<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 March 31, 2000
--------------
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 May 9, 2000:
Class A, Common Stock, $0.01 par value 22,134,979
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 March 31, 2000
Page
----
Part I. Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1999 and March 31, 2000 3
Consolidated Statements of Operations
Three months ended March 31, 1999 and 2000 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 23
Part II. Other Information
Item 1 Legal Proceedings 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25
Signature 26
2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,453 $ 315,317
Restricted cash 2,379 4,449
Accounts receivable, less allowance for doubtful accounts of $1,410 and $1,459, respectively 31,984 28,340
Inventory 10,020 15,599
Program rights 4,373 4,140
Deferred taxes 536 536
Prepaid expenses and other 4,597 5,401
-------- ----------
Total current assets 94,342 373,782
Property and equipment, net 44,415 59,000
Intangible assets, net 736,806 850,956
Deferred financing costs, net 23,831 22,961
Program rights 5,732 4,732
Deferred taxes 30,371 20,739
Investment in affiliates 4,598 116,499
Deposits and other 5,237 6,353
-------- ----------
Total assets $945,332 $1,455,022
======== ==========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 15,488 $ 9,065
Accounts payable 8,999 9,467
Accrued interest 11,592 20,146
Accrued satellite programming, fees and commissions 37,885 40,245
Accrued expenses 14,139 15,641
Amounts due seller 6,729 -
Current portion of program rights payable 4,446 4,281
-------- ----------
Total current liabilities 99,278 98,845
Long-term debt 668,926 745,911
Program rights payable 4,211 3,296
Deferred taxes 90,310 104,806
-------- ----------
Total liabilities 862,725 952,858
-------- ----------
Commitments and contingent liabilities - -
Minority interest 3,000 3,000
Preferred Stock; $0.01 par value; 20.0 million shares authorized - -
Series A Preferred Stock; $0.01 par value; 143,684 shares authorized; 135,073 and 143,684
issued and outstanding 142,734 147,313
Series B Preferred Stock; $0.01 par value; 5,707 shares authorized, issued and outstanding - 5,721
Series D Preferred Stock; $0.01 par value; 22,500 shares authorized, issued and outstanding - 22,650
Series E Preferred Stock; $0.01 par value; 10,000 shares authorized, issued and outstanding - 10,038
Stockholders' equity (deficit):
Series C Preferred Stock; $0.01 par value; 3.0 million shares authorized, issued and outstanding - 300,000
Class A Common Stock; $0.01 par value; 250.0 million shares authorized; 15,216,510 152 159
and 15,943,163 issued and outstanding
Class B Common Stock; $0.01 par value; 30.0 million shares authorized; 4,581,900 46 46
issued and outstanding
Non-Voting Common Stock; $0.01 par value; 200.0 million shares authorized - -
Additional paid-in capital 237,566 361,909
Deficit (300,704) (348,433)
Class A Common Stock in treasury, at cost; 4,253 and 4,907 shares (187) (239)
-------- ----------
Total stockholders' equity (deficit) (63,127) 313,442
-------- ----------
Total liabilities and stockholders' equity (deficit) $945,332 $1,455,022
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
------- -------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $58,336 $ 95,857
Broadcast 7,949 8,138
------- --------
Total net revenues 66,285 103,995
Operating expenses:
DBS
Programming, technical, general and administrative 40,519 67,858
Marketing and selling 21,146 25,409
Incentive compensation 390 400
Depreciation and amortization 21,452 22,450
Broadcast
Programming, technical, general and administrative 4,943 5,963
Marketing and selling 1,467 1,869
Incentive compensation 156 15
Depreciation and amortization 1,189 1,325
Corporate expenses 1,182 1,860
Corporate depreciation and amortization 710 363
Development costs - 427
Other expense, net 349 865
------- --------
Loss from operations (27,218) (24,809)
Interest expense (15,681) (21,247)
Interest income 445 3,426
------- --------
Loss from continuing operations before income taxes,
equity loss and extraordinary items (42,454) (42,630)
Benefit for income taxes (443) (3,806)
Equity in net loss of unconsolidated affiliates - (116)
------- --------
Loss from continuing operations before
extraordinary items (42,011) (38,940)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 133 491
------- --------
Loss before extraordinary items (41,878) (38,449)
Extraordinary loss from extinquishment of debt, net - (9,280)
------- --------
Net loss (41,878) (47,729)
Preferred stock dividends 4,047 4,781
------- --------
Net loss applicable to common shares ($45,925) ($52,510)
======= =======
Basic and diluted earnings per common share:
Loss from continuing operations ($2.82) ($2.15)
Income from discontinued operations 0.01 0.02
------- --------
Loss before extraordinary items (2.81) (2.13)
Extraordinary loss - (0.46)
------- --------
Net loss ($2.81) ($2.59)
======= =======
Weighted average shares outstanding (000's) 16,352 20,249
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
------- -------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($41,878) ($47,729)
Adjustments to reconcile net loss
to net cash used for operating activities:
Extraordinary loss on extinguishment of debt, net - 9,280
Depreciation and amortization 24,436 26,208
Program rights amortization 783 1,221
Amortization of debt discount and deferred financing fees 375 1,464
Stock incentive compensation 569 500
Gain on disposal of assets (35) -
Equity in net loss of unconsolidated affiliates - 116
Bad debt expense 1,020 2,808
Deferred income taxes (443) (3,856)
Change in assets and liabilities:
Accounts receivable (2,491) 1,166
Inventory 840 (5,579)
Prepaid expenses and other (158) (804)
Accounts payable and accrued expenses 494 2,069
Accrued interest (2,373) 8,554
Deposits and other - (1,116)
------- --------
Net cash used for operating activities (18,861) (5,698)
------- --------
Cash flows from investing activities:
Acquisitions (65,776) (35,967)
Capital expenditures (1,662) (8,005)
Purchase of intangible assets (604) (193)
Payments for programming rights (735) (1,068)
Proceeds from sale of assets 509 -
Investment in affiliates - (14,462)
------- --------
Net cash used for investing activities (68,268) (59,695)
------- --------
Cash flows from financing activities:
Repayments of long-term debt (10,849) (9,761)
Borrowings on bank credit facilities 30,500 275,000
Repayments of bank credit facilities (50,200) (204,200)
Restricted cash 10,524 (2,070)
Increase in deferred financing costs (1,419) (10,052)
Capital lease repayments (57) (38)
Proceeds from issuance of Class A Common Stock 79,550 811
Proceeds from issuance of Series C Preferred Stock - 300,000
Underwriting and stock offering costs (4,657) (9,381)
Repurchase of Class A Common Stock - (52)
------- --------
Net cash provided by financing activities 53,392 340,257
------- --------
Net increase (decrease) in cash and cash equivalents (33,737) 274,864
Cash and cash equivalents, beginning of year 54,505 40,453
------- --------
Cash and cash equivalents, end of period $20,768 $315,317
======= ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<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 subsidiary is Pegasus Media
& Communications, Inc. ("PM&C").
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 a cable television
("Cable") system that provides service to individual and commercial subscribers
in Puerto Rico.
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 1999 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, 1999 included
in the Company's Annual Report on Form 10-K for the year then ended.
3. Investment in Affiliates:
Pegasus Development Corporation ("PDC"), a subsidiary of Pegasus, has
an 89% investment in Pegasus PCS Partners, LP ("PCS") which is accounted for by
the equity method. PCS, a jointly owned limited partnership, acquires, owns,
controls and manages wireless licenses. Pegasus PCS, Inc. is the sole general
partner of PCS and is controlled by Marshall W. Pagon, the Company's President
and Chief Executive Officer. PDC's share of undistributed losses of PCS included
in continuing operations was $116,000 for the first quarter of 2000. PDC's total
investment in PCS at March 31, 2000 was $4.5 million.
In January 2000, PDC made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $112.0 million which is accounted for by the equity method. The
investment consisted of $14.4 million in cash, 200,000 shares of Pegasus' Class
A Common Stock (amounting to $18.8 million) and Pegasus' agreement, subject to
certain conditions, to issue warrants to purchase 1.0 million shares of Pegasus'
Class A Common Stock at an exercise price of $90.00 per share and with a term of
ten years. The fair value of the warrants to be issued was estimated using the
Black-Scholes pricing model and is approximately $78.8 million. A subsidiary of
PMC granted to Pegasus an exclusive license for use of PMC's patent portfolio in
the distribution of satellite services from specified orbital locations. Mary C.
Metzger, Chairman of PMC and a member of the Company's Board of Directors, and
John C. Harvey, Managing Member of PMC and Ms. Metzger's husband, own a majority
of and control PMC. PDC's share of undistributed losses of PMC included in
continuing operations was insignificant for the first quarter of 2000. PDC's
total investment in PMC at March 31, 2000 was $112.0 million.
6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Common Stock:
On March 22, 2000, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Class A Common
Stock from 50.0 million to 250.0 million, increasing the number of authorized
shares of Class B Common Stock from 15.0 million to 30.0 million and increasing
the number of authorized shares of Non-Voting Common Stock from 20.0 million to
200.0 million.
As of March 31, 2000, 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.
5. Preferred Stock:
On March 22, 2000, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Preferred Stock
from 5.0 million to 20.0 million.
As of December 31, 1999 and March 31, 2000, the Company had 5.0 million
and 20.0 million shares of Preferred Stock authorized of which 143,684 shares
have been designated as 12.75% Series A Cumulative Exchangeable Preferred Stock
(the "Series A Preferred Stock"), 5,707 shares have been designated as Series B
Junior Convertible Participating Preferred Stock (the "Series B Preferred
Stock"), 3.0 million shares have been designated as 6.5% Series C Convertible
Preferred Stock (the "Series C Preferred Stock"), 22,500 shares have been
designated as Series D Junior Convertible Participating Preferred Stock (the
"Series D Preferred Stock") and 10,000 shares have been designated as Series E
Junior Convertible Participating Preferred Stock (the "Series E Preferred
Stock").
Series A Preferred Stock:
The Company had approximately 135,073 and 143,684 shares of Series A
Preferred Stock issued and outstanding at December 31, 1999 and March 31, 2000,
respectively. On January 1, 2000, the Company paid dividends on the Series A
Preferred Stock in the aggregate of approximately 8,611 shares of Series A
Preferred Stock amounting to approximately $4.6 million.
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.
Series B, Series D and Series E Preferred Stock:
In connection with DBS acquisitions, the Company had 5,707 shares,
22,500 shares and 10,000 shares of Series B, Series D and Series E Preferred
Stock issued and outstanding at March 31, 2000, respectively. Each whole share
of Series B, Series D and Series E Preferred Stock has a liquidation preference
of $1,000 per share plus any accrued but unpaid dividends (the "Series B
Liquidation Preference," the "Series D Liquidation Preference" and the "Series E
Liquidation Preference," respectively) . Each share of Series B, Series D and
Series E Preferred Stock will initially be convertible at any time at the option
of the holder into approximately 16.24 shares, 9.77 shares and 10.78 shares of
Pegasus' Class A Common Stock, respectively. Holders of shares of Series B
Preferred Stock shall be entitled to receive, when, as and if declared by the
Company's Board of Directors, cash dividends at a rate of 1% payable
semi-annually on January 1 and July 1, commencing on July 1, 2000. Holders of
shares of Series D and Series E Preferred Stock shall be entitled to receive,
when, as and if declared by the Company's Board of Directors, dividends at a
rate of 4% payable annually on January 1, commencing on January 1, 2001.
Dividends on the Series D and Series E Preferred Stock shall be payable in cash
or in Pegasus' Class A Common Stock, at the option of the Company. Dividends on
the Series B, Series D and Series E Preferred Stock shall be cumulative and
shall accrue from the date of the original issuance.
7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Preferred Stock: - (Continued)
The carrying amounts of the Series B, Series D, and Series E Preferred
Stock are periodically increased by amounts representing dividends not currently
declared or paid but which will be payable under the redemption features. For
the three months ended March 31, 2000, dividends on the Series B, Series D and
Series E Preferred Stock amounting to $14,000, $150,000 and $38,000 have been
recorded, respectively. The increases in carrying amounts are effected by
charges against retained earnings, or in the absence of retained earnings, by
charges against paid-in capital.
In the event of liquidation, the Series B, Series D and Series E
Preferred Stock will rank, to the extent of their respective liquidation
preferences, junior to Pegasus' Series A and Series C Preferred Stock, senior to
all classes of the Company's Common Stock and on parity with each other.
Series C Preferred Stock:
In January 2000, Pegasus completed an offering of 3.0 million shares of
Series C Preferred Stock, resulting in net proceeds to the Company of $290.6
million. The Company had 3.0 million shares of Series C Preferred Stock issued
and outstanding at March 31, 2000. Each whole share of Series C Preferred Stock
has a liquidation preference of $100 per share plus any accrued but unpaid
dividends (the "Series C Liquidation Preference") and will initially be
convertible at any time at the option of the holder into 0.7843 shares of
Pegasus' Class A Common Stock. Holders of shares of Series C Preferred Stock
shall be entitled to receive, when, as and if declared by the Company's Board of
Directors, dividends at a rate of 6.5% payable quarterly on January 31, April
30, July 31 and October 31, commencing on April 30, 2000. Dividends shall be
payable in cash, in Pegasus' Class A Common Stock or a combination thereof, at
the option of the Company. Dividends on the Series C Preferred Stock shall be
cumulative and shall accrue from the date of the original issuance.
In the event of liquidation, the Series C Preferred Stock will rank
junior to Pegasus' Series A Preferred Stock, senior to Pegasus' Series B, Series
D and Series E Preferred Stock and senior to all classes of the Company's Common
Stock.
Under the terms of the Series A, Series B, Series C, Series D and
Series E Preferred Stock, Pegasus' ability to pay dividends on its Common Stock
is subject to certain restrictions.
8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---- ----
<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 $115,000
Series B Senior Notes payable by Pegasus, due 2006,
interest at 9.75%, payable semi-annually in arrears on
June 1 and December 1......................................... 100,000 100,000
Series A Senior Notes payable by Pegasus, due 2007,
interest at 12.5%, payable semi-annually in arrears on
February 1 and August 1....................................... 155,000 155,000
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..................................... 142,500 -
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..................... 42,700 -
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..................................... 19,000 -
Senior five-year $225.0 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..................................... - -
Senior five-year $275.0 million term loan 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..................................... - 275,000
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 $2.2 million
and $2.1 million as of December 31, 1999 and March
31, 2000, respectively........................................ 82,776 82,876
Mortgage payable, due 2000, interest at 8.75%.................... 431 -
Mortgage payable, due 2010, interest at 9.25%.................... - 8,750
Sellers' notes, due 2000 to 2005, interest at 3% to 8%........... 26,648 18,029
Capital leases and other......................................... 359 321
-------- --------
684,414 754,976
Less current maturities.......................................... 15,488 9,065
-------- --------
Long-term debt................................................... $668,926 $745,911
======== ========
</TABLE>
Certain of the Company's sellers' notes are collateralized by stand-by
letters of credit issued pursuant to the New PM&C Credit Facility.
Digital Television Services, Inc. ("DTS"), a subsidiary of Pegasus,
maintained a $70.0 million senior revolving credit facility and a $20.0 million
senior term credit facility (collectively, the "DTS Credit Facility") which was
collateralized by substantially all of the assets of DTS and its subsidiaries.
9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt: - (Continued)
The DTS Credit Facility was subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant. The DTS
Credit Facility was terminated in January 2000.
PM&C maintained a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which was collateralized by substantially all of the
assets of PM&C and its subsidiaries. The PM&C Credit Facility was subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. The PM&C Credit Facility was amended and
restated in January 2000.
In December 1999, Pegasus entered into a $35.5 million interim letter
of credit facility (the "PCC Credit Facility"). The PCC Credit Facility was
terminated in January 2000.
In January 2000, PM&C entered into a first amended and restated credit
facility, which consists of a $225.0 million senior revolving credit facility
which expires in 2004 and a $275.0 million senior term credit facility which
expires in 2005 (collectively, the "New PM&C Credit Facility"). The New PM&C
Credit Facility is collateralized by substantially all of the assets of PM&C and
its subsidiaries and is subject to certain financial covenants as defined in the
loan agreement, including a debt to adjusted cash flow covenant. As of March 31,
2000, $40.6 million of stand-by letters of credit were issued pursuant to the
New PM&C Credit Facility, including $12.9 million collateralizing certain of the
Company's outstanding sellers' notes.
Commensurate with the closing of the New PM&C Credit Facility, the
Company borrowed $275.0 million under the term loan, outstanding balances under
the PM&C Credit Facility, the DTS Credit Facility, and the PCC Credit Facility
were repaid and commitments under the DTS Credit Facility and the PCC Credit
Facility were terminated. Additionally, in connection with the closing of the
New PM&C Credit Facility, DTS was merged with and into a subsidiary of PM&C.
The Company's publicly held 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.
In February 2000, Pegasus entered into a mortgage of $8.8 million with
interest payable at 9.25% in connection with the purchase of a building in Bala
Cynwyd, PA where Pegasus' corporate offices are located. The mortgage is being
amortized over 25 years with a balloon payment to satisfy the mortgage in 2010.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, to create liens and to pay dividends.
7. 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 (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 2000
---- ----
<S> <C> <C>
Net loss applicable to common shares...................................... ($45,925) ($52,510)
------- -------
Weighted average common shares outstanding................................ 16,352 20,249
------- -------
Total shares used for calculation of basic earnings per common share...... 16,352 20,249
Stock options and warrants................................................ - -
------- -------
Total shares used for calculation of diluted earnings per common share.... 16,352 20,249
------- -------
</TABLE>
10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Earnings Per Common Share: - (Continued)
Basic earnings per common share amounts are based on net loss, 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 period. 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 months ended March 31, 1999 and 2000, net loss per common
share was determined by dividing net loss, as adjusted by the aggregate amount
of preferred stock dividend requirements, approximately $4.0 million and $4.8
million, respectively, by applicable shares outstanding.
8. Acquisitions:
In the first quarter of 2000, the Company acquired, from seven
independent DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV
programming in certain rural areas of the United States and the related assets
in exchange for total consideration of approximately $133.9 million, which
consisted of $36.0 million in cash, 22,500 shares of Pegasus' Series D Preferred
Stock (amounting to $22.5 million), 10,000 shares of Pegasus' Series E Preferred
Stock (amounting to $10.0 million), 436,592 shares of Pegasus' Class A Common
Stock (amounting to $39.7 million), warrants to purchase a total of 1,500 shares
of Pegasus' Class A Common Stock (amounting to $166,000), $24.4 million of a
deferred tax liability, $200,000 in promissory notes and $961,000 in assumed net
liabilities.
9. Discontinued Operations:
In January 2000, the Company entered into a letter of intent to sell
its remaining Cable operations for $170.0 million in cash, subject to certain
adjustments. The Company anticipates closing this sale during the third quarter
of 2000. Accordingly, the results of operations from the entire Cable segment
have been classified as discontinued with prior periods restated.
Net revenues and income from discontinued operations were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Net revenues.............................................................. $3,071 $6,199
Income from operations.................................................... 127 397
Provision (benefit) for income taxes...................................... - (50)
Income from discontinued operations....................................... 133 491
</TABLE>
10. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Barter revenue and related expense........................................... $1,683 $1,807
Acquisition of program rights and assumption of related program payables..... 170 -
Mortgage payable and related purchase of building............................ - 8,750
Capital contribution and related acquisition of intangibles.................. - 78,115
Capital contribution and related investment in affiliates.................... - 97,555
Notes payable and related acquisition of intangibles......................... 2,250 515
Preferred stock dividends and reduction of paid-in capital................... 4,047 4,781
Deferred taxes, net and related acquisition of intangibles................... - 27,985
</TABLE>
11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Supplemental Cash Flow Information: - (Continued)
For the three months ended March 31, 1999 and 2000, the Company paid
cash for interest in the amount of $18.1 million and $12.7 million,
respectively. The Company paid no federal income taxes for the three months
ended March 31, 1999 and 2000.
11. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural
Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The Company's ability to distribute DIRECTV programming services is
dependent upon agreements between the NRTC and Hughes Electronics Corporation,
DIRECTV's parent, and between the Company and the NRTC.
On June 3, 1999, the NRTC filed a lawsuit in federal court against
DIRECTV seeking a court order to enforce the NRTC's contractual rights to obtain
from DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. On July 22, 1999, DIRECTV
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC 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 NRTC's right of first refusal, which is effective at the end of the
term of DIRECTV's contract with the NRTC, does not provide for certain
programming and other rights comparable to those now provided under the
contract.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV had failed to provide to the NRTC its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and Golden Sky Systems, Inc. ("Golden
Sky", a subsidiary of Golden Sky Holdings, Inc.) filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and Golden Sky. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits, term and
rights of first refusal. The complaint seeks monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.
On February 10, 2000, the Company and Golden Sky filed an amended
complaint which added new tort claims against DIRECTV for interference with
plaintiffs' relationships with manufacturers, distributors and dealers of direct
broadcast satellite equipment. The Company and Golden Sky also withdrew the
class action allegations to allow a new class action to be filed on behalf of
the members and affiliates of the NRTC. The class action was filed on February
12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Commitments and Contingent Liabilities: - (Continued)
27, 2000 and has been transferred to the judge assigned to the actions filed by
the Company and Golden Sky and by the NRTC.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
Commitments:
The Company has entered into a multi-year agreement with a provider of
integrated marketing, information and transaction services to provide customer
relationship management services which will significantly increase the Company's
existing call center capacity. The initial term of the agreement ends on
December 31, 2004. The Company must pay minimum fees to the provider as follows
(in thousands):
Annual
Year Minimum Fees
---- ------------
2000................................................. $12,600
2001................................................. 18,216
2002................................................. 20,250
2003................................................. 20,250
2004................................................. 20,250
-------
Total minimum payments $91,566
=======
12. Industry Segments:
The Company operates in growing segments of the media industry: DBS and
Broadcast. DBS consists of providing direct broadcast satellite television
services to customers in certain rural areas of 38 states. Broadcast consists of
ten television stations affiliated with Fox, UPN and the WB and two transmitting
towers, all located in the eastern United States.
All of the Company's revenues are derived from external customers.
Capital expenditures for the Company's DBS segment were $380,000 and $141,000
for the three months ended March 31, 1999 and 2000, respectively. Capital
expenditures for the Company's Broadcast segment were $251,000 and $1.9 million
for the three months ended March 31, 1999 and 2000, respectively. Capital
expenditures for the Company's discontinued Cable segment were $892,000 and $1.7
million for the three months ended March 31, 1999 and 2000, respectively. All
other capital expenditures for the three months ended March 31, 1999 and 2000
were at the corporate level. Identifiable total assets for the Company's DBS
segment were $701.9 million and $821.8 million as of December 31, 1999 and March
31, 2000, respectively. Identifiable total assets for the Company's Broadcast
segment were $70.6 million and $67.1 million as of December 31, 1999 and March
31, 2000, respectively. Identifiable total assets for the Company's discontinued
Cable segment were $86.5 million and $83.9 million as of December 31, 1999 and
March 31, 2000, respectively. All other identifiable assets as of December 31,
1999 and March 31, 2000 were at the corporate level.
13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Other Events:
On May 5, 2000, the Company acquired, from Golden Sky Holdings, Inc.
("GSH"), the rights to provide DIRECTV programming in certain rural areas of 24
states and the related assets and liabilities in exchange for total
consideration of approximately $1.3 billion, which consisted of approximately
6.1 million shares of Pegasus' Class A Common Stock (amounting to $579.0 million
at a price of $95.07 per share, the average closing price per share five days
prior and subsequent to the acquisition announcement), options to purchase a
total of approximately 349,000 shares of Pegasus' Class A Common Stock
(amounting to $33.1 million), approximately $377.8 million of assumed net
liabilities (as of March 31, 2000) and a deferred tax liability of approximately
$342.8 million.
On May 10, 2000, Pegasus announced a two-for-one stock split of its
Class A Common Stock, in the form of a stock dividend, to shareholders of record
on May 19, 2000. Shareholders will receive one additional share of Pegasus'
Class A Common Stock for each share of Pegasus' Class A Common Stock they own as
of the record date.
The following represents the proforma effect of the stock split on
basic and diluted earnings per common share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
---- ----
<S> <C> <C>
Basic and diluted earnings per common share:
Loss from continuing operations...................................... ($1.41) ($1.08)
Income from discontinued operations.................................. 0.01 0.01
------ ------
Loss before extraordinary items...................................... (1.40) (1.07)
Extraordinary loss................................................... - (0.23)
------ ------
Net loss............................................................. ($1.40) ($1.30)
====== ======
Weighted average shares outstanding (000's).......................... 32,704 40,498
====== ======
</TABLE>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to 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.; litigation with DIRECTV; 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; 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 3-14 herein.
General
Pegasus Communications Corporation is:
o The largest independent provider of DIRECTV with 802,000 subscribers
at March 31, 2000, on an actual basis, without giving effect to the
Golden Sky acquisition. We have the exclusive right to distribute
DIRECTV digital broadcast satellite services to 5.3 million rural
households in 38 states. We distribute DIRECTV through the Pegasus
retail network, a network in excess of 2,500 independent retailers.
o The owner or programmer of ten TV stations affiliated with either
Fox, UPN or the WB and the owner of a large cable system in Puerto
Rico serving approximately 55,000 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.
In January 2000, we entered into a letter of intent to sell the assets
of our entire cable system business in Puerto Rico to a subsidiary of Centennial
Cellular Corporation for $170.0 million in cash, subject to certain adjustments.
The closing of this sale is anticipated to occur during the third quarter of
2000 and is subject to the negotiation of a definitive agreement, third-party
approvals, including regulatory approvals, and other customary conditions.
Accordingly, the results of our cable segment have been presented as
discontinued operations in our consolidated statements of operations.
In this section we use the terms pre-marketing cash flow from
continuing operations and location cash flow from continuing operations.
Pre-marketing cash flow from continuing operations is calculated by taking our
earnings and adding back the following expenses:
15
<PAGE>
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges;
o corporate overhead;
o extraordinary and non-recurring items;
o results of discontinued operations; and
o DBS subscriber acquisition costs, which are sales and marketing
expenses incurred and promotional programming provided in connection
with the addition of new DBS subscribers.
Location cash flow from continuing operations is pre-marketing cash
flow from continuing operations less DBS subscriber acquisition costs.
Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations 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 from continuing operations and location cash
flow from continuing operations 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 from continuing operations and location cash flow
from continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors 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 March 31, 2000 compared to three months ended March 31, 1999
Total net revenues from continuing operations for the three months
ended March 31, 2000 were $104.0 million, an increase of $37.7 million, or 57%,
compared to total net revenues of $66.3 million for the same period in 1999. The
increase in total net revenues for the three months ended March 31, 2000 was
primarily due to an increase in DBS revenues of $37.5 million attributable to
acquisitions and to internal growth in Pegasus' DBS subscriber base. Total
operating expenses from continuing operations for the three months ended March
31, 2000 were $128.8 million, an increase of $35.3 million, or 38%, compared to
total operating expenses of $93.5 million for the same period in 1999. The
increase was primarily due to an increase of $32.6 million in operating expenses
attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $2.2 million for the three months
ended March 31, 2000, an increase of $331,000, or 17%, compared to $1.9 million
for the same period in 1999. The increase in corporate expenses is primarily
attributable to the growth in Pegasus' business.
16
<PAGE>
New business development costs were $427,000 for the three months ended
March 31, 2000.
Other expenses from continuing operations were $865,000 for the three
months ended March 31, 2000, an increase of $516,000, or 148%, compared to other
expenses of $349,000 for the same period in 1999. The increase is primarily due
to increased investor relation activities and legal fees associated with the
DIRECTV litigation.
Interest expense from continuing operations was $21.2 million for the
three months ended March 31, 2000, an increase of $5.6 million, or 35%, compared
to interest expense of $15.7 million for the same period in 1999. The increase
in interest expense is primarily due to interest and fees in connection with the
new Pegasus Media & Communications credit facility. Interest income from
continuing operations was $3.4 million for the three months ended March 31,
2000, an increase of $3.0 million, or 670%, compared to interest income of
$445,000 for the same period in 1999. The increase in interest income is due to
significantly higher average cash balances for the three months ended March 31,
2000 compared to the same period in 1999.
The benefit for income taxes from continuing operations amounted to
$3.8 million for the three months ended March 31, 2000, an increase of $3.4
million, compared to a benefit of $443,000 for the same period in 1999. The
increase is primarily attributable to the amortization of deferred tax
liabilities originating from DBS acquisitions.
Equity in the net losses of unconsolidated affiliates, resulting from
investments in Pegasus PCS Partners, LP in August 1999 and Personalized Media
Communications, LLC in January 2000, amounted to $116,000 for the three months
ended March 31, 2000.
Income from discontinued operations of the cable segment, net of income
taxes, was $491,000 for the three months ended March 31, 2000, an increase of
$358,000, or 269%, compared to $133,000 for the same period in 1999. The
increase is primarily attributable to the acquisition of the Aguadilla, Puerto
Rico cable system effective March 31, 1999. Pegasus had approximately 55,000
cable subscribers at March 31, 2000 compared to 50,200 at March 31, 1999.
Extraordinary loss from the extinguishment of debt was $9.3 million for
the three months ended March 31, 2000. In January 2000, Pegasus Media &
Communications entered into an amended and restated $500.0 million credit
facility. Commensurate with the closing of the new credit facility, certain
funds from the initial borrowing were used to repay the outstanding balances
under the existing Pegasus Media & Communications $180.0 million credit
facility, the Digital Television Services $90.0 million credit facilities and
the Pegasus $35.5 million interim letter of credit facility and commitments
under these credit facilities were terminated. Accordingly, the deferred
financing costs related to the terminated credit facilities were written off.
Preferred stock dividends were $4.8 million for the three months ended
March 31, 2000, an increase of $734,000, or 18%, compared to $4.0 million in
preferred stock dividends for the same period in 1999. The increase is
attributable to a greater number of shares of Pegasus' preferred stock
outstanding for the three months ended March 31, 2000 compared to the same
period in 1999 as the result of payment of dividends in kind and the issuance of
four new series of preferred stock in the first quarter of 2000.
DBS
During the last twelve months, Pegasus acquired, through acquisitions,
approximately 77,000 subscribers and the exclusive DIRECTV distribution rights
to approximately 587,000 households in rural areas of the United States. At
March 31, 2000, Pegasus had exclusive DIRECTV distribution rights to 5.3 million
households and 802,000 subscribers as compared to 4.8 million households and
481,000 subscribers at March 31, 1999. Pegasus had 7.2 million households and
approximately 1.2 million subscribers at March 31, 2000, including pending
acquisitions (which include the acquisition of Golden Sky). At March 31, 1999,
subscribers would have been 817,000, including pending and completed
acquisitions. Subscriber penetration increased from 11.3% at March 31, 1999 to
16.1% at March 31, 2000, including pending and completed acquisitions.
17
<PAGE>
Total DBS net revenues were $95.9 million for the three months ended
March 31, 2000, an increase of $37.5 million, or 64%, compared to DBS net
revenues of $58.3 million for the same period in 1999. The increase is primarily
due to an increase in the average number of subscribers in the first quarter of
2000 compared to the first quarter of 1999. The average monthly revenue per
subscriber was $43.52 for the three months ended March 31, 2000 compared to
$43.12 for the same period in 1999. Pro forma DBS net revenues, including
pending acquisitions at March 31, 2000 (which include the acquisition of Golden
Sky), were $146.5 million, an increase of $23.7 million, or 19%, compared to pro
forma DBS net revenues of $122.8 million for the same period in 1999.
Programming, technical, and general and administrative expenses were
$67.9 million for the three months ended March 31, 2000, an increase of $27.3
million, or 67%, compared to $40.5 million for the same period in 1999. 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 70.8% for the three
months ended March 31, 2000 compared to 69.5% for the same period in 1999.
Subscriber acquisition costs were $25.4 million for the three months
ended March 31, 2000, an increase of $4.3 million compared to $21.1 million for
the same period in 1999. Gross subscriber additions were 79,300 for the three
months ended March 31, 2000 compared to 51,600 for the same period in 1999. The
total subscriber acquisition costs per gross subscriber addition were $321 for
the three months ended March 31, 2000 compared to $410 for the same period in
1999. 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 $400,000 for the three months ended March 31,
2000, an increase of $10,000, or 3%, compared to $390,000 for the same period in
1999. The increase resulted from a larger gain in pro forma location cash flow
during the first quarter of 2000 as compared to the first quarter of 1999.
Depreciation and amortization was $22.5 million for the three months
ended March 31, 2000, an increase of $998,000, or 5%, compared to $21.5 million
for the same period in 1999. 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 three months ended March 31, 2000, Pegasus owned or
programmed ten broadcast television stations in six markets. One new station was
launched during the fourth quarter of 1999. Total net broadcast revenues for the
three months ended March 31, 2000 were $8.1 million, an increase of $189,000, or
2%, compared to net broadcast revenues of $7.9 million for the same period in
1999. The increase is primarily attributable to an increase of $125,000 in
barter revenue.
Programming, technical, and general and administrative expenses were
$6.0 million for the three months ended March 31, 2000, an increase of $1.0
million, or 21%, compared to $4.9 million for the same period in 1999. The
increase is primarily due to higher programming costs for the three months ended
March 31, 2000 compared to the same period in 1999 and an increase in fees to
the Fox Television Network.
Marketing and selling expenses were $1.9 million for the three months
ended March 31, 2000, an increase of $402,000, or 27%, compared to $1.5 million
for the same period in 1999. The increase in marketing and selling expenses was
due to an increase in promotional costs associated with the launch of new
stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $15,000 for the three months ended March 31, 2000,
a decrease of $141,000, or 90%, compared to $156,000 for the same period in
1999. The decrease resulted from a lower gain in pro forma location cash flow
during the first quarter of 2000 as compared to the first quarter of 1999.
18
<PAGE>
Depreciation and amortization was $1.3 million for the three months
ended March 31, 2000, an increase of $136,000, or 11%, compared to $1.2 million
for the same period in 1999. The increase is due to capital expenditures
associated with the launch of new stations, our news initiative and the
construction of and facility upgrades to our stations.
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, to meet debt service
obligations, to fund DBS subscriber acquisition costs, to fund DBS programming
costs and dealer commissions and to fund investments in its broadcast and cable
technical facilities.
Pre-marketing cash flow from continuing operations increased by
approximately $8.9 million, or 46%, for the three months ended March 31, 2000 as
compared to the same period in 1999. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $10.2 million, or 57%, increase in DBS pre-marketing cash flow
attributable to acquisitions and internal growth in Pegasus' DBS
subscriber base; and
o a $1.2 million, or 80%, decrease in broadcast location cash flow as
a result of an increase in programming expenses and fees to the Fox
Television Network.
During the three months ended March 31, 2000, $40.5 million of cash on
hand at the beginning of the year, together with $340.3 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $5.7 million and investing activities of approximately $59.7
million. Investing activities consisted of:
o the acquisition of DBS assets from seven independent DIRECTV
providers during the first quarter of 2000 for approximately $36.0
million;
o approximately $1.3 million of broadcast expenditures for broadcast
television transmitter, tower and facility constructions and
upgrades;
o the expansion and enhancements of the Puerto Rico cable system
amounting to approximately $1.3 million;
o investment in affiliates of $14.5 million;
o the purchase of a building for our corporate offices of
approximately $13.0 million, of which $4.3 million was payable in
cash;
o payments of programming rights amounting to $1.1 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $1.4 million.
Financing activities consisted of:
o the issuance of 3.0 million shares of Series C convertible preferred
stock resulting in net proceeds to Pegasus of approximately $290.6
million;
o the issuance of approximately 70,000 shares of Class A common stock
resulting in net proceeds to Pegasus of approximately $811,000;
19
<PAGE>
o net borrowings on bank credit facilities totaling $70.8 million;
o an increase in deferred financing costs of approximately $10.1
million, primarily in connection with the amendment and restatement
of the Pegasus Media & Communications credit facility;
o the repayment of approximately $9.8 million of long-term debt,
primarily sellers' notes and capital leases;
o the placement of approximately $2.1 million in certificates of
deposit to collateralize certain outstanding loans; and
o the repurchase of Class A common stock in treasury of $52,000.
As of March 31, 2000, cash on hand amounted to $315.3 million plus
restricted cash of $4.4 million.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility which expires in 2004 and a $275.0 million senior term
credit facility which expires in 2005. The new Pegasus Media & Communications
credit facility is collateralized by substantially all of the assets of Pegasus
Media & Communications and its subsidiaries and is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. Borrowings under the new Pegasus Media & Communications credit
facility are available for acquisitions, subject to the approval of lenders in
certain circumstances, to retire certain indebtedness, to fund interest
payments, for working capital, capital expenditures and general corporate
purposes. As of March 31, 2000, $275.0 million was outstanding under the senior
term credit facility and stand-by letters of credit amounting to $40.6 million
were issued pursuant to the senior revolving credit facility.
A portion of the proceeds from the initial borrowing under the senior
term credit facility was used to repay the outstanding balances under the
existing Pegasus Media & Communications $180.0 million senior revolving credit
facility, the Digital Television Services $90.0 million credit facilities and
the Pegasus $35.5 million interim letter of credit facility and commitments
under these credit facilities were terminated. Additionally, in connection with
the closing of the new Pegasus Media & Communications credit facility, Digital
Television Services was merged with and into a subsidiary of Pegasus Media &
Communications.
In January 2000, Pegasus completed an offering of 3.0 million shares of
its 6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends, which resulted in net
proceeds to Pegasus of approximately $290.6 million. Each share of Series C
preferred stock will initially be convertible at the option of the holder into
0.7843 shares of Pegasus' Class A common stock. Pegasus may redeem the Series C
preferred stock on or after August 1, 2001, subject to certain conditions, at
redemption prices set forth in the certificate of designation, plus accumulated
and unpaid dividends, if any.
In the first quarter of 2000, Pegasus issued 5,707 shares, 22,500
shares and 10,000 shares of its Series B, Series D and Series E junior
convertible participating preferred stock, respectively, with a liquidation
preference of $1,000 per share plus any accrued but unpaid dividends, as partial
consideration for acquisitions of DIRECTV distribution rights from three
independent DIRECTV providers. Each share of Series B, Series D and Series E
preferred stock will initially be convertible at the option of the holder into
approximately 16.24 shares, 9.77 shares and 10.78 shares of Pegasus' Class A
common stock, respectively.
20
<PAGE>
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. Pro forma for the seven completed
DBS acquisitions occurring in the first quarter of 2000, as if such acquisitions
occurred on April 1, 1999, adjusted operating cash flow would have been
approximately $123.1 million as follows (in thousands):
Four Quarters Ended
March 31, 2000
-------------------
Revenues................................................... $503,458
Direct operating expenses, excluding depreciation,
amortization and other non-cash charges.................. 373,526
--------
Income from operations before incentive compensation,
corporate expenses, depreciation and amortization and
other non-cash charges................................... 129,932
Corporate expenses.........................................
6,846
--------
Adjusted operating cash flow............................... $123,086
========
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 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.
21
<PAGE>
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 is
approached and reached. An issue exists for all companies that rely on
computers. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in systems failures or miscalculations. We have completed an
assessment of and taken corrective measures to mitigate the potential adverse
effects the year 2000 issue may have on our operations. Costs in connection with
any modifications to make our systems compliant have not been and are not
expected to be material. We are not currently aware of any operational or
technical problems as a result of the change to the year 2000 and will continue
to monitor the potential adverse impact of the year 2000 issue on our business;
however, there can be no assurance that the year 2000 issue will not have a
material adverse impact on our financial condition or our results of operations
in the future.
Dividend Policy
As a holding company, Pegasus' ability to pay dividends is dependent
upon the receipt of dividends from its direct and indirect subsidiaries. Pegasus
Media & Communications' credit facility and publicly held debt securities
restrict it from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and to incur indebtedness are subject to certain restrictions
contained in Pegasus' publicly held debt securities, in the terms of Pegasus'
Series A and Series C preferred stock and by Pegasus Media & Communications'
credit facility and publicly held debt securities.
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 in July 1999, 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. Management believes that the adoption of SFAS No. 133 will not have
a material effect on our business, financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"), which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosure related to revenue recognition policies. The subsequent issuance of
SAB 101A has deferred the timing of the adoption of the requirements until the
second quarter of 2000. Management believes that the adoption of SAB 101 will
not have a material effect on our business, financial position or results of
operations.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about Pegasus' market sensitive financial instruments is
provided below and constitutes a "forward-looking statement." Pegasus' major
market risk exposure is changing interest rates that relate to its credit
facilities, debt obligations and preferred stock. Pegasus' objective in managing
its exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flow and to lower its overall borrowing costs.
Pegasus has entered into interest rate protection agreements on its credit
facility to limit its exposure to market interest rate fluctuations.
Pegasus Media & Communications maintained a $180.0 million senior,
reducing revolving credit facility. Interest on the credit facility was
calculated at either the bank's base rate or LIBOR, plus an applicable margin.
The credit facility was amended and restated in January 2000.
Digital Television Services maintained a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility.
Interest on the credit facilities was calculated at either the bank's base rate
or the Eurodollar rate, plus an applicable margin. The credit facilities were
refinanced in January 2000 with the first amended and restated Pegasus Media &
Communications credit facility.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility and a $275.0 million senior term credit facility. As
of March 31, 2000, stand-by-letters of credit amounting to $40.6 million were
issued pursuant to its $225.0 million revolving credit facility and $275.0
million was outstanding under its $275.0 million senior term credit facility.
Availability of borrowings under the revolving credit facility will reduce by
specified amounts quarterly commencing on March 31, 2001 through maturity. The
term credit facility is to be repaid in specified amounts quarterly commencing
on March 31, 2001, with the balance due at maturity. Interest on the credit
facility is calculated at either the bank's base rate or LIBOR, plus an
applicable margin. The revolving credit facility expires in October 2004 and the
term credit facility expires in April 2005.
Commensurate with the closing of the first amended and restated Pegasus
Media & Communications credit facility, Pegasus Media & Communications borrowed
$275.0 million under the term loan, outstanding balances under Pegasus Media &
Communications' existing $180.0 million credit facility and Digital Television
Services' existing $90.0 million credit facilities were repaid and commitments
under Digital Television Services' credit facilities were terminated.
As of March 31, 2000, Pegasus estimated the fair value of its debt and
preferred stock to be approximately $766.9 million and $529.7 million
respectively, using quoted market prices. The market risk associated with
Pegasus' debt and preferred stock is the potential increase in fair value
resulting from a decrease in interest rates. A 10% decrease in assumed interest
rates would increase the fair value of Pegasus' debt and preferred stock to
approximately $777.8 million and $552.3 million, respectively.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation. Please refer to the disclosure relating to
this matter set forth under "Item 3: Legal Proceedings" on pages 25 and 26 of
Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the
fiscal year ended December 31, 1999.
DBS Late Fee Litigation. In November 1998 we were sued in Indiana for
allegedly charging DBS subscribers excessive fees for late payments. The
plaintiffs, who claim to represent a class consisting of residential DIRECTV
customers in Indiana, seek unspecified damages for the purported class and
modification of our late-fee policy. On March 20, 2000, an order for stipulation
of dismissal without prejudice was signed by a judge of the Superior Court
Division II of Hamilton County, Indiana dismissing without prejudice all claims
asserted by the plaintiffs against Pegasus.
Other Matters. In addition to the matters discussed above, from time to
time we are involved with claims that arise in the normal course of our
business. In our opinion, the ultimate liability with respect to these claims
will not have a material adverse effect on our consolidated operations, cash
flows or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 22, 2000, a special meeting of Pegasus' stockholders was held.
At this meeting, votes were cast to approve (i) the merger agreement relating to
the acquisition of Golden Sky Holdings, Inc. by Pegasus and the transactions
contemplated thereby ("Proposal 1"), (ii) the proposal to amend the Pegasus
Restricted Stock Plan to increase the number of shares of Class A Common Stock
that may be issued thereunder from 350,000 to 750,000 ("Proposal 2"), (iii) the
proposal to amend the Pegasus Stock Option Plan to increase the number of shares
of Class A Common Stock that may be issued thereunder from 1,300,000 to
3,000,000 and to increase the maximum number of shares of Class A Common Stock
that may be issued under options granted to any employee from 550,000 to
1,000,000 ("Proposal 3"), (iv) the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of Class A Common
Stock from 50,000,000 to 250,000,000 shares ("Proposal 4"), (v) the proposal to
amend Pegasus' certificate of incorporation to increase the number of authorized
shares of Class B Common Stock from 15,000,000 to 30,000,000 shares ("Proposal
5"), (vi) the proposal to amend Pegasus' certificate of incorporation to
increase the number of authorized shares of non-voting common stock from
20,000,000 to 200,000,000 shares ("Proposal 6"), and (vii) the proposal to amend
Pegasus' certificate of incorporation to increase the number of authorized
shares of preferred stock from 5,000,000 to 20,000,000 shares ("Proposal 7").
Approval of Proposal 5 required the affirmative vote of holders of a majority of
the total voting power of the outstanding shares of Class A Common Stock and
Class B Common Stock voting separately and not as a single class. At the special
meeting, 11,542,343 shares of Class A Common Stock and 4,581,900 shares of Class
B Common Stock were present at the meeting in person or by proxy. After giving
effect to each holder of Class A Common Stock being entitled to one vote per
share and all holders of Class B Common Stock being entitled to ten votes per
share, an aggregate of 57,361,343 votes were entitled to be cast at the meeting.
The results of the votes were as follows:
For Against Abstain
Proposal 1 57,296,484 16,466 48,393
Proposal 2 55,046,517 2,264,803 50,027
Proposal 3 54,983,630 2,374,114 3,603
Proposal 4 55,847,084 3,422,204 48,470
Proposal 5
Class A 11,010,197 2,460,736 48,145
Class B 45,819,000 0 0
Proposal 6 56,004,808 3,284,210 48,790
Proposal 7 53,725,730 3,583,777 51,570
24
<PAGE>
Proposal 7 required the approval of the holders of the Series A
preferred stock and Series C convertible preferred stock voting together as a
single class. Pegasus solicited written consents from such holders. Of the
3,143,684 shares of Series A preferred stock and Series C convertible preferred
stock issued and outstanding, 1,764,719 consents were received in favor of
Proposal 7, 237,288 consents were voted against Proposal 7, and 39,953
abstentions were received.
As a result of the special meeting and consent solicitation, each of
the proposals were approved.
ITEM 5. OTHER INFORMATION
On May 5, 2000, pursuant to the terms of an Agreement and Plan of
Merger among Pegasus, Golden Sky Holdings, Inc., Pegasus GSS Merger Sub, Inc., a
wholly owned subsidiary of Pegasus, certain stockholders of Pegasus and certain
stockholders of Golden Sky Holdings, Inc., Golden Sky Holdings, Inc. was merged
into Pegasus GSS Merger Sub, Inc. and became a wholly owned subsidiary of
Pegasus Communications Corporation. Upon consummation of the merger, 6,090,145
shares of Pegasus' Class A Common Stock in the aggregate were issued to the
former Golden Sky stockholders and holders of Golden Sky options received
options to purchase an aggregate of 348,964 shares of Pegasus' Class A Common
Stock. Pursuant to the Agreement and Plan of Merger, certain stockholders of
Golden Sky signed an amended and restated voting agreement and a registration
rights agreement. In connection with the merger, Robert F. Benbow, William P.
Collatos, and Ted S. Lodge were elected to Pegasus' board of directors as the
designees of Alta Communications, Spectrum Equity Investors, and Marshall W.
Pagon, respectively. At the time of the merger, Michael C. Brooks resigned from
Pegasus' board of directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed during the quarter
ended March 31, 2000, other than those reports disclosed under Item 14 of
Pegasus' Annual Report on Form 10-K filed with the SEC on March 10, 2000 for the
fiscal year ended December 31, 1999
25
<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
May 12, 2000 By: /s/ M. Kasin Smith
- -------------------- --------------------------------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Pegasus Communication Corporation as of March 31,
2000 (unaudited) and the related consolidated statement of operations for the
three months ended March 31, 2000 (unaudited). This information is qualified in
its entirety by reference to such financial statements.
(Dollars in thousands, except per share data)
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 315,317
<SECURITIES> 0
<RECEIVABLES> 29,799
<ALLOWANCES> 1,459
<INVENTORY> 15,599
<CURRENT-ASSETS> 373,782
<PP&E> 93,428
<DEPRECIATION> 34,428
<TOTAL-ASSETS> 1,455,022
<CURRENT-LIABILITIES> 98,845
<BONDS> 452,876
185,722
303,000
<COMMON> 205
<OTHER-SE> 13,237
<TOTAL-LIABILITY-AND-EQUITY> 1,455,022
<SALES> 103,995
<TOTAL-REVENUES> 103,995
<CGS> 0
<TOTAL-COSTS> 128,804
<OTHER-EXPENSES> (3,310)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,247
<INCOME-PRETAX> (42,746)
<INCOME-TAX> (3,806)
<INCOME-CONTINUING> (38,940)
<DISCONTINUED> 491
<EXTRAORDINARY> (9,280)
<CHANGES> 0
<NET-INCOME> (47,729)
<EPS-BASIC> (2.59)
<EPS-DILUTED> (2.59)
</TABLE>
