<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
Commission File Number 0-21389
-------
PEGASUS COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0374669
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company;
5 Radnor Corporate Center, Suite 454, Radnor, PA 19087
- - ------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
---------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Number of shares of each class of the registrant's common stock outstanding as
of November 6, 1998:
Class A, Common Stock, $0.01 par value 11,315,809
Class B, Common Stock, $0.01 par value 4,581,900
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 1998
Page
----
Part I. Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1997 and September 30, 1998 3
Consolidated Statements of Operations
Three months ended September 30, 1997 and 1998 4
Consolidated Statements of Operations
Nine months ended September 30, 1997 and 1998 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1997 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 23
Part II. Other Information
Item 2 Changes in Securities and Use of Proceeds 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 24
Signature 25
2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,049,097 $ 39,073,970
Restricted cash 1,220,056 19,737,235
Accounts receivable, less allowance for doubtful
accounts of $319,000 and $551,000, respectively 13,819,571 19,165,874
Program rights 2,059,346 3,767,113
Inventory 974,920 3,968,253
Deferred taxes 2,602,453 2,602,453
Prepaid expenses and other 788,669 1,493,975
------------- -------------
Total current assets 65,514,112 89,808,873
Property and equipment, net 27,686,646 29,551,695
Intangible assets, net 284,774,027 709,319,035
Program rights 2,262,299 3,468,484
Deferred taxes -- 13,296,554
Deposits and other 624,629 719,565
------------- -------------
Total assets $ 380,861,713 $ 846,164,206
============= =============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt $ 6,357,320 $ 22,218,859
Accounts payable 4,151,226 4,684,795
Accrued interest 8,177,261 11,990,442
Accrued satellite programming and fees 6,089,389 15,824,268
Accrued expenses 6,973,297 8,436,061
Current portion of program rights payable 1,418,581 1,278,641
------------- -------------
Total current liabilities 33,167,074 64,433,066
Long-term debt 201,997,811 482,414,676
Program rights payable 1,416,446 4,786,628
Deferred taxes 2,652,454 69,701,954
------------- -------------
Total liabilities 239,233,785 621,336,324
------------- -------------
Commitments and contingent liabilities -- --
Minority interest 3,000,000 3,000,000
------------- -------------
Series A preferred stock 111,264,424 122,223,017
------------- -------------
Common stockholders' equity:
Class A common stock 57,399 113,158
Class B common stock 45,819 45,819
Additional paid-in capital 64,034,687 174,753,387
Accumulated deficit (36,774,401) (75,307,499)
------------- -------------
Total common stockholders' equity 27,363,504 99,604,865
------------- -------------
Total liabilities and stockholders' equity $ 380,861,713 $ 846,164,206
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997 1998
------------ ------------
(unaudited)
Revenues:
<S> <C> <C>
Basic and satellite service $ 13,419,852 $ 39,161,134
Premium services 1,182,984 5,981,628
Broadcasting revenue,
net of agency commissions 5,504,782 6,139,214
Barter programming revenue 1,453,300 1,615,200
Other 366,347 2,610,002
------------ ------------
Total revenues 21,927,265 55,507,178
Operating expenses:
Programming 6,760,400 21,825,933
Barter programming expense 1,453,300 1,615,200
Technical and operations 956,255 863,046
Marketing and selling 2,975,156 17,639,569
General and administrative 3,055,522 10,583,213
Incentive compensation 223,236 442,299
Corporate expenses 505,279 936,625
Depreciation and amortization 7,306,149 20,190,799
------------ ------------
Loss from operations (1,308,032) (18,589,506)
Interest expense (4,264,459) (13,534,677)
Interest income 137,035 613,393
Other expenses, net (214,847) (288,066)
Gain on sale of cable system -- 24,902,284
------------ ------------
Loss before income taxes (5,650,303) (6,896,572)
Provision for income taxes -- 50,000
------------ ------------
Net loss (5,650,303) (6,946,572)
Preferred stock dividends 3,365,000 3,804,887
------------ ------------
Net loss applicable to common shares ($ 9,015,303) ($10,751,459)
============ ============
Basic and diluted earnings per common share:
Net loss ($0.91) ($0.68)
============ ============
Weighted average shares outstanding 9,902,363 15,897,603
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
Nine Months Ended September 30,
--------------------------------
1997 1998
------------- -------------
(unaudited)
Revenues:
Basic and satellite service $ 32,008,696 $ 88,980,908
Premium services 3,116,253 13,053,641
Broadcasting revenue,
net of agency commissions 16,950,204 18,290,873
Barter programming revenue 4,507,600 4,861,900
Other 954,076 5,842,905
------------- -------------
Total revenues 57,536,829 131,030,227
Operating expenses:
Programming 15,916,313 49,179,278
Barter programming expense 4,507,600 4,861,900
Technical and operations 2,814,922 2,927,287
Marketing and selling 7,429,814 33,688,708
General and administrative 8,341,570 23,463,195
Incentive compensation 744,242 1,471,876
Corporate expenses 1,408,954 2,418,067
Depreciation and amortization 18,160,442 46,789,028
------------- -------------
Loss from operations (1,787,028) (33,769,112)
Interest expense (10,288,211) (29,849,768)
Interest income 828,388 1,333,683
Other expenses, net (454,612) (975,185)
Gain on sale of cable system 4,451,320 24,902,284
------------- -------------
Loss before income taxes (7,250,143) (38,358,098)
Provision for income taxes 50,000 175,000
------------- -------------
Net loss (7,300,143) (38,533,098)
Preferred stock dividends 8,677,500 10,958,593
------------- -------------
Net loss applicable to common shares ($ 15,977,643) ($ 49,491,691)
============= =============
Basic and diluted earnings per common share:
Net loss ($1.64) ($3.66)
============= =============
Weighted average shares outstanding 9,755,882 13,533,756
============= =============
5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
1997 1998
------------- -------------
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss ($ 7,300,143) ($ 38,533,098)
Adjustments to reconcile net loss
to net cash provided used by operating activities:
Depreciation and amortization 18,160,442 46,789,028
Program rights amortization 1,214,289 1,914,072
Accretion on discount of bonds and seller notes 295,486 931,808
Gain on sale of cable system (4,451,320) (24,902,284)
Bad debt expense 812,308 1,773,094
Change in assets and liabilities:
Accounts receivable (2,139,807) (3,657,763)
Inventory 57,455 (1,647,165)
Prepaid expenses and other (158,952) (530,481)
Accounts payable and accrued expenses 461,099 3,598,937
Accrued interest (2,135,269) (1,103,101)
Capitalized subscriber acquisition costs (4,514,874) --
Deposits and other (32,906) (94,936)
------------- -------------
Net cash provided (used) by operating activities 267,808 (15,461,889)
------------- -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (99,305,168) (89,815,402)
Cash acquired from acquisitions 164,221 3,284,382
Capital expenditures (8,375,393) (6,178,866)
Purchase of intangible assets (2,068,864) (10,042,558)
Payments of programming rights (1,792,580) (1,597,782)
Proceeds from sale of cable system 6,945,270 30,132,826
------------- -------------
Net cash used for investing activities (104,432,514) (74,217,400)
------------- -------------
Cash flows from financing activities:
Repayments of long-term debt (241,764) (5,558,004)
Borrowings on bank credit facilities 69,726,250 81,500,000
Repayments of bank credit facilities (30,126,250) (200,000)
Restricted cash (1,181,306) 9,283,210
Debt issuance costs (3,961,383) --
Capital lease repayments (234,331) (321,044)
Proceeds from issuance of Series A preferred stock 100,000,000 --
Underwriting and preferred offering costs (4,187,920) --
------------- -------------
Net cash provided by financing activities 129,793,296 84,704,162
------------- -------------
Net increase (decrease) in cash and cash equivalents 25,628,590 (4,975,127)
Cash and cash equivalents, beginning of year 8,582,369 44,049,097
------------- -------------
Cash and cash equivalents, end of period $ 34,210,959 $ 39,073,970
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries stated below, the "Company"), is a diversified media and
communications company incorporated under the laws of the State of Delaware in
May 1996, and is a direct subsidiary of Pegasus Communications Holdings, Inc.
("PCH" or the "Parent"). Pegasus' direct subsidiaries are Pegasus Media &
Communications, Inc. ("PM&C"), Digital Television Services, Inc. ("DTS"),
Pegasus Development Corporation ("PDC"), Pegasus Towers, Inc. ("Towers") and
Pegasus Communications Management Company ("PCMC").
PM&C is a diversified media and communications company whose
subsidiaries provide direct broadcast satellite television ("DBS") services to
customers in certain rural areas of the United States, provide capital for
various satellite initiatives such as subscriber acquisitions costs, own and
operate a cable television ("Cable") system that provides service to individual
and commercial subscribers in Puerto Rico, own and operate broadcast television
("TV") stations affiliated with the Fox Broadcasting Company ("Fox") and
operate, pursuant to local marketing agreements, stations affiliated with United
Paramount Network ("UPN") and The WB Television Network ("WB").
DTS, which was acquired by the Company on April 27, 1998 (see footnote
7 - Acquisitions and Disposition), provides DBS services to customers in certain
rural areas of the United States. PDC provides capital for various satellite
initiatives such as subscriber acquisitions costs. Towers owns and operates
transmitting towers located in Pennsylvania and Tennessee. PCMC provides certain
management and accounting services for the Company.
2. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The financial statements include
the accounts of Pegasus and all of its subsidiaries. All intercompany
transactions and balances have been eliminated.
The unaudited consolidated financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position of the Company and the results of its operations and its cash flows for
the interim period. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1997 included
in the Company's Annual Report on Form 10-K/A for the year then ended.
7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Common Stock:
At December 31, 1997 common stock consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 5,739,842 issued and outstanding ...................... $57,399
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 ................................................ $103,218
========
At September 30, 1998 common stock consists of the following:
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 11,315,809 issued and outstanding ..................... $113,158
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 ................................................ $158,977
========
</TABLE>
The Company's ability to pay dividends on its Common Stock is subject
to certain restrictions (see footnote 4 - Redeemable Preferred Stock and
footnote 5 - Long-Term Debt).
4. Redeemable Preferred Stock:
In January 1997, Pegasus completed a unit offering (the "Unit
Offering") in which it sold 100,000 shares of 12.75% Series A Cumulative
Exchangeable Preferred Stock (the "Series A Preferred Stock") and warrants to
purchase 193,600 shares of Class A Common Stock at an exercise price of $15 per
share to the public at a price of $1,000 per unit, resulting in net proceeds to
the Company of $95.8 million.
As a result of the Unit Offering and dividends subsequently declared on
the Series A Preferred Stock, the Company had outstanding, at December 31, 1997
and September 30, 1998, 105,490 and 119,369 shares of Series A Preferred Stock,
respectively, authorized, issued and outstanding. Each whole share of Series A
Preferred Stock has a liquidation preference of $1,000 per share (the
"Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are payable
semi-annually on January 1 and July 1. Dividends may be paid, occurring on or
prior to January 1, 2002, at the option of the Company, either in cash or by the
issuance of additional shares of Series A Preferred Stock. Subject to certain
conditions, the Series A Preferred Stock is exchangeable in whole, but not in
part, at the option of the Company, for Pegasus' 12.75% Senior Subordinated
Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes would contain
substantially the same redemption provisions, restrictions and other terms as
the Series A Preferred Stock. Pegasus is required to redeem all of the Series A
Preferred Stock outstanding on January 1, 2007 at a redemption price equal to
the Liquidation Preference thereof, plus accrued dividends.
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
Under the terms of the Series A Preferred Stock, Pegasus' ability to
pay dividends on its Common Stock is subject to certain restrictions.
8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Redeemable Preferred Stock (continued):
Basic earnings per share amounts are based on net income after
deducting preferred stock dividend requirements divided by the weighted average
number of Class A and Class B Common shares outstanding during the period.
5. Long-Term Debt:
Long-term debt consists of the following :
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ ------------
<S> <C> <C>
Series B Notes payable by PM&C, due 2005, interest at 12.5%,
payable semi-annually in arrears on January 1 and July 1,
net of unamortized discount of $3,018,003 and $2,721,088
as of December 31, 1997 and September 30, 1998,
respectively ................................................... $ 81,981,997 $ 82,278,912
Series B Notes payable by DTS, due 2007, interest at 12.5%,
payable semi-annually in arrears on February 1 and August
1, net of unamortized discount of $1,854,358 as of
September 30, 1998 ............................................. -- 153,145,642
Series B Senior Notes payable by Pegasus, due 2005, interest
at 9.625%, payable semi-annually in arrears on April 15
and October 15, commencing on April 15, 1998 ................... 115,000,000 115,000,000
Senior six-year $180.0 million revolving credit facility,
payable by PM&C, interest at PM&C's option at either the
bank's base rate plus an applicable margin or LIBOR plus
an applicable margin ........................................... -- 81,500,000
Senior six-year $70.0 million revolving credit facility,
payable by DTS, interest at DTS' option at either the
bank's base rate or the Eurodollar Rate ........................ -- 9,500,000
Senior six-year $20.0 million term loan facility, payable by
DTS, interest at DTS' option at either the bank's base
rate or the Eurodollar Rate .................................... -- 19,800,000
Mortgage payable, due 2000, interest at 8.75% ...................... 477,664 460,827
Note payable, due 1998, interest at 10% ............................ 3,050,000 --
Sellers' notes, various maturities and interest rates .............. 7,171,621 42,327,380
Capital leases and other ........................................... 673,849 620,774
------------ ------------
208,355,131 504,633,535
Less current maturities ............................................ 6,357,320 22,218,859
------------ ------------
Long-term debt ..................................................... $201,997,811 $482,414,676
============ ============
</TABLE>
9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Long-Term Debt (continued):
In July 1997, DTS entered into an amended and restated $70.0 million
six-year senior revolving credit facility and a $20.0 million six-year senior
term facility (collectively, the "DTS Credit Facility"), which is collateralized
by substantially all of the assets of DTS and its subsidiaries. Interest on the
DTS Credit Facility is, at DTS' option, at either the bank's base rate or the
Eurodollar Rate. The DTS Credit Facility is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. The DTS Credit Facility may be used to refinance certain existing
indebtedness, finance future acquisitions and for working capital, capital
expenditures and general corporate purposes.
In July 1997, DTS completed a senior subordinated notes offering (the
"DTS Notes Offering") in which it sold $155.0 million of its 12.5% Series A
Senior Subordinated Notes due 2007 (the "DTS Series A Notes"), resulting in net
proceeds to DTS of approximately $146.0 million. DTS used the net proceeds to
fund an interest escrow account, which is included in restricted cash on the
Company's consolidated balance sheets, for the first four semi-annual interest
payments on the notes and to repay outstanding indebtedness under the DTS Credit
Facility.
In October 1997, Pegasus completed an offering of senior notes (the
"Senior Notes Offering") in which it sold $115.0 million of its 9.625% Series A
Senior Notes due 2005 (the "9.625% Series A Senior Notes"), resulting in net
proceeds to the Company of approximately $111.0 million. A portion of the
proceeds from the Senior Notes Offering were used to retire an existing $130.0
million credit facility.
In December 1997, PM&C entered into a $180.0 million six-year senior
revolving credit facility (the "New Credit Facility"), which is collateralized
by substantially all of the assets of PM&C and its subsidiaries. Interest on the
New Credit Facility is, at PM&C's option, at either the bank's base rate plus an
applicable margin or LIBOR plus an applicable margin. The New Credit Facility is
subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. The New Credit Facility will be
used to finance future acquisitions and for working capital, capital
expenditures and general corporate purposes.
In January 1998, DTS exchanged its DTS Series A Notes for its 12.5%
Series B Senior Subordinated Notes due 2007 (the "DTS Series B Notes", and
together with the DTS Series A Notes, the "DTS Notes"). The DTS Series B Notes
have substantially the same terms and provisions as the DTS Series A Notes. The
DTS Series B Notes are guaranteed on a full, unconditional, senior subordinated
basis, jointly and severally by all direct and indirect subsidiaries of DTS,
except DTS Capital, which is a co-issuer of the DTS Notes and currently has
nominal assets and does not conduct any operations.
In February 1998, pursuant to a registered exchange offer, Pegasus
exchanged all $115.0 million of its 9.625% Series A Notes for $115.0 million of
its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B Senior Notes",
and together with the 9.625% Series A Senior Notes, the "Senior Notes"). The
9.625% Series B Senior Notes have substantially the same terms and provisions as
the 9.625% Series A Senior Notes. No gain or loss was recorded in connection
with the exchange of the notes.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, create liens and pay dividends.
10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Net Loss Per Common Share:
Calculation of Basic and Diluted Earnings Per Common Share:
The following table sets forth the computation of the number of shares used
in the computation of basic and diluted earnings per common share:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Net loss applicable to common shares ($ 9,015,303) ($10,751,459)
============ ============
Weighted average common shares outstanding 9,902,363 15,897,603
============ ============
Nine Months Ended September 30,
-------------------------------
1997 1998
------------ ------------
Net loss applicable to common shares ($15,977,643) ($49,491,691)
============ ============
Weighted average common shares outstanding 9,755,882 13,533,756
============ ============
</TABLE>
For the three and nine months ended September 30, 1997 and 1998, net
loss per common share was determined by dividing net loss, as adjusted by the
aggregate amount of dividends on the Company's Series A Preferred Stock,
approximately $3.4 million, $8.7 million, $3.8 million and $11.0 million,
respectively, by applicable shares outstanding. The total shares used for the
calculation of diluted net loss per common share were not adjusted for
securities that have not been issued as they are antidulitive.
7. Acquisitions and Disposition:
As of January 7, 1998, the Company acquired, from an independent
DIRECTV(R) ("DIRECTV") provider, the rights to provide DIRECTV programming in
certain rural areas of Minnesota and the related assets in exchange for total
consideration of approximately $1.9 million, which consisted of $1.8 million in
cash and $32,000 in assumed liabilities.
As of March 9, 1998, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Nebraska and Texas and the related assets in exchange for total consideration of
approximately $15.6 million, which consisted of $5.9 million in cash, $105,000
in assumed liabilities, a $9.4 million note, payable over four years, and an
aggregate of $225,000 for consultancy and non-compete agreements (consisting of
$75,000 in cash and a $150,000 obligation, payable over two years).
As of April 9, 1998, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
New Mexico and Texas and the related assets in exchange for total consideration
of approximately $14.3 million, which consisted of $13.1 million in cash,
$298,000 in assumed liabilities and 37,304 shares of the Company's Class A
Common Stock (amounting to $900,000 at the time of issuance).
11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Acquisitions and Disposition (continued):
On April 27, 1998, the Company acquired DTS, which holds the rights to
provide DIRECTV programming in certain rural areas of California, Colorado,
Georgia, Indiana, Kansas, Kentucky, New Hampshire, New Mexico, New York, South
Carolina and Vermont, in exchange for total consideration of approximately
$345.2 million, which consisted of approximately 5.5 million shares of the
Company's Class A Common Stock (amounting to $119.4 million at a price of $21.71
per share), approximately $158.9 million of net liabilities and approximately
$66.9 million of a deferred tax liability.
As of May 11, 1998, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Idaho and Oregon and the related assets in exchange for total
consideration of approximately $9.3 million, which consisted of $9.2 million in
cash and $140,000 in assumed liabilities.
As of June 10, 1998, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Idaho, South Dakota and Texas and the related assets in exchange for
total consideration of approximately $12.5 million, which consisted of $12.2
million in cash, $154,000 in assumed liabilities and a $120,000 obligation,
payable over three years, for a non-compete agreement.
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems to Avalon Cable of New England, LLC
for approximately $30.1 million in cash. The Company recognized a nonrecurring
gain of approximately $24.9 million in the third quarter of 1998 relating to
this transaction.
As of July 10, 1998, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Alabama, Nebraska and South Dakota and the related assets in exchange
for total consideration of approximately $18.6 million, which consisted of $18.1
million in cash, $81,000 in assumed liabilities and an aggregate of $425,000 for
consultancy and non-compete agreements (consisting of $62,000 in cash, a $63,000
obligation, payable over one year, and a $300,000 obligation, payable over three
years).
As of August 10, 1998, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Oregon and the related assets in exchange for total consideration of
approximately $3.0 million, which consisted of $2.8 million in cash, $34,000 in
assumed liabilities and a $200,000 obligation, payable over two years, for
consultancy and non-compete agreements.
As of September 10, 1998, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Alabama, Illinois, Minnesota and Texas and the related assets in
exchange for total consideration of approximately $37.1 million, which consisted
of $26.5 million in cash, $464,000 in assumed liabilities, and $10.2 million in
notes, payable over seven years.
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above DBS territories and cable
systems had been acquired/sold as of the beginning of the periods presented,
after including the impact of certain adjustments, such as the Company's
payments to related parties, amortization of intangibles, interest expense,
preferred stock dividends and related income tax effects. The pro forma
information does not purport to be indicative of what would have occurred had
the acquisitions/disposition been made on those dates or of results which may
occur in the future. This pro forma information does not include any
acquisitions that occurred subsequent to September 30, 1998.
12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Acquisitions and Disposition (continued):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(in thousands, except per share data) (unaudited)
1997 1998
---- ----
<S> <C> <C>
Net revenues .......................................... $123,173 $165,281
-------------- --------------
Operating loss ........................................ ($58,442) ($50,828)
-------------- --------------
Net loss .............................................. ($76,221) ($83,934)
Less: Preferred stock dividends ....................... (10,959) (10,959)
-------------- --------------
Net loss applicable to common shares .................. ($87,180) ($94,893)
============== ==============
Net loss per common share ............................. ($5.54) ($5.98)
============== ==============
</TABLE>
8. Supplemental Cash Flow Information:
The Company incurred significant non-cash investing and financing
activities in connection with the April 27, 1998 acquisition of DTS (see
footnote 7 - Acquisitions and Disposition). The acquisition of DTS was accounted
for using the purchase method of accounting. The purchase price of $345.2
million consisted of the issuance of approximately 5.5 million shares of Pegasus
Class A Common Stock, valued at $21.71 per share ($119.4 million), to the
shareholders of DTS and the assumption of net liabilities amounting to
approximately $158.9 million (total assets of $216.4 million less intangibles of
$161.0 million less total liabilities of $214.3 million). The Company also
recorded a net deferred tax liability, primarily as a result of non-deductible
amortization, of approximately $66.9 million of which $53.6 million was
allocated to DBS rights and $13.3 million was recorded as a deferred tax asset.
The Company incurred other significant non-cash investing and financing
activities which include barter revenue and related expense of $4.9 million,
capital contribution and related acquisition of intangibles of $854,000, notes
payable and related acquisition of intangibles of $19.8 million and Series A
Preferred Stock Dividends of $11.0 million in the nine months ended September
30, 1998. The Company incurred other significant non-cash investing and
financing activities which include barter revenue and related expense of $4.5
million, capital contribution and related acquisitions of intangibles of $6.7
million, notes payable and related acquisitions of intangibles of $1.6 million
and Series A Preferred Stock Dividends of $8.7 million in the nine months ended
September 30, 1997.
9. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
10. Other Events:
On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42 million in cash. The Aguadilla cable system
serves approximately 21,500 subscribers and passes approximately 81,000 of the
90,000 homes in the franchise area. The Aquadilla cable system is contiguous to
the Company's existing Puerto Rico cable system and, upon completion of the
purchase, the Company intends to consolidate the Aquadilla cable system with its
existing cable system. The closing of this acquisition is subject to regulatory
and other approvals, as well as customary conditions, and the Company expects
this transaction to close by the end of the first quarter of 1999.
In July 1998, Pegasus commenced operations of TV station WFXU, which
simulcasts the signal of WTLH, a TV station owned by the Company which is
affiliated with Fox. WFXU is in the Tallahassee, Florida Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA").
13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Other Events (continued):
As of October 9, 1998, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of South Dakota and the related assets in exchange for total consideration
of approximately $1.1 million, which consisted of $1.1 million in cash and
$14,000 in assumed liabilities.
As of November 9, 1998, the Company acquired from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Oklahoma, South Dakota and Texas and the related assets in exchange for
total consideration of approximately $12.5 million in cash.
14
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company that are based on the beliefs of the
management of the Company, as well as assumptions made by and information
currently available to the Company's management. When used in this Report, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. For a discussion of such risks, see the information contained in the
section captioned "Risk Factors" (pages 12-21) of Pegasus' Proxy
Statement/Prospectus dated April 14, 1998, filed as part of Pegasus'
Registration Statement in Form S-4, File No. 333-44929 (the "Proxy
Statement/Prospectus"), which section is incorporated by reference herein.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as the date hereof. The Company does not undertake
any obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Unless otherwise defined, all
defined terms used herein have the same meaning as in the footnotes to the
Consolidated Financial Statements included herein.
General
The Company is a diversified company operating in growing segments of
the media and communications industries: multichannel television and broadcast
television. Pegasus Multichannel Television includes DBS and cable businesses.
As of September 30, 1998, the Company's DBS operations consisted of providing
DIRECTV services to approximately 387,500 subscribers in certain rural areas of
thirty-five states in which the Company holds the exclusive right to provide
such services. Its cable operations consist of a system in Puerto Rico. The
Company sold its New Hampshire cable system effective January 31, 1997. The
Company sold its remaining New England cable systems (Connecticut and
Massachusetts) effective July 1, 1998. Pegasus Broadcast Television owns and
operates six TV stations affiliated with Fox and operates one affiliated with
UPN and another affiliated with WB. It has entered into an agreement to operate
two additional TV stations, which will be affiliated with WB. One station will
commence operations in the fourth quarter of 1998 and the other in the first
half of 1999.
On April 27, 1998, the Company acquired (the "DTS Acquisition") Digital
Television Services, Inc. (DTS). Upon completion of the DTS Acquisition, DTS
became a wholly owned subsidiary of Pegasus. As of September 30, 1998, DTS'
operations consisted of providing DIRECTV services to approximately 163,400
subscribers in certain rural areas of eleven states in which DTS holds the
exclusive right to provide such services.
Multichannel revenues are derived from monthly customer subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping commissions,
advertising time sales and installation charges. Broadcast revenues are derived
from the sale of broadcast airtime to local and national advertisers.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions and ratings and research expenditures, (iii)
technical and operations costs, (iv) general and administrative expenses, and
(v) expensed subscriber acquisition costs. Multichannel programming expenses
consist of amounts paid to program suppliers, digital satellite system or DSS(R)
("DSS") authorization charges and satellite control fees, each of which is paid
on a per subscriber basis, and DIRECTV royalties which are equal to 5% of DBS
program service revenues. Broadcast programming expenses include the
amortization of long-term program rights purchases, music license costs and
"barter" programming expenses which represent the value of broadcast air time
provided to television program suppliers in lieu of cash.
15
<PAGE>
The Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs ("SAC"),
which were being capitalized and amortized over a twelve-month period, are
currently being charged to operations in the period incurred. This change became
effective October 1, 1997. Subscriber acquisition costs charged to operations
are excluded from pre-marketing location operating expenses.
Results of Operations
Three months ended September 30, 1998 compared to three months ended September
30, 1997
The Company's net revenues increased by approximately $33.6 million or
153% for the three months ended September 30, 1998 as compared to the same
period in 1997. Multichannel Television net revenues increased approximately
$32.7 million or 220% and Broadcast Television net revenues increased $855,000
or 12%. The net revenues increased as a result of (i) a $34.1 million or 322%
increase in DBS revenues of which $2.4 million or 7% was due to the increased
number of DBS subscribers in territories owned at the beginning of 1997 and
$31.7 million or 93% resulted from acquisitions made in 1997 and 1998, (ii) a
$1.4 million or 33% decrease in Cable revenues which was the net result of a
$180,000 or 7% increase in Puerto Rico same system revenue, due primarily to
rate increases and increased subscriber levels, and a $1.6 million reduction due
to the sale of the Company's New England cable systems effective July 1, 1998,
(iii) a $852,000 or 12% increase in TV revenues which was the result of a
$470,000 or 7% increase in same station revenues due primarily to increases in
local advertising sales and a $382,000 increase due to the three new stations
launched in August 1997, October 1997 and July 1998, and (iv) a $3,000 increase
in Tower rental income.
The Company's total pre-marketing location operating expenses, as
described above (before DBS subscriber acquisition costs), increased by
approximately $24.0 million or 167% for the three months ended September 30,
1998 as compared to the same period in 1997. Multichannel Television
pre-marketing location operating expenses increased approximately $23.5 million
or 248% and Broadcast Television location operating expenses increased $545,000
or 11%. The pre-marketing location operating expenses increased as a result of
(i) a $24.1 million or 333% increase in operating expenses of the Company's DBS
operations due to a same territory increase in programming and other operating
costs totaling $1.5 million (resulting from the increased number of DBS
subscribers in territories owned at the beginning of 1997) and a $22.7 million
increase attributable to territories acquired in 1997 and 1998, (ii) a $644,000
or 29% decrease in Cable operating expenses as the net result of a $162,000 or
11% increase in Puerto Rico same system operating expenses, due primarily to
increases in programming costs, and a $806,000 reduction due to the sale of the
Company's New England cable systems effective July 1, 1998, (iii) a $548,000 or
11% increase in TV operating expenses as the result of a $175,000 or 4% increase
in same station operating expenses and a $373,000 increase attributable to the
three new stations launched in August 1997, October 1997 and July 1998, and (iv)
a $3,000 reduction in Tower administrative expenses.
Average monthly programming revenue per DBS subscriber was
approximately $41.50, with a contribution margin of approximately 34.7%, for the
three months ended September 30, 1998 as compared to approximately $40.49, at a
36.0% margin, during the same period in 1997. The increase in average monthly
programming revenue per DBS subscriber resulted primarily from an improved mix
of premium package programming subscriptions. The contribution margin decline
was primarily attributable to increases in customer service costs, in part due
to increased call volume associated with the PrimeTime24 network issue, and
other costs associated with the integration of DBS operations in territories
acquired in 1998.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled
approximately $14.1 million or $345 per gross subscriber addition for the three
months ended September 30, 1998 as compared to approximately $2.3 million or
$262 per gross subscriber addition for the same period in 1997.
16
<PAGE>
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by $219,000 or 98% for the three months ended
September 30, 1998 as compared to the same period in 1997.
Corporate expenses increased by $432,000 or 86% for the three months
ended September 30, 1998 as compared to the same period in 1997 primarily due to
increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $12.9
million or 176% for the three months ended September 30, 1998 as compared to the
same period in 1997 as the Company increased its fixed and intangible asset base
as a result of twenty-five completed acquisitions during 1997 and twenty-one
completed acquisitions in the first three quarters of 1998.
As a result of these factors, the Company's loss from operations
increased by approximately $17.3 million for the three months ended September
30, 1998 as compared to the same period in 1997.
Interest expense increased by approximately $9.3 million or 217% for
the three months ended September 30, 1998 as compared to the same period in 1997
as a result of an increase in debt associated with the Company's acquisitions.
The Company reported a net loss of approximately $6.9 million for the
three months ended September 30, 1998 as compared to a net loss of approximately
$5.7 million for the same period in 1997. The $1.3 million change was the net
result of an increase in the loss from operations of approximately $17.3
million, an increase in interest expense of approximately $9.3 million, an
increase in the provision for income taxes of $50,000, a decrease in other
expenses of $404,000 and a nonrecurring gain on the sale of the New England
cable systems of approximately $24.9 million during the third quarter of 1998.
The Company's preferred stock dividends, payable by issuing additional
shares of Series A Preferred Stock, increased $440,000 for the three months
ended September 30, 1998 as compared to the same period in 1997.
Nine months ended September 30, 1998 compared to nine months ended September 30,
1997
The Company's net revenues increased by approximately $73.5 million or
128% for the nine months ended September 30, 1998 as compared to the same period
in 1997. Multichannel Television net revenues increased approximately $71.7
million or 201% and Broadcast Television net revenues increased approximately
$1.8 million or 8%. The net revenues increased as a result of (i) a $72.3
million or 309% increase in DBS revenues of which $6.5 million or 9% was due to
the increased number of DBS subscribers in territories owned at the beginning of
1997 and $65.8 million or 91% resulted from acquisitions made in 1997 and 1998,
(ii) a $580,000 or 5% decrease in Cable revenues which was the net result of a
$865,000 or 11% increase in Puerto Rico same system revenues, due primarily to
rate increases and increased subscriber levels, a $133,000 reduction due to the
sale of the Company's New Hampshire cable system effective January 31, 1997 and
a $1.3 million reduction due to the sale of the Company's remaining New England
cable systems effective July 1, 1998, (iii) a $1.8 million or 8% increase in TV
revenues which was the result of a $649,000 or 3% increase in same station
revenues due primarily to increases in local advertising sales and a $1.1
million increase due to the three new stations launched in August 1997, October
1997 and July 1998, and (iv) a $19,000 increase in Tower rental income.
17
<PAGE>
The Company's total pre-marketing location operating expenses, as
described above (before DBS subscriber acquisition costs), increased by
approximately $51.9 million or 140% for the nine months ended September 30, 1998
as compared to the same period in 1997. Multichannel Television pre-marketing
location operating expenses increased approximately $50.0 million or 222% and
Broadcast Television location operating expenses increased approximately $1.9
million or 13%. The pre-marketing location operating expenses increased as a
result of (i) a $50.3 million or 315% increase in operating expenses of the
Company's DBS operations due to a same territory increase in programming and
other operating costs totaling $3.9 million (resulting from the increased number
of DBS subscribers in territories owned at the beginning of 1997) and a $46.4
million increase attributable to territories acquired in 1997 and 1998, (ii) a
$282,000 or 4% decrease in Cable operating expenses as the net result of a
$553,000 or 13% increase in Puerto Rico same system operating expenses due
primarily to increases in programming costs, a $66,000 reduction due to the sale
of the Company's New Hampshire cable system effective January 31, 1997 and a
$769,000 reduction due to the sale of the Company's remaining New England cable
systems effective July 1, 1998, (iii) a $1.9 million or 13% increase in TV
operating expenses as the result of a $465,000 or 3% increase in same station
operating expenses and a $1.4 million increase attributable to the three new
stations launched in August 1997, October 1997 and July 1998, and (iv) a $6,000
reduction in Tower administrative expenses.
Average monthly programming revenue per DBS subscriber was
approximately $41.75, with a contribution margin of approximately 35.5%, for the
nine months ended September 30, 1998 as compared to approximately $40.75, at a
36.3% margin, during the same period in 1997. The increase in average monthly
programming revenue per DBS subscriber resulted primarily from an improved mix
of premium package programming subscriptions. The contribution margin decline
was primarily attributable to increases in customer service costs, in part due
to increased call volume associated with the PrimeTime24 network issue, and
other costs associated with the integration of DBS operations in territories
acquired in 1997 and 1998.
DBS subscriber acquisition costs, which consist of regional sales
costs, advertising and promotion, and commissions and subsidies, totaled
approximately $25.0 million or $313 per gross subscriber addition for the nine
months ended September 30, 1998 as compared to approximately $6.0 million or
$304 per gross subscriber addition for the same period in 1997.
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by $728,000 or 98% for the nine months ended
September 30, 1998 as compared to the same period in 1997.
Corporate expenses increased by approximately $1.0 million or 72% for
the nine months ended September 30, 1998 as compared to the same period in 1997
primarily due to increased staffing as a result of internal and acquisition
related growth, enhanced public relations activities and additional public
reporting requirements for the Company.
Depreciation and amortization expense increased by approximately $28.6
million or 158% for the nine months ended September 30, 1998 as compared to the
same period in 1997 as the Company increased its fixed and intangible asset base
as a result of twenty-five completed acquisitions during 1997 and twenty-one
completed acquisitions in the first three quarters of 1998.
As a result of these factors, the Company's loss from operations
increased by approximately $32.0 million for the nine months ended September 30,
1998 as compared to the same period in 1997.
Interest expense increased by approximately $19.6 million or 190% for
the nine months ended September 30, 1998 as compared to the same period in 1997
as a result of an increase in debt associated with the Company's acquisitions.
18
<PAGE>
The Company reported a net loss of approximately $38.6 million for the
nine months ended September 30, 1998 as compared to a net loss of approximately
$7.3 million for the same period in 1997. The $31.2 million change was the net
result of an increase in the loss from operations of approximately $32.0
million, an increase in interest expense of approximately $19.6 million, an
increase in the provision for income taxes of $125,000, an increase in other
expenses of $15,000, a nonrecurring gain on the sale of the New Hampshire cable
system of approximately $4.5 million during the first quarter of 1997 and a
nonrecurring gain on the sale of the Company's remaining New England cable
systems of $24.9 million during the third quarter of 1998.
The Company's preferred stock dividends, payable by issuing additional
shares of Series A Preferred Stock, increased approximately $2.3 million for the
nine months ended September 30, 1998 as compared to the same period in 1997.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash
provided by its TV and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. The Company's
principal use of its cash has been to fund acquisitions, to meet debt service
obligations, to fund investment in its TV and cable technical facilities and to
fund DBS subscriber acquisition costs.
Pre-Marketing Location Cash Flow increased by approximately $9.5
million or 126% for the three months ended September 30, 1998 as compared to the
same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow
increased approximately $9.2 million or 171% and Broadcast Television Location
Cash Flow increased $310,000 or 14%. Pre-Marketing Location Cash Flow increased
as a result of (i) a $10.0 million or 299% increase in DBS Pre-Marketing
Location Cash Flow of which $947,000 or 9% was due to an increase in same
territory Pre-Marketing Location Cash Flow and $9.1 million or 91% was
attributable to territories acquired in 1997 and 1998, (ii) a $775,000 or 38%
decrease in Cable Location Cash Flow which was the net result of a $18,000 or 1%
increase in Puerto Rico same system Location Cash Flow and a $793,000 reduction
due to the sale of the Company's New England cable systems effective July 1,
1998, (iii) a $304,000 or 14% increase in TV Location Cash Flow as a result of a
$295,000 or 13% increase in same station Location Cash Flow and a $9,000
increase attributable to the three new stations launched in August 1997, October
1997 and July 1998, and (iv) a $6,000 increase in Tower Location Cash Flow.
Pre-Marketing Location Cash Flow increased by approximately $21.6
million or 106% for the nine months ended September 30, 1998 as compared to the
same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow
increased approximately $21.7 million or 165% and Broadcast Television Location
Cash Flow decreased $94,000 or 1%. Pre-Marketing Location Cash Flow increased as
a result of (i) a $22.0 million or 298% increase in DBS Pre-Marketing Location
Cash Flow of which $2.6 million or 12% was due to an increase in same territory
Pre-Marketing Location Cash Flow and $19.4 million or 88% was attributable to
territories acquired in 1997 and 1998, (ii) a $298,000 or 5% decrease in Cable
Location Cash Flow which was the net result of a $312,000 or 9% increase in
Puerto Rico same system Location Cash Flow, a $67,000 reduction due to the sale
of the Company's New Hampshire cable system effective January 31, 1997 and a
$543,000 reduction due to the sale of the Company's remaining New England cable
systems effective July 1, 1998, (iii) a $119,000 or 2% decrease in TV Location
Cash Flow as the net result of a $184,000 or 3% increase in same station
Location Cash Flow and a $303,000 decrease attributable to the three new
stations launched in August 1997, October 1997 and July 1998, and (iv) a $25,000
increase in Tower Location Cash Flow.
19
<PAGE>
During the nine months ended September 30, 1998, $44.0 million of cash
on hand, together with $30.1 million of proceeds from the sale of the Company's
remaining New England cable systems, $3.3 million of cash acquired from
acquisitions and $84.7 million of net cash provided by the Company's financing
activities, was used to fund operating activities of approximately $15.5 million
and other investing activities of $107.6 million. Investing activities, net of
cash acquired from acquisitions and proceeds from the sale of the New England
cable systems, consisted of (i) the acquisition of DBS assets from three
independent DIRECTV providers during the first quarter of 1998 for approximately
$7.8 million, (ii) the acquisition of DBS assets from nine independent DIRECTV
providers during the second quarter of 1998 for approximately $34.5 million,
(iii) the acquisition of DBS assets from eight independent DIRECTV providers
during the third quarter of 1998 for approximately $47.6 million, (iv) broadcast
television transmitter, tower and facility upgrades totaling approximately $3.2
million, (v) payments of programming rights amounting to $1.6 million, (vi)
capitalized costs relating to the DTS Acquisition of $4.3 million, and (vii)
maintenance and other capital expenditures and intangibles totaling
approximately $8.7 million. Financing activities consisted of (i) the repayment
of approximately $5.9 million of long-term debt and capital leases, (ii) net
borrowings on bank credit facilities totaling $81.3 million, and (iii) net
restricted cash draws of approximately $9.3 million for interest payments. As of
September 30, 1998, the Company's cash on hand approximated $39.1 million.
As defined in the Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights thereof (the "Certificate of
Designation") governing the Series A Preferred Stock and the indenture governing
the Senior Notes (the "Senior Notes Indenture"), the Company is required to
provide Adjusted Operating Cash Flow data for Pegasus and its Restricted
Subsidiaries on a consolidated basis, where Adjusted Operating Cash Flow is
defined as "for the four most recent fiscal quarters for which internal
financial statements are available, Operating Cash Flow of such Person and its
Restricted Subsidiaries, less DBS Cash Flow (Satellite Segment Operating Cash
Flow) for the most recent four-quarter period, plus DBS Cash Flow for the most
recent quarterly period multiplied by four." Operating Cash Flow is income from
operations before income taxes, depreciation and amortization, interest expense,
extraordinary items and non-cash charges. Although Adjusted Operating Cash Flow
is not a measure of performance under generally accepted accounting principles,
the Company believes that Location Cash Flow, Operating Cash Flow and Adjusted
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. Restricted
Subsidiaries carries the same meaning as in the Certificate of Designation. Pro
forma for the twenty completed DBS acquisitions occurring in the first three
quarters of 1998 and the disposition of the New England cable systems, as if
such acquisitions/disposition had occurred as of the beginning of the period,
Adjusted Operating Cash Flow for Pegasus and its Restricted Subsidiaries would
have been approximately $42.1 million, as follows:
<TABLE>
<CAPTION>
Four Quarters
Ended
(in thousands) September 30, 1998
------------------
<S> <C>
Revenues $160,050
Direct operating expenses, excluding depreciation,
amortization and other non-cash charges 114,703
-------------
Income from operations before incentive compensation,
corporate expenses, depreciation, amortization and other
non-cash charges 45,347
Corporate expenses 3,265
-------------
Adjusted operating cash flow $ 42,082
=============
</TABLE>
20
<PAGE>
The Company is restricted by the Senior Notes Indenture from paying
dividends on the Series A Preferred Stock in cash prior to July 1, 2002. The
indenture governing the PM&C Notes (the "PM&C Notes Indenture") and the New
Credit Facility contain certain financial and operating covenants, including
restrictions on PM&C's ability to incur additional indebtedness, create liens
and pay dividends. The indenture governing the DTS Notes (the "DTS Notes
Indenture") and the DTS Credit Facility contain certain financial and operating
covenants, including restrictions on DTS' ability to incur additional
indebtedness, create liens and pay dividends.
Pre-Marketing Location Cash Flow is defined as net revenues less
location operating expenses before subscriber acquisition costs. Location Cash
Flow is defined as net revenues less location operating expenses. Although
Pre-Marketing Location Cash Flow and Location Cash Flow are not measures of
performance under generally accepted accounting principles, the Company believes
that Pre-Marketing Location Cash Flow and Location Cash Flow are accepted within
the Company's business segments as generally recognized measures of performance
and are used by analysts who report publicly on the performance of companies
operating in such segments. Nevertheless, these measures should not be
considered in isolation or as a substitute for income from operations, net
income, net cash provided by operating activities or any other measures for
determining the Company's operating performance or liquidity which is calculated
in accordance with generally accepted accounting principles.
The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company engages in discussions with respect to acquisition opportunities in
media and communications businesses on a regular basis. The Company believes
that cash on hand, together with available borrowings under the New Credit
Facility and the DTS 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 $9.9 million in 1997. 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 1998 capital projects include (i) DBS
facility upgrades of approximately $1.0 million and (ii) approximately $4.5
million of TV expenditures for broadcast television transmitter, tower and
facility constructions and upgrades. The Company commenced the programming of
three new TV stations, WPME in August 1997, WGFL in October 1997 and WFXU in
July 1998 and its plans are to commence programming of two additional stations -
one in the fourth quarter of 1998 and the other in the first half of 1999. There
can be no assurance that the Company's capital expenditure plans will not change
in the future.
Effective October 1, 1997, the Company no longer requires new DBS
customers to sign a one-year programming contract and, as a result, subscriber
acquisition costs, which were being capitalized through September 30, 1997 and
amortized over a twelve-month period, will be charged to operations in the
period incurred. The Company's policy is to capitalize subscriber acquisition
costs directly related to new subscribers who sign a programming contract, such
as commissions and equipment subsidies. These costs are amortized over the life
of the contract. The Company expenses its subscriber acquisition costs when no
new contract is obtained. The Company currently does not require new DBS
customers to sign programming contracts and, as a result, subscriber acquisition
costs are currently being charged to operations in the period incurred.
21
<PAGE>
Other
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the Year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the "2000's" from dates in the "1900's." These problems may
also arise from additional sources, such as the use of special codes and
conventions in software utilizing the date field.
The Company has reviewed all of its systems as to the Year 2000 issue.
The Company's primary focus has been on its own internal systems. The Company
has in the past three years replaced or upgraded, or is in the process of
replacing or upgrading, all of its TV traffic systems, cable billing systems and
corporate accounting systems. All of these new systems will be in place by the
end of 1998. However, if any necessary changes are not made or completed in a
timely fashion or unanticipated problems arise, the Year 2000 issue may take
longer for the Company to address and may have a material impact on the
Company's financial condition and its results of operations.
The Company relies on outside vendors for the operation of its DBS
satellite control and billing systems, including DIRECTV, the NRTC and their
respective vendors. The Company has established a policy to ensure that these
vendors are currently in compliance with the Year 2000 issue or have a plan in
place to be in compliance with the Year 2000 issue by the first quarter of 1999.
In addition, the Company has had initial communications with certain of its
other significant suppliers, distributors, financial institutions, lessors and
parties with which it conducts business to evaluate their Year 2000 compliance
plans and state of readiness and to determine the extent to which the Company's
systems may be affected by the failure of others to remediate their own Year
2000 issues. To date, however, the Company has received only preliminary
feedback from such parties and has not independently confirmed any information
received from other parties with respect to the Year 2000 issue. As such, there
can be no assurance that such other parties will complete their Year 2000
conversion in a timely fashion or will not suffer a Year 2000 business
disruption that may adversely affect the Company's financial condition and its
results of operations.
Because the Company's Year 2000 conversion is expected to be completed
prior to any potential disruption to the Company's business, the Company has not
yet completed the development of a comprehensive Year 2000-specific contingency
plan. However, as part of its Year 2000 contingency planning effort, information
received from external sources is examined for date integrity before being
brought into the Company's internal systems. If the Company determines that its
business or a segment thereof is at material risk of disruption due to the Year
2000 issue or anticipates that its Year 2000 conversion will not be completed in
a timely fashion, the Company will work to enhance its contingency plan. Costs
to date relating to the Year 2000 issue amounted to approximately $150,000.00.
Costs to be incurred beyond September 30, 1998 relating to the Year 2000 issue
are expected to be approximately $200,000.
On April 27, 1998, the Company acquired DTS for total consideration of
approximately $345.2 million, which consisted of approximately 5.5 million
shares of the Company's Class A Common Stock (amounting to $119.4 million at a
price of $21.71 per share), approximately $158.9 million of net liabilities and
approximately $66.9 million of a deferred tax liability. Upon completion of the
DTS Aquisition, DTS became a wholly owned subsidiary of Pegasus. As of September
30, 1998, DTS' operations consisted of providing DIRECTV services to
approximately 163,400 subscribers in certain rural areas of eleven states in
which DTS holds the exclusive right to provide such services.
Effective July 1, 1998, the Company sold substantially all the assets
of its remaining New England cable systems to Avalon Cable of New England, LLC
for approximately $30.1 million in cash. The Company recognized a nonrecurring
gain of approximately $24.9 million in the third quarter of 1998 relating to
this transaction.
22
<PAGE>
On July 23, 1998, the Company entered into an agreement to purchase a
cable system serving Aguadilla, Puerto Rico and neighboring communities for a
purchase price of approximately $42 million in cash. The Aguadilla cable system
serves approximately 21,500 subscribers and passes approximately 81,000 of the
90,000 homes in the franchise area. The closing of the acquisition is subject to
regulatory and other approvals, as well as customary conditions, and the Company
expects this transaction to close by the end of the first quarter of 1999.
On September 22, 1998, service to Pegasus' cable subscribers was
interrupted by Hurricane Georges which struck the island of Puerto Rico. The
Company suffered modest damage to its cable headend and approximately 3% of its
780 miles of cable plant. The Company estimates that it will incur approximately
$300,000 in capital expenditures related to hurricane damage. Repairs will be
substantially completed by December 1, 1998. Hurricane Georges had a negligible
impact on Pegasus' third quarter 1998 operating results and the Company
anticipates approximately a 2% reduction in pre-marketing cash flow for the
quarter ending December 31, 1998, primarily as a result of lost subscribers.
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 New Credit Facility, PM&C is restricted from paying dividends.
Under the terms of the DTS Notes Indenture and the DTS Credit Facility, DTS is
restricted from paying dividends. In addition, Pegasus' ability to pay dividends
and Pegasus' and its subsidiaries' ability to incur indebtedness are subject to
certain restrictions contained in the Senior Notes Indenture and the Certificate
of Designation governing the Series A Preferred Stock.
PM&C's ability to incur additional indebtedness is limited under the
terms of the PM&C Notes 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 in excess of certain agreed upon levels
will require lender consent.
DTS' ability to incur additional indebtedness is limited under the
terms of the DTS Notes Indenture and the DTS Credit Facility. These limitations
take the form of certain leverage ratios and are dependent upon certain measures
of operating profitability and not exceeding a certain "borrowing base" based on
the number of paying subscribers and households in DTS' territories. The terms
of the DTS Credit Facility contain a number of other significant covenants that,
among other things, limit DTS' ability to make capital expenditures and business
acquisitions.
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. A majority of the
Company's indebtedness bears interest at a fixed rate.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement table that is displayed with the same prominence as other financial
statements. SFAS 131 requires that all public business enterprises report
information about operating segments, as well as specific revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. These new standards, which are effective for the
fiscal year ending December 31, 1998, will not have a significant impact on the
Company.
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits". In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Management has reviewed the provisions of SFAS No. 132 and SFAS
No.133 and the implementation of these standards is not expected to have any
significant impact on its consolidated financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
23
<PAGE>
Part II. Other Information
Item 2: Changes in Securities and Use of Proceeds
As of August 10, 1998, Pegasus issued warrants to purchase 7,500 shares
of its Class A Common Stock as partial consideration for the acquisition of
DIRECTV rights and related assets from an independent provider of DIRECTV in
certain rural areas of Oregon. The warrants are exercisable on or before August
20, 2002 at a price of $21.86042 per share, subject to certain adjustments. In
issuing the warrants, Pegasus relied upon exemption from registration set forth
in Section 4(2) of the Securities Act of 1933, as amended.
Item 5: Other Information
New England Cable Sale. Effective July 1, 1998, Pegasus sold
substantially all of the assets of its remaining New England cable systems to
Avalon Cable of New England, LLC for approximately $30.1 million in cash.
Pegasus recognized a nonrecurring gain of approximately $24.9 million in the
third quarter of 1998 relating to this sale.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended September 30, 1998.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pegasus Communications Corporation
Date November 13, 1998 By /s/ Robert N. Verdecchio
-------------------------------------
Robert N. Verdecchio
Senior Vice President, Chief Financial Officer,
Assistant Secretary and Director
(Principal Financial and Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of Pegasus Communication Corporation as of December
31, 1997 and September 30, 1998 (unaudited) and the related consolidated
statements of operations and cash flows for the three and nine months ended
September 30, 1997 (unaudited) and September 30, 1998 (unaudited). This
information is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> MAR-30-1998 SEP-30-1998
<CASH> 39,073,970 39,073,970
<SECURITIES> 0 0
<RECEIVABLES> 19,716,874 19,716,874
<ALLOWANCES> 551,000 551,000
<INVENTORY> 3,968,253 3,968,253
<CURRENT-ASSETS> 89,808,873 89,808,873
<PP&E> 52,393,200 52,393,200
<DEPRECIATION> 22,841,505 22,841,505
<TOTAL-ASSETS> 846,164,206 846,164,206
<CURRENT-LIABILITIES> 64,433,066 64,433,066
<BONDS> 350,424,554 350,424,554
122,223,017 122,223,017
3,000,000 3,000,000
<COMMON> 158,977 158,977
<OTHER-SE> 99,445,888 99,445,888
<TOTAL-LIABILITY-AND-EQUITY> 846,164,206 846,164,206
<SALES> 55,507,178 131,030,227
<TOTAL-REVENUES> 55,507,178 131,030,227
<CGS> 0 0
<TOTAL-COSTS> 74,096,684 164,799,339
<OTHER-EXPENSES> (25,227,611) (25,260,782)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13,534,677 29,849,768
<INCOME-PRETAX> (6,896,572) (38,358,098)
<INCOME-TAX> 50,000 175,000
<INCOME-CONTINUING> (6,946,572) (38,533,098)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,946,572) (38,533,098)
<EPS-PRIMARY> (0.68) (3.66)
<EPS-DILUTED> (0.68) (3.66)
</TABLE>
