<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, 1999
------------------
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;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
------------------------------------------------ ----------
(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 5, 1999:
Class A, Common Stock, $0.01 par value 15,157,562
Class B, Common Stock, $0.01 par value 4,581,900
Non-Voting, Common Stock, $0.01 par value --
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 1999
Page
----
Part I. Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1998 and September 30, 1999 3
Consolidated Statements of Operations
Three months ended September 30, 1998 and 1999 4
Consolidated Statements of Operations
Nine months ended September 30, 1998 and 1999 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 23
Part II. Other Information
Item 2 Changes in Securities and Use of Proceeds 25
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 26
Signature 27
2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $54,505,473 $22,756,987
Restricted cash 21,479,305 1,979,371
Accounts receivable, less allowance for doubtful
accounts of $567,000 and $720,000, respectively 20,882,260 25,164,702
Inventory 5,426,348 6,809,943
Program rights 3,156,715 3,962,351
Deferred taxes 2,602,453 2,809,933
Prepaid expenses and other 1,207,312 6,358,739
------------ ------------
Total current assets 109,259,866 69,842,026
Property and equipment, net 34,066,502 42,601,087
Intangible assets, net 729,405,657 771,971,897
Program rights 3,428,382 6,234,095
Deferred taxes 9,277,280 6,159,979
Deposits and other 872,386 6,094,777
------------ ------------
Total assets $886,310,073 $902,903,861
============ ============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt $14,399,046 $14,207,778
Accounts payable 4,794,809 4,861,656
Accrued interest 17,465,493 14,837,113
Accrued satellite programming, fees and commissions 22,680,595 35,884,964
Accrued expenses 9,599,049 12,619,131
Current portion of program rights payable 2,431,515 4,048,455
------------ ------------
Total current liabilities 71,370,507 86,459,097
Long-term debt 544,629,706 610,666,480
Program rights payable 2,472,367 4,771,662
Deferred taxes 80,671,714 73,236,343
------------ ------------
Total liabilities 699,144,294 775,133,582
------------ ------------
Commitments and contingent liabilities -- --
Minority interest 3,000,000 3,000,000
Preferred Stock; $0.01 par value; 5.0 million shares authorized -- --
Series A Preferred Stock; $0.01 par value; 135,073 shares
authorized; 119,369 and 135,073 issued and outstanding 126,027,871 138,428,209
Common stockholders' equity:
Class A Common Stock; $0.01 par value; 50.0 million shares
authorized; 11,315,809 and 15,153,779 issued and outstanding 113,158 151,537
Class B Common Stock; $0.01 par value; 15.0 million shares
authorized; 4,581,900 issued and outstanding 45,819 45,819
Non-Voting Common Stock; $0.01 par value; 20.0 million shares
authorized -- --
Additional paid-in capital 173,870,633 240,664,640
Deficit (115,891,702) (254,519,926)
------------ ------------
Total common stockholders' equity (deficit) 58,137,908 (13,657,930)
------------ ------------
Total liabilities and stockholders' equity $886,310,073 $902,903,861
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $44,734,926 $ 75,726,952
Broadcast 7,924,426 8,941,015
Cable 2,847,826 6,221,682
------------ ------------
Total net revenues 55,507,178 90,889,649
Operating expenses:
DBS
Programming, technical, general and administrative 31,373,214 53,525,114
Marketing and selling 14,131,132 38,830,387
Incentive compensation 325,000 350,000
Depreciation and amortization 17,892,021 20,400,826
Broadcast
Programming, technical, general and administrative 4,177,612 5,766,495
Marketing and selling 1,255,995 1,369,005
Incentive compensation 112,404 --
Depreciation and amortization 758,309 1,318,593
Cable
Programming, technical, general and administrative 1,507,379 3,181,813
Marketing and selling 81,629 218,878
Incentive compensation 4,895 134,543
Depreciation and amortization 1,075,587 2,002,655
Corporate expenses 936,625 1,593,228
Corporate depreciation and amortization 464,882 745,024
------------ ------------
Loss from operations (18,589,506) (38,546,912)
Interest expense (13,534,677) (16,245,904)
Interest income 613,393 279,854
Other expense, net (112,214) (629,677)
Gain on sale of cable systems 24,726,432 --
------------ ------------
Loss before income taxes (6,896,572) (55,142,639)
Provision (benefit) for income taxes 50,000 (3,016,173)
------------ ------------
Net loss (6,946,572) (52,126,466)
Preferred stock dividends 3,804,887 4,305,462
------------ ------------
Net loss applicable to common shares ($10,751,459) ($56,431,928)
============ ============
Basic and diluted earnings per common share:
Net loss ($0.68) ($2.86)
============ ============
Weighted average shares outstanding 15,897,603 19,720,975
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $ 95,662,160 $198,181,003
Broadcast 23,548,743 26,512,171
Cable 11,819,324 14,870,093
------------ ------------
Total net revenues 131,030,227 239,563,267
Operating expenses:
DBS
Programming, technical, general and administrative 66,324,641 137,890,623
Marketing and selling 25,017,957 88,720,057
Incentive compensation 1,158,919 1,140,000
Depreciation and amortization 38,156,719 62,333,958
Broadcast
Programming, technical, general and administrative 12,244,423 15,920,497
Marketing and selling 4,217,521 4,447,811
Incentive compensation 144,457 202,409
Depreciation and amortization 3,285,727 3,800,539
Cable
Programming, technical, general and administrative 6,047,476 7,595,791
Marketing and selling 268,350 504,216
Incentive compensation 168,500 195,331
Depreciation and amortization 4,003,678 5,025,585
Corporate expenses 2,418,067 4,316,474
Corporate depreciation and amortization 1,342,904 2,195,243
------------ ------------
Loss from operations (33,769,112) (94,725,267)
Interest expense (29,849,768) (47,540,765)
Interest income 1,333,683 1,055,340
Other expense, net (799,333) (1,448,705)
Gain on sale of cable system 24,726,432 --
------------ ------------
Loss before income taxes (38,358,098) (142,659,397)
Provision (benefit) for income taxes 175,000 (4,031,173)
------------ ------------
Net loss (38,533,098) (138,628,224)
Preferred stock dividends 10,958,593 12,400,338
------------ ------------
Net loss applicable to common shares ($49,491,691) ($151,028,562)
============ ============
Basic and diluted earnings per common share:
Net loss ($3.66) ($8.13)
============ ============
Weighted average shares outstanding 13,533,756 18,579,058
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($38,533,098) ($138,628,224)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 46,789,028 73,355,325
Program rights amortization 1,914,072 2,460,368
Accretion on discount of bonds and seller notes 931,808 1,112,815
Stock incentive compensation 1,471,876 1,537,740
Gain on disposal of assets -- (35,343)
Gain on sale of cable systems (24,726,432) --
Bad debt expense 1,773,094 4,987,939
Change in assets and liabilities:
Accounts receivable (3,657,763) (8,783,027)
Inventory (1,647,165) (1,212,595)
Prepaid expenses and other (530,481) (5,077,019)
Accounts payable and accrued expenses 1,951,209 10,871,444
Accrued interest (1,103,101) (2,628,380)
Deposits and other (94,936) (5,217,951)
------------ ------------
Net cash used for operating activities (15,461,889) (67,256,908)
------------ ------------
Cash flows from investing activities:
Acquisitions (89,815,402) (104,064,329)
Cash acquired from acquisitions 3,284,382 5,486
Capital expenditures (6,178,866) (10,700,128)
Purchase of intangible assets (10,042,558) (4,003,116)
Payments for programming rights (1,597,782) (2,155,482)
Proceeds from sale of assets -- 508,988
Proceeds from sale of cable system 30,132,826 --
------------ ------------
Net cash used for investing activities (74,217,400) (120,408,581)
------------ ------------
Cash flows from financing activities:
Repayments of long-term debt (5,558,004) (13,620,685)
Borrowings on bank credit facilities 81,500,000 124,300,000
Repayments of bank credit facilities (200,000) (50,600,000)
Restricted cash 9,283,210 19,499,934
Capital lease repayments (321,044) (136,624)
Proceeds from issuance of common stock -- 81,131,776
Underwriting and common stock offering costs -- (4,657,398)
------------ ------------
Net cash provided by financing activities 84,704,162 155,917,003
------------ ------------
Net decrease in cash and cash equivalents (4,975,127) (31,748,486)
Cash and cash equivalents, beginning of year 44,049,097 54,505,473
------------ ------------
Cash and cash equivalents, end of period $ 39,073,970 $ 22,756,987
============ ============
</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, the "Company") operates in growing segments of the media industry
and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or
the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus
Media & Communications, Inc. ("PM&C") and Digital Television Services, Inc.
("DTS").
PM&C's subsidiaries provide direct broadcast satellite television ("DBS")
services to customers in certain rural areas of the United States; own and/or
program broadcast television ("Broadcast" or "TV") stations affiliated with the
Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB
Television Network ("WB"); and own and operate cable television ("Cable")
systems that provide service to individual and commercial subscribers in Puerto
Rico. DTS and its subsidiaries provide DBS services to customers in certain
rural areas of the United States.
2. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements include the accounts of Pegasus
and all of its subsidiaries. All intercompany transactions and balances have
been eliminated. Certain amounts for 1998 have been reclassified for comparative
purposes.
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, 1998 included
in the Company's Annual Report on Form 10-K for the year then ended.
3. Common Stock:
In March 1999, Pegasus completed a secondary public offering in which it
sold approximately 3.6 million shares of its Class A Common Stock to the public
at a price of $22 per share, resulting in net proceeds to the Company of $74.9
million.
On June 21, 1999, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Class A Common
Stock from 30.0 million to 50.0 million and authorizing 20.0 million shares of
Non-Voting Common Stock, par value $0.01 per share.
As of September 30, 1999, the Company had three classes of Common Stock:
Class A Common Stock, Class B Common Stock and Non-Voting Common Stock. Holders
of Class A Common Stock and Class B Common Stock are entitled to one vote per
share and ten votes per share, respectively.
The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions.
4. Preferred Stock:
As of December 31, 1998 and September 30, 1999, the Company had 5.0
million shares of Preferred Stock authorized of which 135,073 shares have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the
"Series A Preferred Stock").
The Company had approximately 119,369 and 135,073 shares of Series A
Preferred Stock issued and outstanding at December 31, 1998 and September 30,
1999, respectively. On July 1, 1999, the Company paid dividends on the Series A
Preferred Stock of approximately 8,095 shares in the aggregate of Series A
Preferred Stock to stockholders of record on June 15, 1999.
7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Preferred Stock: - (Continued)
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
Under the terms of the Series A Preferred Stock, Pegasus' ability to pay
dividends on its Common Stock is subject to certain restrictions.
5. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following : December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Series B Senior Notes payable by Pegasus, due 2005,
interest at 9.625%, payable semi-annually in
arrears on April 15 and October 15....................................... $115,000,000 $115,000,000
Series B Senior Notes payable by Pegasus, due 2006,
interest at 9.75%, payable semi-annually in
arrears on June 1 and December 1......................................... 100,000,000 100,000,000
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..................... 27,500,000 85,900,000
Senior six-year $70.0 million revolving credit
facility, payable by DTS, interest at DTS'
option at either the bank's base rate plus an
applicable margin or the Eurodollar Rate plus an
applicable margin........................................................ 26,800,000 42,700,000
Senior six-year $20.0 million term loan facility,
payable by DTS, interest at DTS' option at
either the bank's base rate plus an applicable
margin or the Eurodollar Rate plus an applicable
margin................................................................... 19,600,000 19,000,000
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 $2,621,878 and $2,323,529 as of
December 31, 1998 and September 30, 1999,
respectively............................................................. 82,378,122 82,676,471
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 $1,784,844 and $1,582,585 as of
December 31, 1998 and September 30, 1999,
respectively............................................................. 153,215,156 153,417,415
Mortgage payable, due 2000, interest at 8.75%............................... 454,965 436,783
Sellers' notes, due 1999 to 2005, interest at 3% to 8%...................... 33,537,788 25,337,492
Capital leases and other.................................................... 542,721 406,097
------------ ------------
559,028,752 624,874,258
Less current maturities..................................................... 14,399,046 14,207,778
------------ ------------
Long-term debt.............................................................. $544,629,706 $610,666,480
============ ============
</TABLE>
8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Long-Term Debt: - (Continued)
DTS maintains a $70.0 million senior revolving credit facility and a $20.0
million senior term credit facility (collectively, the "DTS Credit Facility")
which expires in 2003 and is collateralized by substantially all of the assets
of DTS and its subsidiaries. The DTS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. As of September 30, 1999, $14.4 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility, including
$6.7 million collateralizing certain of the Company's outstanding sellers'
notes.
PM&C maintains a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant. As of September 30,
1999, $29.7 million of stand-by letters of credit were issued pursuant to the
PM&C Credit Facility, including $14.5 million collateralizing certain of the
Company's outstanding sellers' notes.
Certain of the Company's notes may be redeemed, at the option of the
Company, in whole or in part, at various points in time after July 1, 2000 at
the redemption prices specified in the indentures governing the respective
notes, plus accrued and unpaid interest thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, create liens and pay dividends.
6. Earnings 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,
---------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net loss applicable to common shares ($10,751,459) ($56,431,928)
============ ============
Weighted average common shares outstanding 15,897,603 19,720,975
============ ============
Total shares used for calculation of basic earnings per common share 15,897,603 19,720,975
Stock options and warrants -- --
------------ ------------
Total shares used for calculation of diluted earnings per common share 15,897,603 19,720,975
============ ============
</TABLE>
9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Earnings Per Common Share: - (Continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net loss applicable to common shares ($49,491,691) ($151,028,562)
============ ============
Weighted average common shares outstanding 13,533,756 18,579,058
============ ============
Total shares used for calculation of basic earnings per common share 13,533,756 18,579,058
Stock options and warrants -- --
------------ ------------
Total shares used for calculation of diluted earnings per common share 13,533,756 18,579,058
============ ============
</TABLE>
Basic earnings per common share amounts are based on net income, after
deducting preferred stock dividend requirements, divided by the weighted average
number of shares of Class A, Class B and Non-Voting Common Stock outstanding
during the year. The total shares used for the calculation of diluted earnings
per common share were not adjusted for securities that have not been issued as
they are antidilutive.
For the three and nine months ended September 30, 1998 and 1999, 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 $3.8 million, $11.0 million, $4.3 million and $12.4 million,
respectively, by applicable shares outstanding.
7. Acquisitions:
In the first three quarters of 1999, the Company acquired, from twelve
independent DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV
programming in certain rural areas of Alabama, Colorado, Illinois, Indiana,
Minnesota, Nebraska, North Dakota, Ohio and Texas and the related assets in
exchange for total consideration of approximately $68.1 million, which consisted
of $61.8 million in cash, 12,339 shares of the Company's Class A Common Stock
(amounting to $550,000 at the time of issuance), warrants to purchase a total of
25,000 shares of the Company's Class A Common Stock (amounting to $814,000 at
the time of issuance), $4.7 million in promissory notes and $252,000 in assumed
net liabilities.
Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for a purchase price of
approximately $42.1 million in cash. At March 31, 1999, the Aguadilla cable
system served approximately 21,000 subscribers and passed approximately 81,000
of the 90,000 homes in the franchise area. The Aguadilla cable system is
contiguous to the Company's other Puerto Rico cable system and the Company has
consolidated the Aguadilla cable system with its existing cable system.
10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Barter revenue and related expense........................................... $4,861,900 $5,656,907
Acquisition of program rights and assumption of related program payables..... 4,828,024 6,071,717
Acquisition of plant under capital leases.................................... 36,500 --
Capital contribution and related acquisition of intangibles.................. 123,162,284 1,363,592
Notes payable and related acquisition of intangibles......................... 220,828,844 4,690,000
Series A Preferred Stock dividend and reduction of paid-in capital........... 10,958,593 12,400,338
Deferred taxes, net and related acquisition of intangibles................... 82,934,179 29,029
</TABLE>
For the nine months ended September 30, 1998 and 1999, the Company paid
cash for interest in the amount of $26.0 million and $50.2 million,
respectively. The Company paid no federal income taxes for the nine months ended
September 30, 1998 and 1999.
9. Commitments and Contingent Liabilities:
Legal Matters:
In connection with the pending license renewal application of one of the
Company's television stations, it has come to the attention of the Company that,
at that station, there were violations of the FCC's rules establishing limits on
the amount of commercial material in programs directed to children.
The Company has been sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who purport to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of the Company's
late-fee policy. The Company is advised that similar suits have been brought
against DIRECTV and various cable operators in other parts of the United States.
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 and matters will not have a material adverse effect on the consolidated
operations, liquidity, cash flows or financial position of the Company.
10. Industry Segments:
The Company operates in growing segments of the media industry: DBS,
Broadcast and Cable. DBS consists of providing direct broadcast satellite
television services to customers in certain rural areas of 36 states. Broadcast
consists of nine television stations affiliated with Fox, UPN and the WB and two
transmitting towers, all located in the eastern United States. Cable consists of
providing cable television services to individual and commercial subscribers in
Puerto Rico.
11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Industry Segments: - (Continued)
All of the Company's revenues are derived from external customers. Capital
expenditures for the Company's DBS segment were $1.1 million and $2.0 million
for the nine months ended September 30, 1998 and 1999, respectively. Capital
expenditures for the Company's Broadcast segment were $3.6 million and $3.0
million for the nine months ended September 30, 1998 and 1999, respectively.
Capital expenditures for the Company's Cable segment were $1.3 million and $4.4
million for the nine months ended September 30, 1998 and 1999, respectively.
Identifiable total assets for the Company's DBS segment were $715.6 million and
$705.1 million as of December 31, 1998 and September 30, 1999, respectively.
Identifiable total assets for the Company's Broadcast segment were $67.1 million
and $71.1 million as of December 31, 1998 and September 30, 1999, respectively.
Identifiable total assets for the Company's Cable segment were $47.0 million and
$88.2 million as of December 31, 1998 and September 30, 1999, respectively.
11. Other Events:
In October 1999, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for total consideration of
approximately $4.6 million, which consisted of $2.8 million in cash and a $1.8
million promissory note, payable over four years.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to us that are based on the beliefs of our management, as well as
assumptions made by and information currently available to our 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 our current views with
respect to future events and are subject to unknown risks, uncertainties and
other factors that may cause actual results to differ materially from those
contemplated in such forward-looking statements. Such factors include, among
other things, the following: general economic and business conditions, both
nationally, internationally and in the regions in which we operate;
relationships with and events affecting third parties like DIRECTV, Inc.;
demographic changes; existing government regulations and changes in, or the
failure to comply with government regulations; competition; the loss of any
significant numbers of subscribers or viewers; changes in business strategy or
development plans; technological developments and difficulties (including any
associated with the year 2000); the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report and in reports and registration statements filed from time to time with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do 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.
The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included on pages 3-12 herein.
General
Pegasus Communications Corporation is:
o The largest independent provider of DIRECTV with 653,000 subscribers
at October 31, 1999. We have the exclusive right to distribute DIRECTV
digital broadcast satellite services to 4.9 million rural households
in 36 states. We distribute DIRECTV through the Pegasus retail
network, a network in excess of 2,000 independent retailers.
o The owner or programmer of nine TV stations affiliated with either
Fox, UPN or the WB and the owner of a large cable system in Puerto
Rico serving approximately 54,000 subscribers.
DBS revenues are principally derived from monthly customer subscriptions
and pay-per-view services. Broadcast revenues are derived from the sale of
broadcast airtime to local and national advertisers. Cable revenues are derived
from monthly customer subscriptions, pay-per-view services, subscriber equipment
rentals and installation charges.
In this section we use the terms pre-marketing cash flow and location cash
flow. Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges;
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o corporate overhead; and
o DBS subscriber acquisition costs, which are sales and marketing
expenses incurred to acquire new DBS subscribers.
Location cash flow is pre-marketing cash flow less DBS subscriber
acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not be
considered, alternatives to income from operations, net income, net cash
provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Pegasus'
industry or the economy generally. We believe that pre-marketing cash flow and
location cash flow are important, however, for the following reasons:
o those who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that our lenders, investors and we use to monitor
our financial performance and debt leverage.
Pegasus generally 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.
Results of Operations
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Total net revenues for the three months ended September 30, 1999 were
$90.9 million, an increase of $35.4 million, or 64%, compared to total net
revenues of $55.5 million for the same period in 1998. The increase in total net
revenues for the three months ended September 30, 1999 is primarily due to an
increase in DBS revenues of $31.0 million attributable to acquisitions and
internal growth in Pegasus' DBS subscriber base. Total operating expenses for
the three months ended September 30, 1999 were $129.4 million, an increase of
$55.3 million, or 75%, compared to total operating expenses of $74.1 million for
the same period in 1998. The increase is primarily due to an increase of $49.4
million in operating expenses attributable to the growth in Pegasus' DBS
business.
Total corporate expenses, including corporate depreciation and
amortization, were $2.3 million for the three months ended September 30, 1999,
an increase of $937,000, or 67%, compared to $1.4 million for the same period in
1998. The increase in corporate expenses is attributable to the growth in
Pegasus' business. The increase in corporate depreciation and amortization is
primarily due to amortization of deferred financing costs associated with the
issuance of $100.0 million of senior notes in November 1998.
Interest expense was $16.2 million for the three months ended September
30, 1999, an increase of $2.7 million, or 20%, compared to interest expense of
$13.5 million for the same period in 1998. The increase in interest expense is
primarily due to interest on Pegasus' $100.0 million senior notes issued in
November 1998 and an increase in bank borrowings and sellers' notes associated
with Pegasus' DBS acquisitions. Interest income was $280,000 for the three
months ended September 30, 1999, a decrease of $334,000, or 54%, compared to
interest income of $613,000 for the same period in 1998. The decrease in
interest income is due to lower average cash balances for the three months ended
September 30, 1999 compared to the same period in 1998.
Other expenses were $630,000 for the three months ended September 30,
1999, an increase of $517,000, or 461%, compared to other expenses of $112,000
for the same period in 1998. The increase is primarily due to increased investor
relation activities and other non-operating expenses.
Pegasus sold its New England cable systems effective July 1, 1998 for
$30.1 million resulting in a nonrecurring gain of $24.7 million in the third
quarter of 1998.
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The provision for income taxes declined by approximately $3.1 million
primarily as a result of the amortization of the deferred tax liability that
originated from the acquisition of Digital Television Services, Inc. in April
1998.
Preferred stock dividends were $4.3 million for the three months ended
September 30, 1999, an increase of $501,000, or 13%, compared to $3.8 million in
preferred stock dividends for the same period in 1998. The increase is
attributable to a greater number of shares of Pegasus' preferred stock
outstanding during the third quarter of 1999 compared to the third quarter of
1998 as the result of payment of dividends in kind.
DBS
Pegasus' DBS business has experienced significant growth. During the last
twelve months, Pegasus acquired, through acquisitions, approximately 43,000
subscribers and the exclusive DIRECTV distribution rights to approximately
378,000 households in rural areas of the United States. At September 30, 1999,
Pegasus had exclusive DIRECTV distribution rights to 4.8 million households and
631,000 subscribers as compared to 4.5 million households and 387,000
subscribers at September 30, 1998. Pegasus had 5.1 million households and
654,000 subscribers at September 30, 1999, including pending acquisitions. At
September 30, 1998, subscribers would have been 444,000, including pending and
completed acquisitions. Subscriber penetration increased from 8.8% at September
30, 1998 to 12.9% at September 30, 1999, including pending and completed
acquisitions.
Total DBS net revenues were $75.7 million for the three months ended
September 30, 1999, an increase of $31.0 million, or 69%, compared to DBS net
revenues of $44.7 million for the same period in 1998. The increase is primarily
due to an increase in the average number of subscribers in the third quarter of
1999 compared to the third quarter of 1998. The average monthly revenue per
subscriber was $44.80 for the three months ended September 30, 1999 compared to
$41.50 for the same period in 1998. Pro forma DBS net revenues, including
pending acquisitions at September 30, 1999, were $79.1 million, an increase of
$25.3 million, or 47%, compared to pro forma DBS net revenues of $53.9 million
for the same period in 1998.
Programming, technical, and general and administrative expenses were $53.5
million for the three months ended September 30, 1999, an increase of $22.2
million, or 71%, compared to $31.4 million for the same period in 1998. The
increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.7% for the three
months ended September 30, 1999 compared to 70.1% for the same period in 1998.
Subscriber acquisition costs were $38.8 million for the three months ended
September 30, 1999, an increase of $24.7 million compared to $14.1 million for
the same period in 1998. Gross subscriber additions were 121,600 for the three
months ended September 30, 1999 compared to 40,900 for the same period in 1998.
The total subscriber acquisition costs per gross subscriber addition were $319
for the three months ended September 30, 1999 compared to $345 for the same
period in 1998. The decrease in subscriber acquisition costs per gross
subscriber addition is due to a decrease in promotional programming.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $350,000 for the three months ended September 30,
1999, an increase of $25,000, or 8%, compared to $325,000 for the same period in
1998. The increase resulted from a larger gain in pro forma location cash flow
during the third quarter of 1999 as compared to the third quarter of 1998.
Depreciation and amortization was $20.4 million for the three months ended
September 30, 1999, an increase of $2.5 million, or 14%, compared to $17.9
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of DBS acquisitions that occurred during the last two years.
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Broadcast
During the three months ended September 30, 1999, Pegasus owned or
programmed nine broadcast television stations in six markets. Two new stations
were launched during the second half of 1998. Total net broadcast revenues for
the three months ended September 30, 1999 were $8.9 million, an increase of $1.0
million, or 13%, compared to net broadcast revenues of $7.9 million for the same
period in 1998. The increase is primarily attributable to an increase of
$429,000 in net broadcast revenues from the four stations launched in 1997 and
1998, a $394,000 increase in barter revenue and an increase in local and
national advertising sales.
Programming, technical, and general and administrative expenses were $5.8
million for the three months ended September 30, 1999, an increase of $1.6
million, or 38%, compared to $4.2 million for the same period in 1998. The
increase is primarily due to an increase in expenses from the two new stations
launched in 1998 and an increase in news related expenses associated with the
launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee
markets.
Marketing and selling expenses were $1.4 million for the three months
ended September 30, 1999, an increase of $113,000, or 9%, compared to $1.3
million for the same period in 1998. The increase in marketing and selling
expenses is due to an increase in promotional costs associated with the launch
of the new stations and news programs.
There was no incentive compensation, which is calculated based on
increases in pro forma location cash flow, for the three months ended September
30, 1999 compared to incentive compensation of $112,000 for the same period in
1998. No incentive compensation resulted from a decline in pro forma location
cash flow during the third quarter of 1999 compared to the third quarter of
1998.
Depreciation and amortization was $1.3 million for the three months ended
September 30, 1999, an increase of $560,000, or 74%, compared to $758,000 for
the same period in 1998. The increase is due to capital expenditures associated
with the launch of the new stations and our news initiative.
Cable
Total net cable revenues were $6.2 million for the three months ended
September 30, 1999, an increase of $3.4 million, or 118%, compared to net cable
revenues of $2.8 million for the same period in 1998. The increase is primarily
attributable to the acquisition of the Aguadilla, Puerto Rico cable system
effective March 31, 1999. Net revenues derived from Pegasus' existing Puerto
Rico cable system were $3.6 million for the three months ended September 30,
1999, an increase of $760,000, or 27%, compared to net cable revenues of $2.8
million for the same period in 1998. The Aguadilla, Puerto Rico cable system
generated net revenues of $2.6 million for the three months ended September 30,
1999. The average monthly revenue per subscriber was $38.89 for the three months
ended September 30, 1999 compared to $32.71 for the same period in 1998. On a
pro forma basis, including the completed acquisition of the Aguadilla, Puerto
Rico cable system and the disposition of the New England cable systems, there
were 53,900 subscribers as of September 30, 1999 compared to 51,100 subscribers
as of September 30, 1998.
Programming, technical, and general and administrative expenses were $3.2
million for the three months ended September 30, 1999, an increase of $1.7
million, or 111%, compared to $1.5 million for the same period in 1998. The
increase is primarily attributable to the acquisition of the Aguadilla, Puerto
Rico cable system effective March 31, 1999.
Marketing and selling expenses were $219,000 for the three months ended
September 30, 1999, an increase of $137,000, or 168%, compared to $82,000 for
the same period in 1998. The increase is a result of the acquisition of the
Aguadilla, Puerto Rico cable system.
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<PAGE>
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $135,000 for the three months ended September 30,
1999, an increase of $130,000 compared to $5,000 for the same period in 1998.
The increase resulted from a larger gain in pro forma location cash flow during
the third quarter of 1999 as compared to the third quarter of 1998.
Depreciation and amortization was $2.0 million for the three months ended
September 30, 1999, an increase of $927,000, or 86%, compared to $1.1 million
for the same period in 1998. The increase in depreciation and amortization is
primarily due to the acquisition of the Aguadilla, Puerto Rico cable system.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Total net revenues for the nine months ended September 30, 1999 were
$239.6 million, an increase of $108.5 million, or 83%, compared to total net
revenues of $131.0 million for the same period in 1998. The increase in total
net revenues for the nine months ended September 30, 1999 is primarily due to an
increase in DBS revenues of $102.5 million attributable to acquisitions and
internal growth in Pegasus' DBS subscriber base. Total operating expenses for
the nine months ended September 30, 1999 were $334.3 million, an increase of
$169.5 million, or 103%, compared to total operating expenses of $164.8 million
for the same period in 1998. The increase is primarily due to an increase of
$159.4 million in operating expenses attributable to the growth in Pegasus' DBS
business.
Total corporate expenses, including corporate depreciation and
amortization, were $6.5 million for the nine months ended September 30, 1999, an
increase of $2.8 million, or 73%, compared to $3.8 million for the same period
in 1998. The increase in corporate expenses is attributable to the growth in
Pegasus' business. The increase in corporate depreciation and amortization is
primarily due to amortization of deferred financing costs associated with the
issuance of $100.0 million of senior notes in November 1998.
Interest expense was $47.5 million for the nine months ended September 30,
1999, an increase of $17.7 million, or 59%, compared to interest expense of
$29.8 million for the same period in 1998. The increase in interest expense is
primarily due to interest on Pegasus' $100.0 million senior notes issued in
November 1998, Digital Television Service, Inc.'s $155.0 million senior notes,
which were assumed by Pegasus in April 1998, and an increase in bank borrowings
and sellers' notes associated with Pegasus' DBS acquisitions. Interest income
was $1.1 million for the nine months ended September 30, 1999, a decrease of
$278,000, or 21%, compared to interest income of $1.3 million for the same
period in 1998. The decrease in interest income is due to lower average cash
balances for the nine months ended September 30, 1999 compared to the same
period in 1998.
Other expenses were $1.4 million for the nine months ended September 30,
1999, an increase of $649,000, or 81%, compared to other expenses of $799,000
for the same period in 1998. The increase is primarily due to increased investor
relation activities and other non-operating expenses.
Pegasus sold its New England cable systems effective July 1, 1998 for
$30.1 million resulting in a nonrecurring gain of $24.7 million for the nine
months ended September 30, 1998.
The provision for income taxes declined by approximately $4.2 million
primarily as a result of the amortization of the deferred tax liability that
originated from the acquisition of Digital Television Services, Inc. in April
1998.
Preferred stock dividends were $12.4 million for the nine months ended
September 30, 1999, an increase of $1.4 million, or 13%, compared to $11.0
million in preferred stock dividends for the same period in 1998. The increase
is attributable to a greater number of shares of Pegasus' preferred stock
outstanding during the first three quarters of 1999 compared to the first three
quarters of 1998 as the result of payment of dividends in kind.
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DBS
Total DBS net revenues were $198.2 million for the nine months ended
September 30, 1999, an increase of $102.5 million, or 107%, compared to DBS net
revenues of $95.7 million for the same period in 1998. The increase is primarily
due to an increase in the average number of subscribers in the first three
quarters of 1999 compared to the first three quarters of 1998. The average
monthly revenue per subscriber was $43.33 for the nine months ended September
30, 1999 compared to $41.76 for the same period in 1998. Pro forma DBS net
revenues, including pending acquisitions at September 30, 1999, were $213.2
million, an increase of $59.7 million, or 39%, compared to pro forma DBS net
revenues of $153.5 million for the same period in 1998.
Programming, technical, and general and administrative expenses were
$137.9 million for the nine months ended September 30, 1999, an increase of
$71.6 million, or 108%, compared to $66.3 million for the same period in 1998.
The increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 69.6% for the nine
months ended September 30, 1999 compared to 69.3% for the same period in 1998.
Subscriber acquisition costs were $88.7 million for the nine months ended
September 30, 1999, an increase of $63.7 million compared to $25.0 million for
the same period in 1998. Gross subscriber additions were 249,200 for the nine
months ended September 30, 1999 compared to 80,000 for the same period in 1998.
The total subscriber acquisition costs per gross subscriber addition were $356
for the nine months ended September 30, 1999 compared to $313 for the same
period in 1998. The increase in subscriber acquisition costs per gross
subscriber addition is due to an increase in commissions and an increase in
promotional programming during the first half of 1999.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.1 million for the nine months ended September
30, 1999, a decrease of $19,000, or 2%, compared to $1.2 million for the same
period in 1998. The decrease resulted from a lower gain in pro forma location
cash flow during the first three quarters of 1999 as compared to the first three
quarters of 1998.
Depreciation and amortization was $62.3 million for the nine months ended
September 30, 1999, an increase of $24.2 million, or 63%, compared to $38.2
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of DBS acquisitions that occurred during the last two years.
Broadcast
During the nine months ended September 30, 1999, Pegasus owned or
programmed nine broadcast television stations in six markets. Two new stations
were launched during the second half of 1998. Total net broadcast revenues for
the nine months ended September 30, 1999 were $26.5 million, an increase of $3.0
million, or 13%, compared to net broadcast revenues of $23.5 million for the
same period in 1998. The increase is primarily attributable to an increase of
$1.2 million in net broadcast revenues from the four stations launched in 1997
and 1998, a $795,000 increase in barter revenue and an increase in local and
national advertising sales.
Programming, technical, and general and administrative expenses were $15.9
million for the nine months ended September 30, 1999, an increase of $3.7
million, or 30%, compared to $12.2 million for the same period in 1998. The
increase is primarily due to an increase in expenses from the two new stations
launched in 1998 and an increase in news related expenses associated with the
launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee
markets.
Marketing and selling expenses were $4.4 million for the nine months ended
September 30, 1999, an increase of $230,000, or 5%, compared to $4.2 million for
the same period in 1998. The increase in marketing and selling expenses is due
to an increase in promotional costs associated with the launch of the new
stations and news programs.
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Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $202,000 for the nine months ended September 30,
1999, an increase of $58,000, or 40% compared to $144,000 for the same period in
1998. The increase resulted from a larger gain in pro forma location cash flow
during the first three quarters of 1999 as compared to the first thee quarters
of 1998.
Depreciation and amortization was $3.8 million for the nine months ended
September 30, 1999, an increase of $515,000, or 16%, compared to $3.3 million
for the same period in 1998. The increase is due to capital expenditures
associated with the launch of the new stations and our news initiative.
Cable
Total net cable revenues were $14.9 million for the nine months ended
September 30, 1999, an increase of $3.1 million, or 26% compared to net cable
revenues of $11.8 million for the same period in 1998. The increase is primarily
due to the acquisition of the Aguadilla, Puerto Rico cable system effective
March 31, 1999, partially offset by the sale of Pegasus' New England cable
systems effective July 1, 1998. Net cable revenues from the New England Cable
systems were $3.3 million for the nine months ended September 30, 1998. The net
revenues derived from Pegasus' existing Puerto Rico cable system were $10.0
million for the nine months ended September 30, 1999, an increase of $1.4
million, or 17%, compared to net cable revenues of $8.5 million for the same
period in 1998. The Aguadilla, Puerto Rico cable system generated net revenues
of $4.9 million for the nine months ended September 30, 1999. The average
monthly revenue per subscriber was $37.02 for the nine months ended September
30, 1999 compared to $34.14 for the same period in 1998. On a pro forma basis,
including the completed acquisition of the Aguadilla, Puerto Rico cable system
and the disposition of the New England cable systems, there were 53,900
subscribers as of September 30, 1999 compared to 51,100 subscribers as of
September 30, 1998.
Programming, technical, and general and administrative expenses were $7.6
million for the nine months ended September 30, 1999, an increase of $1.5
million, or 26%, compared to $6.0 million for the same period in 1998. The
increase is primarily attributable to the acquisition of the Aguadilla, Puerto
Rico cable system partially offset by the sale of Pegasus' New England cable
systems.
Marketing and selling expenses were $504,000 for the nine months ended
September 30, 1999, an increase of $236,000, or 88%, compared to $268,000 for
the same period in 1998. The increase is a result of the acquisition of the
Aguadilla, Puerto Rico cable system.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $195,000 for the nine months ended September 30,
1999, an increase of $27,000, or 16%, compared to $169,000 for the same period
in 1998. The increase resulted from a larger gain in pro forma location cash
flow during the first three quarters of 1999 as compared to the first three
quarters of 1998.
Depreciation and amortization was $5.0 million for the nine months
ended September 30, 1999, an increase of $1.0 million, or 26%, compared to $4.0
million for the same period in 1998. The increase in depreciation and
amortization is primarily due to the acquisition of the Aguadilla, Puerto Rico
cable system.
Liquidity and Capital Resources
Pegasus' primary sources of liquidity have been the net cash provided by
its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
uses of its cash has been to fund acquisitions, meet debt service obligations,
fund DBS subscriber acquisition costs and fund investments in its broadcast and
cable technical facilities.
Pre-marketing cash flow increased by approximately $9.7 million, or 57%,
for the three months ended September 30, 1999 as compared to the same period in
1998. The increase in pre-marketing cash flow for the three months ended
September 30, 1999 is primarily due to an increase in DBS pre-marketing cash
flow of $8.8 million, or 66%, attributable to acquisitions and internal growth
in Pegasus' DBS subscriber base.
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Pre-marketing cash flow increased by approximately $31.3 million, or 75%,
for the nine months ended September 30, 1999 as compared to the same period in
1998. The increase in pre-marketing cash flow for the nine months ended
September 30, 1999 is primarily due to an increase in DBS pre-marketing cash
flow of $31.0 million, or 106%, attributable to acquisitions and internal growth
in Pegasus' DBS subscriber base.
During the nine months ended September 30, 1999, $54.5 million of cash on
hand at the beginning of the year, together with $155.9 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $67.3 million and investing activities of $120.4 million.
Investing activities consisted of:
o the purchase of a cable system serving Aguadilla, Puerto Rico and
neighboring communities for approximately $42.1 million;
o the acquisition of DBS assets from twelve independent DIRECTV
providers during the first three quarters of 1999 for approximately
$61.8 million;
o the purchase of a building for broadcast operations in our
Northeastern PA market for approximately $1.8 million;
o broadcast expenditures associated with the launch of self-produced
news in our Portland, Maine and Chattanooga, Tennessee markets
totaling $825,000;
o DBS facility upgrades of $2.0 million;
o the expansion and enhancements of the Puerto Rico cable system
amounting to $3.6 million, including $213,000 related to hurricane
damage;
o payments of programming rights amounting to $2.2 million;
o capitalized costs relating to Pegasus' financing of approximately $1.7
million;
o proceeds from the sale of DBS assets to an independent DIRECTV
provider of $509,000;
o new business development costs of approximately $286,000; and
o other capital expenditures and intangibles totaling $4.7 million.
Financing activities consisted of:
o the issuance of approximately 3.8 million shares of Class A common
stock resulting in net proceeds to Pegasus of approximately $76.5
million;
o net borrowings on bank credit facilities totaling $73.7 million;
o the repayment of approximately $13.8 million of long-term debt,
primarily sellers' notes and capital leases; and
o net restricted cash draws of approximately $18.5 million for interest
payments and $1.0 million in connection with the acquisition of the
Aguadilla, Puerto Rico cable system.
As of September 30, 1999, cash on hand amounted to $22.8 million plus
restricted cash of $2.0 million.
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Pegasus Media & Communications maintains a $180.0 million senior, reducing
revolving credit facility. Borrowings under the credit facility are available
for acquisitions, subject to the approval of the lenders in certain
circumstances, working capital, capital expenditures and for general corporate
purposes. As of September 30, 1999, $85.9 million was outstanding and stand-by
letters of credit amounting to $29.7 million were issued under its $180.0
million credit facility. The credit facility expires in December 2003.
Digital Television Services maintains a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility.
Borrowings under the credit facilities are available to refinance certain
indebtedness and for acquisitions, subject to the approval of the lenders in
certain circumstances, working capital, capital expenditures and for general
corporate purposes. As of September 30, 1999, $61.7 million was outstanding and
stand-by letters of credit amounting to $14.4 million were issued under its
$90.0 million credit facilities. The credit facilities expire in July 2003.
In March 1999, Pegasus completed its secondary public offering in which it
sold approximately 3.6 million shares of its Class A Common Stock to the public
at a price of $22.00 per share, resulting in net proceeds to Pegasus of
approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds
to pay down indebtedness under the Pegasus Media & Communications credit
facility and $25.0 million towards the acquisition of the cable system serving
Aguadilla, Puerto Rico and neighboring communities.
As defined in the Certificate of Designation governing Pegasus' Series A
Preferred Stock and the indentures governing Pegasus' senior notes, Pegasus 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 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, we believe that
Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are
accepted within our 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. Digital Television Services, Inc.,
among certain other Pegasus' subsidiaries, are not included in the definition of
Restricted Subsidiaries and, accordingly, their operating results are not
included in the Adjusted Operating Cash Flow data provided below. Pro forma for
the acquisition of the Aguadilla, Puerto Rico cable system, the two completed
DBS acquisitions occurring in the third quarter of 1999 and the sale of our New
England cable systems, as if such acquisitions/disposition occurred on October
1, 1998, Adjusted Operating Cash Flow would have been approximately $67.4
million as follows:
<TABLE>
<CAPTION>
Four Quarters Ended
(in thousands) September 30,1999
-------------------
<S> <C>
Revenues........................................................................ $219,131
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges.............................................................. 147,330
--------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges............ 71,801
Corporate expenses.............................................................. 4,396
--------
Adjusted operating cash flow ................................................... $ 67,405
========
</TABLE>
Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors that
are beyond our control. We cannot assure you that we will be able to generate
the substantial increases in cash flow from operations that we will need to meet
the obligations under our indebtedness. Furthermore, our
21
<PAGE>
agreements with respect to our indebtedness contain numerous covenants that,
among other things, restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
Year 2000
The 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 2000s from dates in the 1900s. These problems may also
arise from additional sources, such as the use of special codes and conventions
in software utilizing the date field.
Pegasus has reviewed its critical systems as to the year 2000 issue.
Pegasus' primary focus has been on its own internal systems. Pegasus has in the
past three years replaced or upgraded its TV traffic systems, cable billing
systems and corporate accounting systems. However, if any additional necessary
changes are not made or completed in a timely fashion or unanticipated problems
arise, the year 2000 issue may take longer for Pegasus to address and may have a
material adverse impact on Pegasus' financial condition and its results of
operations.
Pegasus relies on outside vendors for the operation of its DBS satellite
control and billing systems, including DIRECTV, the National Rural
Telecommunications Cooperative and their respective vendors. Pegasus 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. In addition, Pegasus has had initial communications with
certain of its other significant suppliers, distributors, financial institutions
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
Pegasus' systems may be affected by the failure of others to remediate their own
year 2000 issues. To date, however, Pegasus 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, we
cannot assure you that these 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 Pegasus' financial condition and its
results of operations.
Because Pegasus' year 2000 conversion is expected to be completed prior to
any potential disruption to Pegasus' business, Pegasus has not yet completed the
development of a year 2000-specific contingency plan. If Pegasus 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, it will work to enhance its contingency plan.
Costs to date relating to the year 2000 issue amounted to approximately
$300,000. Costs to be incurred beyond September 30, 1999, relating to the year
2000 issue are expected to be approximately $50,000.
22
<PAGE>
Dividend Policy
As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Credit
facilities and publicly held debt securities of Pegasus' principal subsidiaries
restrict them from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness
are subject to certain restrictions contained in Pegasus' and its subsidiaries'
credit facilities and publicly held debt securities and in the terms of Pegasus'
Series A preferred stock.
Seasonality
Pegasus' revenues vary throughout the year. As is typical in the broadcast
television industry, Pegasus' first quarter generally produces the lowest
revenues for the year and the fourth quarter generally produces the highest
revenues for the year. Pegasus' 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.
Inflation
Pegasus believes that inflation has not been a material factor affecting
its business. In general, Pegasus' revenues and expenses are impacted to the
same extent by inflation. A majority of Pegasus' indebtedness bears interest at
a fixed rate.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent issuance
of SFAS No. 137, SFAS No. 133 is now effective for fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
that the adoption of SFAS No. 133 will have a material effect on our business,
financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our market sensitive financial instruments is provided
below and constitutes a "forward- looking statement." Our major market risk
exposure is changing interest rates under our credit facilities. Our objective
in managing our exposure to interest rate changes is to limit the impact of
interest rate changes in earnings and cash flow and to lower our overall
borrowing costs. The Company has entered into interest rate protection
agreements on its credit facilities to limit its exposure to market interest
rate fluctuations.
Pegasus Media & Communications maintains a $180.0 million senior, reducing
revolving credit facility. As of September 30, 1999, $85.9 million was
outstanding and stand-by letters of credit amounting to $29.7 million were
issued under its $180.0 million credit facility. Interest on the credit facility
is calculated on either the bank's base rate or LIBOR, plus an applicable
margin. Availability of borrowings under the revolving credit facility reduces
by specified amounts quarterly effective September 30, 1999 through maturity.
The credit facility expires in December 2003.
23
<PAGE>
Digital Television Services maintains a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility. As of
September 30, 1999, $42.7 million was outstanding and stand-by letters of credit
amounting to $14.4 million were issued under its $70.0 million revolving credit
facility. Availability on the revolving credit facility reduces by specified
amounts on December 31, 1998 and quarterly effective September 30, 1999 through
maturity. As of September 30, 1999, $19.0 million was outstanding under its
$20.0 million term credit facility. The term credit facility is to be repaid in
20 consecutive quarterly installments of $200,000, commencing on September 30,
1998, with $16.0 million due as a final payment at maturity. Interest on the
credit facilities is calculated at either the bank's base rate or the Eurodollar
Rate, plus an applicable margin. The credit facilities expire in July 2003.
24
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 13, 1999, Pegasus issued 7,500 shares of its Class A Common Stock
upon the exercise of a warrant previously issued on June 18, 1998 in connection
with an acquisition of DIRECTV rights and related assets from an independent
provider of DIRECTV in certain rural portions of Texas. The exercise price of
the warrant was $24.26, resulting in consideration of $181,950 being received by
Pegasus. In issuing these shares, Pegasus relied upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.
Effective as of September 14, 1999, Pegasus issued 12,339 shares of 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
portions of North Dakota. In issuing the shares, Pegasus relied upon exemption
from registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 5. OTHER INFORMATION
On June 3, 1999, the National Rural Telecommunications Cooperative filed a
lawsuit in federal court against DIRECTV, Inc. seeking a court order to enforce
the National Rural Telecommunications Cooperative's contractual rights to obtain
from DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the National
Rural Telecommunications Cooperative's members and affiliates in their rural
markets. The National Rural Telecommunications Cooperative also sought a
temporary restraining order preventing DIRECTV from marketing the premium
programming in such markets and requiring DIRECTV to provide the National Rural
Telecommunications Cooperative with the premium programming for exclusive
distribution in those areas. The court, in an order dated June 17, 1999, denied
the National Rural Telecommunications Cooperative a preliminary injunction on
such matters, without deciding the underlying claims. On July 22, 1999, DIRECTV
responded to the National Rural Telecommunications Cooperative's continuing
lawsuit by rejecting the National Rural Telecommunications Cooperative's claims
to exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101(degree) W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(degree) W orbital location. DIRECTV also alleges in its counterclaim
that the National Rural Telecommunications Cooperative's right of first refusal,
which is effective at the end of the term of DIRECTV's contract with the
National Rural Telecommunications Cooperative, does not provide for certain
programming and other rights comparable to those now provided under the
contract. On September 8, 1999, the court denied a motion by DIRECTV to dismiss
certain of the National Rural Telecommunications Cooperative's claims, leaving
all of the causes of action asserted by the National Rural Telecommunications
Cooperative at issue.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
National Rural Telecommunications Cooperative its share of launch fees and other
benefits that DIRECTV and its affiliates have received relating to programming
and other services. While we are not a party to the pending litigation between
the National Rural Telecommunications Cooperative and DIRECTV, the outcome of
the litigation could have a material adverse effect on our direct broadcast
satellite business because we are an associate of the National Rural
Telecommunications Cooperative with contract rights that are affected by the
contractual relationship between the National Rural Telecommunications
Cooperative and DIRECTV.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Agreement, effective as of September 13, 1999, by and
among ADS Alliance Data Systems, Inc., Pegasus Satellite
Television, Inc. and Digital Television Services, Inc.
(Portions of this document were redacted and filed
separately with the Securities and Exchange Commission
pursuant to a request by the Company for confidential
treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, in connection with the
filing of this Report on Form 10-Q).
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter ended
September 30, 1999.
26
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Pegasus Communications Corporation has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Pegasus Communications Corporation
November 12, 1999 By: /s/ M. Kasin Smith
- ------------------------ -----------------------
Date M. Kasin Smith
Vice President and Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
27
<PAGE>
EXHIBIT INDEX
Exhibit 10.1 Agreement, effective as of September 13, 1999, by and
among ADS Alliance Data Systems, Inc., Pegasus Satellite
Television, Inc. and Digital Television Services, Inc.
(Portions of this document were redacted and filed
separately with the Securities and Exchange Commission
pursuant to a request by the Company for confidential
treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended, in connection with the
filing of this Report on Form 10-Q).
Exhibit 27.1 Financial Data Schedule.
<PAGE>
AGREEMENT
This agreement (the "Agreement"), dated as of September 13, 1999 (the
"Effective Date"), is by and among ADS ALLIANCE DATA SYSTEMS, INC., a Delaware
corporation with its principal place of business located at 17655 Waterview
Parkway, Dallas, Texas 75252 ("Alliance"), PEGASUS SATELLITE TELEVISION, INC., a
Delaware corporation, with its principal place of business located at 171 Locke
Drive, Marlborough, Massachusetts 01752 ("PST"), and DIGITAL TELEVISION
SERVICES, INC., a Delaware corporation, with its principal place of business
located at 171 Locke Drive, Marlborough, Massachusetts 01752 ("DTS" and together
with PST, the "Customer"). Alliance and Customer are referred to herein
individually as a "Party" and collectively as the "Parties."
RECITALS
WHEREAS, Alliance provides customer service on behalf of businesses;
WHEREAS, Customer desires Alliance to serve as its customer service
provider; and
WHEREAS, Alliance desires to be Customer's customer service provider.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows.
1. SERVICES.
1.1. Services. Alliance will provide to Customer the services described on
Exhibit A hereto as modified from time to time (the "Services").
1.2 Procedures/Reporting. Both Parties will use best efforts to mutually
agree upon and establish policies, procedures, and standard reporting concerning
call center activities, performance, escalation and recovery no later than
December 31, 1999.
1.3. Facility. Alliance will initially provide Services under this Agreement
from its Dallas, Texas call center facility. Alliance shall provide up to
[omitted and filed separately with the Commission] work stations at the Dallas
facility, which is estimated to accommodate [omitted and filed separately with
the Commission] monthly handle time minutes. After consultation with Customer,
Alliance may relocate its call center to accommodate future growth or volume
variations. Alliance agrees that any costs or expenses incurred by Customer as a
result of Alliance relocating its call center, including costs related to
relocating equipment and software provided by Customer or third party vendors or
licensors, shall be borne by Alliance, unless otherwise agreed upon in writing
by Customer. If the number of work stations needed exceeds [omitted and filed
separately with the Commission] and Customer desires Alliance to add additional
capacity, Alliance and Customer agree to negotiate in good faith additional
terms and conditions relating to such additional capacity, including the length
of term for the new facility and the minimum volume requirements for the
facility(ies) needed to handle the additional capacity.
1.4. Changes in Services. From time to time, the Parties may agree to certain
changes in the Services, including but not limited to, requests for software
<PAGE>
modification, additions and enhancements in the system design, research, problem
resolution, testing, report modification, and procedural changes. In the event
Customer desires any such changes, modifications, additions or enhancements,
Customer will provide Alliance with written notice of such request. Alliance
will then evaluate the request to understand the requirements involved and
notify Customer in writing of the cost of and time period necessary to implement
the change(s) and any other modifications in the terms or conditions of this
Agreement that would be required as a result of the change. Upon Customer's
written approval of such fee(s), timeline and other modifications to the terms
of this Agreement, Alliance shall make the modifications to the Services.
Notwithstanding, Alliance shall not be obligated to make any Customer requested
changes in the Services, if Alliance reasonably determines that it cannot make
such changes due to certain constraints, including, but not limited to,
constraints relating to issues concerning financial, legal, employment,
technology and facilities matters.
1.5. Third-Party Performance. Customer acknowledges that Alliance's
performance of the Services is contingent upon the acts of Customer and/or
certain third parties. Accordingly, in the event any act or omission by Customer
and/or any such third party engaged by Customer adversely affects Alliance's
performance of the Services, Customer hereby waives all rights and remedies
available with respect to Alliance's performance of the Services as affected by
Customer and/or such third-party acts or omissions.
2. TERM.
2.1. Initial Term. This Agreement will commence on the first date upon which
Alliance begins providing the Services to Customer (the "Implementation Date")
and will continue for an Initial Term (herein so called) ending December 31,
2004. At the end of the Initial Term, the Agreement will automatically renew for
successive three (3) year terms (each, a "Renewal Term") thereafter, unless
either Party provides the other with at least one hundred fifty (150) days'
written notice prior to the expiration of the Initial Term or at least one
hundred fifty (150) days' written notice prior to the expiration of the
then-existing Renewal Term or unless otherwise terminated as provided herein.
Except as provided in subsection 2.2 below, all the terms and conditions of this
Agreement will remain in effect throughout each Renewal Term.
2.2. Renewal Terms. No later than one hundred eighty (180) days prior to the
close of the Initial Term and one hundred eighty (180) days prior to the close
of the then-existing Renewal Term, Alliance will notify Customer of any new
fees, new Minimums (herein defined in Exhibit B) and other changes to this
Agreement to be effective during the upcoming Renewal Term.
3. FEES, CHARGES AND MINIMUMS.
3.1. Fees. Except as modified pursuant to Sections 3.3,3.4 and 3.5 below
below, Customer will pay to Alliance the fees set forth in Exhibit B during the
Initial Term.
3.2 Taxes. Amounts payable to Alliance by Customer under this Agreement are
net of taxes. Taxes and duties, however designated, on Customer's use of the
Services, excluding taxes based on the income and/or property of Alliance, are
the Customer's responsibility. Alliance will either pay those taxes on behalf of
Customer and invoice Customer for them monthly and/or Customer will provide
Alliance with evidence that Customer is exempt from payment of those taxes. If
such an exemption is later held to be invalid by the taxing authority of the
jurisdiction for which the exemption is asserted, Customer shall be liable for,
and shall indemnify Alliance for, any penalties, taxes and interest. [omitted
<PAGE>
and filed separately with the Commission] The provisions of this Section 3.2
shall survive the termination or expiration of this Agreement.
3.3 Fees Not Included. The Fees for Services set forth in Exhibit B do not
include mutually agreed upon pass-through items and the cost of the following
items: one-time data or telecommunication line and modem charges, fees
associated with the deployment of Customer's software to Alliance facilities,
all output medium, postage, delivery service (i.e. courier, express mail),
training materials and supplies. The costs for such items shall either be paid
directly by Customer or paid by Alliance with prompt reimbursement from
Customer.
3.4. Fee Adjustment. The time clock hour and handle time minute fees for call
center labor set forth in Exhibit B may, as of each anniversary date of this
Agreement, be increased by the actual percentage increase in the average hourly
earnings for service workers published by the Bureau of Labor Statistics of the
Department of Labor, for the then-most-recent twelve (12) months as to which
such statistics are available, provided such fees may not be increased under
this Section 3.4 by more than [omitted and filed separately with the Commission]
per year. If the average hourly earnings for service workers is no longer being
published, the Parties will agree upon use of the most comparable index being
published at that time.
3.5. Minimum Annual Call Handling Fee. Customer shall pay Alliance a minimum
annual fee for call handling based on the minimum amounts set forth in Exhibit
B; provided, however, that with respect to a termination of this Agreement prior
to the end of a calendar year, the annual handle time minimum volumes and annual
call handling fee minimums applicable to that year shall be adjusted by
multiplying such numbers by a number equal to the number of days in the calendar
year that Services are provided under this Agreement prior to termination
divided by 365.
4. SOFTWARE.
4.1 Software License from Customer. For as long as this Agreement is in
effect, Customer hereby grants to Alliance a limited, non-exclusive and
non-transferable object-code license (the "License") to use Customer's
proprietary software or third party software that has been licensed to Customer
and which is necessary for Alliance to use to provide the Services, and any
updates thereto (the "Software"). Customer warrants to Alliance that it has full
title to and/or the right to license the Software to Alliance and that the
Software does not infringe on the patent, copyright, trade secret or other
intellectual property right of any third party. If an intellectual property
infringement claim arises with respect to the Software, in addition to
Alliance's rights to indemnification in Section 6, Customer shall use its best
efforts to procure the right to have Alliance continue to use the Software or
replace the Software with non-infringing Software of equivalent functionality.
4.2 Software License from Alliance. In the event that Customer requests
Alliance to provide, develop or acquire software to meet Customer's special
requirements or if Customer desires to use Alliance's software, or third party
software that is licensed to Alliance, at Customer's facility(ies) or a third
party's facility(ies), then Alliance and Customer shall negotiate, in good
faith, the terms and conditions of Customer's use of such software. If Alliance,
solely at its own discretion, develops or purchases proprietary software which
enhances its operating capability at its own facilities, Alliance will not
charge Customer for the use of such software in Alliance facilities.
<PAGE>
4.3 Related Rights. Neither Party will, as a result of this Agreement or of
performance hereunder, acquire any property or other right, claim or interest,
including any patent right or copyright interest, in any of the information,
systems, processors, equipment, computer software, data or service or trademarks
of the other.
4.4 Survival. The provisions of this Section 4 shall survive the termination
or expiration of this Agreement.
5. PERFORMANCE/CALL FORECASTING.
5.1 Performance. No later than December 31, 1999, Alliance and Customer will
mutually agree upon commercially reasonable performance targets that are
consistent with standard industry practice and that are tied to financial
incentives and disincentives for Alliance ("Performance Targets"). Until the
implementation of the mutually agreed upon Performance Targets, Alliance will
use commercially reasonable efforts to answer eight-five percent (85%) of calls
offered within 30 seconds and to maintain an abandon rate of less than or equal
to ten percent (10%).
5.2 Call Forecasting. In order for Alliance to provide sufficient personnel,
equipment and facilities to provide the Services specified in this Agreement,
Alliance and Customer will mutually agree upon a commercially reasonable call
forecasting process that is consistent with standard industry practice no later
than December 31, 1999.
5.3 Volume Allocation. No later than December 31, 1999, both Parties will
mutually agree on a commercially reasonable methodology to allocate call volume
from Customer's network to Alliance's call centers that is consistent with
standard industry practice.
6. LIABILITY; INDEMNIFICATION.
6.1 Liability and Indemnification Obligations. Except as otherwise provided
in this Section 6 and subject to the terms of subsection 6.2 below, Each Party
shall be liable to the other Party for all direct damages and shall defend,
indemnify and hold the other Party harmless from and against any and all
third-party claims, to the extent any such direct damages and/or third-party
claims are based upon or arise from (i) the indemnifying Party's breach of any
material provision of this Agreement and/or (ii) the indemnifying Party's gross
negligence or willful misconduct in its performance or failure to perform under
this Agreement.
6.2. Limitations on Liability, Indemnification. Each Party's aggregate
liability to the other for (a) direct damages and (b) third-party claims, which
occur or are made during a Contract Year, shall not exceed [omitted and filed
separately with the Commission] of the fees (excluding pass-through expenses)
actually received by Alliance from Customer hereunder during such Contract Year.
The parties agree that (a) any breach or gross negligence or willful misconduct
described in subsection 6.1 above that continues over more than one (1) Contract
Year, and/or (b) all direct damages or third-party claims which are related to
the same breach or gross negligence or willful misconduct described in
subsection 6.1.and which accumulate for more than one (1) Contract Year, shall
be deemed to have occurred or been sustained during the Contract Year in which
such breach or gross negligence or willful misconduct initially occurred. For
the purposes of this Agreement, "Contract Year" shall mean the period commencing
on the Effective Date and continuing for three hundred sixty-four (364) days
thereafter, as well as each subsequent three hundred sixty-five (365)-day period
of the Term and of the Renewal Term.
<PAGE>
6.3. SPECIAL DAMAGES. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR
ANY INDIRECT, SPECIAL, CONSEQUENTIAL DAMAGES, PUNITIVE OR EXEMPLARY ARISING OUT
OF, OR RELATED TO, THIS AGREEMENT.
6.4 Limitation Not Applicable. The limitations on liability contained in
subsections 6.2 and 6.3 shall not apply to: (i) claims that either Party's
intellectual property infringes the intellectual property rights of another;
(ii) a claim by Alliance against Customer for failure to pay the minimum annual
fees or termination fees as provided in this Agreement unless the Customer's
non-payment of such minimum fees or termination fees is otherwise permitted by
the Agreement; or (iii) a claim by Alliance against Customer for Customer's
failure to pay taxes in accordance with Section 3.
6.5. Threshold for Claims. Neither Party shall assert claims for damages
against the other Party unless and until the aggregate amount of such claims
exceeds $25,000. The Party who is the potential indemnitee hereunder shall
promptly notify the other Party (the potential indemnitor) in writing of any
such claim for direct damages or of the receipt of notice of the making or
institution of a third-party claim against the potential indemnitee. However,
the potential indemnitor shall not be liable for any direct damages or
third-party claims where more than three hundred sixty-five (365) days have
elapsed between the initial occurrence of the event giving rise to such direct
damages or such third-party claims and the potential indemnitor's receipt of
notice from the potential indemnitee of a claim for direct damages or the making
or institution of a third-party claim against the potential indemnitee.
6.6 Defense. An indemnitee shall have the option of joining in the contest of
a third-party claim or the defense against same by its own counsel, but in any
event shall reasonably cooperate in any such contest or defense. The indemnitor
shall bear all expenses in connection with the contest, defense and/or
settlement of any third-party claim, except that, if the indemnitee desires to
retain its own counsel to participate in any such contest or defense, it will do
so at its own expense.
6.7 NO WARRANTIES. OTHER THAN THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT,
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, RESPECTING THE GOODS OR
SERVICES PROVIDED BY ALLIANCE PURSUANT TO THIS AGREEMENT. THE REMEDIES SET FORTH
IN THIS SECTION 6 ARE THE SOLE REMEDIES RELATING TO ALLIANCE'S LIABILITY TO
CUSTOMER AND CUSTOMER'S LIABILITY TO ALLIANCE FOR DIRECT DAMAGES AND THIRD-PARTY
CLAIMS.
6.8 Survival. The obligations of the parties pursuant to this Section 6 shall
survive the termination or expiration of this Agreement with respect to any
direct damages or third-party claims.
<PAGE>
7. TERMINATION.
7.1 Events of Default. If either Party fails substantially to perform any
material provision of this Agreement (including performance of the Performance
Targets) and does not cure the failure substantially to perform within sixty
(60) days after written notice from the other Party specifying the failure
(except that such cure period will be thirty (30) days for failure to pay money
when due), or becomes insolvent, enters voluntary bankruptcy or receivership
proceedings or makes an assignment for the benefit of creditors, or if within
thirty (30) days after the filing of any petition or the commencement of any
proceeding against it seeking relief under the Federal Bankruptcy Code such
proceeding shall not have been dismissed, the other Party may, in addition to
any other rights or remedies it may have hereunder or by law, terminate this
Agreement by giving notice at any time thereafter, but if termination is for a
failure substantially to perform, only if the failure remains uncured and is
continuing at the end of the respective cure period. In addition, if the
Customer and Alliance cannot mutually agree, prior to the applicable deadlines
set forth in this Agreement or any mutually agreed upon extension of those
deadlines, upon (i) the procedures and reporting policies pursuant to Section
1.2 or (ii) pursuant to Section 5, performance targets, a call forecasting
process and a method to allocate call volume, Customer shall have the right to
terminate this Agreement, without penalty (notwithstanding any other provision
of this Agreement), upon forty-five (45) days' notice to Alliance.
The terminating Party under this subsection 7.1 will be relieved of all
further obligations hereunder except for those obligations which are specified
to survive the termination or expiration of this Agreement and provided, that if
Customer is the terminating Party, Customer will pay to Alliance any monies
payable by it to Alliance up to such termination.
7.2 Early Termination. [Paragraph omitted and filed separately with the
Commission]
7.3 Deconversion.Upon termination or cancellation of this Agreement, other
than termination by Alliance under Section 7.1 as a result of Customer's breach,
Alliance shall provide Customer with assistance in deconverting the Services.
Such deconversion assistance shall be performed in accordance with commercially
reasonable industry practice. Alliance shall not be required to pay for or share
in any of Customer's out-of-pocket deconversion costs.
7.4 Survival . The provisions of this Section 7 shall survive the termination
or expiration of this Agreement.
<PAGE>
8. CONFIDENTIALITY.
8.1. Customer Information. Except to the extent necessary to perform its
obligations under this Agreement or as required by law, Alliance will not,
without the written authorization of Customer, use or disclose to anyone other
than Customer, information concerning Customer's customers that Alliance obtains
as a result of its negotiating or implementing this Agreement or providing
Services hereunder.
8.2 Confidential Information. "Confidential Information" means any
information or data (whether oral, written, electronic or otherwise) concerning
the terms of this Agreement or either Party's business, business plans,
processes, financial information, data, know-how, designs, reports, technical
specifications, pricing information, market definitions and information,
subscriber account information, inventions and ideas, which is conveyed or
communicated, in any form, by one Party to the other Party or learned as a
result of negotiating or implementing this Agreement or providing Services
hereunder.
8.3. No Disclosure. Neither Party will disclose any Confidential Information
without the prior written consent of the Party to whom the Confidential
Information belongs; provided, however, either Party may disclose Confidential
Information (i) to its employees and agents (including attorneys, lenders,
accountants, and investment bankers) who have a need to know this information,
(ii) in connection with a transfer of control, merger or a sale of substantially
all of a Party's ' assets (provided that the recipient has entered into a
confidentiality agreement that preserves the disclosing Party's Confidential
Information) or (iii) as required by court order or law (including United States
securities laws). Alliance acknowledges that Customer or its affiliates are
publicly reporting companies and may need to file this Agreement with its
filings to the Securities and Exchange Commission. Customer agrees to use it
reasonable best efforts to seek confidential treatment of any such information
that may need to be disclosed by Customer or its affiliates and to consult with
Alliance regarding the disclosure of such information prior to disclosing it.
Information shared between the Parties, including customer information covered
in Subsection 8.1 above, shall not be considered Confidential Information if:
(i) it is generally known to the trade or the public at the time of such
disclosure; (ii) it becomes generally known to the trade or the public
subsequent to the time of such disclosure, but not as a result of disclosure by
the other; (iii) it is legally received by either Party from a third party
without restriction; (iv) it is independently developed by either Party; or (v)
it is approved for release in writing by the Party whose Confidential
Information is to be released, prior to any release
8.4. Property Rights. Neither Party will, as a result of this Agreement or of
performance hereunder, acquire any property or other right, claim or interest,
including any patent right or copyright interest, in any of the information,
systems, processors, equipment, computer software, derivative works, data,
servicemarks or trademarks of the other.
8.5. Procedures to Protect. Both Parties covenant that at all times each will
have in place procedures designed to assure that each of its employees and each
third party who is given access to the other Party's Confidential Information
will protect the confidentiality thereof.
8.6. Breach of Confidentiality. Each of the Parties acknowledges that any
breach of the confidentiality provisions of this Agreement by it shall result in
irreparable and continuing damage to the other Party and, therefore, in addition
to any other remedy which may be afforded by law, any breach or threatened
breach of the confidentiality provisions of this Agreement may be prohibited by
restraining order and/or injunction or other equitable remedies of any court.
<PAGE>
8.7. Survival. The provisions of this Section 8 will survive termination or
expiration of this Agreement for a period of five (5) years.
8.8 Joint Developments. Any jointly developed materials that are not
software, hardware, or derivative works (the ownership of which is covered in
Section 4.3) including without limitation, training materials or scripts, shall
be both Party's Confidential Information, which neither Party will disclose to a
third party without the other Party's prior written consent.
9. INVOICES; INVOICE DISPUTES.
9.1 Invoices. Invoices for amounts owing to Alliance hereunder will be sent
to Customer monthly, in arrears, at the address designated by Customer and are
payable within thirty (30) days of the invoice date. Alliance may include all
charges for a given month on one invoice. Invoices will be in Alliance's
standard invoice format.
9.2. Invoice Disputes. In the event of a dispute as to the accuracy of an
invoice or calculation made pursuant to this Agreement, Customer will promptly
request in writing that Alliance provide to it such supporting material as would
be reasonably designed to ascertain the accuracy of the invoice or calculation.
Customer will notify the Alliance Controller in writing at P. 0. Box 100,
Dallas, TX 75221-0100 of its intent to dispute a portion or all of an invoice,
and in such notice Customer will specify the exact amount of such dispute, and
the reason(s) for such a dispute. Invoice charges that are not more than five
percent (5%) greater than Customer's calculations for such charges will be
payable on receipt; amounts above five percent (5%) need not be paid until the
dispute is resolved.
The Parties will cooperate to resolve any invoice disputes in an
expeditious manner. If an invoice dispute is resolved in favor of the Customer,
Alliance will promptly issue invoice credits to Customer against subsequent
invoices.
9.3. Address for Invoices. Invoices will be sent to Customer at the fo11owing
address: 171 Locke Drive, Marlborough, Massachusetts 01752, Attention: John
DiDio. Customer will promptly notify Alliance of any change in such address.
9.4. Past Due Invoices. Invoices not paid by the invoice due date may be
assessed by Alliance at a rate equal to the lesser of (i) one and one-half
percent (1 1/2%) per month or (ii) the then applicable legal maximum rate of
interest.
10. SUCCESSORS AND ASSIGNS.
This Agreement is binding upon the Parties and their respective successors
and assigns, and neither Party will assign or transfer any rights or obligations
hereunder without the prior written consent of the other Party, which will not
be unreasonably withheld, except that either Party may at any time assign and
transfer this Agreement and all rights and obligations hereunder if the
assignment does not relieve the assignor of any of its obligations hereunder in
the event of default by its assignee
11. FORCE MAJEURE.
Neither Party will be responsible for any failure or delay in performance of
its obligations under this Agreement because of circumstances beyond its
control, including, but not limited to, acts of God, flood, fire, riot,
<PAGE>
terrorist activity or the threat of terrorist activity, strikes or work
stoppage, embargo, inability to obtain material, the failure of the equipment or
phone lines of third parties not affiliated with Alliance, government action
(including any laws, ordinances, regulations or the like which restrict or
prohibit the providing of the Services contemplated by this Agreement), and
other causes whether or not of the same class or kind as specifically named
above. In the event a Party is unable substantially to perform for any of the
reasons described in this Section, it will notify the other Party promptly of
its inability so to perform, and if the inability continues for not fewer than
sixty(60) consecutive days, the Party so notified may then terminate this
Agreement effective upon notice to the other Party. This provision shall not,
however, release the Party unable to perform from taking reasonable action to
avoid or remove such circumstance and such Party unable to perform shall
continue performance hereunder with the utmost dispatch whenever such causes are
removed.
12. NOTICES.
All notices pursuant to this Agreement must be in writing and are given when
mailed by certified or registered mail, return receipt requested, or sent by
receipted courier service, or delivered personally, to the Party concerned at
the following address: If to ADS Alliance Data Systems, Inc., 17655 Waterview
Parkway, Dallas, Texas 75252, Attn: Chief Administrative Officer with a copy to
General Counsel. If to Customer: 171 Locke Drive, Marlborough, Massachusetts
01752, Attn: John DiDio with a copy to: Pegasus Communications Corporation, 225
City Line Avenue, Suite 200, Bala Cynwyd, Pennsylvania 19004, Attn: Ted S.
Lodge.
Either Party may change the address to which notices and communications will
be sent by written notice to the other Party, provided that any notice of change
of address is effective only upon receipt.
13. INTEGRATION.
This Agreement sets forth the entire agreement and understanding between the
Parties relating to its subject matter and merges all prior discussions between
them. This Agreement may not be amended or modified except in writing signed by
the Party against whom such modification or amendment is to be enforced.
14. RELATIONSHIP OF PARTIES.
The Parties to this Agreement are acting solely in the capacity of
independent contractors and nothing in this Agreement shall be construed as to
constitute the Parties as partners or joint venturers, or agent of the other,
and neither Party will so represent itself. Likewise, the employees of each
Party shall not be deemed to be employees of the other Party by virtue of this
Agreement or the rights and obligations set forth herein.
15. HEADINGS.
The headings given to the Sections of this Agreement are for convenience of
reference and are not to be used to interpret this Agreement.
16. SEVERABILITY.
In the event that one or more provisions of this Agreement are held invalid,
illegal or unenforceable in any respect or on the basis of any particular
circumstances or in any jurisdiction, the validity, legality and enforceability
<PAGE>
of such provision or provisions under other circumstances or in other
jurisdictions and of the remaining provisions will not in any way be affected or
impaired, unless the declaration of the invalidity, illegality or
unenforceability of such provision or provisions substantially frustrates the
continued performance by, or entitlement to benefits of, either Party, in which
case this Agreement may be terminated by the affected Party, without minimum fee
guarantees or other penalty.
17. WAIVER.
No failure or delay on the part of either Party in exercising any power or
right under this Agreement operates as a waiver, nor does any single or partial
exercise of any power or right preclude any other or further exercise, or the
exercise of any other power or right. No waiver by a Party of any provision of
this Agreement, or of any breach or default, is effective unless in writing and
signed by the Party against whom the waiver is to be enforced.
18. APPLICABLE LAW.
THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW
THEREOF.
19. MUTUAL DRAFTING.
This Agreement is the joint product of Alliance and Customer and each
provision hereof has been subject to mutual consultation, negotiation and
agreement of Alliance and Customer, and shall not be construed for or against
any Party hereto.
20. NO THIRD PARTY BENEFICIARIES.
The provisions of this Agreement are for the benefit of the Parties hereto
and not for any other person or entity.
21. COORDINATION OF PUBLIC STATEMENTS/USE OF NAMES.
21.1 Public Statements. Neither Party will make any public announcement
pertaining to this Agreement or the Services or provide any information related
to the Agreement or Services to the news, trade or other media without the prior
written approval of the other Party, and will not respond to any inquiry from
any public or governmental authority, except as required by law, pertaining to
this Agreement or the Services without the prior consultation and coordination
with the other Party.
21.2 Use of Names and Logos. Neither Party shall use the other Party's name,
slogans, logos, tradenames, trademarks, servicemarks, or distinctive symbols
without the other Party's prior written permission.
22 NO HIRE.
During this Agreement and for a period of 24 months following termination or
expiration, neither Party shall knowingly hire an employee of the other Party
(the "Employer"); provided, however, that an employee may be hired who is not in
a management position with Employer, who seeks employment in response to a
<PAGE>
classified ad or similar means of obtaining an employee, or who responds to an
ad or request made by a professional recruiting firm or similar organization.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
and through their duly authorized representatives.
PEGASUS SATELLITE TELEVISION, INC.
By: Howard E. Verlin
-------------------------
Title: E.V.P.
-------------------------
DIGITAL TELEVISION SERVICES, INC.
By: Howard E. Verlin
-------------------------
Title: E.V. P.
-------------------------
ADS ALLIANCE DATA SYSTEMS, INC.
By: J.E. Anderson
-------------------------
Title: Ex V.P. & CAO
-------------------------
<PAGE>
EXHIBIT A
SERVICES
1. Alliance will provide the resources to handle inbound calls from Customer's
existing or potential customer base regarding existing or planned Customer
products (hereinafter referred to as "customer care"). Alliance will provide
customer care 24-hour a day, 7 day a week. Alliance's facility will
supplement existing Customer facilities. Initially, Alliance will provide the
Services at its Dallas, Texas facility. Call types to be handled may include,
but may not be limited to:
o General inquiries regarding features, functions, content and pricing of
Customer's product(s).
o Inquiries regarding monthly invoices or billing statements for Customer's
product(s).
o Requests to receive information regarding waivers from local broadcast
network affiliates.
o Enrollment of potential subscribers from direct marketing campaigns.
o Spanish language subscriber inquiries
o Per the terms and conditions of the Agreement, Alliance may also provide
related non-telephone related administrative and clerical support, as well
as the appropriate mutually agreed upon required skills training for
customer care representatives.
2. From time to time, the Customer may require more advanced call center
support, which may include, by way of example only, sales, retention and
technical support. Costs for these types and other call center support not
contemplated in this Agreement will be mutually agreed upon based on the
required skill level and associated support.
3. At the Customer's request, based on terms and conditions to be agreed upon,
Alliance will use commercially reasonable efforts to provide customer care
and related support for significant business events. A significant business
event is an event that requires significant additional Alliance or other
third-party resources, a majority of which will not be retained at the
conclusion of the event, over and above those resources typically dedicated
to support the Customer. By way of example only, these events may include
Tyson or Holyfield Pay-Per-View events, periodic CAM card replacements, etc.
4. Alliance will provide the Services and access the Customer's database
utilizing customer care and billing system software provided by the Customer.
This software will be deployed to Alliance facility workstations in a
mutually agreed upon fashion at the Customer's own expense.
5. Alliance will not provide long distance telephone service. Customer will
utilize its existing network to provide this service and will be responsible
for the initial implementation and ongoing support of all long distance
service and local access.
6. Mutually agreed upon daily, weekly and monthly Service performance reporting
and statistics will be provided to Customer by Alliance.
<PAGE>
EXHIBIT B
FEES
1. Call Center Labor: Through December 31, 1999, call center labor will be
billed on a paid time-clock-hour basis. Thereafter, all call center labor
will be billed on a monthly handle time minute basis as stated in Section 3,
below. A handle time minute is defined as the sum of the talk time of an ACD
call and the after call work time associated with the ACD call. All call
center labor fees include management, supervisory, and quality staff.
2. Ramp-Up Period: All call center labor will be billed at the rate of $
[omitted and filed separately with the Commission] per timeclock hour through
December 31,1999.
3. On-Going Labor: The fees stated below take effect January 1, 2000.
Aggregate
Monthly Handle Time Minutes Fee
[omitted and filed separately with the [omitted and filed separately with
Commission] the Commission]
o Pricing above assumes twenty-four hour per day, seven day per week support
with [omitted and filed separately with the Commission] of calls offered
answered within 30 seconds and an abandon rate equal to or less than
[omitted and filed separately with the Commission].
o Monthly handle time minutes over [omitted and filed separately with the
Commission] may require additional call center facilities which may be
subject to new or additional terms, conditions, and minimums.
4. Specialized Support: At Customer's request, Alliance may provide specialized
call center support for unique call types at the fees set forth below.
Function Fee
-------- ---
Spanish Language Support [omitted and filed separately
with the Commission]
Non-Call Administrative/Clerical Support
Sales/Subscriber Retention Support
Technical Support
o *TBD: Fees for these types of call center representatives and others not
included in the Agreement will be determined on an "as needed" basis based
on required skill level and associated support costs.
<PAGE>
EXHIBIT B
FEES
(Continued)
5. Significant Business Events: At Customer's request, Alliance may provide
support for Customer's significant business events. A significant business
event is an event that requires significant additional Alliance resources, a
majority of which will not be retained at the conclusion of the event, over
and above those resources typically dedicated to support the Customer. These
events may include, by way of example only: Tyson PPV Events, Holyfield PPV
Events, Periodic CAM card replacements, etc. Fees for the support of these
events will be determined on an event-by-event basis based on the required
level of support, duration of the event, and the amount of advance
notification Customer provides to Alliance..
6. Training: All fees quoted include [omitted and filed separately with the
Commission] hours of attrition training. Initial training of customer care
representatives hired during the ramp-up period will be billed to customer at
$ [omitted and filed separately with the Commission] per time clock hour.
Training Type Fee
------------- ---
Customer requested training [omitted and filed separately with the
Creation of training materials Commission]
7. Overtime: Alliance will staff call center support to the mutually agreed upon
call forecasting process. Overtime for call center labor will be used
strictly on an "as needed", mutually agreed upon basis to handle actual call
volume over the mutually agreed upon call volume forecast. Alliance will use
commercially reasonable efforts to maximize all available "regular",
non-overtime hours before authorizing overtime hours. In the event overtime
is required, the following fees apply:
Function Fee
-------- ---
Required Overtime [omitted and filed separately with the
Commission]
8. Minimums: Beginning January 1, 2000, the minimum call handling fees paid by
Customer to Alliance each year shall be as follows:
Annual Handle Time Annual Call Handling
Year Minimum Volumes Fee Minimums
2000 [omitted and filed $12,600,000
2001 separately with the $18,216,000
2002+ Commission] $20,250,000
o Customer shall pay Alliance a monthly call handling fee based on Customer's
actual monthly handle time minutes allocated to Alliance by Customer. If at
the end of each calendar year the total actual handle time fees paid to
Alliance are less than the minimum fees for that year as set forth above,
Customer shall pay Alliance the difference within 30 days of Customer's
receipt of an invoice from Alliance; provided, however, that with respect
to a termination of this Agreement prior to the end of a calendar year, the
annual handle time minimum volumes and annual call handling fee minimums
applicable to that year shall be adjusted by multiplying such numbers by a
number equal to the number of days in the calendar year that Services are
provided under this Agreement prior to termination divided by 365.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Pegasus Communication Corporation as of September
30, 1999 (unaudited) and the related consolidated statements of operations adn
cash flows for the three and nine months ended September 30, 1999 (unaudited).
This information is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<EXCHANGE-RATE> 1 1
<CASH> 22,756,987 22,756,987
<SECURITIES> 0 0
<RECEIVABLES> 25,884,702 25,884,702
<ALLOWANCES> 720,000 720,000
<INVENTORY> 6,809,943 6,809,943
<CURRENT-ASSETS> 69,842,026 69,842,026
<PP&E> 72,731,802 72,731,802
<DEPRECIATION> 30,130,715 30,130,715
<TOTAL-ASSETS> 902,903,861 902,903,861
<CURRENT-LIABILITIES> 86,459,097 86,459,097
<BONDS> 451,093,886 451,093,886
138,428,209 138,428,209
3,000,000 3,000,000
<COMMON> 197,356 197,356
<OTHER-SE> (13,855,286) (13,855,286)
<TOTAL-LIABILITY-AND-EQUITY> 902,903,861 902,903,861
<SALES> 90,889,649 239,563,267
<TOTAL-REVENUES> 90,889,649 239,563,267
<CGS> 0 0
<TOTAL-COSTS> 129,436,561 334,288,534
<OTHER-EXPENSES> 349,823 393,365
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 16,245,904 47,540,765
<INCOME-PRETAX> (55,142,639) (142,659,397)
<INCOME-TAX> (3,016,173) (4,031,173)
<INCOME-CONTINUING> (52,126,466) (138,628,224)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (52,126,466) (138,628,224)
<EPS-BASIC> (2.86) (8.13)
<EPS-DILUTED> (2.86) (8.13)
</TABLE>
