or sale of
DSS units, as well as on the sale of DIRECTV programming.
The Company seeks to identify and target market segments within its service
area in which it believes DIRECTV programming services will have strong appeal.
Depending upon their individual circumstances, potential subscribers may
subscribe to DIRECTV services as a source of multichannel television where no
other source currently exists, as a substitute for existing cable service due to
its high price or poor quality or as a source of programming which is not
available via cable but which is purchased as a supplement to existing cable
service. The Company seeks to develop promotional campaigns, marketing methods
and distribution channels designed specifically for each market segment.
The Company's primary target market consists of residences which are not
passed by cable or which are passed by older cable systems with fewer than 40
channels. The Company estimates that its exclusive DIRECTV territories contain
approximately 319,000 television households which are not passed by cable and
approximately 649,000 television households which are passed by older cable
systems with fewer than 40 channels. The Company actively markets DIRECTV
services as a primary source of television programming to potential subscribers
in this market segment since the Company believes that it will achieve its
largest percentage penetration in this segment.
The Company also targets potential subscribers who are likely to be attracted
by specific DIRECTV programming services. This market segment includes (i)
residences in which a high percentage of the viewing is devoted to movie rentals
or sports, (ii) residences in which high fidelity audio or video systems have
been installed and (iii) commercial locations (such as bars, restaurants, hotels
and private offices) which currently subscribe to pay television or background
music services. The Company estimates that its exclusive DIRECTV territories
contain approximately 120,000 commercial locations.
The Company also targets seasonal residences in which it believes that the
capacity to start and discontinue DIRECTV programming seasonally or at the end
of a rental term has significant appeal. These subscribers are easily
accommodated on short notice without the requirement of a service call because
DIRECTV programming is a fully "addressable" digital service. The Company
estimates that its exclusive DIRECTV territories contain approximately 117,000
seasonal residences in this market segment.
Additional target markets include apartment buildings, multiple dwelling
units and private housing developments. RCA/Thomson has recently begun
commercial sales of DSS units designed specifically for use in such locations.
Finally, DIRECTV has announced its intention to utilize a portion of the
additional capacity from its third satellite and improved compression to offer,
in a joint venture with Microsoft, one or more data services to residences and
businesses in 1997. When this occurs, the Company believes that additional
market segments will develop for data services within its service areas.
The Company benefits from national promotion expenditures incurred by
DIRECTV, USSB and licensed manufacturers of DSS, such as RCA/Thomson and Sony,
to increase consumer awareness and demand for DIRECTV programming and DSS units.
The Company benefits as well from national, regional and local advertising
placed by national retailers, satellite dealers and consumer electronics dealers
authorized to sell DIRECTV programming and DSS units. The Company also
undertakes advertising and promotion cooperatively with local dealers designed
for specific market segments in its distribution area, which are placed through
local newspapers, television, radio and yellow pages. The Company supplements
its advertising and promotion campaigns with direct mail, telemarketing and
door-to-door direct sales.
4
CABLE
BUSINESS STRATEGY
The Company operates cable systems whose revenues and Location Cash Flow it
believes can be increased with limited increases in fixed costs. In general, the
Company's Cable systems (i) have the capacity to offer in excess of 50 channels
of programming, (ii) are "addressable" and (iii) serve communities where off-air
reception is poor. The Company's business strategy in cable is to achieve
revenue growth by (i) adding new subscribers through improved signal quality,
increases in the quality and the quantity of programming, housing growth and
line extensions and (ii) increasing revenues per subscriber through new program
offerings and rate increases. The Company emphasizes the development of strong
engineering management and the delivery of a reliable, high-quality signal to
subscribers. The Company adds new programming (including new cable services,
premium services and pay-per-view movies and events) and invests in additional
channel capacity, improved signal delivery and line extensions to the extent it
believes that it can add subscribers at a low incremental fixed cost.
The Company believes that significant opportunities for growth in revenues
and Location Cash Flow exist in Puerto Rico from the delivery of traditional
cable services. Cable penetration in Puerto Rico averages 34% (versus a United
States average of 65% to 70%). The Company believes that this low penetration is
due principally to the limited amount of Spanish language programming offered on
Puerto Rico's cable systems. In contrast, Spanish language programming
represents virtually all of the programming offered by television stations in
Puerto Rico. The Company believes that cable penetration in its Puerto Rico
Cable systems will increase over the next five years as it substitutes Spanish
language programming for much of the English language cable programming
currently offered. The Company may also selectively expand its presence in
Puerto Rico.
THE CABLE SYSTEMS
The following table sets forth general information for the Company's Cable
systems.
Average
Monthly
Homes in Homes Basic Revenue
Channel Franchise Passed Basic Service per
Cable Systems Capacity Area(1) by Cable(2) Subscribers(3) Penetration(4) Subscriber
------------------- ---------- ----------- ----------- -------------- -------------- ------------
New England ....... (5) 22,900 22,500 15,000 67% $33.55
Mayaguez .......... 62 38,300 34,000 10,400 31% $31.55
San German(6) ..... 50(7) 72,400 47,700 15,800 33% $30.40
----------- ----------- -------------- -------------- ------------
Total Puerto Rico 110,700 81,700 26,200 32% $30.85
----------- ----------- -------------- -------------- ------------
Total ........... 133,600 104,200 41,200 40% $32.45
=========== =========== ============== ============== ============
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(1) Based on information obtained from municipal offices.
(2) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the cable distribution
plant. These data are the Company's estimates as of December 31, 1996.
(3) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area. This information is as of January 31, 1997.
(4) Basic subscribers as a percentage of homes passed by cable.
(5) The channel capacities of New England Cable systems are 36 and 62 and
represent 29% and 71% of the Company's New England Cable subscribers in
Connecticut and Massachusetts, respectively.
(6) The San German Cable System was acquired upon consummation of the Cable
Acquisition in August 1996.
(7) After giving effect to certain system upgrades, this system will be capable
of delivering 62 channels.
PUERTO RICO CABLE SYSTEMS
Mayaguez. The Mayaguez Cable system serves the port city of Mayaguez, Puerto
Rico's third largest municipality and the economic hub of the western coast of
Puerto Rico. The economy is based largely on pharmaceuticals, canning, textiles
and electronics. Key employers include Eli Lilly, Bristol Laboratories, Bumble
Bee, Neptune, Allergan, Hewlett-Packard, Digital Equipment, Wrangler and Levi
Strauss. At Janaury 31, 1997, the system passed approximately 34,000 homes with
260 miles of plant and had 10,400 basic subscribers, representing a basic
penetration rate of 31%. The system currently has a 62-channel capacity and
offers 58 channels of programming. The system is fully addressable.
5
San German. The San German Cable System serves a franchised area comprising
ten communities and approximately 72,400 households. The system currently serves
eight of these communities (two towns are unbuilt) with 480 miles of plant from
two headends. At January 31, 1997, the system had 15,800 subscribers. The
economy is based largely on tourism, light manufacturing, pharmaceuticals and
electronics. Key employers include Baxter Laboratories, General Electric, OMJ
Pharmaceuticals, White Westinghouse and Allergan Medical Optics. The system
currently offers 45 channels of programming and has a 50 channel capacity. The
system is fully addressable.
Consolidation of Puerto Rico Systems. As a result of the Cable Acquisition,
the Company serves contiguous franchise areas of approximately 111,000
households. The Company plans to increase the channel capacity of the San German
Cable System to 62 channels and to consolidate the headends, offices, billing
systems, channel lineup, and rates of the Mayaguez and San German Cable systems.
The consolidated system will consist of one headend serving approximately 26,200
subscribers and passing approximately 82,000 homes with 740 miles of plant. The
Company estimates that the consolidation will result in significant expense
savings and will also enable it to increase revenues in the San German Cable
System from the addition of pay-per-view movies, additional programming
(including Spanish language channels) and improvements in picture quality. The
Company also plans to expand the system to pass an additional 8,950 homes in the
San German franchise.
NEW ENGLAND CABLE SYSTEMS
The Company's New England Cable systems consist of five headends serving 13
towns in Connecticut and Massachusetts. At January 31, 1997, these systems had
approximately 15,000 basic subscribers. New England Cable systems historically
have had higher than national average basic penetration rates due to the
region's higher household income levels and poor off air reception. The
Company's systems offer addressable converters to all premium and pay-per-view
customers, which allow the Company to activate these services without the
requirement of a service call. The Massachusetts system was acquired in June
1991 (with the exception of the North Brookfield, Massachusetts Cable system,
which was acquired in July 1992), and the Connecticut system was acquired in
August 1991.
In January 1997, the Company consummated the New Hampshire Cable Sale, which
resulted in net proceeds to the Company of approximately $7.1 million. The
Company's New Hampshire Cable systems consisted of two headends serving six
towns. At January 31, 1997, these systems had approximately 3,600 basic
subscribers.
TV
BUSINESS STRATEGY
The Company's operating strategy in TV is focused on (i) developing strong
local sales forces and sales management to maximize the value of its stations'
inventory of advertising spots, (ii) improving the stations' programming,
promotion and technical facilities in order to maximize their ratings in a
cost-effective manner and (iii) maintaining strict control over operating costs
while motivating employees through the use of incentive plans, which rewards
Company employees in proportion to annual increases in Location Cash Flow.
The Company seeks to maximize demand for each station's advertising inventory
and thereby increase its revenue per spot. Each station's local sales force is
incentivized to attract first-time television advertisers as well as provide a
high level of service to existing advertisers. Sales management seeks to
"oversell" the Company's share of the local audience. A television station
oversells its audience share if its share of its market's television revenues
exceeds its share of the viewing devoted to all stations in the market.
Historically, the Company's stations have achieved oversell ratios ranging from
120% to 200%. The Company recruits and develops sales managers and salespeople
who are aggressive, opportunistic and highly motivated.
In addition, the Company seeks to make cost-effective improvements in its
programming, promotion and transmitting and studio equipment in order to enable
its stations to increase audience ratings in its targeted demographic segments.
In purchasing programming, the Company seeks to avoid competitive program
purchases and to take advantage of group purchasing efficiencies resulting from
the Company's ownership of multiple stations. The Company also seeks to
counter-program its local competitors in order to target specific audience
segments which it believes are underserved.
6
The Company utilizes its own market research together with national audience
research from its national advertising sales representative and program sources
to select programming that is consistent with the demographic appeal of the Fox
network, the tastes and lifestyles characteristic of the Company's markets and
the counter-programming opportunities it has identified. Examples of programs
purchased by the Company's stations include "Home Improvement," "Seinfeld," "The
Simpsons," "Mad About You," and "Frazier" (off-network); "Star Trek: The Next
Generation" and "Baywatch" (syndication); and "Jenny Jones," "Rosie O'Donnell,"
and various game shows (first run). In addition, the Company's stations purchase
children's programs to complement the Fox Children's Network's Monday through
Saturday programs. Each of the Company's stations is its market leader in
children's viewing audiences, with popular syndicated programming such as
Disney's "Aladdin" and "Gargoyles" complementing Fox programs such as the
"Mighty Morphin Power Rangers" and "R.L. Stine's Goosebumps."
The Company's acquisition strategy in TV seeks to identify stations in
markets of between 200,000 and 600,000 television households (DMAs 40 to 120)
which have no more than four competitive commercial television stations licensed
to them and which have a stable and diversified economic base. The Company has
focused upon these markets because it believes that they have exhibited
consistent and stable increases in local advertising and that television
stations in them have fewer and less aggressive direct competitors. In these
markets, the Company seeks television stations whose revenues and market revenue
share can be substantially improved with limited increases in their fixed costs.
The Company is actively seeking to acquire additional stations in new markets
and to enter into LMAs with owners of stations or construction permits in
markets where it currently owns and operates Fox affiliates. The Company has
historically purchased Fox affiliates because (i) Fox affiliates generally have
had lower ratings and revenue shares than stations affiliated with ABC, CBS and
NBC and, therefore, greater opportunities for improved performance, and (ii) Fox
affiliated stations retain a greater share of their inventory of advertising
spots than do stations affiliated with ABC, CBS or NBC, thereby enabling these
stations to retain a greater share of any increase in the value of their
inventory. The Company is pursuing expansion in its existing markets through
LMAs because second stations can be operated with limited additional fixed costs
(resulting in high incremental operating margins) and can allow the Company to
create more attractive packages for advertisers and program providers.
THE STATIONS
The following table sets forth general information for each of the Company's
stations.
Number Ratings Rank
Acquisition Station Market of TV -------------------- Oversell
Station Date Affiliation Area DMA Households(1) Competitors(2) Prime(3) Access(4) Ratio(5)
- ---------------- --------- ------------ --------------- ---- ------------- -------------- -------- --------- --------
Existing Stations:
WWLF-56/WILF-53/
WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 3 3(tie) 2 169%
WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3 3 4 127%
WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4 3 2(tie) 174%
WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 3 1(tie) 2 126%
WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 122%
Additional Stations:
WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 N/A N/A N/A
WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3 N/A N/A N/A
(1) Represents total homes in a DMA for each TV station as estimated by BIA.
(2) Commercial stations not owned by the Company which are licensed to and
operating in the DMA.
(3) "Prime" represents local station rank in the 18 to 49 age category during
"prime time" based on Nielsen estimates for November 1996.
(4) "Access" indicates local station rank in the 18 to 49 age category
during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen
estimates for November 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using estimated market data and 1996 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain FCC
approvals and assuming no adverse change in current FCC regulatory
requirements, the Company intends to separately program WOLF as an
affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an affiliate
of UPN assuming no adverse change in current FCC regulatory requirements.
7
NORTHEASTERN PENNSYLVANIA
Northeastern Pennsylvania is the 49th largest DMA in the United States
comprising 17 counties in Pennsylvania with a total of 553,000 television
households and a population of 1,465,000. In the past, the economy was primarily
based on steel and coal mining, but in recent years has diversified to emphasize
manufacturing, health services and tourism. In 1995, annual retail sales in this
market totaled approximately $11.4 billion and total television advertising
revenues in the Northeastern Pennsylvania DMA increased 3.5% from approximately
$42.5 million to approximately $44.0 million. Northeastern Pennsylvania is the
only one among the top 50 DMAs in the country in which all TV stations licensed
to it are UHF. In addition to WOLF, WWLF and WILF, which are licensed to
Scranton, Hazelton and Williamsport, respectively, there are three commercial
stations and one educational station operating in the Northeastern Pennsylvania
DMA. The Northeastern Pennsylvania DMA also has an allocation for an additional
channel, which is not operational.
PORTLAND, MAINE
Portland is the 79th largest DMA in the United States, comprising 12 counties
in Maine, New Hampshire and Vermont with a total of 344,000 television
households and a population of 902,000. Portland's economy is based on financial
services, lumber, tourism, and its status as a transportation and distribution
gateway for central and northern Maine. In 1995, annual retail sales in the
Portland market totaled approximately $8.9 billion and the total television
revenues in this market increased 4.0% from approximately $40.0 million to
approximately $41.6 million. In addition to WPXT, there are four VHF and two UHF
stations authorized in the Portland DMA, including one VHF and two UHF
educational stations. The Portland DMA has allocations for five other UHF
stations, four of which are educational.
In the Portland Acquisition, the Company acquired television station WPXT,
the Fox-affiliated television station serving the Portland DMA. The Company
entered into the Portland LMA with the holder of a construction permit for WWLA,
a new TV station to operate UHF channel 35 in the Portland market. Under the
Portland LMA, the Company will lease facilities and provide programming to WWLA,
retain all revenues generated from advertising, and make payments of $52,000 per
year to the FCC license holder in addition to reimbursement of certain expenses.
Construction of WWLA is expected to be completed in 1997. WWLA's offices, studio
and transmission facilities will be co-located with WPXT. In November 1996, the
FCC granted an application to increase significantly WWLA's authorized power and
antenna height in order to expand its potential audience coverage.
CHATTANOOGA, TENNESSEE
Chattanooga is the 82nd largest DMA in the United States, comprising 18
counties in Tennessee, Georgia, North Carolina and Alabama with a total of
320,000 television households and a population of 842,000. Chattanooga's economy
is based on insurance and financial services in addition to manufacturing and
tourism. In 1995, annual retail sales in the Chattanooga market totaled
approximately $7.1 billion and total television revenues in this market
increased 2.4% from approximately $37.6 million to approximately $38.5 million.
In addition to WDSI, there are three VHF and four UHF stations operating in the
Chattanooga DMA, including one religious and two educational stations. The
Company acquired WDSI in May 1993. From October 1991 through April 1993, the
station was managed by the Company.
JACKSON, MISSISSIPPI
Jackson is the 91st largest DMA in the United States, comprising 24 counties
in central Mississippi with a total of 287,000 television households and a
population of 819,000. Jackson is the capital of Mississippi and its economy
reflects the state and local government presence as well as agriculture and
service industries. Because of its central location, it is also a major
transportation and distribution center. In 1995, annual retail sales in the
greater Jackson market totaled approximately $6.1 billion and total television
revenues in the market increased 10.8% from approximately $32.5 million to
approximately $36.0 million. In addition to WDBD, there are two VHF and two UHF
television stations operating in the Jackson DMA, including one educational
station. The Jackson DMA also has an allocation for an additional television
channel which is not operational. The Company acquired WDBD in May 1993. From
October 1991 through April 1993, the station was managed by the Company.
8
TALLAHASSEE, FLORIDA
The Tallahassee DMA is the 116th largest in the United States comprising 18
counties in northern Florida and southern Georgia with a total of 210,000
television households and a population of 578,000. Tallahassee is the state
capital of Florida and its major industries include state and local government
as well as firms providing commercial service to North Florida's cattle, lumber,
tobacco and farming industries. In 1995, annual retail sales in this market
totaled $4.4 billion and total television advertising revenues increased 5.3%
from approximately $18.9 million in 1994 to approximately $19.9 million. In
addition to WTLH, there are two VHF and two UHF television stations operating in
the Tallahassee DMA, including one educational VHF station. An additional
station licensed to Valdosta, Georgia broadcasts from a transmission facility
located in the Albany, Georgia DMA. The Tallahassee DMA has allocations for four
UHF stations that are not operational, one of which is educational.
In March 1996, the Company acquired the principal tangible assets of WTLH and
in August 1996, the Company acquired WTLH's FCC licenses and its Fox Affiliation
Agreements. The FCC recently granted an application which will enable the
Company to move WTLH's tower and transmitter facilities to a site approximately
ten miles closer to Tallahassee and to increase its tower height and power. The
Company anticipates relocating WTLH's transmitter and tower in 1997 to increase
its audience coverage in the Tallahassee market. In August 1996, the Company
also acquired the license for translator station W53HI, Valdosta, Georgia. In
October 1996, the FCC consented to the assignment of the construction permit for
translator station W13BO, Valdosta, Georgia. Special temporary authorities have
been granted by the FCC for continued operation of both translators at relocated
facilities, W13BO until May 7, 1997 and W53HI until June 4, 1997.
RECENT TRANSACTIONS
COMPLETED ACQUISITIONS
Since January 1, 1996, the Company has acquired the following media and
communications properties:
Television Station WPXT. The Company acquired WPXT, the Fox-affiliated
television station serving the Portland, Maine DMA (the "Portland
Acquisition").
Television Station WTLH. The Company acquired WTLH, the Fox-affiliated
television station serving the Tallahassee, Florida DMA (the "Tallahassee
Acquisition").
Television Station WWLA. The Company acquired an LMA with the holder of a
construction permit for WWLA, a new television station authorized to operate
UHF channel 35 in the Portland, Maine DMA (the "Portland LMA"). Under the
Portland LMA, the Company will lease facilities and provide programming to
WWLA. Construction of WWLA is expected to be completed in 1997.
Cable Acquisition. In August 1996, the Company acquired substantially all of
the assets of a cable system (the "San German Cable System"), serving ten
communities contiguous to the Company's Mayaguez Cable system.
Michigan/Texas DBS Acquisition. In October 1996, the Company acquired the
DIRECTV distribution rights for portions of Texas and Michigan and related
assets (the "Michigan/Texas DBS Acquisition").
Ohio DBS Acquisition. In November 1996, the Company acquired the DIRECTV
distribution rights for portions of Ohio and related assets (the "Ohio DBS
Acquisition").
Indiana DBS Acquisition. In January 1997, the Company acquired the DIRECTV
distribution rights for portions of Indiana and related assets (the "Indiana
DBS Acquisition").
Mississippi DBS Acquisition. In February 1997, the Company acquired the
DIRECTV distribution rights for portions of Mississippi and related assets
(including receivables) (the "Mississippi DBS Acquisition").
9
Arkansas DBS Acquisition. In March 1997, the Company acquired the DIRECTV
distribution rights for portions of Arkansas and related assets (the
"Arkansas DBS Acquisition").
Virginia/West Virginia DBS Acquisition. In March 1997, the Company acquired
the DIRECTV distribution rights for portions of Virginia and West Virginia
and related assets (the "Virginia/West Virginia DBS Acquisition").
Recent Sale
New Hampshire Cable Sale. In January 1997, the Company sold its New Hampshire
Cable systems (the "New Hampshire Cable Sale"). The New Hampshire Cable Sale
resulted in net proceeds to the Company of approximately $7.1 million.
PUBLIC OFFERINGS
INITIAL PUBLIC OFFERING
Pegasus consummated the initial public offering of its Class A Common Stock
on October 8, 1996 pursuant to an underwritten offering (the "Initial Public
Offering"). The initial public offering price of the Class A Common Stock was
$14.00 per share and resulted in net proceeds to the Company of approximately
$38.1 million.
The Company applied the net proceeds from the Initial Public Offering as
follows: (i) $17.9 million for the payment of the cash portion of the purchase
price of the Michigan/Texas DBS Acquisition, (ii) $12.0 million to the Ohio DBS
Acquisition, (iii) $3.0 million to repay indebtedness under the New Credit
Facility, (iv) $1.9 million to make a payment on account of the Portland
Acquisition, (v) $1.5 million for the payment of the cash portion of the
purchase price of the Management Agreement Acquisition, (vi) $1.4 million for
the Towers Purchase and (vii) $444,000 for general corporate purposes.
REGISTERED EXCHANGE OFFER
Purchasers of the Notes in PM&C's 1995 Notes offering held all of the PM&C
Class B Shares. The Company through a registered exchange offer (the "Registered
Exchange Offer") exchanged all of the PM&C Class B Shares for 191,775 shares in
the aggregate of Class A Common Stock. The Registered Exchange Offer terminated
on December 30, 1996. As a result of the Registered Exchange Offer, PM&C became
a wholly owned subsidiary of Pegasus.
UNIT OFFERING
Pegasus consummated the Unit Offering on January 27, 1997. The Unit Offering
resulted in net proceeds to the Company of approximately $96.0 million. The
Company applied the net proceeds from the Unit Offering as follows: (i) $29.6
million to the repayment of indebtedness of PM&C under the New Credit Facility,
which represented all indebtedness under the New Credit Facility at the time of
the consummation of the Unit Offering, (ii) $15.0 million for the Mississippi
DBS Acquisition, (iii) $8.8 million for the cash portion of the Indiana DBS
Acquisition, (iv) $7.0 million for the cash portion of the purchase price of the
Virginia/West Virginia DBS Acquisition, (v) $2.4 million for the Arkansas DBS
Acquisition and (vi) approximately $558,000 to the retirement of the Pegasus
Credit Facility and expenses related thereto.
COMPETITION
The Company's TV stations compete for audience share, programming and
advertising revenue with other television stations in their respective markets,
and compete for advertising revenue with other advertising media, such as
newspapers, radio, magazines, outdoor advertising, transit advertising, yellow
page directories, direct mail and local cable systems. Competition for audience
share is primarily based on program popularity, which has a direct effect on
advertising rates. Advertising rates are based upon the size of the market in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic composition of the market served by the
10
station, the availability of alternative advertising media in the market area,
aggressive and knowledgeable sales forces and the development of projects,
features and programs that tie advertiser messages to programming. The Company
believes that its focus on a limited number of markets and the strength of its
programming allows it to compete effectively for advertising within its markets.
Cable operators face competition from television stations, private satellite
master antenna television ("SMATV") systems that serve condominiums, apartment
complexes and other private residential developments, wireless cable,
direct-to-home ("DTH") and DBS systems. As a result of the passage of the 1996
Act, electric utilities and telephone companies will be allowed to compete
directly with cable operators both inside and outside of their telephone service
areas. In September 1996, an affiliate of Southern New England Telephone
Company, which is the dominant provider of local telephone service in
Connecticut, was granted a non-exclusive franchise to provide cable television
service throughout Connecticut. Currently, there is only limited competition
from SMATV, wireless cable, DTH and DBS systems in the Company's franchise
areas. The only DTH and DBS systems with which the Company's cable systems
currently compete are DIRECTV, USSB, EchoStar Communications Corp. ("EchoStar"),
PrimeStar Partners ("PrimeStar") and AlphaStar Digital Television. The Company
is the exclusive provider of DIRECTV services to areas encompassing over 60% of
its cable subscribers in New England. However, the Company cannot predict
whether additional competition will develop in its service areas in the future.
Additionally, cable systems generally operate pursuant to franchises granted on
a non-exclusive basis and, thus, more than one applicant could secure a cable
franchise for an area at any time. It is possible that a franchising authority
might grant a second franchise to another cable company containing terms and
conditions more favorable than those afforded the Company. Although the
potential for "overbuilds" exists, there are presently no overbuilds in any of
the Company's franchise areas and, except as noted above with respect to its
Connecticut franchise, the Company is not aware of any other company that is
actively seeking franchises for areas currently served by the Company.
Both the television and cable industries are continuously faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, and governmental restrictions
or actions of federal regulatory bodies, including the FCC, any of which could
possibly have a material effect on the Company's operations and results.
DIRECTV faces competition from cable (including in New England, the Company's
Cable systems), wireless cable and other microwave systems and other DTH and DBS
operators. Cable currently possesses certain advantages over DIRECTV in that
cable is an established provider of programming, offers local programming and
does not require that its subscribers purchase receiving equipment in order to
begin receiving cable services. DIRECTV, however, offers significantly expanded
service compared to most cable systems. Additionally, upgrading cable companies'
coaxial systems to offer expanded digital video and audio programming similar to
that offered by DIRECTV will be costly. While local programming is not currently
available through DIRECTV directly, DIRECTV provides programming from affiliates
of national broadcast networks to subscribers who are unable to receive networks
over-the-air and who have not subscribed to cable. DIRECTV faces additional
competition from wireless cable systems such as multichannel multipoint
distribution systems ("MMDS") which use microwave frequencies to transmit video
programming over the air from a tower to specially equipped homes within the
line of sight of the tower. The Company is unable to predict whether wireless
video services, such as MMDS, will continue to develop in the future or whether
such competition will have a material impact on the operations of the Company.
DIRECTV also faces competition from other providers and potential providers
of DBS services. Of the eight orbital locations within the BSS band allocated
for United States licensees, three orbital positions enable full coverage of the
contiguous United States. The remaining orbital positions are situated to
provide coverage to either the eastern or western United States, but cannot
provide full coverage of the contiguous United States. This provides companies
licensed to the three orbital locations with full coverage a significant
advantage in providing DBS service to the entire United States, as they must
place satellites in service at only one and not two orbital locations. The
orbital location licensed to DIRECTV and USSB is generally recognized as the
most centrally located for coverage of the contiguous United States; however,
News Corp, Echostar (which has over 430,000 DBS subscribers) and MCI have
recently announced a joint venture to pool much of their U.S. satellite capacity
and licenses for U.S. orbital slots to create a DBS service under the trade
11
name "Sky." This DBS service is expected to be launched later this year. One of
its reported advantages will be the eventual satellite transmission of local
broadcast signals to over 75% of the country and the offering of 500 channels.
Additional details are unknown at this time.
Two other entities plan to initiate DBS service within the next few years, in
competition with DIRECTV, Continental Satellite Corporation ("CSC") has been
assigned a total of 22 DBS channels. Eleven of these DBS channels can serve the
eastern and central United States, and the other eleven can serve the western
and central United States. Dominion Video Satellite, Inc. ("Dominion") has been
assigned eight DBS channels that can be used to serve the eastern and central
United States, and eight DBS channels that can be used to serve the western and
central United States.
In addition, two entities, Western Tele-Communications, Inc., a wholly-owned
subsidiary of Tele-Communications, Inc. ("TCI"), and another company, TeleQuest
Ventures, L.L.C., applied for authority from the FCC to operate earth stations
that would be used to communicate with Canadian DBS satellites that have service
coverage of the United States. This application was recently denied by the FCC
and the denial was upheld on appeal. If these entities ultimately obtain the
necessary authorizations, they could enter the United States multichannel
television programming distribution market and compete with DIRECTV.
The Company also competes with PrimeStar, owned primarily by a consortium of
cable companies, including TCI, that currently offers medium-power Ku-band
programming service to customers using dishes approximately three feet in
diameter. The other current DBS competitors to DIRECTV are USSB, EchoStar and
AlphaStar.
EMPLOYEES
As of December 31, 1996, the Company had 271 full-time and 34 part-time
employees. The Company is not a party to any collective bargaining agreement and
considers its relations with its employees to be good.
LEGISLATION AND REGULATION
The information contained in the section captioned "Business -- Legislation
and Regulation" (pages 57-66) of the Prospectus is incorporated herein by
reference.
LICENSES, LMAS, DBS AGREEMENTS AND CABLE FRANCHISES
The information contained in the section captioned "Business -- Licenses,
LMAs, DBS Agreements and Cable Franchises" (pages 54-57) of the Prospectus is
incorporated herein by reference.
12
ITEM 2: PROPERTIES
The Company's TV stations own and lease studio, tower, transmitter and
antenna facilities and the Company's Cable systems own and lease studio,
parking, storage, headend, tower, earth station and office facilities in the
localities in which they operate. The Company leases office space in Marlboro,
Massachusetts for its DBS operations. The television transmitter and antenna
sites are generally located so as to provide optimum market coverage. The cable
headend and tower sites are located at strategic points within the cable system
franchise area to support the distribution system. The Company believes that its
facilities are in good operating condition and are satisfactory for their
present and intended uses. The following table contains certain information
describing the general character of the Company's properties:
Expiration of Lease
Location and Type of Property Owned or Leased Approximate Size or Renewal Options
- ----------------------------- --------------- ----------------- -------------------
Corporate Office
Radnor, Pennsylvania (office) Leased 4,848 square feet 3/31/98
TV Stations
Jackson, MS (TV transmitting equipment) Leased 1,125 foot tower 2/28/04
Jackson, MS (television station and Lease-Purchase (1) 5,600 square foot building; N/A
transmitter building) 900 square foot building
West Mountain, PA (tower and transmitter) Leased 9.6 acres 1/31/00
916 Oak Street, Scranton, PA (television Leased 8,600 square feet 4/30/00
station)
Bald Eagle Mountain, PA (transmitting) Leased 400 square feet 9/30/97
(Williamsport Tower)
Nescopec Mountain, PA (transmitting) Owned 400 foot tower N/A
Williamsport, PA (tower) Owned 175 foot tower N/A
Chattanooga, TN (transmitting) Owned 577 foot tower N/A
1201 East Main St., Chattanooga, TN Owned 16,240 square foot building N/A
(present television station) on 3.17 acres
2320 Congress Street, Portland, ME Leased 8,000 square feet
(television station) 12/31/97
Gray, ME (tower) Owned 18.6 acres N/A
1203 Governor's Square, Tallahassee, FL Leased 5,012 square feet 9/30/97
(television station)
Leon County, FL Leased(2) 30 acres 2/28/98
Nickleville, GA (tower) Owned 22.5 acres N/A
DBS Systems
Marlboro, MA (office) Leased 1,310 square feet 7/31/99
Charlton, MA (warehouse) Leased 1,750 square foot area monthly
Cable Systems
Winchester, CT (headend) Owned 15.22 acres N/A
140 Willow Street, Winsted, CT (office) Owned 1,900 square feet N/A
Charlton, MA (office, headend site) Leased 38,223 square feet 5/9/99
Hinsdale, MA (headend site) Leased 30,590 square feet 2/1/04
Lanesboro, MA (headend site) Leased 62,500 square feet 4/13/97
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Route #2, Puerto Rico (office) Leased 2,520 square foot building 8/30/98
Mayaguez, Puerto Rico (headend) Leased 530 square foot building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 square foot area monthly
San German, Puerto Rico (headend site) Owned 1,200 square feet; 200 foot tower N/A
San German, Puerto Rico (tower and Owned 60 foot tower; 192 square meters N/A
transmitter)
San German, Puerto Rico (office) Leased 2,928 square feet 2/1/01
Anasco, Puerto Rico (office) Leased 500 square feet 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 square meters monthly
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 2/28/04
Cabo Rojo, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 11/10/04
Hormigueros, Puerto Rico (warehouse) Leased 2,000 square feet monthly
- ------
(1) The Company entered into a lease/purchase agreement in July 1993 which calls
for 60 monthly payments of $4,500 at the end of which the property is
conveyed to the Company.
(2) The Company holds an option to purchase this site for $150,000.
13
ITEM 3: LEGAL PROCEEDINGS
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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Pegasus Communications
Corporation during the fourth quarter of fiscal year 1996.
14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "PGTV." The following table sets forth the high and low sale prices per
share of Class A Common Stock, as reported by Nasdaq for 1996 subsequent to
Pegasus' Initial Public Offering on October 3, 1996. These quotations and sales
prices do not include retail mark-ups, mark-downs or commissions.
1996 High Low
---- ---- ----
Fourth Quarter ....................... $16.00 $11.25
As of March 14, 1997, Pegasus had approximately 105 holders of record
(excluding holders whose securities were held in street or nominee name).
RECENT SALES OF UNREGISTERED SECURITIES
Pegasus was incorporated on May 30, 1996. On April 1, 1996, PM&C, which
became a wholly-owned subsidiary of Pegasus on October 8, 1996, granted Donald
W. Weber, a director of PM&C, an option exercisable for 3,385 shares of Pegasus'
Class A Common Stock at the exercise price of $14.00 per share, pursuant to an
Option Agreement, as amended. In connection with its incorporation, Pegasus
issued 100 shares of Class B Common Stock to its parent, Pegasus Communications
Holdings, Inc. on May 30, 1996, in reliance on the exemption from registration
set forth in Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"). On October 8, 1996, Pegasus issued a total of 3,614 shares of
its Class A Common Stock pursuant to its Restricted Stock Plan to certain of its
employees. On October 8, 1996, Pegasus issued 852,110 shares in connection with
the Michigan/Texas DBS Acquisition, 263,606 shares pursuant to the Management
Share Exchange, 269,964 shares initially issued as Class B Common Stock and
transferred as Class A Common Stock to certain members of management who
participated in the Management Share Exchange, 10,714 shares in connection with
the Portland Acquisition and 71,429 shares in connection with the Portland LMA.
All of the foregoing issuances were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
consideration relating to these issuances.
In addition, on October 8, 1996, Pegasus also issued 1,400,000 shares in
connection with the Management Agreement Acquisition, 71,429 shares in
connection with the Portland Acquisition and 3,380,435 shares issued to the
Parent on account of the Parent's contribution of all of the outstanding PM&C
Class A Shares to Pegasus. All of the foregoing issuances were made in reliance
upon the exemption from registration set forth in Section 4(2) of the Securities
Act. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for consideration relating to these issuances.
On October 8, 1996, Pegasus issued $1.0 million in warrants to purchase Class
A Common Stock of Pegasus in connection with the purchase by Pegasus of
television station WTLH. This issuance was also made in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for consideration relating to this issuance.
CALCULATION OF AGGREGATE MARKET VALUE OF NONAFFILIATE SHARES
For the purposes of calculating the aggregate market value of the shares of
Class A Common Stock of Pegasus held by nonaffiliates, as shown on the cover
page of this Report, it has been assumed that all the outstanding shares were
held by nonaffiliates except for the shares held by directors, including Mark W.
Pason, Pegasus' Chief Executive Officer and President. However, this should not
be deemed to constitute an admission that all directors of Pegasus are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company. Further information concering shareholdings of
officers, directors and principal shareholders is included in Item 12 herein.
DIVIDEND POLICY
Pegasus has not paid any cash dividends on its Common Stock. The Company
currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends on its Common Stock for
the foreseeable future. Under the terms of the Series A Preferred Stock,
Pegasus' ability
15
to pay dividends on the Class A Common Stock is subject to certain restrictions.
The payment of future dividends, if any, will depend, among other things, on the
Company's results of operations and financial condition, any restriction in the
Company's loan agreements and on such other factors as Pegasus' Board of
Directors may, in its discretion, consider relevant. Since Pegasus is a holding
company, its ability to pay dividends is dependent upon the receipt of dividends
from its direct and indirect subsidiaries. PM&C, which is a direct subsidiary of
Pegasus, is a party to the New Credit Facility and the Indenture that restrict
its ability to pay dividends. Under the terms of the Indenture, PM&C is
prohibited from paying dividends prior to July 1, 1998. The payment of dividends
by PM&C 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 New Credit Facility.
ITEM 6: SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data for the years ended
December 31, 1992 through 1996 have been derived from the Company's audited
Consolidated Financial Statements for such periods. The information should be
read in conjunction with the Consolidated Financial Statements and the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere herein.
16
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------------------------------------------
1992 1993 (1) 1994 1995 1996
---------- ---------- ---------- --------- ----------
Income Statement Data:
Net revenues:
Multichannel Television
DBS ............................. $ -- $ -- $ 174 $ 1,469 $ 5,829
Cable ........................... 5,279 9,134 10,148 10,606 13,496
TV ................................ -- 10,307 17,808 19,973 28,488
Other ............................. 40 46 61 100 116
---------- ---------- ---------- --------- ----------
Total net revenues .............. 5,319 19,487 28,191 32,148 47,929
---------- ---------- ---------- --------- ----------
Location operating expenses:
Multichannel Television
DBS ............................. -- -- 210 1,379 4,958
Cable ............................. 2,669 4,655 5,545 5,791 7,192
TV ................................ -- 7,564 12,380 13,933 18,726
Other ........................... 12 16 18 38 28
Incentive compensation (2) ........... 36 192 432 528 985
Corporate expenses ................... 471 1,265 1,506 1,364 1,429
Depreciation and amortization ........ 2,541 5,978 6,940 8,751 12,061
---------- ---------- ---------- --------- ----------
Income (loss) from operations ........ (410) (183) 1,160 364 2,550
Interest expense ..................... (1,255) (4,402) (5,973) (8,817) (12,455)
Interest income ...................... -- -- -- 370 232
Other expense, net ................... (21) (220) (65) (44) (171)
Provision (benefit) for taxes ........ -- -- 140 30 (120)
Extraordinary gain (loss) from
extinguishment of debt ............ -- -- (633) 10,211 (250)
---------- ---------- ---------- --------- ----------
Net income (loss) .................... (1,686) (4,805) (5,651) 2,054 (9,974)
Dividends on Series A Preferred Stock -- -- -- -- --
---------- ---------- ---------- --------- ----------
Net income (loss) applicable to common
shares ............................ $(1,686) $(4,805) $(5,651) $ 2,054 $ (9,974)
========== ========== ========== ========= ==========
Income (loss) per share:
Loss before extraordinary item ....... $ (0.99) $ (1.59) $ (1.56)
Extraordinary item ................... (0.13) 1.99 (.04)
---------- --------- ----------
Net income (loss) per share .......... $ (1.12) $ 0.40 $ (1.60)
========== ========= ==========
Weighted average shares
outstanding (000's) ............... 5.044 5,140 6,240
========== ========= ==========
Other Data:
Location Cash Flow (3) ............... $ 2,638 $ 7,252 $10,038 $11,007 $ 17,025
Operating Cash Flow (3) .............. 2,131 5,795 8,100 9,287 15,596
Capital expenditures ................. 681 885 1,264 2,640 6,294
As of December 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
-------- --------- ---------- --------- ----------
Balance Sheet Data:
Cash and cash equivalents ........... $ 938 $ 1,506 $ 1,380 $21,856 $ 8,582
Working capital (deficiency)......... (52) (3,844) (23,074) 17,566 6,747
Total assets ........................ 17,418 76,386 75,394 95,770 173,680
Total debt (including
current) ......................... 15,045 72,127 61,629 82,896 115,575
Total liabilities ................... 16,417 78,954 68,452 95,521 133,354
Redeemable preferred stock .......... -- -- -- -- --
Minority interest ................... -- -- -- -- --
Total equity (deficit) (4) .......... 1,001 (2,427) 6,942 249 40,326
(see footnotes on the following page)
17
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(1) The Company's operations began in 1991. The 1993 data include the results of
the Mayaguez, Puerto Rico Cable system from March 1, 1993 and
WOLF/WWLF/WILF, WDSI and WDBD from May 1, 1993.
(2) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans. See "Management and Certain
Transactions -- Incentive Program."
(3) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations, marketing
and selling expenses. Operating Cash Flow is defined as income (loss) from
operations plus (i) depreciation and amortization and (ii) non-cash
incentive compensation. The difference between Location Cash Flow and
Operating Cash Flow is that Operating Cash Flow includes cash incentive
compensation and corporate expenses. Although Operating Cash Flow and
Location Cash Flow are not measures of performance under generally accepted
accounting principles, the Company believes that Location Cash Flow and
Operating 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 measure for determining the Company's
operating performance or liquidity which is calculated in accordance with
generally accepted accounting principles.
(4) The Company has not paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Payment of
cash dividends on the Company's Common Stock are restricted by the terms of
the Series A Preferred Stock and the Exchange Notes. The terms of the Series
A Preferred Stock and the Exchange Notes permit the Company to pay dividends
and interest thereon by issuance, in lieu of cash, of additional shares of
Series A Preferred Stock and additional Exchange Notes, respectively.
18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Consolidated Financial
Statements and related notes which are included elsewhere herein. This Report
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein.
COMPANY HISTORY
The Company is a diversified media and communications company operating in
two business segments: multichannel television and broadcast television. The
day-to-day operations of WDBD, WDSI and the Mayaguez Cable system were managed
by the Company prior to their acquisition by the Company. WOLF was managed by
Guyon Turner from its sign-on in 1985 until its acquisition by the Company. Each
of the following acquisitions was or will be accounted for using the purchase
method of accounting. The following table presents information regarding
completed acquisitions, pending acquisitions and the completed sale.
Acquisitions
- -----------------------------------------------------------------------------------------------------------------------------
Adjusted
Property Date Acquired Consideration(1) Form of Consideration
-------------------------------------- --------------- ---------------- ------------------------------------------------
(Dollars in millions)
Completed acquisitions:
New England Cable systems ............ June 1991(2) $16.1(3) $6.0 cash and $10.1 of assumed liabilities, net
Mayaguez, Puerto Rico Cable system ... March 1993(4) $12.3(5) $12.3 of assumed liabilities, net
WOLF/WILF/WWLF, WDSI and WDBD ........ May 1993(6) $24.2(7) $24.2 of assumed liabilities, net
New England DIRECTV rights ........... June 1993(8) $ 5.0 $5.0 cash
WPXT ................................. January 1996(9) $14.8 $12.2 cash, $0.4 assumed liabilities, $1.2 of
Class A Common Stock and $1.0 of Class B
Common Stock(10)
WTLH ................................. March 1996 $ 8.1 $5.0 cash, $3.1 deferred obligation and warrants
(which subsequently expired by their terms)
Portland LMA ......................... May 1996 $ 1.0 $1.0 of Class A Common Stock(10)
Cable Acquisition .................... August 1996 $26.0 $25.0 cash and $1.0 of assumed liabilities, net
Michigan/Texas DBS Acquisition ....... October 1996 $29.8 $17.9 cash and $11.9 of Class A Common Stock(10)
Ohio DBS Acquisition ................. November 1996 $12.0 $12.0 cash
Indiana DBS Acquisition .............. January 1997 $14.3 $8.7 cash and $5.6 of Class A Common Stock(11)
Mississippi DBS Acquisition .......... February 1997 $15.0 $15.0 cash
Arkansas DBS Acquisition ............. March 1997 $ 2.4 $2.4 cash
Virginia/West Virginia DBS Acquisition March 1997 $11.2 $8.2 cash, $3.0 of preferred stock of a subsidiary
of Pegasus and warrants to purchase a total of
283,969 shares of Class A Common Stock
Completed sale:
New Hampshire Cable Sale ............. January 1997 $ 7.1 $7.1 cash
- ------
(1) Adjusted consideration equals total consideration reduced by the amount of
current assets obtained in connection with the acquisition and discounts
realized by the Company and its affiliates on liabilities assumed in
connection with certain of the acquisitions. See footnotes (3), (5) and
(7).
(2) The Connecticut and North Brookfield, Massachusetts Cable systems were
acquired by the Company in August 1991 and July 1992, respectively.
(3) An affiliate of the Company acquired for $6.0 million certain credit
facilities having a face amount of $8.5 million which were assumed by the
Company in connection with these acquisitions and later satisfied in full
by the Company. Proceeds realized by the affiliate were subsequently used
to fund the purchase of New England DIRECTV rights which the affiliate
contributed to the Company.
(4) This Cable system's day-to-day operations have been managed by the
Company's executives since May 1, 1991.
(5) In July 1995, the Company realized a $12.6 million pre-tax gain upon the
extinguishment of certain credit facilities that were assumed by the
Company in connection with this acquisition.
(6) These television stations' day-to-day operations have been managed by the
Company's executives since October 1991.
(7) An affiliate of the Company acquired for $18.5 million certain credit
facilities which were assumed by the Company in connection with these
acquisitions. Immediately subsequent to this transaction, the Company's
indebtedness under these credit facilities of approximately $23.5 million
was discharged for approximately $18.5 million of cash and $5.0 million of
stock issued to the affiliate.
(8) The Company's rights purchases were initiated in June 1993 and completed in
February 1995. The Company commenced DBS operations in October 1994.
(9) The Company acquired WPXT's FCC license and Fox Affiliation Agreement in
October 1996.
(10) The number of shares of Common Stock issued in connection with these
acquisitions was based on the $14.00 price per share in the Initial Public
Offering.
(11) The 466,667 shares of Common Stock issued in connection with this
acquisition was based on the market price of the Class A Common Stock.
19
CORPORATE STRUCTURE REORGANIZATION
The Company's Consolidated Financial Statements include the accounts of PM&C,
PM&C's subsidiaries, Towers and Pegasus Communications Management Company.
Concurrently with the consummation of the Initial Public Offering, the Parent
contributed all of the PM&C Class A Shares to Pegasus for 3,380,435 shares of
Class B Common Stock. As a result of the Registered Exchange Offer, Pegasus
obtained all 8,500 of the PM&C Class B Shares in exchange for 191,775 shares of
Class A Common Stock in the aggregate. Upon consummation of the Initial Public
Offering, the Company acquired the assets of Towers for $1.4 million in cash.
The Company also acquired the Management Agreement together with certain net
assets, including approximately $1.5 million of accrued management fees, for
$19.6 million of Class B Common Stock (valued at the price to the public in the
Initial Public Offering) and approximately $1.5 million in cash.
RESULTS OF OPERATIONS
TV revenues are derived from the sale of broadcast air time to local and
national advertisers. DBS revenues are derived from monthly customer
subscriptions, pay-per-view services, DSS equipment rentals, leases and
installation charges. Cable revenues are derived from monthly subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping commissions,
advertising time sales and installation charges.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions, and ratings and research expenditures, (iii)
technical and operations costs, and (iv) general and administrative expenses. TV
programming expenses include the amortization of long-term program rights
purchases, music license costs and "barter" programming expenses which represent
the value of broadcast air time provided to television program suppliers in lieu
of cash. DBS programming expenses consist of amounts paid to program suppliers,
DSS authorization charges and satellite control fees, each of which is paid on a
per subscriber basis, and DIRECTV royalties which are equal to 5% of program
service revenues. Cable programming expenses consist of amounts paid to program
suppliers on a per subscriber basis.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's net revenues increased by approximately $15.8 million or 49%
for the year ended December 31, 1996 as compared to the same period in 1995 as a
result of (i) a $8.5 million or 43% increase in TV revenues of which $1.5
million or 17% was due to ratings growth which the Company was able to convert
into higher revenues and $7.0 million or 83% was the result of acquisitions made
in the first quarter of 1996, (ii) a $4.4 million or 297% increase in DBS
revenues of which $2.7 million or 63% was due to the increased number of DBS
subscribers and $1.7 million or 37% resulting from acquisitions made in the
fourth quarter of 1996, (iii) a $2.0 million or 51% increase in Puerto Rico
Cable revenues due primarily to acquisitions effective September 1, 1996, (iv) a
$864,000 or 13% increase in New England Cable revenues due primarily to rate
increases and new combined service packages, and (v) a $16,000 increase in Tower
rental income.
The Company's total location operating expenses increased by approximately
$9.8 million or 46% for the year ended December 31, 1996 as compared to the same
period in 1995 as a result of (i) a $4.8 million or 34% increase in TV operating
expenses as the net result of a $115,000 or 1% decrease in same station direct
operating expenses and a $4.9 million increase attributable to stations acquired
in the first quarter of 1996, (ii) a $3.6 million or 260% increase in operating
expenses generated by the Company's DBS operations due to an increase in
programming costs of $1.4 million, royalty costs of $138,000, marketing expenses
of $455,000, customer support charges of $199,000 and other DIRECTV costs such
as security, authorization fees and telemetry and tracking charges totaling
$237,000, all generated from the increased number of DBS subscribers, and a $1.1
million increase attributable to territories acquired in the fourth quarter of
1996, (iii) a $912,000 or 37% increase in Puerto Rico Cable operating expenses
as the net result of a $64,000 or 3% decrease in same system direct operating
expenses and a $976,000 increase attributable to the system acquired effective
September 1, 1996, (iv) a $489,000 or 15% increase in New England Cable
operating expenses due primarily to increases in programming costs associated
with the new combined service packages, and (v) a $10,000 decrease in Tower
administrative expenses.
20
As a result of these factors, Location Cash Flow increased by $6.0 million or
55% for the year ended December 31, 1996 as compared to the same period in 1995
as a result of (i) a $3.7 million or 62% increase in TV Location Cash Flow of
which $1.6 million or 42% was due to an increase in same station Location Cash
Flow and $2.1 million or 58% was due to an increase attributable to stations
acquired in the first quarter of 1996, (ii) a $781,000 or 868% increase in DBS
Location Cash Flow of which $312,000 or 40% was due to an increase in same
territory Location Cash Flow and $469,000 or 60% was due to an increase
attributable to the territories acquired in the fourth quarter of 1996, (iii) a
$1.1 million or 72% increase in Puerto Rico Cable Location Cash Flow of which
$126,000 or 11% was due to an increase in same system Location Cash Flow and
$988,000 or 89% was due to the system acquired effective September 1, 1996, (iv)
a $375,000 or 11% increase in New England Cable Location Cash Flow, and (v) a
$26,000 increase in Tower Location Cash Flow.
As a result of these factors, incentive compensation which is calculated from
increases in Location Cash Flow increased by approximately $457,000 or 87% for
the year ended December 31, 1996 as compared to the same period in 1995 due
mainly to the increases in revenues.
Corporate expenses increased by $65,000 or 5% for the year ended December 31,
1996 as compared to the same period in 1995 primarily due to the initiation of
public reporting requirements for PM&C and Pegasus.
Depreciation and amortization expense increased by approximately $3.3 million
or 38% for the year ended December 31, 1996 as compared to the same period in
1995 as the Company increased its fixed and intangible assets as a result of
five completed acquisitions during 1996.
As a result of these factors, income from operations increased by
approximately $2.2 million for the year ended December 31, 1996 as compared to
the same period in 1995.
Interest expense increased by approximately $3.7 million or 42% for the year
ended December 31, 1996 as compared to the same period in 1995 as a result of a
combination of the Company's issuance of Notes on July 7, 1995 and an increase
in debt associated with the Company's 1996 acquisitions. A portion of the
proceeds from the issuance of the Notes was used to retire floating debt on
which the effective interest rate was lower than the 12.5% interest rate under
the Notes, but having other less favorable terms.
The Company reported a net loss of approximately $10.0 million for the year
ended December 31, 1996 as compared to net income of approximately $2.0 million
for the same period in 1995. The $12.0 million change was the net result of an
increase in income from operations of approximately $2.2 million, an increase in
interest expense of $3.6 million, a decrease in extraordinary items of $10.5
million from extinguishment of debt, a decrease in the provision for income
taxes of $150,000 and an increase in other expenses of approximately $265,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net revenues increased by approximately $4.0 million or 14% in
1995 as compared to 1994 as a result of (i) a $2.2 million or 12% increase in TV
revenues due to ratings growth and improved economic conditions, within the
Company's markets, which the Company was able to convert into higher revenues,
(ii) a $1.3 million increase in revenues from DBS operations which commenced in
the fourth quarter of 1994, (iii) a $165,000 or 4% increase in Puerto Rico Cable
revenues due primarily to a rate increase implemented in March 1995, (iv) a
$293,000 or 5% increase in New England Cable revenues due to an increase in the
number of subscribers and rate increases in the third quarter of 1995, and (v) a
$39,000 increase in Tower rental income.
The Company's location operating expenses increased by approximately $3.0
million or 16% in 1995 as compared to 1994 as a result of (i) a $1.6 million or
13% increase in TV operating expenses primarily due to increases in programming,
sales and promotion expenses, (ii) a $1.2 million increase in DBS operating
expenses primarily due to increases in programming costs which are payable based
on revenues and the number of subscribers, (iii) a $131,000 or 6% increase in
Puerto Rico Cable operating expenses due primarily to an increase in programming
costs for existing channels, as well as increases in the number of Spanish
language channels offered by the system, (iv) a $115,000 or 4% increase in New
England Cable operating expenses due primarily to increases in programming
costs, and (v) a $20,000 increase in Tower administrative expenses.
21
As a result of these factors, Location Cash Flow increased by approximately
$969,000 or 10% in 1995 as compared to 1994 as a result of (i) a $612,000 or 11%
increase in TV Location Cash Flow, (ii) a $126,000 or 350% increase in DBS
Location Cash Flow, (iii) a $34,000 or 2% increase in Puerto Rico Cable Location
Cash Flow, (iv) a $178,000 or 6% increase in New England Cable Location Cash
Flow, and (v) a $19,000 increase in Tower Location Cash Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $96,000 or 22% in 1995 as compared to 1994.
Corporate expenses decreased by approximately $142,000 or 9% in 1995 as
compared to 1994 primarily as a result of the transfer of certain functions from
corporate office staff to operating company staff.
Depreciation and amortization expense increased by approximately $1.8 million
or 26% in 1995 as compared to 1994 primarily as a result of the amortization of
the Company's DBS rights and deferred financing costs.
As a result of these factors, income from operations decreased by
approximately $796,000 in 1995 as compared to 1994.
Interest expense increased by approximately $2.8 million or 48% in 1995 as
compared to 1994 as a result of the Company's issuance of the Notes on July 7,
1995. A portion of the proceeds from issuance of the Notes was used to retire
floating rate debt on which the effective interest rate was lower than the 12.5%
interest rate under the Notes.
The Company's net income increased by approximately $7.7 million in 1995 as
compared to 1994 as a net result of a decrease in income from operations of
approximately $796,000, an increase in interest expense of $2.8 million, an
increase in interest income of $370,000, a decrease in income taxes of $110,000,
a decrease in other expenses of approximately $21,000 and an increase in
extraordinary items of $10.8 million for the reasons described in "-- Liquidity
and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been the net cash provided by
its TV and Cable operations and credit available under its credit facilities.
Additionally, the Company had $9.9 million in a restricted cash account that was
used to pay interest on the Company's Notes in January and July 1996. The
Company's principal uses of its cash have been to fund acquisitions, to meet its
debt service obligations, to fund investments in its TV and Cable technical
facilities and to fund investments in Cable and DBS customer premises equipment
that is rented or leased to subscribers.
During the year ended December 31, 1996, net cash provided by operations was
approximately $4.3 million which, together with $12.0 million of cash on hand,
$9.9 million of restricted cash and $74.7 million of net cash provided by the
Company's financing activities was used to fund investing activities of $82.5
million. Investment activities consisted of (i) the Portland Acquisition and the
Tallahassee Acquisition for approximately $16.6 million, (ii) the Cable
Acquisition for approximately $26.0 million, (iii) the Michigan/Texas DBS
Acquisition for approximately $17.9 million, (iv) the Ohio DBS Acquisition for
approximately $12.0 million, (v) the purchase of the Pegasus Cable Television of
Connecticut, Inc. ("PCT-CT") office facility and headend facility for $201,000,
(vi) the fiber upgrade in the PCT-CT Cable system amounting to $323,000, (vii)
the purchase of DSS units used as rental and lease units amounting to $832,000,
(viii) payments of programming rights amounting to $1.8 million, and (ix)
maintenance and other capital expenditures and intangibles totaling
approximately $6.7 million. As of December 31, 1996, the Company's cash on hand
approximated $8.6 million.
During 1995, net cash provided by operations was approximately $6.2 million,
which together with $1.4 million of cash on hand and $10.9 million of net cash
provided by the Company's financing activities, was used to fund a $12.5 million
distribution to the Parent and to fund investment activities totalling $6.5
million. Investment activities consisted of (i) the final payment of the
deferred purchase price for the Company's New England DBS rights of
approximately $1.9 million, (ii) the purchase of a new WDSI studio and office
facility
22
for $520,000, (iii) the purchase of a LIBOR cap for $300,000, (iv) the purchase
of DSS units used as rental and lease units for $157,000, (v) payments of
programming rights amounting to $1.2 million, and (vi) maintenance and other
capital expenditures totalling approximately $2.3 million.
During 1994, net cash provided by operations amounted to $4.1 million, which
together with cash on hand and borrowings of $35.0 million was used to fund
capital expenditures of $1.3 million, to pay a portion of the deferred purchase
price of the DBS rights for $943,000, to repay debt totalling $34.0 million, to
fund debt issuance costs of $1.6 million and to pay programming rights of $1.3
million.
On October 8, 1996, the Company completed the Initial Public Offering in
which it sold 3,000,000 shares of its Class A Common Stock to the public at a
price of $14.00 per share resulting in net proceeds to the Company of
approximately $38.1 million. The Company applied the net proceeds from the
Initial Public Offering as follows: (i) $17.9 million for the payment of the
cash portion of the purchase price of the Michigan/Texas DBS Acquisition, (ii)
$12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay
indebtedness under the New Credit Facility, (iv) $1.9 million to make a payment
on account of the Portland Acquisition, (v) $1.5 million for the payment of the
cash portion of the purchase price of the Management Agreement Acquisition, and
(vi) $1.4 million for the Towers Purchase. The Management Agreement Acquisition
and the Towers Purchase were accounted for using the pooling of interest method.
On January 27, 1997, the Company completed the Unit Offering in which it sold
100,000 Units resulting in net proceeds to the Company of $96.0 million. The
Company applied or intends to apply the net proceeds from the Unit Offering as
follows: (i) $29.6 million to the repayment of indebtedness under the New Credit
Facility, which represented all indebtedness under the New Credit Facility at
the time of the consummation of the Unit Offering, (ii) $15.0 million for the
Mississippi DBS Acquisition, (iii) $8.8 million for the cash portion of the
Indiana DBS Acquisition, (iv) $7.0 million for the cash portion of the purchase
price of the Virginia/West Virginia DBS Acquisition, (v) $2.4 million for the
Arkansas DBS Acquisition and (vi) approximately $558,000 to the retirement of
the Pegasus Credit Facility and expenses related thereto. The remaining net
proceeds together with available borrowings under the New Credit Facility and
proceeds from the New Hampshire Cable Sale will be used for working capital,
general corporate purposes and to finance future acquisitions. The Company
engages in discussions with respect to acquisition opportunities in media and
communications businesses on a regular basis. Although the Company is in various
stages of discussions in connection with potential acqisitions, the Company has
not entered into any definitive agreements with respect to any such acquisitions
at this time. The Company intends to temporarily invest the net remaining
proceeds of the Unit Offering in short-term, investment grade securities. The
Company intends to use the net proceeds for working capital, general corporate
purposes and to finance future acquisitions.
The Company is highly leveraged. As of December 31, 1996, on a pro forma
basis after giving effect to the Completed Transactions, the Company would have
had Indebtedness of $86.0 million, total stockholders' equity of $149.2 million
including Preferred Stock of $96.0 million and, assuming certain conditions are
met, $50.0 million available under the New Credit Facility. For the year ended
December 31, 1996, on a pro forma basis after giving effect to the Completed
Transactions, the Company's earnings would have been inadequate to cover its
combined fixed charges and Series A Preferred Stock dividends by approximately
$25.2 million. The ability of the Company to repay its existing indebtedness and
to pay dividends on the Series A Preferred Stock and to redeem the Series A
Preferred Stock at maturity will depend upon future operating performance, which
is subject to the success of the Company's business strategy, prevailing
economic conditions, regulatory matters, levels of interest rates and financial,
business and other factors, many of which are beyond the Company's control.
The Company completed the $85.0 million Notes offering on July 7, 1995. The
Notes were issued pursuant to an Indenture between PM&C and First Union National
Bank, as trustee. The Indenture restricts PM&C's ability to engage in certain
types of transactions including debt incurrence, payment of dividends,
investments in unrestricted subsidiaries and affiliate transactions.
During July 1995, the Company entered into the Old Credit Facility in the
amount of $10.0 million from which $6.0 million was drawn in connection with the
Portland and Tallahassee Acquisitions in the first quarter of 1996 and $2.8
million was drawn to fund deposits in connection with the Cable Acquisition. The
Old Credit Facility was retired in August 1996 from borrowings under the New
Credit Facility.
23
The New Credit Facility is a seven-year, senior collateralized revolving
credit facility for $50.0 million. The amount of the New Credit Facility will
reduce quarterly beginning March 31, 1998. As of December 31, 1996, $29.6
million had been drawn under the New Credit Facility in connection with the
retirement of the Old Credit Facility and the consummation of the Cable
Acquisition. The New Credit Facility is intended to be used for general
corporate purposes and to fund possible future acquisitions. Borrowings under
the New Credit Facility are subject to among other things, PM&C's ratio of total
funded debt to adjusted operating cash flow. The Company repaid $3.0 million of
indebtedness under the New Credit Facility with proceeds from the Initial Public
Offering and subsequently borrowed an additional $1.0 million. The Company
repaid $29.6 million, representing the outstanding balance under the New Credit
Facility at the consummation of the Unit Offering, with proceeds of the Unit
Offering. Currently, the Company is able to draw down $50.0 million from the New
Credit Facility, subject to certain exceptions.
The Pegasus Credit Facility was entered into by Pegasus in January 1997 and
retired concurrently with the consummation of the Unit Offering. Under the
Pegasus Credit Facility, Pegasus was permitted to borrow up to $5.0 million in
connection with the acquisition of DBS businesses until the consummation of the
Unit Offering. Prior to the retirement of the Pegasus Credit Facility, $526,000
had been drawn under the Pegasus Credit Facility.
The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company believes that the remaining net proceeds of the Unit Offering together
with available borrowings under 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 as
compared to $2.6 million in 1995. The increase was primarily due to $3.1 million
of nonrecurring expenditures relating to TV transmitter upgrades and Cable
interconnections and fiber upgrades. 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, (ii) Cable expenditures of approximately $1.0 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 to $7.5
million of TV expenditures for broadcast television transmitter, tower and
facility constructions and upgrades. 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, 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 New Credit
Facility.
PM&C's ability to incur additional indebtedness is limited under the terms of
the Indenture and 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 the New Credit Facility, capital expenditures
and business acquisitions that do not meet certain criteria will require lender
consent.
24
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.
The Company believes that inflation has not been a material factor affecting
the Company's business. In general, the Company's revenues and expenses are
impacted to the same extent by inflation. Substantially all of the Company's
indebtedness bear interest at a fixed rate.
The Company has reviewed the provisions of Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the implementation
of the above standards did not have any impact on the Company.
In March 1997, the Financial Accounting Standards Board 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 is currently evaluating the impact, if any, adoption of SFAS No. 128
will have on its financial statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth on pages F-1 through F-24.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10: EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below is certain information concerning the executive officers and
directors of Pegasus.
Name Age Position
- ------------------------ ----- ------------------------------------------
Marshall W. Pagon........ 41 Chairman of the Board, President, Chief
Executive Officer and Treasurer
Robert N. Verdecchio..... 40 Senior Vice President, Chief Financial
Officer and Assistant Secretary
Ted S. Lodge ........... 40 Senior Vice President, General Counsel,
Chief Administrative Officer and Assistant
Secretary
Howard E. Verlin ....... 35 Vice President and Secretary
Guyon W. Turner ........ 55 Vice President
James J. McEntee, III(1) 39 Director
Mary C. Metzger(2) ..... 51 Director
Donald W. Weber(1)(2) .. 60 Director
- ------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Marshall W. Pagon has served as President, Chief Executive Officer, Treasurer
and Chairman of the Board of Pegasus since its incorporation. Mr. Pagon also
serves as Chief Executive Officer and Director of each of Pegasus' subsidiaries.
From 1991 to October 1994, when the assets of various affiliates of PM&C,
principally limited partnerships that owned and operated the Company's TV and
Cable operations, were transferred to PM&C's subsidiaries, Mr. Pagon or entities
controlled or affiliated with Mr. Pagon served as the general partner of these
partnerships and conducted the business of the Company. Mr. Pagon's background
includes over 15 years of experience in the media and communications industry.
Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception. He has also
served similar functions for PM&C's affiliates and predecessors in interest
since 1990. Mr. Verdecchio is a certified public accountant and has over ten
years of experience in the media and communications industry.
Ted S. Lodge has served as Senior Vice President, General Counsel, Chief
Administrative Officer and Assistant Secretary of Pegasus since July 1, 1996.
From June 1992 through May 1996, Mr. Lodge practiced law with the law firm of
Lodge & Company. During such period, Mr. Lodge was engaged by the Company as its
outside legal counsel in connection with several of the Company's acquisitions.
Prior to founding Lodge & Company, Mr. Lodge served as Vice President, Legal
Department of SEI Corporation from May 1991 to June 1992 and as Vice President,
General Counsel of Vik Brothers Insurance, Inc. from March 1989 to May 1991.
Howard E. Verlin is a Vice President and Secretary of Pegasus and is
responsible for operating activities of the Company's Cable and DBS
subsidiaries, including supervision of their general managers. Mr. Verlin has
served similar functions with respect to the Company's predecessors in interest
and affiliates since 1987 and has over 14 years of experience in the media and
communications industry.
Guyon W. Turner is a Vice President of Pegasus and is responsible for the
Company's broadcast television subsidiary. From 1984 to 1993, Mr. Turner was the
managing general partner of Scranton TV Partners, Ltd., from which the Company
acquired WOLF and WWLF in 1993. Mr. Turner was also chairman and director of
Empire Radio Partners, Ltd. from March 1991 to December 1993. In November 1992,
Empire filed for protection under Chapter 11 of the Bankruptcy Code. Mr.
Turner's background includes over 20 years of experience in the media and
communications industry.
26
James J. McEntee, III has been a Director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle &
McErlane, P.C. for the past five years and a principal of that law firm for
the past three years.
Mary C. Metzger has been a Director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and
its predecessor company, Personalized Media Communications Corp. since
February 1989. Ms. Metzger has also been Managing Director of Video
Technologies International, Inc. since June 1986.
Donald W. Weber has been a Director of Pegasus since its incorporation and a
director of PM&C since November 1995. Mr. Weber has been the President and Chief
Executive Officer of Viewstar Entertainment Services, Inc., an NRTC member that
distributes DIRECTV services in North Georgia, since August 1993. From November
1991 through August 1993, Mr. Weber was a private investor and consultant to
various communication companies. Prior to that time, Mr. Weber was President and
Chief Operating Officer of Contel Corporation until its merger with GTE
Corporation in 1991. Mr. Weber is currently a member of the boards of directors
of InterCel, Inc. and Healthdyne Information Enterprises, Inc., which are
publicly-traded companies.
In connection with the Michigan/Texas DBS Acquisition, the Parent agreed to
nominate a designee of Harron as a member of Pegasus' Board of Directors.
Effective October 8, 1996, James J. McEntee, III was appointed to Pegasus' Board
of Directors as Harron's designee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Pegasus' executive officers and directors and persons
who own more than ten percent of a registered class of Pegasus' equity
securities (collectively, the "reporting persons") to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and to
furnish Pegasus with copies of these reports. Based on Pegasus' review of the
copies of these reports received by it, and written representations, if any,
received from reporting persons with respect to the filing of reports on Form 3,
4 and 5, Pegasus believes that all filings required to be made by the reporting
persons for 1996 were made on a timely basis.
ITEM 11: EXECUTIVE COMPENSATION
The salaries of the Company's executive officers were historically paid by
the Management Company. Upon the closing of the Initial Public Offering, the
Management Agreement was transferred to the Company and the salaries of the
Company's executive officers began to be paid for by the Company. The following
table summarizes the compensation paid for the last two fiscal years to the
Chief Executive Officer and to each of the Company's most highly compensated
officers whose total annual salary and bonus for the fiscal year ended December
31, 1996 exceeded $100,000.
27
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation(1) Compensation
---------------------- --------------
Restricted All
Other Annual Stock Other
Name Principal Position Year Salary Compensation Awards(3) Compensaton(4)
- ---------------------- -------------------------------------- ---- ---------- -------------- -------------- --------------
Marshall W. Pagon ... President and Chief Executive Officer 1996 $150,000 -- -- --
1995 $150,000 -- -- --
1994 $150,000 -- -- --
Robert N. Verdecchio.. Senior Vice President, Chief Financial 1996 $125,000 -- $1,746,794 --
Officer and Assistant Secretary 1995 $122,083 -- $ 133,450 --
1994 $ 90,000 -- -- --
Howard E. Verlin .... Vice President, Cable and Satellite 1996 $100,000 -- $ 89,166 --
Television, and Secretary 1995 $100,000 -- $ 95,321 --
1994 $ 65,000 -- -- --
Guyon W. Turner ..... Vice President, Broadcast Television 1996 $130,717 $18,200(2) $1,738,674 --
1995 $130,486 $18,200(2) $ 95,321 --
1994 $140,364 $20,480(2) -- --
- ------
(1) Prior to the consummation of the Initial Public Offering, the Company's
executive officers never received any salary or bonus compensation from the
Company. The salary amounts presented above for 1994 and 1995 and for
January 1, 1996 through October 8, 1996 were paid by the Management Company.
After October 8, 1996, the Company's executive officers' salaries were paid
by the Company. There are no employment agreements between the Company and
its executive officers.
(2) Includes $18,000 housing allowance paid by the Company.
(3) Represents grants of the Parent's Non-Voting Common Stock in 1995 (875
shares to Mr. Verdecchio and 625 shares each to Messrs. Verlin and Turner).
Amounts shown in the table for 1995 are based on a valuation prepared for
the Parent at the time of the grants. Amounts shown in the table for 1996
are based on the Initial Public Offering price of $14.00 per share.
One-fourth of the shares vest on December 31 of each of 1995, 1996, 1997 and
1998. Upon the completion of the Initial Public Offering, all of the
Parent's Non-Voting Common Stock were exchanged for shares of Class A Common
Stock pursuant to the Management Share Exchange resulting in 46,132, 39,952
and 32,952 shares of Class A Common Stock, respectively to Messrs.
Verdecchio, Verlin and Turner. In 1996, 123,868, 6,369 and 124,191 shares
were granted to Messrs. Verdecchio, Verlin and Turner which vested in
accordance with the same vesting schedule. An additional 903 shares were
granted to Mr. Verdecchio pursuant to the Restricted Stock Plan. As of
December 31, 1996, Messrs. Verdecchio, Verlin and Turner had an aggregate of
170,903, 39,321 and 157,143 shares of Class A Common Stock with an aggregate
value as of December 31, 1996 of $2,349,916, $540,664 and $2,160,716,
respectively.
(4) Amounts listed for fiscal 1996 do not include the Company's contributions
under the 401(k) Plans since such contributions have not been determined as
of the date of this Report.
COMPENSATION OF DIRECTORS
Under Pegasus' By-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the Board of
Directors. Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $5,000 plus $500 for each Board
meeting attended in person and $250 for each Board meeting held by telephone.
Pegasus also reimburses each director for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or committee of the
Board.
As additional remuneration for joining the Board, Mr. Weber was granted in
April 1996 an option to purchase 3,385 shares of Class A Common Stock at an
exercise price of $14.00 per share. Mr. Weber's option vested upon issuance, is
exercisable until November 2000 and, at the time of grant, was issued at an
exercise price equal to fair market value at the time Mr. Weber was elected a
director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Initial Public Offering, Pegasus did not have a compensation
committee or any other committee of the Board of Directors performing similar
functions. Decisions concerning compensation of executive officers were made by
the Board of Directors, which included Mr. Pagon, the President and Chief
Executive Officer of Pegasus. Pegasus' compensation committee currently consists
of Messrs. McEntee and Weber.
28
INCENTIVE PROGRAM
GENERAL
The Incentive Program, which includes the Restricted Stock Plan (as defined),
the 401(k) Plans (as defined) and the Stock Option Plan (as defined), is
designed to promote growth in stockholder value by providing employees with
restricted stock awards in the form of Class A Common Stock and grants of
options to purchase Class A Common Stock. Awards under the Restricted Stock Plan
(other than certain discretionary awards) and the 401(k) Plans (other than
matching contributions) are in proportion to annual increases in Location Cash
Flow. For this purpose Location Cash Flow is automatically adjusted for
acquisitions such that, for the purpose of calculating the annual increase in
Location Cash Flow, the Location Cash Flow of the acquired properties is
included as if it had been a part of the Company's financial results for the
comparable period of the prior year. The Company has authorized up to 720,000
shares of Class A Common Stock in connection with the Restricted Stock Plan and
Stock Option Plan (subject to adjustment to reflect stock dividends, stock
splits, recapitalizations, and similar changes in the capitalization of Pegasus)
and up to 205,000 shares of Class A Common Stock in connection with the 401(k)
Plans.
The Company believes that the Restricted Stock Plan and 401(k) Plans result
in greater increases in stockholder value than result from a conventional stock
option program, because these plans create a clear cause and effect relationship
between initiatives taken to increase Location Cash Flow and the amount of
incentive compensation that results therefrom.
Although the Restricted Stock Plan and 401(k) Plans like conventional stock
option programs provide compensation to employees as a function of growth in
stockholder value, the tax and accounting treatments of these programs are
different. For tax purposes, incentive compensation awarded under the Restricted
Stock Plan (upon vesting) and the 401(k) Plans is fully tax deductible as
compared to conventional stock option grants which generally are only partially
tax deductible upon exercise. For accounting purposes, conventional stock option
programs generally do not result in a charge to earnings while compensation
under the Restricted Stock Plan and the 401(k) Plans do result in a charge to
earnings. The Company believes that these differences result in a lack of
comparability between the EBITDA of companies that utilize conventional stock
option programs and the EBITDA of the Company.
The table below lists the specific maximum components of the Restricted Stock
Plan (other than certain discretionary awards) and the 401(k) Plans (other than
matching contributions) in terms of a $1 increase in annual Location Cash Flow.
Component Amount
- ------------------------------------------------------------------------------------------- ----------
Restricted Stock grants to general managers based on the increase in annual Location Cash
Flow of individual business units ........................................................ 6cents
Restricted Stock grants to department managers based on the increase in annual Location
Cash Flow of individual business units ................................................... 6cents
Restricted Stock grants to corporate managers (other than executive officers) based on the
Company-wide increase in annual Location Cash Flow ....................................... 3cents
Restricted Stock grants to employees selected for special recognition ..................... 5cents
Restricted Stock grants under the 401(k) Plans for the benefit of all eligible employees
and allocated pro-rata based on wages .................................................... 10cents
----------
Total ................................................................................. 30cents
==========
As of January 31, 1997, the Company has six general managers, 27 department
managers and nine corporate managers.
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the Restricted Stock Plan. Executive officers are
eligible to receive awards under the Restricted Stock Plan consisting of (i)
special recognition awards, (ii) awards made to the extent that an employee does
not receive a matching contribution because of restrictions of the Internal
Revenue Code of 1986, as amended (the "Code") and (iii) discretionary awards
determined by the Compensation Committee. Executive officers and non-employee
directors are eligible to receive options under the Stock Option Plan.
29
RESTRICTED STOCK PLAN
In September 1996, Pegasus adopted the Pegasus Restricted Stock Plan (the
"Restricted Stock Plan" and, together with the 401(k) Plans and the Stock Option
Plan, the "Incentive Program"), which was also approved by Pegasus' stockholders
in September 1996. The Restricted Stock Plan will terminate in September 2006.
Under the Restricted Stock Plan, 270,000 shares of Class A Common Stock (subject
to adjustment to reflect stock dividends, stock splits, recapitalizations, and
similar changes in the capitalization of Pegasus) are available for granting
restricted stock awards to eligible employees of the Company who have completed
at least one year of service. The Restricted Stock Plan provides for three types
of restricted stock awards that are made in the form of Class A Common Stock as
shown in the table above: (i) profit sharing awards to general managers,
department managers and corporate managers (other than executive officers); (ii)
special recognition awards for consistency (team award), initiative (a team or
individual award), problem solving (a team or individual award) and individual
excellence; and (iii) awards that are made to the extent that an employee does
not receive a matching contribution under the U.S. 401(k) Plan or the Puerto
Rico 401(k) Plan because of restrictions of the Code or the Puerto Rico Internal
Revenue Code, respectively. The Restricted Stock Plan, as amended effective as
of February 1, 1997, also permits the Compensation Committee to make
discretionary restricted stock awards to eligible employees. Restricted Stock
Awards vest 34% after two years of service with the Company (including years
before the Restricted Stock Plan was established), 67% after three years of
service and 100% after four years of service.
STOCK OPTION PLAN
In September 1996, Pegasus adopted the Pegasus Communications 1996 Stock
Option Plan (the "Stock Option Plan"), which was also approved by Pegasus'
stockholders in September 1996. The Stock Option Plan terminates in September
2006. Under the Stock Option Plan, up to 450,000 shares of Class A Common Stock
(subject to adjustment to reflect stock dividends, stock splits,
recapitalizations, and similar changes in the capitalization of Pegasus) are
available for the granting of nonqualified stock options ("NQSOs") and options
qualifying as incentive stock options ("ISOs") under Section 422 of the Code.
Executive officers, who are not eligible to receive profit sharing awards under
the Restricted Stock Plan, are eligible to receive NQSOs or ISOs under the Stock
Option Plan, but no executive officer may be granted options covering more than
275,000 shares of Class A Common Stock under the Stock Option Plan. Directors of
Pegasus who are not employees of the Company are eligible to receive NQSOs under
the Stock Option Plan. Currently, five executive officers and three non-employee
directors are eligible to receive options under the Stock Option Plan.
401(K) PLANS
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus
Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and,
together with the U.S. 401(k) Plan, the "401(k) Plans") for eligible employees
of the Company's Puerto Rico subsidiaries. Substantially all Company employees
who, as of the enrollment date under the 401(k) Plans, have completed at least
one year of service with the Company are eligible to participate in one of the
401(k) Plans. Participants may make salary deferral contributions of 2% to 6% of
salary to the 401(k) Plans.
The Company may make three types of contributions to the 401(k) Plans, each
allocable to a participant's account if the participant completes at least 1,000
hours of service in the applicable plan year, and is employed on the last day of
the applicable plan year: (i) the Company matches 100% of a participant's salary
deferral contributions to the extent the participant invested his or her salary
deferral contributions in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans; (ii) the Company, in its discretion, may
contribute an amount that equals up to 10% of the annual increase in
Company-wide Location Cash Flow (these Company discretionary contributions, if
any, are allocated to eligible participants' accounts based on each
participant's salary for the plan year); and (iii) the Company also matches a
participant's rollover contribution, if any, to the 401(k) Plans, to the extent
the participant invests his or her rollover contribution in Class A Common Stock
at the time of his or her initial contribution to the 401(k) Plans.
Discretionary Company contributions and Company matches of employee salary
deferral contributions and
30
rollover contributions are made in the form of Class A Common Stock, or in cash
used to purchase Class A Common Stock. The Company has authorized and reserved
for issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) Plans. Company contributions to the 401(k) Plans are subject to
limitations under applicable laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all times
and all Company contributions, if any, vest 34% after two years of service with
the Company (including years before the 401(k) Plans were established); 67%
after three years of service and 100% after four years of service. A participant
also becomes fully vested in Company contributions to the 401(k) Plans upon
attaining age 65 or upon his or her death or disability.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 21, 1997, certain information with
respect to the beneficial holdings of each director, each of the executive
officers named in the Summary Compensation Table, and all executive officers and
directors as a group, as well as the holdings of each stockholder who was known
to Pegasus to be the beneficial owner, as defined in Rule 13d-3 under the
Exchange Act, of more than 5% of the Class A Common Stock and Class B Common
Stock. Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally, and holders of Class B
Common Stock are entitled to ten votes per share. Shares of Class B Common Stock
are convertible immediately into shares of Class A Common Stock on a one-for-one
basis, and accordingly, holders of Class B Common Stock are deemed to own the
same number of shares of Class A Common Stock. The Parent and Pegasus Capital,
L.P. hold in the aggregate all shares of Class B Common Stock, representing
47.1% of the Common Stock (and 89.9% of the combined voting power of all voting
stock) of Pegasus on a fully diluted basis. Marshall W. Pagon is deemed to be
the beneficial owner of all of the Class B Common Stock. The outstanding capital
stock of the Parent consists of 64,119 shares of Class A Voting Common Stock and
5,000 shares of Parent Non-Voting Stock, all of which are beneficially owned by
Marshall W. Pagon.
31
Pegasus Class A Pegasus Class B
Common Stock Common Stock
Beneficially Owned Beneficially Owned
------------------------- -----------------------
Beneficial Owner Shares % Shares %
------------------------------------------ -------------- ------- ----------- --------
Marshall W. Pagon(1)(2) .................. 4,590,990(3) 47.1% 4,581,900 100.0%
Guyon W. Turner .......................... 157,143(4) 3.0% -- --
Robert N. Verdecchio ..................... 175,448(4) 3.4% -- --
Howard E. Verlin ......................... 48,411(4) (5) -- --
James J. McEntee, III .................... 500 (5) -- --
Mary C. Metzger .......................... 500 (5) -- --
Donald W. Weber(6) ....................... 5,385 (5) -- --
Richard D. Summe(7) ...................... 284,719 5.5% -- --
Harron Communications Corp.(8)
70 East Lancaster Avenue
Frazer, PA 19355 ........................ 852,110 16.5% -- --
Directors and Executive Officers as a
Group
(8 persons)(9) .......................... 4,983,513 51.1% 4,581,900 100.0%
- ------
(1) The address of this person is c/o Pegasus Communications Management
Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road,
Radnor, Pennsylvania 19087.
(2) Pegasus Capital, L.P. holds 1,217,348 shares of Class B Common Stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B Common Stock are owned by the
Parent. All Class A Voting Common Stock of the Parent are held by Pegasus
Communications Limited Partnership. Mr. Pagon controls Pegasus
Communications Limited Partnership by reason of his ownership of all the
outstanding voting stock of the sole general partner of a limited
partnership that is, in turn, the sole general partner in Pegasus
Communications Limited Partnership. As such, Mr. Pagon is the beneficial
owner of 100% of Class B Common Stock with sole voting and investment
power over all such shares.
(3) Includes 4,581,900 shares of Class B Common Stock, which are convertible
into shares of Class A Common Stock on a one-for-one basis.
(4) On March 26, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Pegasus which would permit Messrs. Turner,
Verdecchio and Verlin to sell 157,143, 170,000 and 39,321 shares of Class A
Common Stock, respectively, subject to certain vesting and other
restrictions. Messrs. Turner, Verdecchio and Verlin have sole voting and
investment power over their shares, subject to certain vesting restrictions.
(5) Represents less than 1% of the outstanding shares of the class of Common
Stock.
(6) Includes 3,385 shares of Class A Common Stock issuable upon the exercise of
the vested portion of outstanding stock options.
(7) The address of Richard D. Summe is 11790 E. State Road 334, Zionsville,
Indiana 46077-9399.
(8) Under the terms of a stockholder's agreement entered into by the Company in
connection with the Michigan/Texas DBS Acquisition, the Company has a right
of first offer to purchase any shares sold by Harron in a private
transaction exempt from registration under the Securities Act.
(9) See footnotes (2), (3) and (6). Also includes 1,500 shares of Class A Common
Stock owned by Ted S. Lodge's wife, for which Mr. Lodge disclaims beneficial
ownership, and 3,636 shares of Class A Common Stock issued to Mr. Lodge for
which Mr. Lodge has sole voting and investment power, subject to certain
vesting restrictions.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
The Management Company performed various management and accounting services
for the Company pursuant to the Management Agreement between the Management
Company and the Company. Mr. Pagon controls and is the majority owner of the
Management Company. Upon the consummation of the Initial Public Offering, the
Management Agreement was transferred to the Company, and the employees of the
Management Company became employees of the Company. In consideration for the
transfer of this agreement together with certain net assets, including
approximately $1.5 million of accrued management fees, the Management Company
received $19.6 million of Class B Common Stock (1,400,000 shares of Class B
Common Stock) and approximately $1.5 million in cash. Of the 1,400,000 shares,
182,652 were exchanged for an equal number of shares of Class A Common Stock and
transferred to certain members of management who were participants in the
Management Share Exchange. The fair market value of the Management Agreement was
32
determined by Kane Reece Associates, Inc. ("Kane Reece"), an independent
appraiser, based upon a discounted cash flow approach using historical financial
results and management's financial projections. In return for Kane Reece's
services, the Company incurred a fee of approximately $15,000 plus expenses.
Under the Management Agreement, the Management Company provided specified
executive, administrative and management services to PM&C and its operating
subsidiaries. These services included: (i) selection of personnel; (ii) review,
supervision and control of accounting, bookkeeping, recordkeeping, reporting and
revenue collection; (iii) supervision of compliance with legal and regulatory
requirements; and (iv) conduct and control of daily operational aspects of the
Company. In consideration for the services performed by the Management Company
under the Management Agreement, the Company was charged management fees, which
represented 5% of the Company's net revenues, and reimbursements for the
Management Company's accounting department costs. The Management Company's
offices are located at Suite 454, 5 Radnor Corporate Center, 100 Matsonford
Road, Radnor, Pennsylvania 19087.
MANAGEMENT SHARE EXCHANGE
Certain members of the Company's management, including all of the Company's
executive officers with the exception of Marshall W. Pagon and Ted S. Lodge,
held prior to the consummation of the Initial Public Offering 5,000 shares in
the aggregate of Parent Non-Voting Stock. Upon consummation of the Initial
Public Offering, all shares of the Parent Non-Voting Stock were exchanged for an
aggregate of 263,606 shares of Class A Common Stock and the Parent Non-Voting
Stock was distributed to the Parent.
SPLIT DOLLAR AGREEMENT
In December 1996, the Company entered into a Split Dollar Agreement with the
trustees of an insurance trust established by Marshall W. Pagon. Under the Split
Dollar Agreement, the Company agreed to pay a portion of the premiums for
certain life insurance policies covering Mr. Pagon owned by the insurance trust.
The agreement provides that the Company will be repaid for all amounts it
expends for such premiums, either from the cash surrender value or the proceeds
of the insurance policies.
LOAN PROGRAM
In February 1997, the Company adopted a program to assist its employees in
obtaining loans to pay such employees' income taxes as a result of grants of
Class A Common Stock by the Company and other purposes. Assistance may take the
form of direct loans by the Company, guarantees by the Company of loans made by
third parties, or other forms of credit support or credit enhancement, including
without limitation, agreements by the Company to purchase such loans, purchase
any collateral securing such loans (including Class A Common Stock), lend money
or otherwise provide funds for the repayment of such loans. Any direct loan by
the Company may not exceed 75 percent of the market value of the Class A Common
Stock at the time that the loan is made.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements filed as part of this report are listed on the Index
to Financial Statements on page F-1.
(2) Financial Statement Schedules
Page
--------
Report of Coopers & Lybrand L.L.P. .............. S-1
Schedule II -- Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla
Acosta, Maria Del Carmen Padilla Lopez, Dom's Tele-Cable, Inc. and the
Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which is
incorporated herein by reference to Exhibit 2.1 of the Form 10-K for
the year ended December 31, 1995 of Pegasus Media & Communications,
Inc.).
2.2 Contribution and Exchange Agreement by and between the Parent and
Harron dated as of May 30, 1996 (including form of Joinder Agreement,
Stockholder's Agreement and Noncompetition Agreement) (which is
incorporated by reference to Exhibit 2.2 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
2.3 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to
Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated
August 29, 1996).
2.4 Joinder Agreement dated as of May 31, 1996 by and among the Parent,
Dominica Padilla Acosta (aka Dominick Padilla), Maria Del Carmen
Padilla Lopez and Domar (which is incorporated by reference to Exhibit
5 to Pegasus Media & Communications, Inc.'s Form 8-K dated August 29,
1996).
2.5 Amendment No. 1 to Exhibit 2.2 (which is incorporated by reference to
Pegasus' Form 8-K, dated October 8, 1996).
2.6 Amendment No. 2 to Exhibit 2.2 (which is incorporated by reference to
Exhibit 2.5 to Pegasus' Registration Statement on Form S-1 (File No.
333-057057).
2.7 Amendment No. 3 to Exhibit 2.2 (which is incorporated by reference to
Exhibit 4 to Pegasus' Form 8-K dated October 8, 1996).
2.8 Joinder Agreement by and among Pegasus Communications Holdings, Inc.,
Pegasus Communications Corporation and Harron Communications Corp.
dated as of October 8, 1996 (which is incorporated by reference to
Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996).
2.9 Stockholders' Agreement by and among Pegasus Communications Holdings,
Inc., Pegasus Communications Corporation and Harron Communications
Corporation dated as of October 8, 1996 (which is incorporated by
reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8,
1996).
2.10 Non-Competition Agreement by and among Pegasus Communications Holdings,
Inc., Pegasus Communications Corporation and Harron Communications
Corp. dated October 8, 1996 (which is incorporated by reference to
Exhibit 7 to Pegasus Form 8-K dated as of October 8, 1996).
34
Exhibit
Number Description of Document
- ------- -----------------------
2.11 Asset Purchase Agreement by and among Pegasus Communications
Corporation and Horizon Telcom, Inc., Horizon Infotech, Inc. and
Chillicothe Telephone Company dated as of October 23, 1996 (which is
incorporated herein by reference to Pegasus' Registration Statement on
Form S-4 (File No. 333-14857).
2.12 Asset Purchase Agreement dated as of November 6, 1996 between State
Cable TV Corp. and Pegasus Cable Television, Inc. (which is
incorporated by reference to Exhibit 2.12 to Pegasus' Registration
Statement on Form S-1 (File No. 333-18739).
2.13 Agreement and Plan of Merger dated as of January 21, 1997 among Pegasus
Communications Corporation, Pegasus Satellite Television of Indiana,
Inc. and DBS of Indiana, Inc. and Exhibit 8 thereto (Stockholders
Agreement dated as of January 31, 1997) (other exhibits have been
omitted but will be provided to the SEC upon request) (which is
incorporated by reference to Exhibit 1 to Pegasus' Form 8-K dated
January 31, 1997).
2.14 Asset Purchase Agreement by and among Pegasus Communications
Corporation and ClearVision, Inc. and its Shareholders, dated as of
January 25, 1997 (exhibits have been omitted but will be provided to
the SEC upon request) (which is incorporated by reference herein to
Exhibit 3 to Pegasus' Form 8-K dated January 31, 1997).
3.1 Certificate of Incorporation of Pegasus, as amended (which is
incorporated by reference to Exhibit 3.1 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2
to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
3.3 Certificate of Designation, Preferences and Relative, Participating,
Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof which is
incorporated by reference to Exhibit 3.3 to Pegasus' Registration
Statement on Form S-1 (File No. 333-23595).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media &
Communications, Inc., the Guarantors (as this term is defined in the
Indenture), and First Fidelity Bank, National Association, as Trustee,
relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005
(including the form of Notes and Subsidiary Guarantee) (which is
incorporated herein by reference to Exhibit 4.1 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No.
33-95042).
4.2 Form of Notes (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee (included in Exhibit 4.1 above).
4.4 Indenture by and between Pegasus and First Union National Bank, as
trustee, relating to the Exchange Notes (included in Exhibit 3.3
above).
10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcasting Company and D. & K. Broadcast Properties L.P. relating to
television station WDBD (which is incorporated herein by reference to
Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042).
10.2 Agreement and Amendment to Station Affiliation Agreement, dated as of
June 11, 1993, between Fox Broadcasting Company and Donatelli & Klein
Broadcast relating to television station WDBD (which is incorporated
herein by reference to Exhibit 10.6 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcast Company and Scranton TV Partners Ltd. relating to television
station WOLF (which is incorporated herein by reference to Exhibit 10.8
to Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated June
11, 1993, between Fox Broadcasting Company and Scranton TV Partners,
Ltd. relating to television station WOLF (which is incorporated herein
by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
35
Exhibit
Number Description of Document
- ------- -----------------------
10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement
Regarding Network Nonduplication Protection, dated December 2, 1993,
between Fox Broadcasting Company and Pegasus Broadcast Television, L.P.
relating to television stations WOLF, WWLF, and WILF (which is
incorporated herein by reference to Exhibit 10.10 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No.
33-95042).
10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting
Company and Pegasus Broadcast Television, L.P. relating to television
station WOLF (which is incorporated herein by reference to Exhibit
10.11 to Pegasus Media & Communications, Inc.'s Registration Statement
on Form S-4 (File No. 33-95042).
10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox
Broadcasting Company and WDSI Ltd. relating to television station WDSI
(which is incorporated herein by reference to Exhibit 10.12 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042).
10.8 Agreement and Amendment to Station Affiliation Agreement, dated June
11, 1993, between Fox Broadcasting Company and Pegasus Broadcast
Television, L.P. relating to television station WDSI (which is
incorporated herein by reference to Exhibit 10.13 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No.
33-95042).
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated
herein by reference to Exhibit 10.14 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services,
dated June 24, 1993, between the National Rural Telecommunications
Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated
herein by reference to Exhibit 10.28 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042) (other
similar agreements with the National Rural Telecommunications
Cooperative are not being filed but will be furnished upon request,
subject to restrictions on confidentiality).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of
DBS Services, dated June 24, 1993, between the National Rural
Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.29 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and
Pegasus Satellite Television, Inc. (which is incorporated herein by
reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and
operate cable television systems for the municipalities of Cabo Rojo,
San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao
(which is incorporated herein by reference to Exhibit 2 to Pegasus
Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and
operate cable television systems for the municipalities of Anasco,
Rincon and Las Marias (which is incorporated herein by reference to
Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 21, 1996).
10.15 New Credit Facility (which is incorporated by reference to Exhibit
10.27 to Pegasus' Registration Statement on Form S-1 (File No.
333-05057).
10.16+ Pegasus Restricted Stock Plan (which is incorporated by reference to
Exhibit 10.28 to Pegasus' Registration Statement on Form S-1 (File No.
333-05057).
10.17+ Option Agreement for Donald W. Weber (which is incorporated by
reference to Exhibit 10.29 Pegasus' Registration Statement on Form S-1
(File No. 333-05057).
10.18+ Pegasus 1996 Stock Option Plan (which is incorporated by reference to
Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No.
333-05057).
10.19+ Amendment to Option Agreement for Donald W. Weber, dated December 19,
1996 (which is incorporated by reference to Exhibit 10.31 to Pegasus'
Registration Statement on Form S-1 (File No. 333-18739).
36
Exhibit
Number Description of Document
- ------- -----------------------
10.20 Warrant Agreement between Pegasus and First Union National Bank, as
Warrant Agent relating to the Warrants (which is incorporated by
reference to Exhibit 10.32 to Pegasus' Registration Statement on Form
S-1 (File No. 333-23595).
21.1 Subsidiaries of Pegasus (which is incorporated by reference to Exhibit
21.1 to Pegasus' Registration Statement on Form S-1 (File No.
333-18739).
23.1* Consent of Coopers & Lybrand L.L.P.
24.1* Powers of Attorney (included in Signatures and Powers of Attorney).
27.1 Financial Data Schedule (which is incorporated by reference to Exhibit
27.1 to Pegasus' Registration Statement on Form S-1 (333-23595).
99.1 The sections captioned "Prospectus Summary -- Glossary of Defined
Terms," "Risk Factors," "Business -- Licenses, LMAs, DBS Agreements and
Cable Franchises," and "Business -- Legislation and Regulation," from
the Prospectus (which is incorporated herein by reference to the
Prospectus dated March 26, 1997, filed as part of Pegasus' Registration
Statement on Form S-1 (File No. 333-23595).
- ------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
(b) Reports on Form 8-k
On October 22, 1996, Pegasus filed a Current Report on Form 8-K dated
October 8, 1996 reporting under Item 2 the acquisition of DBS territories in
certain rural areas of Texas and Michigan and related assets from Harron
Communications Corp., in exchange for $11.9 million of Class A Common Stock
(valued at the price to the public of $14.00 per share in the Initial Public
Offering) and approximately $17.9 million in cash. The Form 8-K contained
financial statements relating to this acquisition.
On November 25, 1996, Pegasus filed a Current Report on Form 8-K dated
November 8, 1996 reporting under Item 2 the acquisition of DBS territories in
certain rural areas of Ohio and related assets from Horizon Infotech, Inc. for
approximately $12.0 million in cash (subject to certain adjustments). The Form
8-K contained pro forma financial information.
37
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Marshall W. Pagon
-----------------------------------
Marshall W. Pagon
Chief Executive Officer and President
Date: March 26, 1997
Know all men by these presents, that each person whose signature appears below
hereby constitutes and appoints Marshall W. Pagon, Robert N. Verdecchio and Ted
S. Lodge and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all amendments to this
Annual Report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto each of such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary in connection with such matters and hereby ratifying and confirming
all that each of such attorneys-in-fact and agents or his substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Marshall W. Pagon President, Chief Executive Officer and March 26, 1997
-------------------------------- Chairman of the Board
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief March 26, 1997
-------------------------------- Financial Officer and Assistant
Robert N. Verdecchio Secretary
(Principal Financial and
Accounting Officer)
/s/ James J. McEntee, III Director March 26, 1997
--------------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director March 26, 1997
--------------------------------
Mary C. Metzger
/s/ Donald W. Weber Director March 26, 1997
--------------------------------
Donald W. Weber
38
PEGASUS COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page
--------
Pegasus Communications Corporation (a newly formed entity which has nominal assets and includes the
consolidated operations of entities under common control)
Report of Coopers & Lybrand L.L.P. .................................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 ........................................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 .......... F-4
Consolidated Statements of Changes in Total Equity for the years ended December 31, 1994, 1995 and
1996 ............................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 .......... F-6
Notes to Consolidated Financial Statements .......................................................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pegasus Communications Corporation
We have audited the accompanying consolidated balance sheets of Pegasus
Communications Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in total equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pegasus
Communications Corporation as of December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 21, 1997 except as to Note 14
for which the date is March 10, 1997
F-2
PEGASUS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
1995 1996
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $11,974,747 $ 8,582,369
Restricted cash ............................................... 9,881,198 --
Accounts receivable, less allowance for doubtful accounts of
$238,000 and $243,000, respectively ......................... 4,884,045 9,155,545
Program rights ................................................ 931,664 1,289,437
Inventory ..................................................... 1,100,899 697,957
Deferred taxes ................................................ 42,440 1,290,397
Prepaid expenses and other .................................... 329,895 851,592
-------------- --------------
Total current assets ........................................ 29,144,888 21,867,297
Property and equipment, net ........................................ 16,571,538 24,115,138
Intangible assets, net ............................................. 48,028,410 126,236,128
Program rights ..................................................... 1,932,680 1,294,985
Deposits and other ................................................. 92,325 166,498
-------------- --------------
Total assets ................................................ $95,769,841 $173,680,046
============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Notes payable ................................................. $ 316,188 $ 48,610
Advances payable -- related party ............................. 468,327 --
Current portion of long-term debt ............................. 271,934 315,223
Accounts payable .............................................. 2,494,738 5,075,981
Accrued interest .............................................. 5,173,745 5,592,083
Accrued expenses .............................................. 1,712,603 3,803,993
Current portion of program rights payable ..................... 1,141,793 601,205
-------------- --------------
Total current liabilities ................................... 11,579,328 15,437,095
-------------- --------------
Long-term debt, net ................................................ 82,308,195 115,211,610
Program rights payable ............................................. 1,421,399 1,365,284
Deferred taxes ..................................................... 211,902 1,339,859
-------------- --------------
Total liabilities ........................................... 95,520,824 133,353,848
Commitments and contingent liabilities ............................. -- --
Total equity:
Preferred stock; $0.01 par value; 5.0 million shares authorized -- --
Class A common stock .......................................... 1,615 46,632
Class B common stock .......................................... 85 45,819
Additional paid-in capital .................................... 7,880,848 57,736,011
Retained earnings (deficit) ................................... 1,825,283 (17,502,264)
Partners' deficit ............................................. (9,458,814) --
-------------- --------------
Total equity ................................................ 249,017 40,326,198
-------------- --------------
Total liabilities and equity .................................. $95,769,841 $173,680,046
============== ==============
See accompanying notes to consolidated financial statements
F-3
PEGASUS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------------------
1994 1995 1996
--------------- -------------- ---------------
Revenues:
Basic and satellite service ........................ $ 8,455,815 $10,002,579 $ 16,645,428
Premium services ................................... 1,502,929 1,652,419 2,197,188
Broadcasting revenue, net of agency commissions .... 13,204,148 14,862,734 21,813,409
Barter programming revenue ......................... 4,604,200 5,110,662 6,337,220
Other .............................................. 423,998 519,682 935,387
--------------- -------------- ---------------
Total revenues ................................ 28,191,090 32,148,076 47,928,632
--------------- -------------- ---------------
Operating expenses:
Programming ........................................ 4,094,688 5,475,623 9,889,895
Barter programming expense ......................... 4,604,200 5,110,662 6,337,220
Technical and operations ........................... 2,791,885 2,740,670 3,271,564
Marketing and selling .............................. 3,372,482 3,928,073 5,481,315
General and administrative ......................... 3,289,532 3,885,473 5,923,247
Incentive compensation ............................. 432,066 527,663 985,365
Corporate expenses ................................. 1,505,904 1,364,323 1,429,252
Depreciation and amortization ...................... 6,940,147 8,751,489 12,060,498
--------------- -------------- ---------------
Income from operations ........................ 1,160,186 364,100 2,550,277
Interest expense ........................................ (5,360,729) (8,793,823) (12,454,891)
Interest expense -- related party ....................... (612,191) (22,759) --
Interest income ......................................... -- 370,300 232,361
Other expenses, net ..................................... (65,369) (44,488) (171,289)
--------------- -------------- ---------------
Loss before income taxes and extraordinary items ... (4,878,103) (8,126,670) (9,843,543)
Provision (benefit) for income taxes .................... 139,462 30,000 (120,000)
--------------- -------------- ---------------
Loss before extraordinary items .................... (5,017,565) (8,156,670) (9,723,543)
Extraordinary gain (loss) from extinguishment of debt,
net ................................................... (633,267) 10,210,580 (250,603)
--------------- -------------- ---------------
Net income (loss) .................................. ($ 5,650,832) $ 2,053,910 ($ 9,974,146)
=============== ============== ===============
Income (loss) per share:
Loss before extraordinary items .................... ($ 0.99) ($ 1.59) ($ 1.56)
Extraordinary (loss) gain .......................... (0.13) 1.99 (0.04)
--------------- -------------- ---------------
Net income (loss) .................................. ($ 1.12 ) $ 0.40 ($ 1.60)
=============== ============== ===============
Weighted average shares outstanding ................ 5,044,042 5,139,937 6,239,663
=============== ============== ===============
See accompanying notes to consolidated financial statements
F-4
PEGASUS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY
Common Stock
------------------------- Additional Retained Partners' Total
Number Par Paid-In Earnings Capital Equity
of Shares Value Capital (Deficit) (Deficit) (Deficiency)
----------- ---------- -------------- --------------- -------------- --------------
Balances at January 1, 1994 .... $ 140,372 ($ 2,567,724) ($ 2,427,352)
Net loss ....................... (790,501) (4,860,331) (5,650,832)
Incorporation of partnerships .. 444 $ 444 (3,255,780) 3,228,038 (27,298)
Redemption of minority interest ($ 49,490) (49,490)
LP interests contribution ...... 1,335,000 (1,335,000)
Conversion of term loans ....... 50 50 15,096,544 15,096,594
----------- ---------- -------------- --------------- -------------- --------------
Balances at December 31, 1994 .. 494 494 16,382,054 (3,905,909) (5,535,017) 6,941,622
Net income (loss) .............. 5,731,192 (3,677,282) 2,053,910
Distributions to Partners ...... (246,515) (246,515)
Distributions to Parent ........ (12,500,000) (12,500,000)
Exchange of common stock ....... 161,006 1,121 (1,121)
Issuance of Class B common stock 8,500 85 3,999,915 4,000,000
----------- ---------- -------------- --------------- -------------- --------------
Balances at December 31, 1995 .. 170,000 1,700 7,880,848 1,825,283 (9,458,814) 249,017
Net loss ....................... (5,934,261) (4,039,885) (9,974,146)
Contributions by Parent ........ 579,152 105,413 684,565
Distributions to Parent ........ (2,946,379) (2,946,379)
Issuance of Class A common stock
due to:
Initial Public Offering ...... 3,000,000 30,000 38,153,000 38,183,000
WPXT Acquisition ............. 82,143 821 1,149,179 1,150,000
MI/TX DBS Acquisition ........ 852,110 8,521 11,921,025 11,929,546
Awards ....................... 3,614 36 50,559 50,595
Issuance of Class B common stock due to:
WPXT Acquisition ............. 71,429 714 999,286 1,000,000
Conversions of partnerships .... (13,393,286) 13,393,286
Exchange of PM&C Class B ....... 183,292 1,833 (1,833)
Exchange of PM&C Class A ....... 4,882,541 48,826 (48,826)
----------- ---------- -------------- --------------- -------------- --------------
Balances at December 31, 1996 .. 9,245,129 $92,451 $ 57,736,011 ($ 17,502,264) $ 40,326,198
=========== ========== ============== =============== ============== ==============
See accompanying notes to consolidated financial statements
F-5
PEGASUS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------------------------
1994 1995 1996
--------------- -------------- ---------------
Cash flows from operating activities:
Net income (loss) ................................... ($ 5,650,832) $ 2,053,910 ($ 9,974,146)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary (gain) loss on extinguishment of
debt, net ...................................... 633,267 (10,210,580) 250,603
Depreciation and amortization .................... 6,940,147 8,751,489 12,060,498
Program rights amortization ...................... 1,193,559 1,263,190 1,514,122
Accretion on discount of bonds ................... -- 195,454 392,324
Stock incentive compensation ..................... -- -- 50,595
Gain on disposal of fixed assets ................. 30,524 -- --
Bad debt expense ................................. 200,039 146,147 335,856
Deferred income taxes ............................ 139,462 30,000 (120,000)
Change in assets and liabilities:
Accounts receivable ............................ (1,353,448) (815,241) (4,607,356)
Inventory ...................................... (711,581) (389,318) 402,942
Prepaid expenses and other ..................... (250,128) 490,636 (521,697)
Accounts payable & accrued expenses ............ 702,240 (826,453) 4,672,633
Advances payable -- related party .............. 142,048 326,279 (468,327)
Accrued interest ............................... 2,048,569 5,173,745 418,338
Deposits and other ............................. 39,633 5,843 (74,173)
--------------- -------------- ---------------
Net cash provided by operating activities ........... 4,103,499 6,195,101 4,332,212
Cash flows from investing activities:
Acquisitions ..................................... -- -- (72,567,216)
Capital expenditures ............................. (1,264,212) (2,640,475) (6,294,352)
Purchase of intangible assets .................... (943,238) (2,334,656) (1,758,727)
Payments of programming rights ................... (1,310,294) (1,233,777) (1,830,903)
Other ............................................ (53,648) (250,000) --
--------------- -------------- ---------------
Net cash used for investing activities .............. (3,571,392) (6,458,908) (82,451,198)
Cash flows from financing activities:
Proceeds from long-term debt ..................... 35,015,000 81,455,919 --
Repayments of long-term debt ..................... (33,991,965) (48,095,692) (103,639)
Borrowings on revolving credit facility .......... -- 2,591,335 41,400,000
Repayments on revolving credit facility .......... -- (2,591,335) (11,800,000)
Proceeds from borrowings from related parties .... 26,000 20,000 --
Restricted cash .................................. -- (9,881,198) 9,881,198
Debt issuance costs .............................. (1,552,539) (3,974,454) (304,237)
Capital lease repayments ......................... (154,640) (166,050) (267,900)
Contributions by Parent .......................... -- -- 684,565
Distributions to Parent .......................... -- (12,500,000) (2,946,379)
Proceeds from issuance of common stock ........... -- 4,000,000 42,000,000
Underwriting and IPO costs ....................... -- -- (3,817,000)
--------------- -------------- ---------------
Net cash provided by (used in) financing activities . (658,144) 10,858,525 74,726,608
Net increase (decrease) in cash and cash equivalents .. (126,037) 10,594,718 (3,392,378)
Cash and cash equivalents, beginning of year .......... 1,506,066 1,380,029 11,974,747
--------------- -------------- ---------------
Cash and cash equivalents, end of year ................ $ 1,380,029 $ 11,974,747 $ 8,582,369
=============== ============== ===============
See accompanying notes to consolidated financial statements
F-6
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 in May 1996, is a direct subsidiary of
Pegasus Communications Holdings, Inc. ("PCH" or the "Parent").
Pegasus Media & Communications, Inc. ("PM&C") is a diversified media and
communications company whose subsidiaries consist of Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT"), Pegasus
Broadcast Associates, L.P. ("PBA"), Pegasus Satellite Television, Inc.
("PST") and MCT Cablevision, L.P. ("MCT"). PBT operates broadcast television
("TV") stations affiliated with the Fox Broadcasting Company television
network ("Fox"). PCT, together with its subsidiary, Pegasus Cable Television
of Connecticut, Inc. ("PCT-CT") and MCT operate cable television ("Cable")
systems that provide service to individual and commercial subscribers in New
England and Puerto Rico, respectively. PST provides direct broadcast
satellite ("DBS") service to customers in the New England area. PBA holds a
television station license which simulcasts programming from a station
operated by PBT.
Pegasus Satellite Holdings, Inc. ("PST Holdings") is a DBS holding company
whose subsidiaries provide direct broadcast satellite service to customers in
certain rural areas of Michigan, Texas and Ohio.
On October 8, 1996, the Company completed an initial public offering (the
"Initial Public Offering") in which it sold 3,000,000 shares of its Class A
Common Stock to the public at a price of $14.00 per share resulting in net
proceeds to the Company of $38.1 million.
On October 8, 1996, in conjunction with the Initial Public Offering, the
limited partnerships which owned and operated the Company's Puerto Rico cable
operations and owned one of its broadcast licenses, restructured. This
reorganization has been accounted for as if a pooling of interests had occurred.
On October 31, 1994, the limited partnerships which owned and operated PCH's
broadcast television, New England cable and satellite operations, restructured
and transferred their assets to PM&C. This reorganization has been accounted for
as if a pooling of interests had occurred.
Pegasus Towers L.P. ("Towers"), a subsidiary of Pegasus, owns and operates
television and radio transmitting towers located in Pennsylvania and
Tennessee.
Pegasus Communications Management Company ("PCMC"), a subsidiary of Pegasus,
provides certain management and accounting services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The financial statements include the accounts of Pegasus and all of its
subsidiaries or affiliates. All intercompany transactions and balances have been
eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities and
disclosure of contingencies. Actual results could differ from those estimates.
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 lower of cost or market on a
first-in, first-out basis.
F-7
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. The cost and related accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the respective accounts, and any resulting gains or losses are included in the
statement of operations. For cable television systems, initial subscriber
installation costs, including material, labor and overhead costs of the hookup,
are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense. Satellite equipment that
is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities ... 7 to 11 years
Transmitter equipment ................... 5 to 10 years
Equipment, furniture and fixtures ....... 5 to 10 years
Building and improvements ............... 12 to 39 years
Vehicles ................................ 3 to 5 years
INTANGIBLE ASSETS:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and amortized
over the lives of the related franchise agreements, while unsuccessful franchise
applications and abandoned franchises are charged to expense. Financing costs
incurred in obtaining long-term financing are amortized over the term of the
applicable loan. Goodwill, broadcast licenses, network affiliation agreements
and other intangible assets ("Intangible Assets") are reviewed periodically for
impairment or whenever events or circumstances provide evidence that suggest
that the carrying amounts may not be recoverable. The Company assesses the
recoverability of its Intangible Assets by determining whether the amortization
of the respective Intangible Asset balance can be recovered through projected
undiscounted future cash flows.
Amortization of Intangible Assets is computed using the straight-line method
based upon the following lives:
Broadcast licenses ................ 40 years
Network affiliation agreements .... 40 years
Goodwill .......................... 40 years
Other intangibles ................. 2 to 14 years
REVENUE:
The Company operates in two industry segments: multichannel television (DBS
and Cable) and broadcast television (TV). The Company recognizes revenue in its
TV operations when advertising spots are broadcasted. The Company recognizes
revenue in its DBS and Cable operations when video and audio services are
provided.
PROGRAMMING:
The Company obtains a portion of its programming, including presold
advertisements, through its network affiliation agreement with Fox and also
through independent producers. The Company does not make any direct payments for
this programming. For running network programming, the Company received payments
from Fox, which totaled approximately $71,000, $215,000 and $73,000 in 1994,
1995 and 1996, respectively. For running independent producers' programming, the
Company received 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 presold advertisements
are broadcasted.
F-8
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
ADVERTISING COSTS:
Advertising costs are charged to operations in the year incurred and totaled
$525,000, $613,000 and $1.1 million for the years ended December 31, 1994, 1995
and 1996, respectively.
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.
RESTRICTED CASH:
The Company had restricted cash, including interest earned, held in escrow of
$9.9 million at December 31, 1995. These funds were disbursed from the escrow to
pay interest on its Series B Senior Subordinated Notes due 2005 (the "Series B
Notes") in 1996.
PROGRAM RIGHTS:
The Company enters into agreements to show motion pictures and syndicated
programs on television. In accordance with the Statements of Financial
Accounting Standards No. 63 ("SFAS No. 63"), only the right and associated
liabilities for those films and programs currently available for showing are
recorded. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period which approximates amortization based on the estimated
number of showings during the contract period. Amortization of $1.2 million,
$1.3 million and $1.5 million is included in programming expenses for the years
ended December 31, 1994, 1995 and 1996, respectively. The obligations arising
from the acquisition of film rights are recorded at the gross amount. Payments
for the contracts are made pursuant to the contractual terms over periods which
are generally shorter than the license periods.
The Company has entered into agreements totaling $1.7 million as of December
31, 1996, which are not yet available for showing at December 31, 1996, and
accordingly, are not recorded by the Company.
At December 31, 1996, the Company has commitments for future program rights
of approximately $1,300,000, $815,000, $363,000 and $18,000 in 1997, 1998, 1999
and 2000, respectively.
INCOME TAXES:
On October 31, 1994, in conjunction with the incorporation of certain
entities, the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109") were adopted. Prior to such date,
the above entities operated as partnerships for federal and state income tax
purposes and, therefore, no provision for income taxes was necessary. MCT is
treated as a partnership for federal and state income tax purposes, but taxed as
a corporation for Puerto Rico income tax purposes. The adoption of SFAS No. 109
did not have a material impact on the Company's financial position or results of
operations. For the year ended December 31, 1994, income and deferred taxes are
based on the Company's operations from November 1, 1994 through December 31,
1994, excluding (i) MCT, which for Puerto Rico income tax purposes is taxed as a
corporation for the 12 month period ended December 31, 1994, and (ii) PBA and
Towers, which are limited partnerships.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of trade receivables.
Concentration of Credit Risk: -- (Continued)
F-9
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
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. As of
December 31, 1994, 1995 and 1996 the Company had no significant concentrations
of credit risk.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31, December 31,
1995 1996
-------------- --------------
Land ................................. $ 259,459 $ 862,298
Reception and distribution facilities.. 22,839,470 29,140,040
Transmitter equipment ................ 7,478,134 11,643,812
Building and improvements ............ 1,554,743 1,553,548
Equipment, furniture and fixtures .... 1,333,797 1,509,588
Vehicles ............................. 571,456 766,192
Other equipment ...................... 997,352 2,295,446
-------------- --------------
35,034,411 47,770,924
Accumulated depreciation ............. (18,462,873) (23,655,786)
-------------- --------------
Net property and equipment ........... $ 16,571,538 $ 24,115,138
============== ==============
Depreciation expense amounted to $4,027,866, $4,140,058, and $5,209,382 for
the years ended December 31, 1994, 1995 and 1996, respectively.
4. INTANGIBLES:
Intangible assets consist of the following:
December 31, December 31,
1995 1996
-------------- --------------
Goodwill ...................... $ 28,490,035 $ 28,490,035
Franchise costs ............... 13,254,985 35,972,374
Broadcast licenses ............ 3,124,461 16,168,683
Network affiliation agreements 1,236,641 2,761,641
Deferred financing costs ...... 3,974,454 4,020,665
DBS rights .................... 4,832,160 45,829,174
Non-compete agreement ......... -- 2,700,000
Organization and other costs .. 3,862,021 7,640,708
-------------- --------------
58,774,757 143,583,280
Accumulated amortization ...... (10,746,347) (17,347,152)
-------------- --------------
Net intangible assets ....... $ 48,028,410 $126,236,128
============== ==============
F-10
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Intangibles: - (Continued)
Amortization expense amounted to $2,912,281, $4,611,431 and $6,851,116 for
the years ended December 31, 1994, 1995 and 1996, respectively.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
December 31, December 31,
1995 1996
-------------- --------------
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 $3,804,546
and $3,412,222 as of December 31, 1995 and 1996,
respectively ............................................. $81,195,454 $ 81,587,778
Senior seven year revolving credit facility, interest at the
Company's option at either the banks prime rate, plus an
applicable margin or LIBOR, plus an applicable margin
(8.375% at December 31, 1996) ............................ -- 29,600,000
Mortgage payable, due 2000, interest at 8.75% ............. 517,535 498,468
Note payable, due 1998 interest at 10% .................... -- 3,050,000
Capital leases and other .................................. 867,140 790,587
-------------- --------------
82,580,129 115,526,833
Less current maturities ................................... 271,934 315,223
-------------- --------------
Long-term debt ............................................ $82,308,195 $115,211,610
============== ==============
In October 1994, the Company repaid the outstanding balances under its senior
and junior term loan agreements with a portion of the proceeds from a $20.0
million term note agreement ("senior note") and $15.0 million subordinated term
loan agreement ("subordinated loan") from various banking institutions. The
senior note and subordinated loan were scheduled to mature on December 31, 2001
and September 30, 2003, respectively. Amounts were subsequently repaid as
described below, which resulted in an extraordinary loss of $633,267.
In July 1995, the Company sold 85,000 units consisting of $85.0 million in
aggregate amount of 12.5% 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 net proceeds
from the sale were used to (i) repay approximately $38.6 million in loans and
other obligations, (ii) repurchase $26.0 million of notes for approximately
$13.0 million resulting in an extraordinary gain of $10.2 million, net of
expenses of $2.8 million, (iii) make a $12.5 million distribution to PCH, (iv)
escrow $9.7 million for the purpose of paying interest on the Notes, (v) pay
$3.3 million in fees and expenses and (vi) to fund proposed acquisitions.
In November 1995, the Company exchanged its Series B Notes for the Series A
Notes. The Series B Notes have substantially the same terms and provisions as
the Series A Notes. There was no gain or loss recorded with this transaction.
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 contain
certain financial and operating covenants, including restrictions on the Company
to incur additional indebtedness, create liens and to pay dividends. The Company
is in compliance with all its financial and operating covenants.
The fair value of the Company's Series B Notes approximates $91.8 million as
of December 31, 1996. This amount is approximately $10.2 million higher than the
carrying amount reported on the balance sheet at December 31, 1996. Fair value
is estimated based on the quoted market price for the same or similar
instruments.
F-11
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Long-Term Debt: - (Continued)
In conjunction with the acquisition of the WTLH Tallahassee, Florida FCC
license and Fox affiliation agreement (see Footnote 12), the Company incurred
indebtedness of $3.1 million. The fair market value of the note payable
approximates the carrying amount.
In August 1996, PM&C entered into a $50.0 million seven-year senior revolving
credit facility, which is collateralized by substantially all of the assets of
PM&C. On the same date, the Company had drawn $8.8 million to repay all amounts
outstanding under the $10.0 million senior collateralized five-year revolving
credit facility and $22.8 million to fund the acquisition of Dom's Tele-Cable,
Inc. ("Dom's"). Deferred financing fees relating to the $10.0 million revolving
credit facility were written off, resulting in an extraordinary loss of $250,603
on the refinancing transaction. The $50.0 million revolving credit facility is
subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. The fair market value of the
revolving credit facility approximates the carrying amount.
At December 31, 1996, maturities of long-term debt and capital leases are as
follows:
1997 ........ $ 315,223
1998 ........ 3,283,016
1999 ........ 212,321
2000 ........ 59,816
2001 ........ 39,050
Thereafter .. 111,617,407
------------
$115,526,833
============
6. LEASES:
The Company leases certain studios, towers, utility pole attachments,
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2007. Rent expense for the years ended December 31, 1994,
1995 and 1996 was $464,477, $503,118 and $711,690 respectively.
The Company leases equipment under long-term leases and has the option to
purchase the equipment for a nominal cost at the termination of the leases. The
related obligations are included in long-term debt. Property and equipment at
December 31 include the following amounts for leases that have been capitalized:
1995 1996
----------- -----------
Equipment, furniture and fixtures $ 375,190 $ 215,112
Vehicles ......................... 196,064 446,372
----------- -----------
571,254 661,484
Accumulated depreciation ......... (190,500) (250,288)
----------- -----------
Total .......................... $ 380,754 $ 411,196
=========== ===========
F-12
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Leases: - (Continued)
Future minimum lease payments on noncancellable operating and capital leases
at December 31, 1996 are as follows:
Operating Capital
Leases Leases
------------ ----------
1997 ........................................ $ 575,000 $211,000
1998 ........................................ 287,000 125,000
1999 ........................................ 221,000 66,000
2000 ........................................ 156,000 42,000
2001 ........................................ 75,000 12,000
Thereafter .................................. 102,000 --
------------ ----------
Total minimum payments ...................... $1,416,000 456,000
============
Less: amount representing interest .......... 74,000
----------
Present value of net minimum lease payments
including current maturities of $187,000 ... $382,000
==========
7. COMMITMENTS AND CONTINGENT LIABILITIES:
LEGAL MATTERS:
The operations of the Company are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities, including
the Connecticut Department of Public Utility Control ("DPUC").
During 1994, the DPUC ordered a reduction in the rates charged by PCT-CT for
its basic cable service tier and equipment charges and refunds for related
overcharges, plus interest, retroactive to September 1, 1993 requiring PCT-CT to
issue refunds totaling $141,000. In December 1994, the Company filed an appeal
with the FCC. In March 1995, the FCC granted a stay of the DPUC's rate reduction
and refund order pending the appeal. The FCC has not ruled on the appeal and the
outcome cannot be predicted with any degree of certainty. The Company believes
it will prevail in its appeal. In the event of an adverse ruling, the Company
expects to make refunds in kind rather than in cash.
The Company is currently contesting a claim for unpaid premiums on its
workers' compensation insurance policy assessed by the state insurance fund of
Puerto Rico. Based upon current information available, the Company's liability
related to the claim is estimated to be less than $200,000.
From time to time the Company is also involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, cash flows or financial position of the Company.
8. INCOME TAXES:
The following is a summary of the components of income taxes from operations:
1994 1995 1996
---------- --------- ------------
Federal -- deferred ....... $104,644 $23,000 $(169,000)
State and local ........... 34,818 7,000 49,000
---------- --------- ------------
Provision for income
taxes ................ $139,462 $30,000 $(120,000)
========== ========= ============
F-13
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Income Taxes: - (Continued)
The deferred income tax assets and liabilities recorded in the combined
balance sheets at December 31, 1995 and 1996, are as follows:
1995 1996
------------- --------------
Assets:
Receivables .................................... $ 42,440 $ 47,887
Excess of tax basis over book basis from tax
gain recognized upon incorporation of
subsidiaries ................................ 1,751,053 1,890,025
Loss carryforwards ............................. 9,478,069 14,197,578
Other .......................................... 806,312 870,305
------------- --------------
Total deferred tax assets ................... 12,077,874 17,005,795
Liabilities:
Excess of book basis over tax basis of property,
plant and equipment ......................... (1,015,611) (1,754,621)
Excess of book basis over tax basis of
amortizable intangible assets ............... (4,277,512) (4,616,997)
------------- --------------
Total deferred tax liabilities .............. (5,293,123) (6,371,618)
------------- --------------
Net deferred tax assets ........................ 6,784,751 10,634,177
Valuation allowance ............................ (6,954,213) (10,683,639)
------------- --------------
Net deferred tax liabilities ................... $ (169,462) $ (49,462)
============= ==============
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration of
the Company's net operating loss carryforwards and portions of other deferred
tax assets related to prior acquisitions. The valuation allowance increased
primarily as the result of net operating loss carryforwards generated during
1996 which may not be utilized.
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $41.8 million which are available to offset future taxable income
and expire through 2012.
A reconciliation of the federal statutory rate to the effective tax rate is
as follows:
1994 1995 1996
---------- ---------- ----------
U.S. statutory federal income tax rate ............. (34.00%) (34.00%) (34.00)%
Net operating loss attributable to the partnerships 29.55 -- --
Foreign net operating income (loss) ................ (18.14) (27.09) (4.11)
State net operating loss ........................... (.96) -- --
Valuation allowance ................................ 25.70 61.46 36.92
Other .............................................. .72 -- --
---------- ---------- ----------
Effective tax rate ................................. 2.87% .37% (1.19)%
========== ========== ==========
F-14
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. RELATED PARTY TRANSACTIONS:
At December 31, 1995, the Company had a demand note payable to an affiliate,
bearing interest at 8%, amounting to $151,815. The note payable was cancelled
during 1996. Total interest expense on the affiliated debt was $10,901 and
$9,244 for the years ended December 31, 1995 and 1996, respectively.
At December 31, 1995, the Company had a demand note payable to an affiliate,
bearing interest at prime plus two percent, payable monthly in arrears,
amounting to $105,413. The demand note payable was cancelled at the beginning of
1996. The effective interest rate was 10.25% at December 31, 1995. Total
interest expense on the affiliated debt was $11,858 for the year ended December
31, 1995.
10. SUPPLEMENTAL CASH FLOW INFORMATION:
Significant noncash investing and financing activities are as follows:
Years ended December 31,
--------------------------------------------
1994 1995 1996
------------- ------------ ------------
Capital contribution and related reduction of
debt ......................................... $15,069,173 -- --
Barter revenue and related expense ............ 4,604,200 $5,110,662 $ 6,337,220
Intangible assets and related affiliated debt . -- -- --
Acquisition of program rights and assumption of
related program payables ..................... 1,797,866 1,335,275 1,140,072
Acquisition of plant under capital leases ..... 168,960 121,373 312,578
Redemption of minority interests and related
receivable ................................... 49,490 246,515 --
Interest converted to principal ............... 867,715 -- --
Capital contribution and related acquisition of
intangibles .................................. -- -- 14,079,546
Execution of license agreement option ......... -- -- 3,050,000
For the years ended December 31, 1994, 1995 and 1996, the Company paid cash
for interest in the amount of $3.8 million, 3.6 million and $12.0 million,
respectively. The Company paid no income taxes for the years ended December 31,
1994, 1995 and 1996.
11. COMMON STOCK:
At December 31, 1995, common stock consists of the following:
PM&C Class A common stock, $0.01 par value; 230,000
shares authorized; 161,500 issued and outstanding............... $ 1,615
PM&C Class B common stock, $0.01 par value; 20,000
shares authorized; 8,500 issued and outstanding ................ 85
--------
Total common stock ............................................ $ 1,700
========
At December 31, 1996, common stock consists of the following:
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
=========
F-15
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Common Stock: - (Continued)
On July 7, 1995, as part of a plan of reorganization, PM&C agreed to exchange
161,500 Class A Shares for all of the existing common stock outstanding of PM&C,
all outstanding shares of PST and a 99% limited interest in PBA. The Company
also acquired all of the outstanding interests of MCT for nominal consideration.
Additionally, the Company issued 8,500 Class B Shares of PM&C on July 7, 1995 in
connection with the Note Offering (see footnote 5).
In 1996, the Company, through a registered exchange offer, exchanged all of
the PM&C Class B Shares for 191,775 shares in the aggregate of Class A Common
Stock.
Under the terms of the Series A Preferred Stock, Pegasus' ability to pay
dividends on the Class A Common Stock is subject to certain restrictions.
12. ACQUISITIONS:
In January 1996, PCH acquired 100% of the outstanding stock of Portland
Broadcasting, Inc. ("PBI"), which owns the tangible assets of WPXT, Portland,
Maine. PCH immediately transferred the ownership of PBI to the Company. The
aggregate purchase price of PBI was approximately $11.7 million of which $1.5
million was allocated to fixed and tangible assets and $10.2 million to
intangible assets. In June 1996, PCH acquired the FCC license of WPXT for
aggregate consideration of $3.0 million. PCH immediately transferred the
ownership of the license to the Company.
Effective March 1, 1996, the Company acquired the principal tangible assets
of WTLH, Inc., Tallahassee, Florida and certain of its affiliates for
approximately $5.0 million in cash, except for the FCC license and Fox
affiliation agreement. Additionally, the Company entered into a put/call
agreement regarding the FCC license and Fox affiliation agreement with the
licensee of WTLH. In August 1996, the Company exercised its rights and recorded
$3.1 million in intangible assets and long term debt.
The aggregate purchase price of WTLH, Inc. and the related FCC licenses and
Fox affiliation agreement is approximately $8.1 million of which $2.2 million
was allocated to fixed and tangible assets and $5.9 million to various
intangible assets. In addition, the Company granted the sellers of WTLH a
warrant to purchase $1.0 million of stock at $14.00 per share. The warrant
expired in February 1997.
Effective August 29, 1996, the Company acquired all of the assets of Dom's
for approximately $25.0 million in cash and $1.0 million in assumed liabilities.
Dom's operates cable systems serving ten communities contiguous to the Company's
Mayaguez, Puerto Rico cable system. The aggregate purchase price of the
principal assets of Dom's amounted to $26.0 million of which $4.7 million was
allocated to fixed and tangible assets and $21.3 million to various intangible
assets.
On October 8, 1996, the Company acquired from Harron Communications Corp. the
rights to provide DIRECTV programming in certain rural areas of Texas and
Michigan and related assets in exchange for approximately $17.9 million in cash
and $11.9 million of the Company's Class A Common Stock. Substantially the
entire purchase price was allocated to various intangible assets.
On November 8, 1996, the Company acquired the rights to provide DIRECTV
programming in certain rural areas of Ohio and the related assets, including
receivables, in exchange for approximately $12.0 million in cash. Substantially
the entire purchase price was allocated to various intangible assets.
In accordance with the Purchase Method of accounting, the purchase price has
been allocated to the underlying assets and liabilities based on their
respective fair values at the date of acquisition. Such allocations have been
based on preliminary estimates which may be revised at a later date.
F-16
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Acquisitions: - (Continued)
The following unaudited summary, prepared on a pro forma basis, combines the
results of operations as if the above stations, cable system and DBS territories
had been acquired as of the beginning of the periods presented, after including
the impact of certain adjustments, such as the Company's reduced commission
rate, payments to related parties, amortization of intangibles, interest expense
and related income tax effects. The pro forma information does not purport to be
indicative of what would have occurred had the acquisitions been made on those
dates or of results which may occur in the future. This pro forma does not
include the Arkansas DBS Acquisition, the Indiana DBS acquisition, the
Mississippi DBS acquisition, the Virginia/West Virginia DBS acquisition or the
New Hampshire Cable Sale, all which did not occur as of December 31, 1996 (see
Notes 14 and 15).
(unaudited)
(in thousands, except earnings per share) Year Ended December 31,
----------------------------
1995 1996
----------- -----------
Net Revenues ................................ $ 48,712 $ 57,284
=========== ===========
Operating income (loss) ..................... $ (2,174) $ 706
=========== ===========
Net loss before extraordinary item .......... $(16,625) $(14,742)
=========== ===========
Net loss per share before extraordinary item.. $ (3.23) $ (2.36)
=========== ===========
13. EMPLOYEE BENEFIT PLANS:
The Company has two active stock plans available to grant stock options and
restricted stock awards to eligible employees, executive officers and
non-employee directors of the Company.
The 1996 Stock Option Plan was approved by shareholders of the Company in
September 1996 and terminates in September 2006. The plan provides for the
granting of a maximum of 450,000 (subject to adjustment to reflect stock
dividends, stock splits, recapitalizations and similar changes in the
capitalization of Pegasus) nonqualified and qualified options to purchase Class
A Common Stock of the Company. Executive officers, who are not eligible to
receive profit sharing awards under the 1996 Restricted Stock Plan, are eligible
to receive nonqualified or qualified stock options under the Stock Option Plan,
but no executive officer may be granted more than 275,000 options to purchase
Class A Common Stock under the plan. Directors of Pegasus who are not employees
of the Company are eligible to receive nonqualified options under the Stock
Option Plan. Currently, five executive officers and three non-employee directors
are eligible to receive options under the Stock Option Plan. At December 31,
1996, no options have been granted under the Stock Option Plan.
The 1996 Restricted Stock Plan was also approved by shareholders of the
Company in September 1996 and terminates in September 2006. The plan provides
for the granting of a maximum of 270,000 (subject to adjustment to reflect stock
dividends, stock splits, recapitalizations and similar changes in the
capitalization of Pegasus) restricted stock awards of Class A Common Stock of
the Company to eligible employees who have completed at least one year of
service. As of December 31, 1996, 3,614 shares of Class A Common Stock have been
granted under the Restricted Stock Plan. Restricted stock received under the
plan vest 34% after two years of service with the Company (including years
before the Restricted Stock Plan was established), 67% after three years of
service and 100% after four years of service.
The Company applies APB No. 25 and related interpretations in accounting for
its plans. The pro forma impact to both net income and earnings per share from
calculating compensation expense consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation", was immaterial for the year ended December 31, 1996.
F-17
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Employee Benefit Plans: - (Continued)
401(K) PLANS
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus
Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and,
together with the U.S. 401(k) Plan, the "401(k) Plans") for eligible employees
of the Company's Puerto Rico subsidiaries. Substantially all Company employees
who, as of the enrollment date under the 401(k) Plans, have completed at least
one year of service with the Company are eligible to participate in one of the
401(k) Plans. Participants may make salary deferral contributions of 2% to 6% of
salary to the 401(k) Plans.
The Company may make three types of contributions to the 401(k) Plans, each
allocable to a participant's account if the participant completes at least 1,000
hours of service in the applicable plan year, and is employed on the last day of
the applicable plan year: (i) the Company matches 100% of a participant's salary
deferral contributions to the extent the participant invested his or her salary
deferral contributions in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans; (ii) the Company, in its discretion, may
contribute an amount that equals up to 10% of the annual increase in
Company-wide Location Cash Flow (these Company discretionary contributions, if
any, are allocated to eligible participants' accounts based on each
participant's salary for the plan year); and (iii) the Company also matches a
participant's rollover contribution, if any, to the 401(k) Plans, to the extent
the participant invests his or her rollover contribution in Class A Common Stock
at the time of his or her initial contribution to the 401(k) Plans.
Discretionary Company contributions and Company matches of employee salary
deferral contributions and rollover contributions are made in the form of Class
A Common Stock, or in cash used to purchase Class A Common Stock. The Company
has authorized and reserved for issuance up to 205,000 shares of Class A Common
Stock in connection with the 401(k) Plans. Company contributions to the 401(k)
Plans are subject to limitations under applicable laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all times
and all Company contributions, if any, vest 34% after two years of service with
the Company (including years before the 401(k) Plans were established); 67%
after three years of service and 100% after four years of service. A participant
also becomes fully vested in Company contributions to the 401(k) Plans upon
attaining age 65 or upon his or her death or disability.
14. SUBSEQUENT EVENTS:
On January 27, 1997 the Company completed the Preferred Stock Offering in
which it sold 100,000 shares of 12 3/4 % Series A Cumulative Exchangeable
Preferred Stock and 100,000 Warrants to purchase 193,600 shares of Class A
Common Stock to the public at a price of $1,000 per share resulting in net
proceeds to the Company of $96.0 million. The Company intends to apply the net
proceeds from the Preferred Offering as follows: (i) $29.6 million to the
repayment of all outstanding Indebtedness under the credit facility, (ii) $15.0
million to the Mississippi DBS acquisition, (iii) $8.8 million for the payment
of the cash portion of the purchase price of the Indiana DBS acquisition, (iv)
$7.0 million for the payment of the cash portion of the purchase price of the
Virginia/West Virginia DBS acquisition, (v) $2.4 million to the Arkansas DBS
acquisition and (vi) $558,000 to the retirement of the Pegasus Credit Facility
and expenses related thereto. The remaining net proceeds together with available
borrowings under the New Credit Facility and proceeds from the New Hampshire
Cable Sale, which is described below, will be used for working capital, general
corporate purposes and to finance future acquisitions. The Mississippi, Indiana,
Arkansas and Virginia/West Virginia DBS acquisitions are described below.
On January 31, 1997, the Company acquired, from DBS of Indiana, Inc., the
rights to provide DIRECTV programming in certain rural areas of Indiana and the
related assets in exchange for approximately $8.9 million in cash and $5.6
million of the Company's Class A common stock.
On January 31, 1997, the Company sold substantially all assets of its New
Hampshire cable system to State Cable TV Corp. for approximately $7.1 million in
cash. The Company anticipates recognizing a gain in the transaction.
F-18
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Subsequent Events: - (Continued)
On February 14, 1997, the Company acquired, from ClearVision, Inc., the
rights to provide DIRECTV programming in certain rural areas of Mississippi and
the related assets in exchange for approximately $15.0 million in cash.
As of March 10, 1997, the Company acquired the rights to provide DIRECTV
programming in certain rural areas of Arkansas and the related assets in
exchange for approximately $2.4 million in cash.
As of March 10, 1997, the Company acquired the rights to provide DIRECTV
programming in certain rural areas of Virginia/West Virginia and the related
assets in exchange for approximately $8.2 million in cash and $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.
15. OTHER INFORMATION (UNAUDITED)
As required in the Certificate of Designation governing the Series A
Cumulative Exchangeable Preferred Stock, the Company is obligated to provide
Adjusted Operating Cash Flow 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 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 management fees and incentive
compensation. Restricted Subsidiaries carries the same meaning as in the
Certificate of Designation. Pro forma for the acquisitions of Michigan/Texas
DBS, Ohio DBS, WPXT, WTLH and Dom's, Adjusted Operating Cash Flow would have
been approximately $17.9 million.
Year
December 31, 1996
-----------------
Net revenues .............................................................. $47,929,000
Direct operating expenses ................................................. 30,904,000
-----------------
Income from operations before incentive compensation, corporate expenses
and depreciation and amortization ........................................ 17,025,000
Corporate expenses and cash portion of incentive compensation ............. 1,429,000
-----------------
Operating cash flow ....................................................... 15,596,000
Less DBS cash flow, last twelve months .................................. (871,000)
Plus DBS cash flow, last quarter annualized ............................. 2,564,000
-----------------
Adjusted operating cash flow .............................................. $17,289,000
=================
F-19
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. INDUSTRY SEGMENTS:
The Company operates in two industry segments: multichannel television (DBS
and Cable) and broadcast television (TV). TV consists of five Fox affiliated
television stations, of which one also simulcasts its signal in Hazelton and
Williamsport, Pennsylvania. Cable and DBS consists of cable television services
and direct broadcast satellite services/equipment, respectively. Information
regarding the Company's business segments in 1994, 1995, and 1996 is as follows
(in thousands):
TV Multichannel Television Other Consolidated
---------- ----------------------- -------- --------------
DBS Cable
--------- ----------
1994
Revenues ................... $17,808 $ 174 $10,148 $ 61 $ 28,191
Operating income (loss) .... 2,057 (103) (769) (25) 1,160
Identifiable assets ........ 36,078 4,438 34,535 343 75,394
Incentive compensation ..... 327 -- 105 -- 432
Corporate expenses ......... 860 5 634 7 1,506
Depreciation and
amortization ............ 2,184 61 4,632 63 6,940
Capital expenditures ....... 411 57 704 92 1,264
1995
Revenues ................... $19,973 $ 1,469 $10,606 $ 100 $ 32,148
Operating income (loss) .... 2,252 (752) (1,103) (33) 364
Identifiable assets ........ 36,906 5,577 34,395 18,892 95,770
Incentive compensation ..... 415 9 104 -- 528
Corporate expenses ......... 782 114 450 18 1,364
Depreciation and
amortization ............ 2,591 719 5,364 77 8,751
Capital expenditures ....... 1,403 216 953 69 2,641
1996
Revenues ................... $28,488 $ 5,829 $13,496 $ 116 $ 47,929
Operating income (loss) .... 3,925 (1,239) 190 (326) 2,550
Identifiable assets ........ 61,817 53,090 54,346 4,427 173,680
Incentive compensation ..... 691 95 148 51 985
Corporate expenses ......... 756 158 497 18 1,429
Depreciation and
amortization ............ 4,000 1,786 5,245 1,029 12,060
Capital expenditures ....... 2,289 855 3,070 80 6,294
F-20
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Pegasus Communications
Corporation is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule included on page S-2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 27, 1997 except as to Note 14
for which the date is March 10, 1997
S-1
PEGASUS COMMUNICATIONS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
Balance at Additions Additions Balance at
Beginning Charged To Charged To End of
Description of Period Expenses Other Accounts Deductions Period
Allowance for Uncollectible
Accounts Receivable
Year 1994 ............ $ 308 $ 200 $ -- $ 160 (a) $ 348
Year 1995 ............ $ 348 $ 146 $ -- $ 256 (a) $ 238
Year 1996 ............ $ 238 $ 336 $ -- $ 331 (a) $ 243
Valuation Allowance for
Deferred Tax Assets
Year 1994 ............ $ 0 $1,756 $ -- $ -- $ 1,756
Year 1995 ............ $1,756 $8,675 $ -- $3,477 $ 6,954
Year 1996 ............ $6,954 $7,032 $ -- $3,302 $10,684
(a) Amounts written off, net of recoveries.
S-2
PEGASUS COMMUNICATIONS CORPORATION
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- -----------------------------------
23.1 Consent of Coopers & Lybrand L.L.P.