<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, 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
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PEGASUS COMMUNICATIONS CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 51-0374669
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(State 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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
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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 3, 2000:
Class A, Common Stock, $0.01 par value 45,903,240
Class B, Common Stock, $0.01 par value 9,163,800
Non-Voting, Common Stock, $0.01 par value -
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PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 2000
Page
Part I. Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1999 and September 30, 2000 4
Consolidated Statements of Operations and
Comprehensive Loss
Three months ended September 30, 1999 and 2000 5
Consolidated Statements of Operations and
Comprehensive Loss
Nine months ended September 30, 1999 and 2000 6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 2000 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 27
Part II. Other Information
Item 1 Legal Proceedings 28
Item 2 Changes in Securities and Use of Proceeds 28
Item 6 Exhibits and Reports on Form 8-K 28
Signature 29
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
<PAGE>
Pegasus Communications Corporation
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $40,453 $306,901
Restricted cash 2,379 7,957
Accounts receivable, net 31,984 45,000
Inventory 10,020 20,415
Program rights 4,373 4,505
Deferred taxes 536 845
Prepaid expenses and other 4,597 13,441
-------- ----------
Total current assets 94,342 399,064
Property and equipment, net 44,415 58,162
Intangible assets, net 736,806 2,253,818
Deferred financing costs, net 23,831 31,427
Program rights 5,732 5,416
Deferred taxes 30,371 23,876
Investment in affiliates 4,598 116,399
Marketable securities - 25,497
Deposits and other 5,237 16,356
-------- ----------
Total assets $945,332 $2,930,015
======== ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $15,488 $14,451
Current portion of program rights payable 4,446 4,727
Taxes payable - 28,000
Accounts payable 8,999 4,080
Accrued interest 11,592 21,017
Accrued satellite programming, fees and commissions 37,885 62,182
Accrued expenses 14,139 54,280
Amounts due seller 6,729 6,741
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Total current liabilities 99,278 195,478
Long-term debt 668,926 1,114,464
Finance obligation - 36,120
Program rights payable 4,211 4,022
Deferred taxes 90,310 571,596
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Total liabilities 862,725 1,921,680
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Commitments and contingent liabilities
Minority interest 3,000 877
Redeemable preferred stock 142,734 195,853
Stockholders' equity (deficit):
Series C preferred stock - 300,000
Common stock 396 549
Other stockholders' equity (63,523) 511,056
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Total stockholders' equity (deficit) (63,127) 811,605
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Total liabilities and stockholders' equity (deficit) $945,332 $2,930,015
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
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Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 2000
----------- -----------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $75,727 $159,583
Broadcast 8,941 8,718
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Total net revenues 84,668 168,301
Operating expenses:
DBS
Programming, technical, general and administrative 53,526 110,918
Marketing and selling 38,830 55,077
Incentive compensation 350 648
Depreciation and amortization 20,401 68,719
Broadcast
Programming, technical, general and administrative 5,766 6,207
Marketing and selling 1,369 1,612
Incentive compensation - 158
Depreciation and amortization 1,319 1,318
Corporate expenses 1,484 2,593
Corporate depreciation and amortization 746 360
Development costs 74 1,141
Other expense, net 593 1,052
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Loss from operations (39,790) (81,502)
Interest expense (16,236) (34,182)
Interest income 257 3,664
Other non-operating income, net - 896
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Loss from continuing operations before income taxes (55,769) (111,124)
Benefit for income taxes (3,016) (14,743)
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Loss from continuing operations (52,753) (96,381)
Discontinued operations:
Income from discontinued operations of cable segment 626 580
Gain on sale of discontinued operations, net of taxes - 59,366
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Net loss (52,127) (36,435)
Preferred stock dividends 4,305 10,086
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Net loss applicable to common shares (56,432) (46,521)
Other comprehensive loss - (12,019)
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Comprehensive loss ($56,432) ($58,540)
======== ========
Basic and diluted per common share amounts:
Loss from continuing operations, less preferred stock dividends ($1.45) ($1.94)
Income from discontinued operations 0.02 0.01
Gain on sale of discontinued operations - 1.08
-------- --------
Net loss applicable to common shares ($1.43) ($0.85)
======== ========
Weighted average number of common shares outstanding 39,442 54,742
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
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Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
----------- -----------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $198,181 $389,851
Broadcast 26,512 26,128
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Total net revenues 224,693 415,979
Operating expenses:
DBS
Programming, technical, general and administrative 137,891 272,925
Marketing and selling 88,720 111,646
Incentive compensation 1,140 1,835
Depreciation and amortization 62,334 141,696
Broadcast
Programming, technical, general and administrative 15,920 18,253
Marketing and selling 4,448 5,523
Incentive compensation 202 204
Depreciation and amortization 3,801 3,860
Corporate expenses 4,108 6,041
Corporate depreciation and amortization 2,196 1,116
Development costs 76 2,310
Other expense, net 1,410 3,428
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Loss from operations (97,553) (152,858)
Interest expense (47,497) (86,185)
Interest income 1,015 11,142
Other non-operating income, net - 234
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Loss from continuing operations before income taxes
and extraordinary items (144,035) (227,667)
Benefit for income taxes (4,031) (30,022)
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Loss from continuing operations before
extraordinary items (140,004) (197,645)
Discontinued operations:
Income from discontinued operations of cable segment 1,375 1,234
Gain on sale of discontinued operations, net of taxes - 59,366
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Loss before extraordinary items (138,629) (137,045)
Extraordinary loss from extinquishment of debt - (9,280)
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Net loss (138,629) (146,325)
Preferred stock dividends 12,400 25,042
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Net loss applicable to common shares (151,029) (171,367)
Other comprehensive loss - (12,019)
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Comprehensive loss ($151,029) ($183,386)
========= =========
Basic and diluted per common share amounts:
Loss from continuing operations, less preferred stock dividends ($4.10) ($4.63)
Income from discontinued operations 0.04 0.03
Gain on sale of discontinued operations - 1.23
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Loss before extraordinary items (4.06) (3.37)
Extraordinary loss - (0.19)
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Net loss applicable to common shares ($4.06) ($3.56)
========= =========
Weighted average number of common shares outstanding 37,158 48,097
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
6
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Pegasus Communications Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 2000
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net cash used for operating activities ($67,257) ($65,250)
--------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (104,059) (116,384)
Capital expenditures (10,700) (36,080)
Purchase of intangible assets (2,243) (12,042)
Payments for programming rights (2,155) (3,334)
Proceeds from sale of cable operations - 166,937
Investment in affiliates - (14,560)
Other 510 431
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Net cash used for investing activities (118,647) (15,032)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt - 8,750
Repayments of long-term debt (13,621) (13,887)
Net borrowings on bank credit facilities 73,700 62,800
Restricted cash 19,499 6,303
Debt financing costs (1,760) (9,752)
Proceeds from issuance of Class A common stock 81,132 3,088
Proceeds from issuance of Series C preferred stock - 300,000
Underwriting and stock offering costs (4,657) (9,570)
Repurchase of Class A common stock - (352)
Other (137) (650)
--------- --------
Net cash provided by financing activities 154,156 346,730
--------- --------
Net increase (decrease) in cash and cash equivalents (31,748) 266,448
Cash and cash equivalents, beginning of year 54,505 40,453
--------- --------
Cash and cash equivalents, end of period $22,757 $306,901
========= ========
</TABLE>
See accompanying notes to consolidated financial statements
7
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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"). The Company's principal direct operating subsidiaries are Pegasus
Media & Communications, Inc. ("PM&C") and Golden Sky Holdings, Inc. ("GSH").
PM&C's principal subsidiaries provide direct broadcast satellite
television ("DBS") services to customers in various rural areas of the United
States and own and/or program broadcast television ("Broadcast") stations. GSH's
subsidiaries provide DBS services to customers in various rural areas of the
United States. GSH and its subsidiaries were acquired by the Company on May 5,
2000 (see Note 8). Discontinued operations on the statements of operations and
comprehensive loss represent PM&C's cable operations, which were sold on
September 15, 2000 (see Note 9).
In January 2000, Digital Television Services, Inc. ("DTS"), a direct
subsidiary of Pegasus, was merged with and into a subsidiary of PM&C.
On September 15, 2000, Pegasus' Board of Directors approved a
reorganization of the current corporate structure. Under the new structure, a
new publicly-held parent holding company ("New PCC") will be formed and will
assume the identity and capital stock structure of the existing Pegasus
Communications Corporation ("Old PCC"). New PCC will issue common and preferred
securities identical in terms, conditions and amounts as that present with Old
PCC. The ownership interests and rights of common and preferred shareholders of
New PCC will be exactly the same in New PCC as in Old PCC. Debt securities held
by Old PCC will remain with Old PCC. New PCC will not issue or hold any debt
securities as a consequence of the reorganization. In the reorganization, Old
PCC will become a direct wholly-owned subsidiary of New PCC and will be renamed
Pegasus Satellite Communications, Inc. ("Satellite"). In the reorganization, Old
PCC will distribute to New PCC its investments in its following presently direct
wholly-owned subsidiaries: Pegasus Development Corporation ("PDC"), Pegasus
Communications Management Company, Pegasus Communications Corporation PAC,
Pegasus Real Estate Company and Pegasus Travel, Inc. These companies will become
direct wholly-owned subsidiaries of New PCC. It is expected that the
reorganization will be accounted for as a recapitalization in which the
historical basis of assets and liabilities are not changed. All entities will
retain their book values existing at the date of the reorganization. The
reorganization is expected to become effective by the end of 2000.
As stated above, all of the existing Old PCC preferred stock, including
the 12.75% Series A Cumulative Exchangeable Preferred Stock ("Series A preferred
stock") will become identical New PCC preferred stock as a result of the
reorganization. In connection with the reorganization, Satellite will initiate
an offer to exchange the Series A preferred stock of New PCC for a new series of
preferred stock of Satellite having identical terms as the Series A preferred
stock.
2. Basis of Presentation
The accompanying unaudited consolidated financial statements are
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The unaudited consolidated financial statements reflect
all adjustments consisting of normal recurring items that 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
comprehensive loss and its cash flows for the interim period. The amounts on the
balance sheet as of December 31, 1999 were derived from the audited balance
sheet as of that date. For further information, refer to the consolidated
financial statements and footnotes thereto included in Pegasus' Annual Report on
Form 10-K for the year ended December 31, 1999.
The financial statements include the accounts of Pegasus and all of its
subsidiaries on a consolidated basis. All intercompany transactions and balances
have been eliminated. The balance sheet and statement of cash flows are
presented on a condensed basis. Certain amounts for 1999 have been reclassified
for comparative purposes.
8
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PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Basis of Presentation (continued)
Stock Split:
On May 10, 2000, Pegasus announced a two-for-one stock split of its
Class A and Class B common stock in the form of a stock dividend, effective May
30, 2000, to shareholders of record on May 19, 2000. The dividend was effected
by a charge to paid-in capital in the amount of $268,000, the par value of the
additional Class A and Class B common shares that were issued. All references to
shares, per share amounts and exercise prices included in the accompanying
financial statements and notes reflect the effect of the stock split.
Development Costs:
Development costs on the statements of operations and comprehensive
loss represent the combined expenses of other corporate initiatives that are in
their infancy of development. Most of these initiatives are presently being
sponsored by PDC. The operations of each initiative will be separately presented
on the statements of operations and comprehensive loss when they are determined
to be of a material continuing nature.
3. Investment in Affiliates
In January 2000, PDC made an investment of approximately $112.0 million
in Personalized Media Communications, LLC ("PMC"), an advanced communications
technology company, that is accounted for by the equity method. The investment
consisted of $14.4 million in cash, 400,000 shares of Pegasus' Class A common
stock (amounting to $18.8 million) and warrants to purchase 2.0 million shares
of the Class A common stock at an exercise price of $45.00 per share and with a
term of ten years. These warrants at the time of their issuance were estimated
to have a fair value of $78.8 million. A subsidiary of PMC granted to the
Company an exclusive license for use of PMC's patent portfolio in the
distribution of satellite services from specified orbital locations. Through
September 30, 2000, PDC's equity in the losses of PMC was not material.
4. Common Stock and Other Stockholders' Equity
On March 22, 2000, Pegasus amended its Certificate of Incorporation by
increasing the number of its authorized shares of common stock as follows: Class
A to 250.0 million from 50.0 million; Class B to 30.0 million from 15.0 million;
and Non-Voting to 200.0 million from 20.0 million. The number of shares of Class
A outstanding at September 30, 2000 and December 31, 1999 was 45.8 million and
30.4 million, respectively. The number of shares outstanding at each date for
Class B was 9.2 million. No shares were outstanding at either date for
Non-Voting. Class A shares issued in 2000 through September 30 were 13.5 million
as consideration in acquisitions, 1.0 million for exercises of options and
warrants, and 763,000 for other purposes. Pegasus issued 130,221 shares of Class
A in payment of the dividend on the Series C preferred stock that was payable on
October 31, 2000. For the nine months ended September 30, 2000, common stock
issued in connection with acquisitions and investment in affiliates provided
additional paid-in capital of $752.9 million.
5. Preferred Stock
On March 22, 2000, Pegasus amended its Certificate of Incorporation,
increasing the aggregate number of authorized shares of preferred stock to 20.0
million from 5.0 million.
Redeemable Preferred Stocks:
Series A Preferred Stock
------------------------
The number of shares issued and outstanding at September 30, 2000 of
Series A preferred stock increased to 152,844 from 135,073 at December 31, 1999.
This increase was due to dividends on Series A payable in 2000 that were paid in
shares of Series A preferred stock. The carrying amount increased by $14.0
million to $156.8 million due to accrued and unpaid dividends payable under the
mandatory redemptiion features.
9
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PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Preferred Stock (continued)
Series B, Series D and Series E Preferred Stock
-----------------------------------------------
In connection with DBS acquisitions in the first quarter of 2000,
Pegasus issued 5,707 shares of Series B Junior Convertible Participating
Preferred Stock (the "Series B preferred stock"), 22,500 shares of Series D
Junior Convertible Participating Preferred Stock (the "Series D preferred
stock") and 10,000 shares of Series E Junior Convertible Participating Preferred
Stock (the "Series E preferred stock"). Each whole share of Series B, Series D
and Series E preferred stock has a liquidation preference equal to its stated
value of $1,000 per share plus any accrued and unpaid dividends. Each share of
Series B, Series D and Series E preferred stock is convertible at any time at
the option of the holder into 32.47 shares, 19.54 shares and 16.04 shares,
respectively, of Pegasus' Class A common stock, subject to adjustment under
certain circumstances. Additionally, each share of Series B, Series D and Series
E preferred stock is redeemable at the option of the holder at a price of $1,000
plus any accrued and unpaid dividends. Each series may be redeemed at the option
of holders as follows: Series B in whole any time after January 4, 2002; Series
D 10,000 shares on any day after March 1, 2000, an additional 6,125 shares
beginning on February 1, 2002, and the remaining shares on February 1, 2003;
Series E 5,000 shares on any day after February 25, 2002, and the remaining
shares beginning February 25, 2003. Pegasus may redeem at its option shares of
each series in whole as follows: Series B any time after January 4, 2005 at a
price of $1,000 per share; Series D at any time at a price of $1,000 per share;
Series E any time up to February 25, 2001 at a price of $1,100 per share, and
any time thereafter at a price of $1,000 per share. The preceding redemption
prices are in addition to any accrued and unpaid dividends. Holders of shares of
Series B preferred stock are entitled to receive, when, as and if declared by
Pegasus' Board of Directors, cash dividends at an annual rate of 1% payable
semi-annually on January 1 and July 1 commencing July 1, 2000. Holders of shares
of Series D and Series E preferred stock are entitled to receive, when, as and
if declared by the Board of Directors, dividends at an annual rate of 4% payable
annually on January 1 commencing January 1, 2001. Dividends on Series D and
Series E preferred stock are payable in cash or shares of Pegasus Class A common
stock, at the option of Pegasus. Dividends on Series B, Series D and Series E
preferred stock are cumulative and accrue from the date of original issuance.
The carrying amounts of Series B, Series D, and Series E preferred stock are
increased by amounts representing dividends not currently declared or paid but
that are payable under the redemption features. In the event of liquidation,
Series B, Series D and Series E preferred stock rank, to the extent of their
respective liquidation preferences, junior to Series A and Series C preferred
stock, senior to all classes of Pegasus' common stock and on a parity with each
other. Upon liquidation, holders of Series B, Series D and Series E preferred
stock are entitled to participate with holders of Pegasus common stock and other
participating stock, if any, in the remaining assets of the Company after
certain other distributions have been satisfied. Generally, Series B, Series D
and Series E preferred stock have no voting rights other than those granted by
law.
The carrying amounts of Series B, Series D and Series E preferred stock
increased by $42,000, $600,000 and $238,000, respectively, to $5.7 million,
$23.1 million and $10.2 million, respectively, at September 30, 2000. These
increases represent accrued and unpaid dividends payable under the mandatory
redemption features. At September 30, 2000, 5,707, 22,500 and 10,000 shares of
Series B, Series D and Series E preferred stock, respectively, were issued and
outstanding.
Preferred Stock in Stockholders' Equity:
Series C Preferred Stock
------------------------
In January 2000, Pegasus completed an offering of 3.0 million shares of
6 1/2% Series C Convertible Preferred Stock (the "Series C preferred stock"),
resulting in net proceeds of $290.4 million. Each whole share of Series C
preferred stock has a liquidation preference equal to its stated value of $100
per share, plus any accrued and unpaid dividends, and is convertible at any time
at the option of the holder into 1.5686 shares of Pegasus' Class A common stock.
This conversion ratio is subject to adjustment under certain circumstances.
Holders of shares of Series C preferred stock are entitled to receive, when, as
and if declared by the Board of Directors, dividends at a rate of 6.5% payable
quarterly on January 31, April 30, July 31 and October 31 commencing April 30,
2000. Dividends are payable in cash, shares of Pegasus Class A common stock or a
combination thereof, at the option of Pegasus. Dividends on Series C preferred
stock are cumulative and accrue from the date of
10
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PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Preferred Stock (continued)
original issuance. In the event of liquidation, Series C preferred stock ranks
junior to Series A preferred stock, senior to Series B, Series D and Series E
preferred stocks and senior to all classes of Pegasus' common stock. Pegasus at
its option may redeem shares, in whole or in part, of Series C preferred stock
at any time from February 1, 2003, and under certain circumstances from August
1, 2001 to prior to February 1, 2003, at premiums specified in Series C's
certificate of designation, plus any accrued and unpaid dividends. Holders of
Series C preferred stock have no voting rights other than those granted by law,
except that holders voting as a class are entitled to elect two directors to the
Board of Directors in the event dividends payable on Series C preferred stock
are in arrears for six quarterly periods until such arrearage is paid in full
and concerning matters that effect the terms and ranking of the series or
amendments to Pegasus' charter that may adversely affect their rights. At
September 30, 2000, 3.0 million shares of Series C preferred stock were issued
and outstanding.
6. Long-Term Debt
In January 2000, PM&C amended and restated its credit facility,
consisting of a $225.0 million senior revolving credit facility that expires in
2004, a $275.0 million senior term credit facility that expires in 2005 and
an uncommitted facility for an additional $200.0 million through June 30, 2001
(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. With the closing of the New
PM&C Credit Facility, PM&C borrowed $275.0 million under the term loan facility
and used a portion of the proceeds to pay off balances aggregating $221.5
million outstanding under other credit facilities. These other credit facilities
along with their related commitments and a letter of credit facility were then
terminated. At September 30, 2000, $275.0 million was outstanding under the term
loan facility, with $38.2 million of stand-by letters of credit issued
thereunder.
Golden Sky Systems, Inc. ("GSS"), a subsidiary of GSH, maintains a
$115.0 million senior revolving credit facility and a $35.0 million senior term
credit facility (collectively, the "GSS Credit Facility"), that are
collateralized by substantially all of the assets of GSS and its subsidiaries.
The facility expires in 2005. This facility had been entered into prior to
Pegasus' acquisition of GSH. The GSS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. In January 2000, GSS amended the GSS Credit
Facility. This amendment waived GSS' third quarter 1999 covenant violations and
amended certain fourth quarter 1999 and year 2000 covenant requirements. The
amendment limited further availability under the revolving credit portion
through December 31, 2000 to an additional $20.0 million above amounts already
outstanding at the time of the amendment. As of September 30, 2000, GSS was in
compliance with the GSS Credit Facility's amended covenants. At September 30,
2000, amounts outstanding under the revolving and term facilities were $17.0
million and $35.0 million, respectively, with $35.9 million of stand-by letters
of credit issued thereunder.
GSS has outstanding $195.0 million of 12.375% Senior Subordinated Notes
due 2006 (the "GSS Notes") that were issued prior to Pegasus' acquisition of
GSH. The GSS Notes are guaranteed on a full, unconditional, senior subordinated
basis, jointly and severally by GSS' subsidiaries. A portion of the net proceeds
from the GSS Notes held in an interest escrow account that had been included in
restricted cash on the balance sheet was released and used to pay interest due
on the GSS Notes. No further escrow balances or requirements exist with respect
to the GSS Notes.
Golden Sky DBS, Inc. ("GSDBS"), a direct subsidiary of GSH and GSS'
parent, has outstanding 13.5% Senior Discount Notes due 2007 (the "GSDBS Notes")
that were issued prior to Pegasus' acquisition of GSH. These notes have an
aggregate stated maturity of $193.1 million. The GSDBS Notes are unsecured and
effectively rank below all of the liabilities of GSDBS' direct and indirect
subsidiaries. These notes were issued at a discount. Non-cash interest accretes
on these notes until March 1, 2004. Thereafter, cash interest will accrue and be
payable. From the date of the GSH acquisition through September 30, 2000, the
Company has recognized amortization of discount on the notes of $6.5 million.
11
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PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Per Common Share Amounts
Within each respective period presented on the statement of operations
and comprehensive loss, basic and diluted per common share amounts were the same
because all potential common stock items were antidilutive and excluded from the
computation. Per common share amounts are readily computed from the face of the
statements of operations and comprehensive loss.
8. Acquisitions
On May 5, 2000, Pegasus acquired GSH, which holds the rights to provide
DIRECTV(R) ("DIRECTV") programming in various rural areas of 24 states, along
with its assets and liabilities in exchange for total consideration of
approximately $1.5 billion. The consideration consisted of approximately 12.2
million shares of Class A common stock valued at $579.0 million (based on a
price of $47.54 per share, which was the average closing price per share five
days prior and subsequent to the acquisition announcement), options to purchase
approximately 698,000 shares of Class A common stock valued at $33.2 million,
net liabilities of GSH assumed by Pegasus of $383.0 million and a deferred tax
liability incurred of $489.5 million. The deferred tax liability was allocated
to DBS rights and was attributed to non-deductible amortization related thereto.
Costs of $20.7 million have been incurred in the acquisition. The acquisition of
GSH was accounted for by the purchase method, which allocates the cost of the
acquisition to the assets acquired and liabilities assumed based on their
estimated fair values on the date of acquisition. Of the total acquisition cost,
approximately $1.3 billion (including the amount attributed to the deferred tax
liability incurred) have been allocated to DBS rights. DBS rights are amortized
on a straight-line basis over 10 years. The Company's results of operations
include the operations of GSH from the date of acquisition.
During the nine months ended September 30, 2000, the Company completed
16 other acquisitions of independent providers of DIRECTV. These acquisitions
principally consisted of the rights to provide DIRECTV programming in various
rural areas of the United States. The total consideration paid by the Company
for these acquisitions of $194.5 million consisted of cash of $95.6 million,
873,184 shares of Pegasus Class A common stock (amounting to $39.7 million),
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),
warrants to purchase 3,000 shares of Pegasus Class A common stock (amounting to
$166,000), a deferred tax liability incurred of $24.4 million, $200,000 in
promissory notes and $1.8 million in assumed net liabilities. These acquisitions
were accounted for by the purchase method, wherein substantially all of the
total consideration for these acquisitions was allocated to DBS rights. The DBS
rights are being amortized on a straight-line basis over 10 years. The Company's
results of operations include the operations of these acquisitions from their
respective effective dates of acquisition.
The following unaudited pro forma financial information presents the
Company's consolidated results of operations as if the above noted acquisitions
had occurred at the beginning of the periods presented. This unaudited pro forma
financial information is presented for comparative purposes only and does not
necessarily reflect the results of operations of the Company had the
acquisitions occurred on the dates indicated nor results that may occur in the
future.
12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Acquisitions (continued)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Nine Months Ended September 30,
-------------------------------
1999 2000
---- ----
(unaudited)
<S> <C> <C>
Net revenues ............................................................. $ 343,943 $ 480,587
========= =========
Loss before extraordinary items, after preferred stock dividends.......... (334,615) (248,131)
========= =========
Net loss applicable to common shares...................................... (337,550) (257,411)
========= =========
Loss before extraordinary items per common share.......................... (6.69) (4.61)
========= =========
Net loss applicable to common shares per common share..................... (6.75) (4.79)
========= =========
</TABLE>
9. Discontinued Operations
Discontinued operations on the statements of operations and
comprehensive loss represent PM&C's cable operations located in Puerto Rico. The
measurement date for accounting for the cable operations as discontinued was
December 31, 1999. Since net income from and a gain on the sale of the
operations was expected, net income and gain after the measurement date were
recognized when earned. Revenues of the Puerto Rico cable operations for the
three and nine months ended September 30, 2000 and 1999 were $5.4 million and
$18.1 million, respectively, and $6.2 million and $14.9 million, respectively.
No income taxes were allocated to discontinued operations because of the
Company's net operating loss carryforward position.
On September 15, 2000, PM&C sold to an unrelated third party its
interests in the assets of its entire cable operations in Puerto Rico. The sale
price was $170.0 million cash. Cash proceeds received at closing, after
adjustment for transaction costs paid at that time and $3.0 million placed in
escrow, were $164.5 million. The after tax gain on the sale was $59.4 million.
The net amount of assets and liabilities associated with the sale was $80.5
million and $1.2 million, respectively. The net assets primarily consisted of
net property, plant and equipment of $19.1 million and net intangibles
associated with prior acquisitions amounting to $60.9 million. Escrow remaining
after satisfaction of valid claims of indemnification, if any, made by the buyer
pursuant to the asset purchase agreement will be released to the Company. Taxes
recognized on the gain from the sale of $28.0 million are for Puerto Rico
capital gains and withholding taxes and are currently payable.
10. Extraordinary Loss from Extinguishment of Debt
In connection with the outstanding borrowings paid off in January 2000
with the proceeds of the New PM&C Credit Facility, unamortized balances of
deferred financing costs in the amount of $9.3 million associated with the
borrowings paid off were written off. No income taxes were allocated to this
loss because of the Company's net operating loss carryforward position.
11. Sale and Leaseback of Tower Assets and Related Accounting
On July 17, 2000, the Company sold through two wholly-owned
subsidiaries 11 broadcast towers and related assets for approximately 1.4
million shares of restricted common stock of the buyer. The value of the buyer's
common stock on the sale closing date was approximately $37.5 million, and the
book value of the assets sold was $2.3 million. Coincident with the sale of the
towers, PM&C leased back from the buyer eight of the 11 towers sold. The lease
has an initial term of 10 years with five successive 10-year renewal periods at
the option of the Company. Aggregate minimum lease payments in each of the next
five fiscal years and in total over the remaining initial lease term are:
$683,000 in 2001; $711,000 in 2002; $739,000 in 2003; $769,000 in 2004; $799,000
in 2005; and $4.1 million in total thereafter. The Company recognized a gain of
$1.0 million on the three towers sold outright. The Company's receipt of the
buyer's common stock represents a continuing involvement by the Company in the
eight towers sold and leased back. Accordingly, the sale and leaseback of these
towers is accounted for as a financing.
13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Sale and Leaseback of Tower Assets and Related Accounting (continued)
As a result the Company recorded a finance obligation in the amount of $36.1
million, which in essence represents a deferral of the net gain and related
costs of the sale that might be otherwise recognized on the date of sale. Under
the finance method, lease payments made on the assets leased back are allocated
between a reduction of the finance obligation and interest as appropriate.
Because of the amount of the finance obligation relative to the amount of the
payments, the Company expects that all future payments will be applied to
interest expense. The eight towers and related assets remain on the Company's
records and continue to be depreciated by the Company as long as the financing
method applies. The accounting as a financing of the eight towers sold and
leased back will continue as long as the Company's continuing involvement in the
towers, as represented by the Company's ownership of the buyer's common stock,
remains.
The stock received by the Company in the towers sale is accounted for
as an investment in marketable securities available for sale. Accordingly,
unrealized gain or loss on the investment is recorded as a component of the
Company's stockholders' equity. Other comprehensive loss on the statements of
operations and comprehensive loss reflects the unrealized loss on this
investment amounting to $12.0 million at September 30, 2000.
The Company has an agreement with the buyer of the tower assets in
which the buyer will build future towers for the Company as determined by the
Company.
12. Income Taxes
The Company is in a net operating loss carryforward position for income
tax purposes. The tax benefit recognized represents the reversal of deferred tax
liabilities recognized in acquisitions.
13. Industry Segments
At September 30, 2000, the Company's two reportable segments were DBS
and Broadcast. Information on each of these segments' revenue and measure of
profit or loss is as presented on the statements of operations and comprehensive
loss. Each segment derived its revenues from external customers for each period
presented therein. Identifiable total assets for DBS increased from December 31,
1999 by $1.56 billion to $2.23 billion at September 30, 2000. This increase was
principally due to additional DBS rights obtained in acquisitions completed
during 2000. Broadcast's identifiable total assets increased from December 31,
1999 by $26.2 million to $86.6 million at September 30, 2000 principally due to
the current fair market value of the common stock received in the sale and
leaseback of the tower assets.
14. Supplemental Cash Flow Information
Significant noncash investing and financing activities were as follows
(in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 2000
---- ----
<S> <C> <C>
Barter revenue and related expense............................................ $ 5,657 $ 5,377
Marketable securities received in sale of tower assets........................ - 37,516
Customer conversion costs and costs of related equipment ..................... - 17,787
Acquisition of program rights and assumption of related program payables...... 6,072 3,426
Capital issued and related acquisition of intangibles......................... 1,364 693,620
Minority interest and related acquisition of intangibles...................... - 852
Capital issued and related investment in affiliates........................... - 97,555
Notes payable and related acquisition of intangibles.......................... 4,690 379,773
Preferred stock dividends and reduction of paid-in capital.................... 12,400 14,912
Deferred taxes, net and related acquisition of intangibles.................... 29 517,451
</TABLE>
14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. 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 September 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, GSS and the Company filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
law 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 GSS and the Company. 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, GSS and the Company 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. GSS and the Company later withdrew the class action
allegations previously filed 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 27, 2000. All four actions are pending before the same judge. On
November 20, 2000, the court will hear argument on the motion for class
certification and on DIRECTV's motion to dismiss certain of the Company's claims
and claims by the class members. DIRECTV's motion for partial summary judgment
on the right of first refusal will be heard on or about December 11, 2000. The
court has set a trial date of November 27, 2001 for all four actions.
15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Commitments and Contingent Liabilities (continued)
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.
16. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS
No. 138, becomes effective for the Company starting January 1, 2001. SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. At September 30, 2000, the Company's use of derivative
instruments is confined to two interest rate swap and two interest rate cap
instruments. These instruments were entered into in connection with PM&C's
credit facility. The Company does not use these instruments for trading or
speculative purposes. The notional amounts associated with these instruments
range from $33.9 million to $37.1 million. The Company believes that it does not
possess any derivative instruments that may be embedded in other contracts or
agreements. The Company continues to analyze SFAS 133 for any material impacts
of its adoption that it is not presently aware of. Because of the limited number
and use of derivative instruments that the Company has and the relatively minor
notional amounts associated with these instruments, the Company believes at the
present time that the accounting for its derivative instruments under SFAS 133
will not have a material impact on the Company.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
addresses revenue recognition policies and practices of companies that report to
the SEC. The Company will adopt SAB 101 in the fourth quarter of 2000. The
Company believes that the adoption of SAB 101 will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. The Company is still analyzing the requirements of this statement
and does not fully know whether or not the impact of this statement will be
material. At the present time, the Company is not involved with any
securitization transactions.
16
<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 our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes which are included on pages 4-16 herein.
Significant Developments during 2000
In January 2000, Pegasus Media & Communications amended and restated
its credit facility, consisting of a $225.0 million senior revolving credit
facility that expires in 2004, a $275.0 million senior term credit facility that
expires in 2005 and an uncommitted facility for an additional $200.0 million
through June 30, 2001. With the closing of the new credit facility, PM&C
borrowed $275.0 million under the term loan facility and used a portion of the
proceeds to pay off balances aggregating $221.5 million outstanding under other
credit facilities. In January 2000, we completed an offering of 3.0 million
shares of 6 1/2% Series C convertible preferred stock, resulting in net proceeds
to us of $290.4 million.
On May 5, 2000, we acquired Golden Sky Holdings, Inc., which holds the
rights to provide DIRECTV(R) ("DIRECTV") programming in various rural areas of
24 states, along with its assets and liabilities in exchange for total
consideration of approximately $1.5 billion. At the date of the acquisition,
Golden Sky had a subscriber base of 345,100. The consideration we paid consisted
of approximately 12.2 million shares of our Class A common stock valued at
$579.0 million (based on a price of $47.54 per share, which was the average
closing price per share five days prior and subsequent to the acquisition
announcement), options to purchase approximately 698,000 shares of our Class A
common stock valued at $33.2 million, net liabilities of Golden Sky assumed by
us of $383.0 million and a deferred tax liability incurred of $489.5 million.
Costs of $20.7 million have been incurred in the acquisition. Of the total
acquisition cost, approximately $1.3 billion have been allocated to direct
broadcast satellite television ("DBS") rights.
During the nine months ended September 30, 2000, we completed 16 other
acquisitions of independent providers of DIRECTV. These acquisitions principally
consisted of the rights to provide DIRECTV programming in various rural areas of
the United States. The total consideration we paid for these acquisitions of
$194.5 million consisted of cash of $95.6 million, 873,184 shares of our Class A
common stock (amounting to $39.7 million), 22,500 shares of Series D preferred
stock (amounting to $22.5 million), 10,000 shares of Series E preferred stock
(amounting to $10.0 million), warrants to purchase 3,000 shares of Class A
common stock (amounting to $166,000), a deferred tax liability incurred of $24.4
million, $200,000 in promissory notes and $1.8 million in assumed net
liabilities. Substantially all of the total consideration for these acquisitions
was allocated to DBS rights.
17
<PAGE>
On July 17, 2000, we sold 11 broadcast towers and related assets for
approximately 1.4 million shares of restricted common stock of the buyer. The
value of the buyer's common stock on the sale closing date was approximately
$37.5 million, and the book value of the assets we sold was $2.3 million.
Coincident with the sale of the towers, we leased back from the buyer eight of
the towers sold. The aggregate minimum lease payments in each of the next five
fiscal years and in total over the remaining initial lease term are: $683,000 in
2001; $711,000 in 2002; $739,000 in 2003; $769,000 in 2004; $799,000 in 2005;
and $4.1 million in total thereafter. We recognized a gain of $1.0 million on
the three towers sold outright. Our receipt of the buyer's common stock and
resultant ownership interest in the buyer represents a continuing involvement by
us in the tower assets sold and leased back. As a result, the gain that would
otherwise be recognized on the sale of these at the date of sale is deferred as
a finance obligation amounting to $36.1 million. While we continue to own the
buyer's common stock, we expect that the lease payments we make on the assets
leased back will be allocated to interest expense due to the amount of the
finance obligation relative to the amount of the payments. We also will continue
to depreciate the tower assets sold as if we still owned them while the
financing method applies.
On September 15, 2000, Pegasus Media & Communications sold to an
unrelated third party its interests in the assets of its entire cable operations
in Puerto Rico. The cash proceeds we received at closing, after adjustment for
transaction costs paid at that time and $3.0 million placed in escrow, were
$164.5 million and the after tax gain on the sale was $59.4 million. Escrow
remaining after satisfaction of valid claims of indemnification, if any, made by
the buyer pursuant to the asset purchase agreement will be released to the
Company.
On September 15, 2000, our board of directors approved a reorganization
of the current corporate structure. Under the new structure, a new publicly-held
parent holding company ("New PCC") will be formed and will assume the identity
and capital stock structure of the existing Pegasus Communications Corporation
("Old PCC"). New PCC will issue common and preferred securities identical in
terms, conditions and amounts as that present with Old PCC. The ownership
interests and rights of common and preferred shareholders of New PCC will be
exactly the same in New PCC as in Old PCC. Debt securities held by Old PCC will
remain with Old PCC. New PCC will not issue or hold any debt securities as a
consequence of the reorganization. In the reorganization, Old PCC will become a
direct wholly-owned subsidiary of New PCC and will be renamed Pegasus Satellite
Communications, Inc. In the reorganization, Old PCC will distribute to New PCC
its investments in its following presently direct wholly-owned subsidiaries:
Pegasus Development Corporation, Pegasus Communications Management Company,
Pegasus Communications Corporation PAC, Pegasus Real Estate Company and Pegasus
Travel, Inc. These companies will become direct wholly-owned subsidiaries of New
PCC. It is anticipated that the reorganization will be accounted for as a
recapitalization in which the historical basis of assets and liabilities are not
changed. All entities will retain their book values existing at the date of the
reorganization. The reorganization is expected to become effective by the end of
2000.
As stated above, all of the existing Old PCC preferred stock, including
the 12.75% Series A Cumulative Exchangeable Preferred Stock, will become
identical New PCC preferred stock as a result of the reorganization. In
connection with the reorganization, Satellite will initiate an offer to exchange
the Series A preferred stock of New PCC for a new series of preferred stock of
Satellite having identical terms as the Series A preferred stock.
Pre-marketing and Location Cash Flows
In this section we use the terms pre-marketing cash flow and location
cash flow. Pre-marketing cash flow of the DBS business is calculated by taking
the DBS revenues and deducting from them their related programming, technical,
general and administrative expenses. Location cash flow of the DBS business is
its pre-marketing cash flow less DBS marketing and selling expenses. The DBS
marketing and selling expenses are also known as subscriber acquisition costs.
Subscriber acquisition costs are sales and marketing expenses incurred and
promotional programming provided in connection with the addition of new DBS
subscribers. Location cash flow for the broadcast
18
<PAGE>
television ("Broadcast") business is calculated by taking the Broadcast revenues
and deducting from them their related programming, technical, general and
administrative and marketing and selling expenses.
Pre-marketing cash and location cash flows 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 and location cash flows also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures or to react to changes in our industry or the
economy generally. We believe that pre-marketing and location cash flows are
important 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.
General
We are a rapidly growing company that is highly leveraged. We have a
history of reported losses from our operations principally due to our
significant amounts of interest expense and amortization and depreciation and we
are likely to continue to report losses for the foreseeable future due to these
two items.
At the present, our principal operations are based on the distribution
of DBS services from DIRECTV. We are currently involved in litigation with
DIRECTV. An outcome in this litigation that is unfavorable to us could have a
material adverse effect on our DBS business. Refer herein to Note 15 of the
Notes to Consolidated Financial Statements and Item 1 - Legal Proceedings under
Part II for a more descriptive account of the litigation.
Results of Operations
In this section, amounts specified for three and nine months ended
periods are for the periods ended September 30, 2000, and the changes to these
amounts are with respect to the corresponding periods ended September 30, 1999,
unless indicated otherwise.
Comparison of Three and Nine Months Ended September 30, 2000 and 1999
DBS Business
Revenues increased $83.9 million to $159.6 million for the three months
ended and increased $191.7 million to $389.9 million for the nine months ended.
These increases were primarily due to the incremental impacts of acquisitions we
made over the last 12 months. During the 12 months ended September 30, 2000,
through acquisitions we obtained 433,500 subscribers and the exclusive DIRECTV
distribution rights to approximately 2.6 million households in rural areas of
the United States. The Golden Sky acquisition added 345,100 subscribers and 1.9
million households. Additionally, we added 247,100 subscribers during the last
12 months through internal growth. At September 30, 2000, we had exclusive
DIRECTV distribution rights to 7.4 million households and 1.3 million
subscribers compared to 4.8 million households and 630,900 subscribers at
September 30, 1999. Our subscriber penetration within territories in which we
have exclusive DIRECTV distribution rights increased to 17.8% at September 30,
2000 from 13.0% at September 30, 1999. During the three months ended September
30, 2000, we added 77,300 subscribers through internal growth and 32,300
subscribers from acquisitions. Average monthly revenue per subscriber was $43.41
for the three months ended compared to $44.80 for the corresponding 1999 period,
and $43.33 for the nine months ended 2000 and 1999. The variance in the average
monthly revenue per subscriber for the three months ended was due to a
combination of lower contributions from pay per view and lower average revenues
of subscribers obtained in acquisitions relative to our other subscribers.
19
<PAGE>
Programming, technical and general and administrative expenses
increased $57.4 million to $110.9 million for the three months ended and
increased $135.0 million to $272.9 million for the nine months ended. These
increases were due to the growth in the number of subscribers. The rate of
increase of these expenses in each period was consistent with the increased
average number of customers within each period.
Subscriber acquisition costs increased $16.2 million to $55.1 million
for the three months ended and increased $22.9 million to $111.6 million for the
nine months ended. These increases were principally due to increased commissions
and subsidies to our dealer network resulting from the subscriber growth we
experienced and due to revisions to our commission and subsidy plans. During
2000, we revised our commission and subsidy plans to be more competitive. In the
current three months ended period, we also expanded our commission plans to
include large, national dealers affiliated with DIRECTV to whom commissions
previously were paid directly by DIRECTV. Advertising and promotional
programming expenses also impact our subscriber acquisition costs. Advertising
and promotional programming expenses are discretionary expenditures and vary
depending in large part based on sales initiatives that we want to promote
and/or expand. Advertising and promotional programming expenses increased in the
current three months ended largely due to our efforts to attract additional
subscribers in the territory obtained in the Golden Sky acquisition. Subscriber
acquisition costs per gross subscriber based on subscribers added through
internal growth was $440 for 125,200 subscribers added and $379 for 294,400
subscribers added for the three and nine months ended, respectively, compared to
$319 for 121,600 subscribers added and $356 for 249,200 subscribers added for
the same 1999 periods, respectively.
Depreciation and amortization increased $48.3 million to $68.7 million
for the three months ended and increased $79.4 million to $141.7 million for the
nine months ended. These increases were primarily due to increased amortization
of DBS rights as a result of additional DBS rights incurred in acquisitions over
the 12 months ended September 30, 2000 amounting to $1.49 billion. Of these
total additional DBS rights incurred, $60.6 million and $1.47 billion were
incurred in the three and nine months ended, respectively, with $1.28 billion
resulting from the Golden Sky acquisition. Also adding to these increased
expenses is depreciation of DBS equipment that is rented to subscribers. Renting
units to subscribers commenced in the second quarter of 2000 with respect to our
conversions of subscribers of a former DBS provider into our subscribers. These
converted subscribers had rented their equipment from the former DBS provider
and we have added this service as a convenience to these subscribers. Rented
equipment capitalized was $5.4 million for the three months ended and $10.3
million for the nine months ended. Rental units are depreciated over a
three-year period. We expect that rental units and related depreciation will
increase as more of our subscribers choose a rental alternative.
Pre-marketing cash flow was $48.7 million and $116.9 million for the
three and nine months ended, respectively, compared to $22.2 million and $60.3
million for the corresponding 1999 periods, respectively. Location cash flow was
$(6.4) million and $5.3 million for the three and nine months ended,
respectively, compared to $(16.6) million and $(28.4) million for the
corresponding 1999 periods, respectively.
Broadcast Business
Revenues decreased $223,000 to $8.7 million for the three months ended
and decreased $384,000 to $26.1 million for the nine months ended. Reduced
ratings this year for our affiliated Fox network stations combined with lowered
television advertising in general in 2000 contributed to these decreases. Also,
contributing to the decrease is that the nine months ended in 1999 include
revenues related to the National Football League's Super Bowl held in January
1999 that was carried by the Fox network. Despite strong revenues of our other
affiliated stations, we expect overall that revenues for the fourth quarter and
year 2000 will be lower relative to the prior year.
Programming, technical, and general and administrative expenses
increased $441,000 to $6.2 million for the three months ended and increased $2.3
million to $18.3 million for the nine months ended. These increases principally
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reflect increased amortization of additional programming costs incurred and fees
charged by the Fox network that commenced in July 1999. The additional
programming costs were incurred in the purchase of new and additional
programming, some of which were for premier shows that have a higher programming
premium associated with them.
Marketing and selling expenses increased $243,000 to $1.6 million for
the three months ended and increased $1.1 million to $5.5 million for the nine
months ended. These increases were primarily due to increased promotional costs
associated with the launch of new stations and news programs.
Location cash flow was $899,000 and $2.4 million for the three and nine
months ended, respectively, compared to $1.8 million and $6.1 million for the
corresponding 1999 periods, respectively.
Other Statements of Operations and Comprehensive Loss Items
Corporate expenses increased $1.1 million to $2.6 million for the three
months ended and increased $1.9 million to $6.0 million for the nine months
ended. These increases reflect growth in the corporate infrastructure in support
of the overall growth in business experienced by us.
Development costs of $1.1 million and $2.3 million for the three and
nine months ended, respectively, represent the combined expenses of corporate
initiatives that are in their infancy of development and not yet of a material,
continuing nature. Most of these initiatives are presently being sponsored by
Pegasus Development Corporation. Actual and potential impacts of these
initiatives on liquidity and capital resources are addressed in the section so
entitled.
Other expenses, net from continuing operations increased $459,000 to
$1.1 million for the three months ended and increased $2.0 million to $3.4
million for the nine months ended. These increases principally reflect expenses
associated with our ongoing litigation with DIRECTV. Expenses incurred in the
DIRECTV litigation were $600,000 and $1.5 million for the three and nine months
ended, respectively.
Interest expense increased $17.9 million to $34.2 million for the three
months ended and increased $38.7 million to $86.2 million for the nine months
ended. These increases were due to additional borrowings outstanding and higher
rates of interest incurred during the periods. Fixed rate borrowings increased
by $328.9 million from September 30, 1999 to $780.4 million at September 30,
2000. This increase was principally due to debt of Golden Sky totaling $318.6
million at a combined weighted average interest rate of 12.44% that we assumed
in the acquisition of Golden Sky. Variable rate borrowings under credit
facilities we maintain increased from September 30, 1999 by $179.4 million to
$327.0 million at September 30, 2000. This increase was primarily due to net
additional amounts borrowed under the credit facility of Pegasus Media &
Communications of $127.4 million and debt outstanding under credit facilities
maintained by Golden Sky of $52.0 million that we assumed in the acquisition.
The weighted average amount of principal and interest rates associated with
outstanding variable rate debt were: principal of $327.0 million at 10.25% and
$301.3 million at 9.97% for the three and nine months ended September 30, 2000,
respectively, and $122.8 million at 7.96% and $91.3 million at 8.12% for the
corresponding 1999 periods, respectively.
Interest income increased $3.4 million to $3.7 million for the three
months ended and $10.1 million to $11.1 million for the nine months ended. These
increases were due to significantly higher average cash balances available for
short-term investing. These higher balances principally reflect unused portions
of the proceeds received from the Series C preferred stock we issued in January
2000.
Other non-operating income, net for the three months ended of $896,000
primarily represents the gain on the portion of the tower assets sold outright
of $1.0 million.
We are in a net operating loss carryforward position for income tax
purposes. The tax benefit recognized represents the reversal of deferred tax
liabilities recognized in acquisitions.
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Within discontinued operations, a gain of $59.4 million, net of taxes
of $28.0 million, was recognized in the three and nine months ended periods on
the sale of our Puerto Rico cable operations. The taxes recognized on the gain
relate to Puerto Rico capital gain and withholding taxes and are currently
payable.
An extraordinary loss from the extinguishment of debt in the amount of
$9.3 million was recognized for the nine months ended. This reflects the
write-off of unamortized balances of deferred financing costs connected with our
debt that was refinanced when Pegasus Media & Communications' credit facility
was amended in January 2000. No income taxes were allocated to the loss because
of our net operating loss carryforward position.
Preferred stock dividends increased $5.8 million to $10.1 million for
the three months ended and increased $12.6 million to $25.0 million for the nine
months ended. These increases resulted from a greater number of shares of our
preferred stock outstanding during the respective current year periods. The
greater number of shares of preferred stock outstanding primarily reflect the
issuance in the first quarter of 2000 of 5,707 shares of Series B with a
dividend rate of 1%, 3.0 million shares of Series C with a dividend rate of 6
1/2%, 22,500 shares of Series D with a dividend rate of 4% and 10,000 shares of
Series E with a dividend rate of 4%.
Other comprehensive loss represents the unrealized loss on the common
stock we obtained in the sale and leaseback of our tower assets.
Liquidity and Capital Resources
Our primary sources of liquidity have been the net cash provided by our
operations, amounts available under our credit facilities and proceeds from
security offerings. Our principal uses of cash have been for the funding of
acquisitions, meeting debt service requirements and the funding of DBS
subscriber acquisition costs, programming costs and dealer commissions,
investments in broadcast facilities and our operations in general.
We are a rapidly growing and expanding company. As a result, access to
and availability within the capital markets, especially the equity segment of
the market, has been and will continue to be critical to our growth strategy and
success. Our capital stock has been a major source of capital for us. During
2000, in connection with acquisitions and obtaining an investment interest in
others we issued 13.6 million shares of Class A common stock, 5,707 shares of
Series B preferred stock, 22,500 shares of Series D preferred stock and 10,000
shares of Series E preferred stock. In January 2000, we completed an offering of
3.0 million shares of 6 1/2% Series C preferred stock that resulted in net
proceeds to us of $290.4 million. During 2000 through September 30, we issued
59,422 shares of our Class A common stock as compensation to employees and
others and 195,927 shares in payment of dividends on our preferred stock.
Additionally, in 2000 we issued 17,771 shares of our Series A preferred stock in
payment of dividends payable on this preferred stock. On October 31, 2000, we
issued 130,221 shares of Class A common stock in payment of the dividend on the
Series C preferred stock that was payable on October 31, 2000.
Each share of Series B, Series D and Series E preferred stock noted
above is convertible at any time at the option of the holder into 32.47 shares,
19.54 shares and 16.04 shares, respectively, of our Class A common stock,
subject to adjustment under certain circumstances. Each share of Series B,
Series D and Series E preferred stock is redeemable at the option of the holder
at a price of $1,000. Each series may be redeemed at the option of holders as
follows: Series B in whole any time after January 4, 2002; Series D 10,000
shares on any day after March 1, 2000, an additional 6,125 shares beginning on
February 1, 2002, and the remaining shares on February 1, 2003; Series E 5,000
shares on any day after February 25, 2002, and the remaining shares beginning
February 25, 2003. Each share of Series C preferred stock is convertible at any
time at the option of the holder into 1.5686 shares of our Class A common stock,
subject to adjustment under certain circumstances.
In January 2000, Pegasus Media & Communications amended and restated
its credit facility, consisting of a $225.0 million senior revolving credit
facility that expires in 2004, a $275.0 million senior term credit facility that
expires in 2005 and an uncommitted facility for an additional $200.0 million
through June 30, 2001. The new credit facility is collateralized by
substantially all of the assets of PM&C and its subsidiaries and is subject to
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certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. Borrowings under the new credit facility are
available for acquisitions, to retire certain indebtedness, to fund interest
payments, for working capital, capital expenditures and general corporate
purposes. With the closing of the new credit facility, PM&C borrowed $275.0
million under the term loan facility and used a portion of the proceeds to pay
off balances aggregating $221.5 million outstanding under other credit
facilities. These other credit facilities along with their related commitments
and a letter of credit facility were then terminated. At September 30, 2000,
$275.0 million was outstanding under the new credit facility, with $38.2 million
of stand-by letters of credit issued thereunder.
Our Golden Sky Systems, Inc. subsidiary maintains a $115.0 million
senior revolving credit facility and a $35.0 million senior term credit facility
that are collateralized by substantially all of its assets and those of its
subsidiaries. The facility expires in 2005. These facilities had been entered
into prior to our acquisition of the Golden Sky companies. This credit facility
is subject to certain financial covenants as defined in the loan agreement,
including a debt to adjusted cash flow covenant. Borrowings under the credit
facility are available for acquisitions, to retire certain indebtedness, for
working capital, capital expenditures and general corporate purposes. In January
2000, Golden Sky Systems amended the credit facility. This amendment waived
Golden Sky Systems' third quarter 1999 covenant violations and amended certain
fourth quarter 1999 and year 2000 covenant requirements. The amendment limited
further availability under the revolving credit portion through December 31,
2000 to an additional $20.0 million above amounts already outstanding at the
time of the amendment. As of September 30, 2000, Golden Sky Systems was in
compliance with the credit facility. At September 30, 2000, amounts outstanding
under the revolving and term facilities were $17.0 million and $35.0 million,
respectively, with $35.9 million of stand-by letters of credit issued
thereunder. At September 30, 2000, $20.0 million was available under the credit
facility.
Golden Sky Systems has outstanding $195.0 million of 12.375% Senior
Subordinated Notes due 2006 that were issued prior to our acquisition of the
Golden Sky companies. Golden Sky DBS, Inc., another one of our subsidiaries
acquired with the Golden Sky companies, has outstanding 13.5% Senior Discount
Notes due 2007 that had been issued prior to the acquisition. These notes have
an aggregate stated maturity of $193.1 million.
Net cash used for operating activities was $65.3 million for the nine
months ended September 30, 2000 compared to $67.3 million for the corresponding
period of the prior year. Cash from revenues less cash for operating needs was
greater in the current year than in the prior year, but interest payments were
greater in the current year than in the prior year. The net cash usage for
operating activities was funded by a combination of proceeds from the Series C
preferred stock issuance and Pegasus Media & Communications' credit facility.
Pre-marketing cash flow increased $25.6 million to $49.6 million and
increased $52.8 million to $119.3 million for the three and nine months ended
September 30, 2000, respectively. Our DBS business contributed increases of
$26.5 million and $56.6 million, respectively, whereas our Broadcast business
generated decreases of $907,000 and $3.8 million, respectively.
Net cash used for investing activities for the nine months ended
September 30, 2000 amounted to $15.0 million. Acquisitions of $116.4 million
were all for DBS businesses. Capital expenditures increased $25.4 million to
$36.1 million compared to the corresponding period of the prior year,
principally due to purchases of and improvements to office facilities of $22.3
million and purchases of DBS rental equipment of $6.4 million. We expect that
the purchases of DBS rental equipment will grow as more of our subscribers
choose a rental alternative. Investments in affiliates of $14.6 million
represent the cash portion of our investment in Personalized Media
Communications. Net cash used for investing activities was principally funded
with proceeds available from the Series C preferred stock issuance and Pegasus
Media & Communications' credit facility. Cash from the sale of the Puerto Rico
cable operations of $166.9 million was received in mid September. Of the amount
received, $163.9 million was placed in short-term interest-bearing accounts for
immediate availability when needed and $3.0 million was placed in escrow to
cover claims that may arise out of the cable sale. The use of the proceeds from
the cable sale are limited by Pegasus Media & Communications' credit facility to
permitted acquisitions, paying down amounts outstanding under the credit
facility and payment of costs associated with the cable sale.
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Net cash provided by financing activities was $346.7 million for the
nine months ended September 30, 2000. The principal sources of cash were the net
proceeds of the Series C preferred stock issuance of $290.4 million, net of
related costs of $9.6 million, and net borrowings under Pegasus Media &
Communications' credit facility of $62.8 million.
On September 25, 2000, we were the successful bidder on 31 guard band
licenses in an auction conducted by the Federal Communications Commission. The
total price of the licenses is $91.5 million. We already paid a required down
payment of $5.4 million for these licenses. When we receive final FCC approval
for the licenses, the remaining $86.1 million will be payable in one amount. We
expect that the payment will be made from existing cash sources. We anticipate
that the FCC will grant its approval for the licenses anytime from late November
2000 to January 2001.
We are in the process of developing a broadband business that will be a
new service provided by us. We have already entered into an agreement with a
party that will enable us to offer this broadband high-speed internet access by
satellite to rural and underserved areas. We expect that this service will offer
two-way (send and receive capability) satellite access. Our plans are to launch
this new service in the first quarter of 2001. The capital requirements and
sources of the capital to finance this business are still being developed. We
cannot make any assurances as to the prospects of this new business.
At September 30, 2000, we had an unrestricted cash balance of $306.9
million. We had availability under the Pegasus Media & Communications credit
facility of $186.6 million plus access to an additional $200.0 million in
uncommitted funds. Additionally, Golden Sky had availability of $20.0 million
under its credit facility at September 30, 2000. We believe that we have
adequate resources to meet our working capital, maintenance capital expenditure
and debt service and preferred stock requirements for at least the next twelve
months. However, because we are highly leveraged, our ability to repay our
existing debt and preferred stock 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 our debt and preferred stock
requirements. 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.
We closely monitor conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing our
future expansion and acquisition requirements, we expect to increase our
leverage. This could result in increased debt service or preferred stock
requirements. We cannot assure you that such financing can be completed on terms
satisfactory to us or at all.
As previously discussed, we expect that we will effect our corporate
reorganization into a new publicly-held parent holding company by the end of
2000. Under the current organization structure, the existing publicly-held
parent is subject to operating restrictions and other covenants arising from our
existing publicly-held debt securities and Series A preferred stock. After
giving effect to the reorganization and a concurrent exchange offer for the
Series A preferred stock of New PCC for identical preferred stock of Old PCC
(assuming that a sufficient number of shares of Series A preferred Stock of New
PCC are exchanged), Old PCC will hold the publicly-held debt and the Series A
preferred stock containing the restrictive covenants. As a result, the new
publicly-held parent will not be subject to the provisions of these securities.
We believe this reorganization will provide New PCC with more flexibility
regarding future investments, operations and financing alternatives, including
the ability to incur debt and distribute assets.
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In compliance with the certificates of designation governing our Series
A and Series C preferred stock and the indentures governing our senior notes, we
provide below adjusted operating cash flow data for our restricted subsidiaries
on a consolidated basis. Under the governing documents, 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
adjusted operating cash flow is accepted as a recognized measure of performance
within the industries that we operate. This data is also used by analysts who
report publicly on the performance of companies in the industries in which we
operate. Including in the calculation the effects of DBS acquisitions completed
in the third quarter of 2000, as if these acquisitions had occurred on October
1, 1999, pro forma adjusted operating cash flow would have been as follows:
<TABLE>
<CAPTION>
Four Quarters Ended
(in thousands) September 30, 2000
--------------------
<S> <C>
Revenues........................................................................ $462,326
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges.............................................................. 326,419
--------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges............ 135,907
Corporate expenses.............................................................. 7,736
--------
Adjusted operating cash flow.................................................... $128,171
========
</TABLE>
Seasonality
Our revenues vary throughout the year. As is typical in the broadcast
television industry, our first quarter generally produces the lowest revenues
for the year and the fourth quarter generally produces the highest revenues for
the year. Our operating results in any period may be affected by the incurrence
of advertising and promotional 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.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 138,
becomes effective for us starting January 1, 2001. SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. At September 30, 2000, our use of derivative instruments is confined
to two interest rate swap and two interest rate cap instruments. These
instruments were entered into in connection with Pegasus Media & Communications'
credit facility. We do not use these instruments for trading or speculative
purposes. The notional amounts associated with these instruments range from
$33.9 million to $37.1 million. At the present time, we believe that we do not
possess any derivative instruments that may be embedded in other contracts or
agreements. We continue to analyze SFAS 133 for any material impacts of its
adoption that we are not presently aware of. Because of the limited number and
use of derivative instruments that we have and the relatively minor notional
amounts associated with these instruments, we believe at the present time that
the accounting for our derivative instruments under SFAS 133 will not have a
material impact on us.
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The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements". SAB 101 addresses revenue
recognition policies and practices of companies that report to the SEC. We will
adopt SAB 101 in the fourth quarter of 2000. The Company believes that our
adoption will not have a material impact.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement revises standards for accounting
for securitizations and other transfers of financial assets and collateral. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This standard
is effective for transfers occurring after March 31, 2001 and for fiscal years
ending after December 15, 2000 with respect to recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral. We are still analyzing the requirements of this statement and we do
not fully know whether or not the impact of this statement will be material. At
the present time, we are not involved with any securitization transactions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal market risk exposure is changing interest rates that
relate to our credit facilities, debt obligations and preferred stock. Our
objective in managing this exposure is to limit the impact of interest rate
changes on earnings and cash flow and to lower overall borrowing costs. As a
highly-leveraged company, we may not have as much of an ability to minimize
interest rates incurred on our debt facilities and preferred stock securities as
less leveraged entities. The market risks we are exposed to and the way we
manage these risks did not change during the three and nine months ended
September 30, 2000.
Our primary exposure is to variable rates of interest associated with
borrowings under our credit facilities. At September 30, 2000, the total amount
of borrowings subject to variable interest rates is $327.0 million. In
connection with Pegasus Media & Communications' credit facility, we entered into
interest rate protection instruments. These are confined to two interest rate
swaps and two interest rate caps with aggregate notional amounts of $140.0
million. With the interest rate swaps, we exchange variable interest for fixed
interest on a total notional amount of $72.1 million. We do not use these
instruments for trading or speculative purposes and the notional amounts are not
subject to exchange or payment. With respect to the interest rate swaps, for the
three months ended September 30, 2000, we received from the counterparties total
interest of $411,000 and for the nine months ended September 30, 2000 we paid to
the counterparties total interest of $185,000. No amounts have been paid or
received with respect to the interest rate caps in the three and nine months
ended September 30, 2000.
In the first quarter of 2000, we entered into new interest rate
protection instruments and terminated all other interest rate protection
instruments then outstanding. We received $927,000 in settlement of the
instruments terminated, and paid $262,000 in premiums to initiate new interest
rate cap instruments.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation:
We hereby incorporate by reference the disclosure relating to
"DIRECTV/NRTC Litigation" set forth under "Item 3: Legal Proceedings" on pages
25 and 26 of our Annual Report on Form 10-K filed with the SEC on March 10, 2000
for the fiscal year ended December 31, 1999. The last paragraph of this
disclosure is deleted and replaced in its entirety by the paragraphs set forth
below. To the extent the disclosure set forth below supersedes or updates other
disclosure under "Item 3: Legal Proceedings," such disclosure is hereby deemed
to be modified, superseded and/or updated.
On February 10, 2000, Golden Sky and we filed an amended complaint
which added new tort claims against DIRECTV for interference with our
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. Golden Sky and we later withdrew the class action
allegations we previously filed to allow a new class action to be filed on
behalf of the members and affiliates of the National Rural Telecommunications
Cooperative. The class action was filed on February 27, 2000. All four actions
are pending before the same judge. On November 20, 2000, the court will hear
argument on the motion for class certification and on DIRECTV's motion to
dismiss certain of our claims and claims by the class members. DIRECTV's motion
for partial summary judgment on the right of first refusal will be heard on or
about December 11, 2000. The court has set a trial date of November 27, 2001 for
all four actions.
The outcome of this litigation and the litigation filed by the National
Rural Telecommunications Cooperative could have a material adverse effect on our
direct broadcast satellite business.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 25, 2000, Pegasus issued warrants to purchase 10,000
shares of its Class A common stock as partial consideration for the acquisition
of DIRECTV rights and related assets from an independent provider of DIRECTV in
certain rural areas of North Dakota. The warrants are exercisable on or before
September 25, 2005 at a price of $46.90 per share, subject to certain
adjustments. In issuing the warrants, Pegasus relied upon an exemption from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended.
On September 26, 2000, Pegasus issued 50,000 shares of its Class A
common stock upon the exercise of a warrant previously issued in connection with
an acquisition. Upon exercise of the warrant, Pegasus received approximately
$604,428 in cash, which was the amount of the exercise price (as adjusted for
Pegasus' May 2000 stock dividend) specified in the original warrant. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On September 29, 2000, we filed a Current Report on Form 8-K dated
September 15, 2000 reporting under Item 5 the sale of our Puerto Rico cable
operations.
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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 14, 2000 By: /s/ M. Kasin Smith
----------------- -----------------------
Date M. Kasin Smith
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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