<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 June 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
PEGASUS COMMUNICATIONS CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 51-0374669
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
c/o Pegasus Communications Management Company;
225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004
------------------------------------------------ -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (888) 438-7488
--------------
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes_X_ No___
Number of shares of each class of the Registrant's common stock
outstanding as of August 4, 2000:
Class A, Common Stock, $0.01 par value 45,617,961
Class B, Common Stock, $0.01 par value 9,163,800
Non-Voting, Common Stock, $0.01 par value _
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended June 30, 2000
Page
----
Part I. Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1999 and June 30, 2000 3
Consolidated Statements of Operations
Three months ended June 30, 1999 and 2000 4
Consolidated Statements of Operations
Six months ended June 30, 1999 and 2000 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 30
Part II. Other Information
Item 1 Legal Proceedings 31
Item 2 Changes in Securities and Use of Proceeds 31
Item 4 Submission of Matters to a Vote of Security Holders 32
Item 6 Exhibits and Reports on Form 8-K 32
Signature 33
2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,453 $ 250,257
Restricted cash 2,379 16,641
Accounts receivable, less allowance for doubtful accounts of $1,410 and
$2,888, respectively 31,984 43,894
Inventory 10,020 20,922
Program rights 4,373 3,868
Deferred taxes 536 784
Prepaid expenses and other 4,597 7,341
-------- ----------
Total current assets 94,342 343,707
Property and equipment, net 44,415 71,578
Intangible assets, net 736,806 2,292,982
Deferred financing costs, net 23,831 32,844
Program rights 5,732 3,843
Deferred taxes 30,371 34,048
Investment in affiliates 4,598 116,444
Deposits and other 5,237 14,042
-------- ----------
Total assets $945,332 $2,909,488
======== ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Notes payable
Current portion of long-term debt $15,488 $13,895
Accounts payable 8,999 8,442
Accrued interest 11,592 32,797
Accrued satellite programming, fees and commissions 37,885 45,168
Accrued expenses 14,139 39,149
Amounts due seller 6,729 -
Current portion of program rights payable 4,446 4,360
-------- ----------
Total current liabilities 99,278 143,811
Long-term debt 668,926 1,111,360
Program rights payable 4,211 2,248
Deferred taxes 90,310 596,605
-------- ----------
Total liabilities 862,725 1,854,024
-------- ----------
Commitments and contingent liabilities - -
Minority interest 3,000 904
Preferred Stock; $0.01 par value; 20.0 million shares authorized - -
Series A Preferred Stock; $0.01 par value; 152,844 shares authorized; 135,073 and 143,684
issued and outstanding 142,734 151,894
Series B Preferred Stock; $0.01 par value; 5,707 shares authorized, issued and outstanding - 5,735
Series D Preferred Stock; $0.01 par value; 22,500 shares authorized, issued and outstanding - 22,875
Series E Preferred Stock; $0.01 par value; 10,000 shares authorized, issued and outstanding - 10,138
Stockholders' equity (deficit):
Series C Preferred Stock; $0.01 par value; 3.0 million shares authorized, issued and
outstanding - 300,000
Class A Common Stock; $0.01 par value; 250.0 million shares authorized; 30,433,020
and 45,255,419 issued and outstanding 304 452
Class B Common Stock; $0.01 par value; 30.0 million shares authorized; 9,163,800
issued and outstanding 92 92
Non-Voting Common Stock; $0.01 par value; 200.0 million shares authorized - -
Additional paid-in capital 237,368 974,046
Deficit (300,704) (410,594)
Class A Common Stock in treasury, at cost; 8,506 and 1,936 shares (187) (78)
-------- ----------
Total stockholders' equity (deficit) (63,127) 863,918
-------- ----------
Total liabilities and stockholders' equity (deficit) $945,332 $2,909,488
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
1999 2000
------- -------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $64,118 $134,411
Broadcast 9,622 9,272
-------- --------
Total net revenues 73,740 143,683
Operating expenses:
DBS
Programming, technical, general and administrative 43,846 94,149
Marketing and selling 28,744 31,160
Incentive compensation 400 787
Depreciation and amortization 20,481 50,527
Broadcast
Programming, technical, general and administrative 5,211 6,083
Marketing and selling 1,612 2,042
Incentive compensation 46 31
Depreciation and amortization 1,293 1,217
Corporate expenses 1,442 2,461
Corporate depreciation and amortization 740 393
Development costs 2 742
Other expense, net 468 638
-------- --------
Loss from operations (30,545) (46,547)
Interest expense (15,580) (30,756)
Interest income 313 4,052
Other non-operating expenses, net - (447)
-------- --------
Loss from continuing operations before income taxes,
equity loss and extraordinary items (45,812) (73,698)
Benefit for income taxes (572) (11,473)
Equity in net loss of unconsolidated affiliate - (99)
-------- --------
Loss from continuing operations (45,240) (62,324)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 616 163
-------- --------
Net loss (44,624) (62,161)
Preferred stock dividends 4,048 10,175
-------- --------
Net loss applicable to common shares ($48,672) ($72,336)
======== ========
Basic and diluted earnings per common share:
Loss from continuing operations ($1.26) ($1.48)
Income from discontinued operations 0.02 -
-------- --------
Net loss ($1.24) ($1.48)
======== ========
Weighted average shares outstanding 39,254 48,978
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------
1999 2000
-------- --------
(unaudited)
<S> <C> <C>
Net revenues:
DBS $122,454 $230,268
Broadcast 17,571 17,410
-------- --------
Total net revenues 140,025 247,678
Operating expenses:
DBS
Programming, technical, general and administrative 84,365 162,007
Marketing and selling 49,890 56,569
Incentive compensation 790 1,187
Depreciation and amortization 41,933 72,977
Broadcast
Programming, technical, general and administrative 10,154 12,046
Marketing and selling 3,079 3,911
Incentive compensation 202 46
Depreciation and amortization 2,482 2,542
Corporate expenses 2,624 4,321
Corporate depreciation and amortization 1,450 756
Development costs 2 1,169
Other expense, net 817 1,503
-------- --------
Loss from operations (57,763) (71,356)
Interest expense (31,261) (52,003)
Interest income 758 7,478
Other non-operating expenses, net - (447)
-------- --------
Loss from continuing operations before income taxes,
equity loss and extraordinary items (88,266) (116,328)
Benefit for income taxes (1,015) (15,279)
Equity in net loss of unconsolidated affiliates - (215)
-------- --------
Loss from continuing operations before
extraordinary items (87,251) (101,264)
Discontinued operations:
Income from discontinued operations of cable
segment, net of income taxes 749 654
-------- --------
Loss before extraordinary items (86,502) (100,610)
Extraordinary loss from extinquishment of debt, net - (9,280)
-------- --------
Net loss (86,502) (109,890)
Preferred stock dividends 8,095 14,956
-------- --------
Net loss applicable to common shares ($94,597) ($124,846)
======== ========
Basic and diluted earnings per common share:
Loss from continuing operations ($2.65) ($2.60)
Income from discontinued operations 0.02 0.02
-------- --------
Loss before extraordinary items (2.63) (2.58)
Extraordinary loss - (0.21)
-------- --------
Net loss ($2.63) ($2.79)
======== ========
Weighted average shares outstanding (000's) 35,997 44,739
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1999 2000
--------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($86,502) ($109,890)
Adjustments to reconcile net loss
to net cash used for operating activities:
Extraordinary loss on extinguishment of debt, net - 9,280
Depreciation and amortization 48,888 80,470
Program rights amortization 1,539 2,410
Amortization of debt discount and deferred financing fees 746 5,744
Stock incentive compensation 1,053 1,613
Gain on disposal of assets (35) -
Equity in net loss of unconsolidated affiliates and minority interest - 267
Bad debt expense 2,555 7,411
Deferred income taxes (1,015) (15,080)
Change in assets and liabilities:
Accounts receivable (2,215) (12,335)
Inventory (749) (8,588)
Prepaid expenses and other (2,803) (1,822)
Accounts payable and accrued expenses 5,681 5,414
Accrued interest (275) 14,662
Deposits and other (5,241) (8,296)
-------- --------
Net cash used for operating activities (38,373) (28,740)
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired (91,925) (36,039)
Capital expenditures (4,121) (27,342)
Purchase of intangible assets (1,311) (20,750)
Payments for programming rights (1,256) (2,065)
Investment in affiliates - (14,506)
Other 509 916
-------- --------
Net cash used for investing activities (98,104) (99,786)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt - 8,750
Repayments of long-term debt (13,315) (13,526)
Borrowings on bank credit facilities 77,500 275,000
Repayments of bank credit facilities (50,400) (212,200)
Restricted cash 10,317 (2,381)
Increase in deferred financing costs (1,541) (9,717)
Capital lease repayments (96) (122)
Proceeds from issuance of Class A Common Stock 80,843 2,207
Proceeds from issuance of Series C Preferred Stock - 300,000
Underwriting and stock offering costs (4,657) (9,551)
Repurchase of Class A Common Stock - (130)
-------- --------
Net cash provided by financing activities 98,651 338,330
-------- --------
Net increase (decrease) in cash and cash equivalents (37,826) 209,804
Cash and cash equivalents, beginning of year 54,505 40,453
-------- --------
Cash and cash equivalents, end of period $16,679 $250,257
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries, the "Company") operates in growing segments of the media industry
and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or
the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus
Media & Communications, Inc. ("PM&C") and Golden Sky Holdings, Inc. ("GSH").
PM&C's subsidiaries provide direct broadcast satellite television
("DBS") services to customers in certain rural areas of the United States; own
and/or program broadcast television ("Broadcast" or "TV") stations affiliated
with the Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and
The WB Television Network ("WB"); and own and operate a cable television
("Cable") system that provides service to individual and commercial subscribers
in Puerto Rico. GSH's subsidiaries provide DBS services to customers in certain
rural areas of the United States. GSH and it subsidiaries were acquired by the
Company on May 5, 2000.
2. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements include the accounts of Pegasus
and all of its subsidiaries. All intercompany transactions and balances have
been eliminated. Certain amounts for 1999 have been reclassified for comparative
purposes.
The unaudited consolidated financial statements reflect all adjustments
consisting of normal recurring items which are, in the opinion of management,
necessary for a fair presentation, in all material respects, of the financial
position of the Company and the results of its operations and its cash flows for
the interim period. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1999 included
in the Company's Annual Report on Form 10-K for the year then ended.
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, including shares outstanding, per share amounts, option shares, warrant
shares and exercise prices included in the accompanying consolidated financial
statements and notes reflect the stock split and its retroactive effect.
3. Investment in Affiliates:
Pegasus Development Corporation ("PDC"), a subsidiary of Pegasus, has a
90% investment in Pegasus PCS Partners, LP ("PCS") which is accounted for by the
equity method. PCS, a jointly owned limited partnership, acquires, owns,
controls and manages wireless licenses. Pegasus PCS, Inc. is the sole general
partner of PCS and is controlled by Marshall W. Pagon, the Company's President
and Chief Executive Officer. PDC's share of undistributed losses of PCS included
in continuing operations was $211,000 for the first half of 2000. PDC's total
investment in PCS at June 30, 2000 was $4.4 million.
7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
3. Investment in Affiliates: - (Continued)
In January 2000, PDC made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $112.0 million which is accounted for by the equity method. The
investment consisted of $14.4 million in cash, 400,000 shares of Pegasus' Class
A Common Stock (amounting to $18.8 million) and warrants to purchase 2.0 million
shares of Pegasus' Class A Common Stock at an exercise price of $45.00 per share
and with a term of ten years. The fair value of the warrants to be issued was
estimated using the Black-Scholes pricing model and is approximately $78.8
million. A subsidiary of PMC granted to Pegasus an exclusive license for use of
PMC's patent portfolio in the distribution of satellite services from specified
orbital locations. Mary C. Metzger, Chairman of PMC and a member of the
Company's Board of Directors, and John C. Harvey, Managing Member of PMC and Ms.
Metzger's husband, own a majority of and control PMC. PDC's share of
undistributed losses of PMC included in continuing operations was $4,000 for the
first half of 2000. PDC's total investment in PMC at June 30, 2000 was $112.0
million.
4. Common Stock:
On March 22, 2000, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Class A Common
Stock from 50.0 million to 250.0 million, increasing the number of authorized
shares of Class B Common Stock from 15.0 million to 30.0 million and increasing
the number of authorized shares of Non-Voting Common Stock from 20.0 million to
200.0 million.
As of June 30, 2000, the Company had three classes of Common Stock:
Class A Common Stock, Class B Common Stock and Non-Voting Common Stock. Holders
of Class A Common Stock and Class B Common Stock are entitled to one vote per
share and ten votes per share, respectively.
The Company's ability to pay dividends on its Common Stock is subject
to certain restrictions.
5. Preferred Stock:
On March 22, 2000, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Preferred Stock
from 5.0 million to 20.0 million.
As of December 31, 1999, the Company had 5.0 million shares of
Preferred Stock authorized of which 152,844 shares have been designated as
12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred
Stock"). As of June 30, 2000, the Company had 20.0 million shares of Preferred
Stock authorized of which 152,844 shares have been designated as Series A
Preferred Stock, 5,707 shares have been designated as Series B Junior
Convertible Participating Preferred Stock (the "Series B Preferred Stock"), 3.0
million shares have been designated as 6.5% Series C Convertible Preferred Stock
(the "Series C Preferred Stock"), 22,500 shares have been designated as Series D
Junior Convertible Participating Preferred Stock (the "Series D Preferred
Stock") and 10,000 shares have been designated as Series E Junior Convertible
Participating Preferred Stock (the "Series E Preferred Stock").
Series A Preferred Stock:
The Company had approximately 135,073 and 143,684 shares of Series A
Preferred Stock issued and outstanding at December 31, 1999 and June 30, 2000,
respectively. In June 2000, the Board of Directors declared a dividend on the
Series A Preferred Stock in the aggregate of approximately 9,160 shares of
Series A Preferred Stock, payable on July 3, 2000.
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
8
<PAGE>
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, the Company had 5,707 shares,
22,500 shares and 10,000 shares of Series B, Series D and Series E Preferred
Stock issued and outstanding at June 30, 2000, respectively. Each whole share of
Series B, Series D and Series E Preferred Stock has a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends. Each share of Series B,
Series D and Series E Preferred Stock will initially be convertible at any time
at the option of the holder into approximately 32.47 shares, 19.54 shares and
16.04 shares of Pegasus' Class A Common Stock, respectively. Additionally, each
share of Series B, Series D and Series E Preferred Stock is redeemable at the
option of the holder at a price equivalent to the respective liquidation
preferences, plus any accrued but unpaid dividends, at any time after the dates
as specified in the respective certificates of designation. Holders of shares of
Series B Preferred Stock shall be entitled to receive, when, as and if declared
by the Company's Board of Directors, cash dividends at an annual rate of 1%
payable semi-annually on January 1 and July 1, commencing on July 1, 2000.
Holders of shares of Series D and Series E Preferred Stock shall be entitled to
receive, when, as and if declared by the Company's Board of Directors, dividends
at an annual rate of 4% payable annually on January 1, commencing on January 1,
2001. Dividends on the Series D and Series E Preferred Stock shall be payable in
cash or in Pegasus' Class A Common Stock, at the option of the Company.
Dividends on the Series B, Series D and Series E Preferred Stock shall be
cumulative and shall accrue from the date of the original issuance.
The carrying amounts of the Series B, Series D, and Series E Preferred
Stock are periodically increased by amounts representing dividends not currently
declared or paid but which will be payable under the redemption features. For
the six months ended June 30, 2000, dividends on the Series B, Series D and
Series E Preferred Stock amounting to $28,000, $375,000 and $138,000 have been
recorded, respectively. The increases in carrying amounts are effected by
charges against retained earnings, or in the absence of retained earnings, by
charges against paid-in capital.
In the event of liquidation, the Series B, Series D and Series E
Preferred Stock will rank, to the extent of their respective liquidation
preferences, junior to Pegasus' Series A and Series C Preferred Stock, senior to
all classes of the Company's Common Stock and on parity with each other.
Series C Preferred Stock:
In January 2000, Pegasus completed an offering of 3.0 million shares of
Series C Preferred Stock, resulting in net proceeds to the Company of $290.4
million. The Company had 3.0 million shares of Series C Preferred Stock issued
and outstanding at June 30, 2000. Each whole share of Series C Preferred Stock
has a liquidation preference of $100 per share plus any accrued but unpaid
dividends and will initially be convertible at any time at the option of the
holder into 1.5686 shares of Pegasus' Class A Common Stock. Holders of shares of
Series C Preferred Stock shall be entitled to receive, when, as and if declared
by the Company's Board of Directors, dividends at a rate of 6.5% payable
quarterly on January 31, April 30, July 31 and October 31, commencing on April
30, 2000. Dividends shall be payable in cash, in Pegasus' Class A Common Stock
or a combination thereof, at the option of the Company. Dividends on the Series
C Preferred Stock shall be cumulative and shall accrue from the date of the
original issuance. On May 1, 2000, the Company paid a dividend on the Series C
Preferred Stock in the aggregate of 90,446 shares of Class A Common Stock,
amounting to approximately $5.3 million.
In the event of liquidation, the Series C Preferred Stock will rank
junior to Pegasus' Series A Preferred Stock, senior to Pegasus' Series B, Series
D and Series E Preferred Stock and senior to all classes of the Company's Common
Stock.
Under the terms of the Series A, Series B, Series C, Series D and
Series E Preferred Stock, Pegasus' ability to pay dividends on its Common Stock
is subject to certain restrictions.
9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following (in thousands): December 31, June 30,
1999 2000
------------ ----------
<S> <C> <C>
Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%,
payable semi-annually in arrears on April 15 and October 15.............. $115,000 $115,000
Series B Senior Notes payable by Pegasus, due 2006, interest at
9.75%, payable semi-annually in arrears on June 1 and
December 1............................................................... 100,000 100,000
Series A Senior Notes payable by Pegasus, due 2007, interest at 12.5%,
payable semi-annually in arrears on February 1 and August 1.............. 155,000 155,000
Senior six-year $180.0 million revolving credit facility, payable by
PM&C, interest at PM&C's option at either the bank's base rate plus an
applicable margin or LIBOR plus an applicable margin..................... 142,500 -
Senior six-year $70.0 million revolving credit facility, payable by DTS,
interest at DTS' option at either the bank's base rate plus an applicable
margin or the Eurodollar Rate plus an applicable
margin................................................................... 42,700 -
Senior six-year $20.0 million term loan facility, payable by DTS,
interest at DTS' option at either the bank's base rate plus an applicable
margin or the Eurodollar Rate plus an applicable margin.................. 19,000 -
Senior five-year $225.0 million revolving credit facility, payable
by PM&C, interest at PM&C's option at either the bank's base rate plus an
applicable margin or LIBOR plus an applicable margin..................... - -
Senior five-year $275.0 million term loan facility, payable by PM&C, interest at
PM&C's option at either the bank's base rate plus an applicable margin or
LIBOR plus an applicable margin.......................................... - 275,000
Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable
semi-annually in arrears on January 1 and July 1, net of unamortized
discount of $2.2 million and $2.0 million as of
December 31, 1999 and June 30, 2000, respectively........................ 82,776 82,976
Senior Subordinated Notes payable by GSS, due 2006, interest at
12.375%, payable semi-annually in arrears on February 1 and
August 1................................................................. - 195,000
Senior Discount Notes payable by GSDBS, due 2007, interest at 13.5%,
payable semi-annually in arrears on March 1 and September 1, commencing
September 1, 2004, net of unamortized discount of $73.4
million as of June 30, 2000.............................................. - 119,661
Senior seven-year $115.0 million revolving credit facility, payable
by GSS, interest at GSS' option at either the bank's rate plus an
applicable margin or LIBOR plus an applicable margin..................... - 17,000
Senior seven-year $35.0 million term loan facility, payable by GSS,
interest at GSS' option at either the bank's rate plus an
applicable margin or LIBOR plus an applicable margin..................... - 35,000
Mortgage payable, due 2000, interest at 8.75%................................ 431 -
Mortgage payable, due 2010, interest at 9.25%................................ - 8,727
Sellers' notes, due 2000 to 2005, interest at 3% to 8%....................... 26,648 21,397
</TABLE>
10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt: - (Continued)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ ----------
<S> <C> <C>
Capital leases and other.......................................... 359 494
-------- ----------
684,414 1,125,255
Less current maturities........................................... 15,488 13,895
-------- ----------
Long-term debt.................................................... $668,926 $1,111,360
======== ==========
</TABLE>
Certain of the Company's sellers' notes are collateralized by stand-by
letters of credit issued pursuant to the New PM&C Credit Facility and the GSS
Credit Facility.
Digital Television Services, Inc. ("DTS"), a subsidiary of Pegasus,
maintained a $70.0 million senior revolving credit facility and a $20.0 million
senior term credit facility (collectively, the "DTS Credit Facility") which was
collateralized by substantially all of the assets of DTS and its subsidiaries.
The DTS Credit Facility was subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant. The DTS
Credit Facility was terminated in January 2000.
PM&C maintained a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which was collateralized by substantially all of the
assets of PM&C and its subsidiaries. The PM&C Credit Facility was subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. The PM&C Credit Facility was amended and
restated in January 2000.
In December 1999, Pegasus entered into a $35.5 million interim letter
of credit facility (the "PCC Credit Facility"). The PCC Credit Facility was
terminated in January 2000.
In January 2000, PM&C entered into a first amended and restated credit
facility, which consists of a $225.0 million senior revolving credit facility
which expires in 2004 and a $275.0 million senior term credit facility which
expires in 2005 (collectively, the "New PM&C Credit Facility"). The New PM&C
Credit Facility is collateralized by substantially all of the assets of PM&C and
its subsidiaries and is subject to certain financial covenants as defined in the
loan agreement, including a debt to adjusted cash flow covenant. As of June 30,
2000, $38.2 million of stand-by letters of credit were issued pursuant to the
New PM&C Credit Facility, including $10.4 million collateralizing certain of the
Company's outstanding sellers' notes.
Commensurate with the closing of the New PM&C Credit Facility, the
Company borrowed $275.0 million under the term loan, outstanding balances under
the PM&C Credit Facility, the DTS Credit Facility, and the PCC Credit Facility
were repaid and commitments under the DTS Credit Facility and the PCC Credit
Facility were terminated. Additionally, in connection with the closing of the
New PM&C Credit Facility, DTS was merged with and into a subsidiary of PM&C.
A subsidiary of GSH, Golden Sky Systems, Inc. ("GSS"), maintains a
$115.0 million senior revolving credit facility and a $35.0 million senior term
credit facility (collectively, the "GSS Credit Facility"), which is
collateralized by substantially all of the assets of GSS and its subsidiaries.
The GSS Credit Facility is subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant. As of June
30, 2000, $35.9 million of stand-by letters of credit were issued pursuant to
the GSS Credit Facility, including $6.9 million collateralizing certain of the
Company's outstanding sellers' notes.
11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt: - (Continued)
In January 2000, GSS completed an amendment to the GSS Credit Facility.
The amendment, which was effective as of December 31, 1999, waived GSS' third
quarter 1999 covenant violations and amended certain fourth quarter 1999 and
year 2000 covenant requirements. Pursuant to the amendment, GSS was authorized
to borrow up to an additional $20.0 million under the GSS Credit Facility prior
to March 31, 2000. These incremental borrowings, which were secured by letters
of credit provided by certain of GSH's former shareholders, were required to be
repaid by May 31, 2000. Upon repayment of the incremental borrowings, GSS will
have potential incremental borrowing capacity during the remainder of the year
ending December 31, 2000 equal to the lesser of equity contributed by Pegasus to
repay the incremental borrowings and fund other working capital requirements or
$20.0 million. In May 2000, Pegasus made an $8.1 million capital contribution to
GSS that was used to repay the incremental borrowings and a $12.0 million
capital contribution to GSS that was used for working capital. As of June 30,
2000, GSS was in compliance with the GSS Credit Facility's amended covenants.
Prior to being acquired by Pegasus, GSS completed a senior subordinated
notes offering (the "GSS Notes Offering") in which it sold $195.0 million of its
12.375% Senior Subordinated Notes due 2006 (the "GSS Notes"). A portion of the
net proceeds from the GSS Notes Offering was used to fund an interest escrow
account, which is included in restricted cash on the Company's consolidated
balance sheet, for the first four semiannual interest payments on the GSS Notes.
The GSS Notes are guaranteed on a full, unconditional, senior subordinated
basis, jointly and severally by GSS and its subsidiaries.
Prior to being acquired by Pegasus, Golden Sky DBS, Inc. ("GSDBS"), a
direct subsidiary of GSH and GSS' parent, completed a senior discount notes
offering (the "GSDBS Notes Offering") in which it sold its 13.5% Senior Discount
Notes due 2007 (the "GSDBS Notes"), which have an aggregate balance due at
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.
The Company's publicly held notes may be redeemed, at the option of the
Company, in whole or in part, at various points in time after July 1, 2000 at
the redemption prices specified in the indentures governing the respective
notes, plus accrued and unpaid interest thereon.
In February 2000, Pegasus entered into a mortgage of $8.8 million with
interest payable at 9.25% in connection with the purchase of a building in Bala
Cynwyd, PA where Pegasus' corporate offices are located. The mortgage is being
amortized over 25 years with a balloon payment to satisfy the mortgage in 2010.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company's ability to incur additional
indebtedness, to create liens and to pay dividends.
7. Earnings Per Common Share:
Calculation of basic and diluted earnings per common share:
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted earnings per common share (in
thousands):
12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Earnings Per Common Share: - (Continued)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 2000
--------- --------
<S> <C> <C>
Net loss applicable to common shares...................................... ($48,672) ($72,336)
======== ========
Weighted average common shares outstanding................................ 39,254 48,978
======== ========
Total shares used for calculation of basic earnings per common share...... 39,254 48,978
Stock options and warrants................................................ - -
-------- --------
Total shares used for calculation of diluted earnings per common share.... 39,254 48,978
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
-------- ---------
<S> <C> <C>
Net loss applicable to common shares...................................... ($94,597) ($124,846)
======== =========
Weighted average common shares outstanding................................ 35,997 44,739
======== =========
Total shares used for calculation of basic earnings per common share...... 35,997 44,739
Stock options and warrants................................................ - -
-------- ---------
Total shares used for calculation of diluted earnings per common share.... 35,977 44,739
======== =========
</TABLE>
Basic earnings per common share amounts are based on net loss, after
deducting preferred stock dividend requirements, divided by the weighted average
number of shares of Class A, Class B and Non-Voting Common Stock outstanding
during the period. The total shares used for the calculation of diluted earnings
per common share were not adjusted for securities that have not been issued as
they are antidilutive.
For the three and six months ended June 30, 1999 and 2000, net loss per
common share was determined by dividing net loss, as adjusted by the aggregate
amount of preferred stock dividend requirements, approximately $4.0 million,
$8.1 million, $10.2 million and $15.0 million, respectively, by applicable
shares outstanding.
8. Acquisitions:
In the first half of 2000, the Company acquired (exclusive of the
acquisition of GSH), from seven independent DIRECTV(R) ("DIRECTV") providers,
the rights to provide DIRECTV programming in certain rural areas of the United
States and the related assets in exchange for total consideration of
approximately $133.9 million, which consisted of $36.0 million in cash, 22,500
shares of Pegasus' Series D Preferred Stock (amounting to $22.5 million), 10,000
shares of Pegasus' Series E Preferred Stock (amounting to $10.0 million),
873,184 shares of Pegasus' Class A Common Stock (amounting to $39.7 million),
warrants to purchase a total of 3,000 shares of Pegasus' Class A Common Stock
(amounting to $166,000), $24.4 million of a deferred tax liability, $200,000 in
promissory notes and $961,000 in assumed net liabilities.
13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Acquisitions: - (Continued)
On May 5, 2000, the Company acquired GSH, which holds the rights to
provide DIRECTV programming in certain rural areas of 24 states, and the related
assets and liabilities in exchange for total consideration of approximately $1.5
billion, which consisted of approximately 12.2 million shares of Pegasus' Class
A Common Stock (amounting to $579.0 million at a price of $47.54 per share, the
average closing price per share five days prior and subsequent to the
acquisition announcement), options to purchase a total of approximately 698,000
shares of Pegasus' Class A Common Stock (amounting to $33.2 million),
approximately $383.0 million of assumed net liabilities and a deferred tax
liability of approximately $489.5 million.
Other than the acquisition of GSH, the Company's 2000 acquisitions of
rights to provide DIRECTV programming were not significant and, accordingly, the
pro forma impact of those acquisitions has not been presented. The following
unaudited summary, prepared on a pro forma basis, combines the results of
operations as if GSH had been acquired as of the beginning of the periods
presented, after including the impact of certain adjustments, such as the
depreciation of fixed assets, amortization of intangibles, interest expense and
related income tax effects. This information does not purport to be indicative
of what would have occurred had the acquisition of GSH been made on those dates
or of results which may occur in the future.
<TABLE>
<CAPTION>
(In thousands, except per share data) Six Months Ended June 30,
-------------------------
1999 2000
--------- ---------
<S> <C> <C>
Net revenues from continuing operations................................... $199,980 $305,824
========= =========
Loss from continuing operations before extraordinary items................ ($206,475) ($173,113)
========= =========
Net loss.................................................................. ($205,726) ($172,459)
========= =========
Net loss applicable to common shares...................................... ($213,821) ($187,415)
========= =========
Loss from continuing operations per common share.......................... ($4.45) ($3.54)
========= =========
Net loss per common share................................................. ($4.44) ($3.53)
========= =========
</TABLE>
9. Discontinued Operations:
In January 2000, the Company entered into a letter of intent to sell
its remaining Cable operations for $170.0 million in cash, subject to certain
adjustments. The Company anticipates closing this sale during the second half of
2000. Accordingly, the results of operations from the entire Cable segment have
been classified as discontinued with prior periods restated.
Net revenues and income from discontinued operations were as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 2000
-------- ---------
<S> <C> <C>
Net revenues.............................................................. $5,577 $6,511
Income from operations.................................................... 638 414
Provision for income taxes................................................ - 249
Income from discontinued operations....................................... 616 163
</TABLE>
14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Discontinued Operations: - (Continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 2000
--------- ----------
<S> <C> <C>
Net revenues................................................................ $8,648 $12,710
Income from operations...................................................... 765 811
Provision for income taxes.................................................. - 199
Income from discontinued operations......................................... 749 654
</TABLE>
10. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 2000
------- --------
<S> <C> <C>
Barter revenue and related expense............................................ $3,648 $3,558
Acquisition of program rights and assumption of related program payables...... 6,655 16
Capital issued and related acquisition of intangibles......................... 814 693,582
Minority interest and related acquisition of intangibles...................... - 852
Capital issued and related investment in affiliates........................... - 97,555
Notes payable and related acquisition of intangibles.......................... 4,490 379,773
Preferred stock dividends and reduction of paid-in capital.................... 8,095 9,701
Deferred taxes, net and related acquisition of intangibles.................... 29 517,451
</TABLE>
For the six months ended June 30, 1999 and 2000, the Company paid cash
for interest in the amount of $30.8 million and $31.6 million, respectively. The
Company paid no federal income taxes for the six months ended June 30, 1999 and
2000.
11. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural
Telecommunications Cooperative ("NRTC"). The NRTC is a cooperative organization
whose members and affiliates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The Company's ability to distribute DIRECTV programming services is
dependent upon agreements between the NRTC and Hughes Electronics Corporation,
DIRECTV's parent, and between the Company and the NRTC.
On June 3, 1999, the NRTC filed a lawsuit in federal court against
DIRECTV seeking a court order to enforce the NRTC's contractual rights to obtain
from DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. On July 22, 1999, DIRECTV
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101(Degree) W orbital
location, without regard to the orbital lives of the other DIRECTV satellites at
the 101(Degree) W orbital location. DIRECTV also alleges in its counterclaim
that the NRTC's right of first refusal, which is effective at the end of the
term of DIRECTV's contract with the NRTC, does not provide for certain
programming and other rights comparable to those now provided under the
contract.
15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Commitments and Contingent Liabilities: - (Continued)
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV had failed to provide to the NRTC its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and GSS filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and GSS. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the NRTC and its members and affiliates.
On February 10, 2000, the Company and GSS filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. The Company and GSS also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members and
affiliates of the NRTC. The class action was filed on February 27, 2000. All
four actions are now pending before the same judge, who has set various hearing
dates, including the following. On October 2, 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 October 30,
2000. The court has set a trial date of November 27, 2001 for all four actions.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
Commitments:
The Company has entered into a multi-year agreement with a provider of
integrated marketing, information and transaction services to provide customer
relationship management services which will significantly increase the Company's
existing call center capacity. The initial term of the agreement ends on
December 31, 2004. The Company must pay minimum fees to the provider as follows
(in thousands):
<TABLE>
<CAPTION>
Annual
Year Minimum Fees
---- -----------------
<S> <C> <C>
2000.................................................. $12,600
2001.................................................. 18,216
2002.................................................. 20,250
2003.................................................. 20,250
2004.................................................. 20,250
-------
Total minimum payments $91,566
</TABLE>
12. Industry Segments:
The Company operates in growing segments of the media industry: DBS and
Broadcast. DBS consists of providing direct broadcast satellite television
services to customers in certain rural areas of 41 states. Broadcast consists of
ten television stations affiliated with Fox, UPN and the WB and three
transmitting towers, all located in the eastern United States.
16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Industry Segments: - (Continued)
All of the Company's revenues are derived from external customers.
Capital expenditures for the Company's DBS segment were $966,000 and $7.6
million for the six months ended June 30, 1999 and 2000, respectively. Capital
expenditures for the Company's Broadcast segment were $494,000 and $4.1 million
for the six months ended June 30, 1999 and 2000, respectively. Capital
expenditures for the Company's discontinued Cable segment were $2.4 million and
$3.1 million for the six months ended June 30, 1999 and 2000, respectively. All
other capital expenditures for the six months ended June 30, 1999 and 2000 were
at the corporate level.
Identifiable total assets for the Company's DBS segment were $701.9
million and $2.3 billion as of December 31, 1999 and June 30, 2000 respectively.
Identifiable total assets for the Company's Broadcast segment were $70.6 million
and $71.3 million as of December 31, 1999 and June 30, 2000, respectively.
Identifiable total assets for the Company's discontinued Cable segment were
$86.5 million and $83.4 million as of December 31, 1999 and June 30, 2000,
respectively. All other identifiable assets as of December 31, 1999 and June 30,
2000 were at the corporate level.
13. Other Events:
In July 2000, Pegasus Towers, Inc., a subsidiary of Pegasus, and
Pegasus Broadcast Television, Inc. ("PBT"), a subsidiary of PM&C, sold
substantially all of their broadcast tower assets to SpectraSite Broadcast Group
("SpectraSite"), a division of SpectraSite Holdings, Inc. ("SpectraSite
Holdings"), for approximately 1.4 million shares of SpectraSite Holdings' common
stock (amounting to approximately $36.6 million at a price of $26.63 per share).
The Company anticipates recognizing a gain on the transaction. Under the terms
of the agreement, SpectraSite will lease certain of its existing tower
facilities and build additional digital television towers for use by PBT.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among other things, the following: general economic and
business conditions, both nationally, internationally and in the regions in
which we operate; relationships with and events affecting third parties like
DIRECTV, Inc.; litigation with DIRECTV; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition; the loss of any significant numbers of subscribers or
viewers; changes in business strategy or development plans; technological
developments and difficulties; the ability to attract and retain qualified
personnel; our significant indebtedness; the availability and terms of capital
to fund the expansion of our businesses; and other factors referenced in this
Report and in reports and registration statements filed from time to time with
the Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as the date
hereof. We do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included on pages 3-17 herein.
General
Pegasus Communications Corporation is:
o The largest independent provider of DIRECTV with approximately 1.2
million subscribers at June 30, 2000, on an actual basis. We have
the exclusive right to distribute DIRECTV digital broadcast
satellite services to 7.2 million rural households in 41 states.
We distribute DIRECTV through the Pegasus retail network, a
network in excess of 3,000 independent retailers.
o The owner or programmer of ten TV stations affiliated with either
Fox, UPN or the WB and the owner of a large cable system in Puerto
Rico serving approximately 56,000 subscribers.
On May 5, 2000, the Company acquired Golden Sky Holdings, Inc. Upon
completion of the acquisition, Golden Sky Holdings became a wholly owned
subsidiary of Pegasus. As of June 30, 2000, Golden Sky's operations consisted of
providing DIRECTV services to approximately 354,000 subscribers in certain rural
areas of 24 states in which Golden Sky holds the exclusive rights to provide
such services.
DBS revenues are principally derived from monthly customer
subscriptions and pay-per-view services. Broadcast revenues are derived from the
sale of broadcast airtime to local and national advertisers.
In January 2000, we entered into a letter of intent to sell the assets
of our entire cable system business in Puerto Rico to a subsidiary of Centennial
Cellular Corporation for $170.0 million in cash, subject to certain adjustments.
The closing of this sale is anticipated to occur during the second half of 2000
and is subject to the negotiation of a definitive agreement, third-party
approvals, including regulatory approvals, and other customary conditions.
Accordingly, the results of our cable segment have been presented as
discontinued operations in our consolidated statements of operations.
18
<PAGE>
In this section we use the terms pre-marketing cash flow from
continuing operations and location cash flow from continuing operations.
Pre-marketing cash flow from continuing operations is calculated by taking our
earnings and adding back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges;
o corporate overhead;
o extraordinary and non-recurring items;
o results of discontinued operations; and
o DBS subscriber acquisition costs, which are sales and marketing
expenses incurred and promotional programming provided in
connection with the addition of new DBS subscribers.
Location cash flow from continuing operations is pre-marketing cash
flow from continuing operations less DBS subscriber acquisition costs.
Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations are not, and should not be considered,
alternatives to income from operations, net income, net cash provided by
operating activities or any other measure for determining our operating
performance or liquidity, as determined under generally accepted accounting
principles. Pre-marketing cash flow from continuing operations and location cash
flow from continuing operations also do not necessarily indicate whether our
cash flow will be sufficient to fund working capital, capital expenditures, or
to react to changes in Pegasus' industry or the economy generally. We believe
that pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to
monitor our financial performance and debt leverage.
Pegasus generally does not require new DBS customers to sign
programming contracts and, as a result, subscriber acquisition costs are
currently being charged to operations in the period incurred.
Certain of our DBS customers, primarily those converted from
Primestar's medium-power DBS business, pay a monthly rental fee to us for use of
our DBS subscriber equipment. The equipment is owned by us and, accordingly, the
equipment costs are capitalized and depreciated over a period of three years.
These equipment costs are not included as a component of subscriber acquisition
costs in our results of operations.
19
<PAGE>
Results of Operations
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Total net revenues from continuing operations for the three months
ended June 30, 2000 were $143.7 million, an increase of $69.9 million, or 95%,
compared to total net revenues of $73.7 million for the same period in 1999. The
increase in total net revenues for the three months ended June 30, 2000 was
primarily due to an increase in DBS revenues of $70.3 million attributable to
acquisitions and to internal growth in Pegasus' DBS subscriber base. Total
operating expenses from continuing operations for the three months ended June
30, 2000 were $190.2 million, an increase of $85.9 million, or 82%, compared to
total operating expenses of $104.3 million for the same period in 1999. The
increase was primarily due to an increase of $83.2 million in operating expenses
attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $2.9 million for the three months
ended June 30, 2000, an increase of $672,000, or 31%, compared to $2.2 million
for the same period in 1999. The increase in corporate expenses is primarily
attributable to the growth in Pegasus' business.
New business development costs were $742,000 for the three months ended
June 30, 2000 compared to $2,000 for the same period in 1999.
Other expenses from continuing operations were $638,000 for the three
months ended June 30, 2000, an increase of $170,000, or 36%, compared to other
expenses of $468,000 for the same period in 1999. The increase is primarily due
to increased investor relation activities and legal fees associated with the
DIRECTV litigation.
Interest expense from continuing operations was $30.8 million for the
three months ended June 30, 2000, an increase of $15.2 million, or 97%, compared
to interest expense of $15.6 million for the same period in 1999. The increase
in interest expense is primarily due to interest and fees in connection with the
new Pegasus Media & Communications credit facility and interest related to
senior notes and credit facilities that were assumed as a result of the merger
with Golden Sky. Interest income from continuing operations was $4.1 million for
the three months ended June 30, 2000, an increase of $3.7 million, or 1195%,
compared to interest income of $313,000 for the same period in 1999. The
increase in interest income is due to significantly higher average cash balances
for the three months ended June 30, 2000 compared to the same period in 1999.
Other non-operating expenses from continuing operations were $447,000
for the three months ended June 30, 2000 and consist principally of losses on
the disposal of fixed assets.
The benefit for income taxes from continuing operations amounted to
$11.5 million for the three months ended June 30, 2000, an increase of $10.9
million, compared to $572,000 for the same period in 1999. The increase is
primarily attributable to the amortization of deferred tax liabilities
originating from the merger with Golden Sky and other DBS acquisitions.
Equity in the net losses of unconsolidated affiliates, resulting from
investments in Pegasus PCS Partners, LP in August 1999 and Personalized Media
Communications, LLC in January 2000, amounted to $99,000 for the three months
ended June 30, 2000.
Income from discontinued operations of the cable segment, net of income
taxes, was $163,000 for the three months ended June 30, 2000, a decrease of
$453,000, or 74%, compared to $616,000 for the same period in 1999. The decrease
is primarily attributable to an increase in incentive compensation and income
tax expense. Pegasus had approximately 56,000 cable subscribers at June 30, 2000
compared to 52,700 at June 30, 1999.
Preferred stock dividends were $10.2 million for the three months ended
June 30, 2000, an increase of $6.1 million, or 151%, compared to $4.0 million in
preferred stock dividends for the same period in 1999. The increase is
attributable to a greater number of shares of Pegasus' preferred stock
outstanding for the three months ended June 30, 2000 compared to the same period
in 1999 as the result of payment of dividends in kind and the issuance of four
new series of preferred stock in the first quarter of 2000.
20
<PAGE>
DBS
During the last twelve months, Pegasus acquired, through acquisitions,
approximately 408,000 subscribers and the exclusive DIRECTV distribution rights
to approximately 2.4 million households in rural areas of the United States. At
June 30, 2000, Pegasus had exclusive DIRECTV distribution rights to 7.2 million
households and 1.2 million subscribers as compared to 4.8 million households and
540,000 subscribers at June 30, 1999. Pegasus had 7.5 million households and
approximately 1.3 million subscribers at June 30, 2000, including pending
acquisitions. At June 30, 1999, subscribers would have been 930,000, including
pending and completed acquisitions. Subscriber penetration increased from 12.3%
at June 30, 1999 to 16.8% at June 30, 2000, including pending and completed
acquisitions.
Total DBS net revenues were $134.4 million for the three months ended
June 30, 2000, an increase of $70.3 million, or 110%, compared to DBS net
revenues of $64.1 million for the same period in 1999. The increase is primarily
due to an increase in the average number of subscribers in the second quarter of
2000 compared to the second quarter of 1999. The average monthly revenue per
subscriber was $43.11 for the three months ended June 30, 2000 compared to
$41.89 for the same period in 1999. Pro forma for the Golden Sky acquisition,
DBS net revenues were $149.0 million for the three months ended June 30, 2000,
an increase of $53.5 million, or 56%, compared to pro forma DBS net revenues of
$95.5 million for the same period in 1999.
Programming, technical, and general and administrative expenses were
$94.1 million for the three months ended June 30, 2000, an increase of $50.3
million, or 115%, compared to $43.8 million for the same period in 1999. The
increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.0% for the three
months ended June 30, 2000 compared to 68.4% for the same period in 1999.
Subscriber acquisition costs were $31.2 million for the three months
ended June 30, 2000, an increase of $2.4 million, or 8%, compared to $28.7
million for the same period in 1999. Gross subscriber additions were 89,900 for
the three months ended June 30, 2000 compared to 76,000 for the same period in
1999. The total subscriber acquisition costs per gross subscriber addition were
$347 for the three months ended June 30, 2000 compared to $378 for the same
period in 1999. The decrease in subscriber acquisition costs per gross
subscriber addition is primarily due to a decrease in promotional programming.
Approximately $4.8 million of DBS subscriber equipment was capitalized in the
second quarter of 2000 related to rental units which are being depreciated over
a three year period.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $787,000 for the three months ended June 30, 2000,
an increase of $387,000, or 97%, compared to $400,000 for the same period in
1999. The increase resulted from a larger gain in pro forma location cash flow
during the second quarter of 2000 as compared to the second quarter of 1999.
Depreciation and amortization was $50.5 million for the three months
ended June 30, 2000, an increase of $30.0 million, or 147%, compared to $20.5
million for the same period in 1999. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of the merger with Golden Sky and other DBS acquisitions that
occurred during the last two years.
Broadcast
During the three months ended June 30, 2000, Pegasus owned or
programmed ten broadcast television stations in six markets. One new station was
launched during the fourth quarter of 1999. Total net broadcast revenues for the
three months ended June 30, 2000 were $9.3 million, a decrease of $350,000, or
4%, compared to net broadcast revenues of $9.6 million for the same period in
1999. The decrease is primarily attributable to a decrease in barter revenue.
21
<PAGE>
Programming, technical, and general and administrative expenses were
$6.1 million for the three months ended June 30, 2000, an increase of $872,000,
or 17%, compared to $5.2 million for the same period in 1999. The increase is
primarily due to higher programming costs for the three months ended June 30,
2000 compared to the same period in 1999 and an increase in fees to the Fox
Television Network.
Marketing and selling expenses were $2.0 million for the three months
ended June 30, 2000, an increase of $430,000, or 27%, compared to $1.6 million
for the same period in 1999. The increase in marketing and selling expenses was
due to an increase in promotional costs associated with the launch of new
stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $31,000 for the three months ended June 30, 2000,
a decrease of $15,000, or 33%, compared to $46,000 for the same period in 1999.
The decrease resulted from a lower gain in pro forma location cash flow during
the second quarter of 2000 as compared to the second quarter of 1999.
Depreciation and amortization was $1.2 million for the three months
ended June 30, 2000, a decrease of $76,000, or 6%, compared to $1.3 million for
the same period in 1999.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Total net revenues from continuing operations for the six months ended
June 30, 2000 were $247.7 million, an increase of $107.7 million, or 77%,
compared to total net revenues of $140.0 million for the same period in 1999.
The increase in total net revenues for the six months ended June 30, 2000 was
primarily due to an increase in DBS revenues of $107.8 million attributable to
acquisitions and to internal growth in Pegasus' DBS subscriber base. Total
operating expenses from continuing operations for the six months ended June 30,
2000 were $319.0 million, an increase of $121.2 million, or 61%, compared to
total operating expenses of $197.8 million for the same period in 1999. The
increase was primarily due to an increase of $115.8 million in operating
expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including
corporate depreciation and amortization, were $5.1 million for the six months
ended June 30, 2000, an increase of $1.0 million, or 25%, compared to $4.0
million for the same period in 1999. The increase in corporate expenses is
primarily attributable to the growth in Pegasus' business.
New business development costs were $1.2 million for the six months
ended June 30, 2000 compared to $2,000 for the same period in 1999.
Other expenses from continuing operations were $1.5 million for the six
months ended June 30, 2000, an increase of $686,000, or 84%, compared to other
expenses of $817,000 for the same period in 1999. The increase is primarily due
to increased investor relation activities and legal fees associated with the
DIRECTV litigation.
Interest expense from continuing operations was $52.0 million for the
six months ended June 30, 2000, an increase of $20.7 million, or 66%, compared
to interest expense of $31.3 million for the same period in 1999. The increase
in interest expense is primarily due to interest and fees in connection with the
new Pegasus Media & Communications credit facility and interest related to
senior notes and credit facilities that were assumed as a result of the merger
with Golden Sky. Interest income from continuing operations was $7.5 million for
the six months ended June 30, 2000, an increase of $6.7 million, or 887%,
compared to interest income of $758,000 for the same period in 1999. The
increase in interest income is due to significantly higher average cash balances
for the six months ended June 30, 2000 compared to the same period in 1999.
Other non-operating expenses from continuing operations were $447,000
for the six months ended June 30, 2000 and consist principally of losses on the
disposal of fixed assets.
22
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The benefit for income taxes from continuing operations amounted to
$15.3 million for the six months ended June 30, 2000, an increase of $14.3
million, or 1405%, compared to $1.0 million for the same period in 1999. The
increase is primarily attributable to the amortization of deferred tax
liabilities originating from the merger with Golden Sky and other DBS
acquisitions.
Equity in the net losses of unconsolidated affiliates, resulting from
investments in Pegasus PCS Partners, LP in August 1999 and Personalized Media
Communications, LLC in January 2000, amounted to $215,000 for the six months
ended June 30, 2000.
Income from discontinued operations of the cable segment, net of income
taxes, was $654,000 for the six months ended June 30, 2000, a decrease of
$95,000, or 13%, compared to $749,000 for the same period in 1999. The decrease
is primarily attributable to an increase in incentive compensation and income
tax expense.
Extraordinary loss from the extinguishment of debt was $9.3 million for
the six months ended June 30, 2000. In January 2000, Pegasus Media &
Communications entered into an amended and restated $500.0 million credit
facility. Commensurate with the closing of the new credit facility, certain
funds from the initial borrowing were used to repay the outstanding balances
under the existing Pegasus Media & Communications $180.0 million credit
facility, the Digital Television Services $90.0 million credit facilities and
the Pegasus $35.5 million interim letter of credit facility and commitments
under these credit facilities were terminated. Accordingly, the deferred
financing costs related to the terminated credit facilities were written off.
Preferred stock dividends were $15.0 million for the six months ended
June 30, 2000, an increase of $6.9 million, or 85%, compared to $8.1 million in
preferred stock dividends for the same period in 1999. The increase is
attributable to a greater number of shares of Pegasus' preferred stock
outstanding for the six months ended June 30, 2000 compared to the same period
in 1999 as the result of payment of dividends in kind and the issuance of four
new series of preferred stock in the first quarter of 2000.
DBS
Total DBS net revenues were $230.3 million for the six months ended
June 30, 2000, an increase of $107.8 million, or 88%, compared to DBS net
revenues of $122.5 million for the same period in 1999. The increase is
primarily due to an increase in the average number of subscribers in the first
half of 2000 compared to the first half of 1999. The average monthly revenue per
subscriber was $43.28 for the six months ended June 30, 2000 compared to $42.47
for the same period in 1999. Pro forma for the Golden Sky acquisition, DBS net
revenues were $288.4 million for the six months ended June 30, 2000, an increase
of $137.4 million, or 91%, compared to pro forma DBS net revenues of $151.0
million for the same period in 1999.
Programming, technical, and general and administrative expenses were
$162.0 million for the six months ended June 30, 2000, an increase of $77.6
million, or 92%, compared to $84.4 million for the same period in 1999. The
increase is attributable to significant growth in subscribers and territory
during the last twelve months. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.4% for the six months
ended June 30, 2000 compared to 68.9% for the same period in 1999.
Subscriber acquisition costs were $56.6 million for the six months
ended June 30, 2000, an increase of $6.7 million, or 13%, compared to $49.9
million for the same period in 1999. Gross subscriber additions were 169,200 for
the six months ended June 30, 2000 compared to 127,700 for the same period in
1999. The total subscriber acquisition costs per gross subscriber addition were
$334 for the six months ended June 30, 2000 compared to $391 for the same period
in 1999. The decrease in subscriber acquisition costs per gross subscriber
addition is primarily due to a decrease in promotional programming.
Approximately $4.8 million of DBS subscriber equipment was capitalized in the
second quarter of 2000 related to rental units which are being depreciated over
a three year period.
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<PAGE>
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.2 million for the six months ended June 30,
2000, an increase of $397,000, or 50%, compared to $790,000 for the same period
in 1999. The increase resulted from a larger gain in pro forma location cash
flow during the first half of 2000 as compared to the first half of 1999.
Depreciation and amortization was $73.0 million for the six months
ended June 30, 2000, an increase of $31.0 million, or 74%, compared to $41.9
million for the same period in 1999. The increase in depreciation and
amortization is primarily due to an increase in the fixed and intangible asset
base as the result of the merger with Golden Sky and other DBS acquisitions that
occurred during the last two years.
Broadcast
Total net broadcast revenues for the six months ended June 30, 2000
were $17.4 million, a decrease of $161,000 or 1%, compared to net broadcast
revenues of $17.6 million for the same period in 1999. The decrease is primarily
attributable to a decrease in barter revenue.
Programming, technical, and general and administrative expenses were
$12.0 million for the six months ended June 30, 2000, an increase of $1.9
million, or 19%, compared to $10.2 million for the same period in 1999. The
increase is primarily due to higher programming costs for the six months ended
June 30, 2000 compared to the same period in 1999 and an increase in fees to the
Fox Television Network.
Marketing and selling expenses were $3.9 million for the six months
ended June 30, 2000, an increase of $832,000, or 27%, compared to $3.1 million
for the same period in 1999. The increase in marketing and selling expenses was
due to an increase in promotional costs associated with the launch of new
stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $46,000 for the six months ended June 30, 2000, a
decrease of $156,000, or 77%, compared to $202,000 for the same period in 1999.
The decrease resulted from a lower gain in pro forma location cash flow during
the first half of 2000 as compared to the first half of 1999.
Depreciation and amortization was $2.6 million for the six months ended
June 30, 2000, an increase of $60,000, or 2%, compared to $2.5 million for the
same period in 1999.
Liquidity and Capital Resources
Pegasus' primary sources of liquidity have been the net cash provided
by its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
uses of its cash has been to fund acquisitions, to meet debt service
obligations, to fund DBS subscriber acquisition costs, to fund DBS programming
costs and dealer commissions and to fund investments in its broadcast and cable
technical facilities.
Pre-marketing cash flow from continuing operations increased by
approximately $18.3 million, or 79%, for the three months ended June 30, 2000 as
compared to the same period in 1999. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $20.0 million, or 99%, increase in DBS pre-marketing cash flow
attributable to acquisitions, the merger with Golden Sky and
internal growth in Pegasus' DBS subscriber base; and
o a $1.7 million, or 59%, decrease in broadcast location cash flow
as a result of an increase in programming expenses and fees to the
Fox Television Network.
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<PAGE>
Pre-marketing cash flow from continuing operations increased by
approximately $27.3 million, or 64%, for the six months ended June 30, 2000 as
compared to the same period in 1999. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $30.2 million, or 79%, increase in DBS pre-marketing cash flow
attributable to acquisitions, the merger with Golden Sky and
internal growth in Pegasus' DBS subscriber base; and
o a $2.9 million, or 67%, decrease in broadcast location cash flow
as a result of an increase in programming expenses and fees to the
Fox Television Network.
During the six months ended June 30, 2000, $40.5 million of cash on
hand at the beginning of the year, together with $338.3 million of net cash
provided by Pegasus' financing activities, was used to fund operating activities
of approximately $28.7 million and investing activities of approximately $99.8
million. Investing activities consisted of:
o the acquisition of DBS assets from seven independent DIRECTV
providers during the first quarter of 2000 for approximately $36.0
million;
o DBS facility construction and upgrades of approximately $3.1
million;
o approximately $4.8 million in expenditures for DBS subscriber
rental equipment;
o capitalized costs relating to the merger with Golden Sky of
approximately $18.7 million;
o approximately $2.7 million of broadcast expenditures for broadcast
television transmitter, tower and facility construction and
upgrades;
o the expansion and enhancements of the Puerto Rico cable system
amounting to approximately $2.5 million;
o investment in affiliates of $14.5 million;
o the purchase of a building for our corporate offices of
approximately $13.0 million;
o payments of programming rights amounting to $2.1 million; and
o maintenance and other capital expenditures and intangibles
totaling approximately $2.4 million.
Financing activities consisted of:
o the issuance of 3.0 million shares of Series C convertible
preferred stock resulting in net proceeds to Pegasus of
approximately $290.4 million;
o the issuance of approximately 552,000 shares of Class A common
stock resulting in net proceeds to Pegasus of approximately $2.2
million;
o the proceeds from a mortgage totaling $8.8 million for the
purchase of a building for our corporate offices;
o net borrowings on bank credit facilities totaling $62.8 million;
o a net increase in deferred financing costs of approximately $9.7
million, primarily in connection with the amendment and
restatement of the Pegasus Media & Communications credit facility;
o the repayment of approximately $13.6 million of long-term debt,
primarily sellers' notes and capital leases;
25
<PAGE>
o the placement of approximately $2.4 million in certificates of
deposit to collateralize certain outstanding loans; and
o the repurchase of Class A common stock in treasury of $130,000.
As of June 30, 2000, cash on hand amounted to $250.3 million plus
restricted cash of $16.6 million.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility which expires in 2004 and a $275.0 million senior term
credit facility which expires in 2005. The new Pegasus Media & Communications
credit facility is collateralized by substantially all of the assets of Pegasus
Media & Communications and its subsidiaries and is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. Borrowings under the new Pegasus Media & Communications credit
facility are available for acquisitions, subject to the approval of lenders in
certain circumstances, to retire certain indebtedness, to fund interest
payments, for working capital, capital expenditures and general corporate
purposes. As of June 30, 2000, $275.0 million was outstanding under the senior
term credit facility and stand-by letters of credit amounting to $38.2 million
were issued pursuant to the senior revolving credit facility.
A portion of the proceeds from the initial borrowing under the senior
term credit facility was used to repay the outstanding balances under the
existing Pegasus Media & Communications $180.0 million senior revolving credit
facility, the Digital Television Services $90.0 million credit facilities and
the Pegasus $35.5 million interim letter of credit facility and commitments
under these credit facilities were terminated. Additionally, in connection with
the closing of the new Pegasus Media & Communications credit facility, Digital
Television Services was merged with and into a subsidiary of Pegasus Media &
Communications.
In January 2000, Pegasus completed an offering of 3.0 million shares of
its 6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends, which resulted in net
proceeds to Pegasus of approximately $290.4 million. Each share of Series C
preferred stock will initially be convertible at the option of the holder into
1.5686 shares of Pegasus' Class A common stock. Pegasus may redeem the Series C
preferred stock on or after August 1, 2001, subject to certain conditions, at
redemption prices set forth in the certificate of designation, plus accumulated
and unpaid dividends, if any.
In the first quarter of 2000, Pegasus issued 5,707 shares, 22,500
shares and 10,000 shares of its Series B, Series D and Series E junior
convertible participating preferred stock, respectively, with a liquidation
preference of $1,000 per share plus any accrued but unpaid dividends, as partial
consideration for acquisitions of DIRECTV distribution rights from three
independent DIRECTV providers. Each share of Series B, Series D and Series E
preferred stock will initially be convertible at the option of the holder into
approximately 32.47 shares, 19.54 shares and 16.04 shares of Pegasus' Class A
common stock, respectively.
On May 5, 2000, Pegasus acquired Golden Sky Holdings, Inc. and its
subsidiaries, which holds the rights to provide DIRECTV programming in certain
rural areas of 24 states, and the related assets and liabilities in exchange for
total consideration of approximately $1.5 billion, which consisted of
approximately 12.2 million shares of Pegasus' Class A common stock (amounting to
$579.0 million at a price of $47.54 per share, the average closing price per
share five days prior and subsequent to the acquisition announcement), options
to purchase a total of approximately 698,000 shares of Pegasus' Class A common
stock (amounting to $33.2 million), approximately $383.0 million of assumed net
liabilities and a deferred tax liability of approximately $489.5 million.
Golden Sky Systems, Inc., a subsidiary of Golden Sky Holdings,
maintains a $115.0 million senior revolving credit facility and a $35.0 million
senior term credit facility which expire in 2005. The Golden Sky Systems' credit
facilities are collateralized by substantially all of the assets of Golden Sky
Systems and its subsidiaries and are subject to certain financial covenants as
defined in the loan agreement, including a debt to adjusted cash flow covenant.
Borrowings under the credit facilities are available for acquisitions, subject
to the approval of lenders in certain circumstances, to retire certain
indebtedness, for working capital, capital expenditures and general corporate
purposes. As of June 30, 2000, $52.0 million was outstanding and stand-by
letters of credit amounting to $35.9 million were issued pursuant to its $150.0
million credit facilities.
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<PAGE>
In January 2000, Golden Sky Systems completed an amendment to its
credit facilities. The amendment, which was effective as of December 31, 1999,
waived Golden Sky Systems' third quarter 1999 covenant violations and amended
certain fourth quarter 1999 and year 2000 covenant requirements. Pursuant to the
amendment, Golden Sky Systems was authorized to borrow up to an additional $20.0
million under its credit facilities prior to March 31, 2000. These incremental
borrowings, which were secured by letters of credit provided by certain of
Golden Sky Holdings' former shareholders, were required to be repaid by May 31,
2000. Upon repayment of the incremental borrowings, Golden Sky Systems will have
potential incremental borrowing capacity during the remainder of the year ending
December 31, 2000 equal to the lesser of equity contributed by Pegasus to repay
the incremental borrowings and fund other working capital requirements or $20.0
million. In May 2000, Pegasus made an $8.1 million capital contribution to
Golden Sky Systems that was used to repay the incremental borrowings and a $12.0
million capital contribution to Golden Sky Systems that was used for working
capital. As of June 30, 2000, Golden Sky Systems was in compliance with its
amended covenants.
Prior to being acquired by Pegasus, Golden Sky Systems completed a
senior subordinated notes offering in which it sold $195.0 million of its
12.375% senior subordinated notes due 2006. A portion of the net proceeds from
the Golden Sky Systems' senior notes offering was used to fund an interest
escrow account for the first four semiannual interest payments on the Golden Sky
Systems' notes. Golden Sky Systems' notes are guaranteed on a full,
unconditional, senior subordinated basis, jointly and severally by Golden Sky
Systems and its subsidiaries.
Prior to being acquired by Pegasus, Golden Sky DBS, Inc., a direct
subsidiary of Golden Sky Holdings and Golden Sky Systems' parent, completed a
senior discount notes offering in which it sold its 13.5% senior discount notes
due 2007, which have an aggregate balance due at stated maturity of $193.1
million. Golden Sky DBS' notes are unsecured and effectively rank below all of
the liabilities of Golden Sky DBS' direct and indirect subsidiaries.
As defined in the certificates of designation governing Pegasus' Series
A and Series C preferred stock and the indentures governing Pegasus' senior
notes, Pegasus is required to provide adjusted operating cash flow data for
Pegasus and its restricted subsidiaries on a consolidated basis where adjusted
operating cash flow is defined as "for the four most recent fiscal quarters for
which internal financial statements are available, operating cash flow of such
person and its restricted subsidiaries less DBS cash flow for the most recent
four-quarter period plus DBS cash flow for the most recent quarterly period,
multiplied by four." Operating cash flow is income from operations before income
taxes, depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although adjusted operating cash flow is not a measure of
performance under generally accepted accounting principles, we believe that
location cash flow, operating cash flow and adjusted operating cash flow are
accepted within our business segments as generally recognized measures of
performance and are used by analysts who report publicly on the performance of
companies operating in such segments. Restricted subsidiaries carries the same
meaning as in the certificate of designation. Golden Sky, among certain other of
Pegasus' subsidiaries, are not included in the definition of restricted
subsidiaries and accordingly, their operating results are not included in the
adjusted operating cash flow data provided below. Pro forma adjusted operating
cash flow would have been approximately $129.9 million as follows (in
thousands):
<TABLE>
<CAPTION>
Four Quarters Ended
June 30, 2000
---------------------
<S> <C>
Revenues............................................................................... $442,802
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges..................................................................... 305,067
--------
Income from operations before incentive compensation, corporate
expenses, depreciation and amortization and other non-cash charges................... 137,735
Corporate expenses..................................................................... 7,861
--------
Adjusted operating cash flow........................................................... $129,874
========
</TABLE>
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Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors that
are beyond our control. We cannot assure you that we will be able to generate
the substantial increases in cash flow from operations that we will need to meet
the obligations under our indebtedness. Furthermore, our agreements with respect
to our indebtedness contain numerous covenants that, among other things,
restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
Dividend Policy
As a holding company, Pegasus' ability to pay dividends is dependent
upon the receipt of dividends from its direct and indirect subsidiaries. Pegasus
Media & Communications' and Golden Sky Systems' credit facilities and publicly
held debt securities restrict it from paying dividends to Pegasus. In addition,
Pegasus' ability to pay dividends and to incur indebtedness are subject to
certain restrictions contained in Pegasus' publicly held debt securities, in the
terms of Pegasus' Series A and Series C preferred stock and by Pegasus Media &
Communications' and Golden Sky's credit facilities and publicly held debt
securities.
Seasonality
Pegasus' revenues vary throughout the year. As is typical in the
broadcast television industry, Pegasus' first quarter generally produces the
lowest revenues for the year and the fourth quarter generally produces the
highest revenues for the year. Pegasus' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
Inflation
Pegasus believes that inflation has not been a material factor
affecting its business. In general, Pegasus' revenues and expenses are impacted
to the same extent by inflation. A majority of Pegasus' indebtedness bears
interest at a fixed rate.
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New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). As a result of the
subsequent issuance of SFAS No. 137 in July 1999 and SFAS No. 138 in June 2000,
SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. Management believes that the adoption of
SFAS No. 133 will not have a material effect on our business, financial position
or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met in order to recognize revenue and
provides guidance for disclosure related to revenue recognition policies. The
subsequent issuance of SAB 101B has deferred the timing of the adoption of the
requirements until the fourth quarter of 2000. Management believes that the
adoption of SAB 101 will not have a material effect on our business, financial
position or results of operations.
29
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about Pegasus' market sensitive financial instruments is
provided below and constitutes a "forward-looking statement." Pegasus' major
market risk exposure is changing interest rates that relate to its credit
facilities, debt obligations and preferred stock. Pegasus' objective in managing
its exposure to interest rate changes is to limit the impact of interest rate
changes on earnings and cash flow and to lower its overall borrowing costs.
Pegasus has entered into interest rate protection agreements on its credit
facility to limit its exposure to market interest rate fluctuations.
Pegasus Media & Communications maintained a $180.0 million senior,
reducing revolving credit facility. Interest on the credit facility was
calculated at either the bank's base rate or LIBOR, plus an applicable margin.
The credit facility was amended and restated in January 2000.
Digital Television Services maintained a $70.0 million senior, reducing
revolving credit facility and a $20.0 million senior term credit facility.
Interest on the credit facilities was calculated at either the bank's base rate
or the Eurodollar rate, plus an applicable margin. The credit facilities were
refinanced in January 2000 with the first amended and restated Pegasus Media &
Communications credit facility.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility and a $275.0 million senior term credit facility. As
of June 30, 2000, stand-by-letters of credit amounting to $38.2 million were
issued pursuant to its $225.0 million revolving credit facility and $275.0
million was outstanding under its $275.0 million senior term credit facility.
Availability of borrowings under the revolving credit facility will reduce by
specified amounts quarterly commencing on March 31, 2001 through maturity. The
term credit facility is to be repaid in specified amounts quarterly commencing
on March 31, 2001, with the balance due at maturity. Interest on the credit
facility is calculated at either the bank's base rate or LIBOR, plus an
applicable margin. The revolving credit facility expires in October 2004 and the
term credit facility expires in April 2005.
Commensurate with the closing of the first amended and restated Pegasus
Media & Communications credit facility, Pegasus Media & Communications borrowed
$275.0 million under the term loan, outstanding balances under Pegasus Media &
Communications' existing $180.0 million credit facility and Digital Television
Services' existing $90.0 million credit facilities were repaid and commitments
under Digital Television Services' credit facilities were terminated.
Golden Sky Systems maintains a $115.0 million senior, reducing
revolving credit facility and a $35.0 million senior term credit facility.
Availability of borrowings under the revolving credit facility will reduce by
specified amounts quarterly commencing on March 31, 2001 through maturity. The
term credit facility is to be repaid in specified amounts quarterly commencing
on March 31, 2002, with the balance due at maturity. As of June 30, 2000, $17.0
million was outstanding and stand-by letters of credit amounting to $35.9
million were issued under its $115.0 million revolving credit facility. As of
June 30, 2000, $35.0 million was outstanding under its $35.0 million term credit
facility. Interest on the credit facilities is calculated at either the bank's
base rate or LIBOR, plus an applicable margin. The revolving credit and term
facilities expire in September 2005 and December 2005, respectively.
As of June 30, 2000, Pegasus estimated the fair value of its debt and
preferred stock to be approximately $1.16 billion and $427.9 million
respectively, using quoted market prices. The market risk associated with
Pegasus' debt and preferred stock is the potential increase in fair value
resulting from a decrease in interest rates. A 10% decrease in assumed interest
rates would increase the fair value of Pegasus' debt and preferred stock to
approximately $1.18 billion and $455.5 million, respectively.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DIRECTV/NRTC Litigation. Registrant incorporates by reference the
disclosure relating to "DIRECTV/NRTC Litigation" set forth under "Item 3: Legal
Proceedings" on pages 25 and 26 of Pegasus' Annual Report on Form 10-K filed
with the SEC on March 10, 2000 for the fiscal year ended December 31, 1999. 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, we and Golden Sky filed an amended complaint
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members and
affiliates of the National Rural Telecommunications Cooperative. The class
action was filed on February 27, 2000. All four actions are now pending before
the same judge, who has set various hearing dates, including the following. On
October 2, 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 October 30, 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 June 6, 2000, Pegasus issued an aggregate of 10,000 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 $121,326 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 2, 2000, Pegasus held its annual meeting of stockholders. At
this meeting, Marshall W. Pagon, Ted S. Lodge, Robert F. Benbow, William P.
Collatos, Harry F. Hopper III, James J. McEntee, III, Mary C. Metzger, William
P. Phoenix, Riordon B. Smith, and Robert N. Verdecchio were reelected to
Pegasus' Board of Directors. In such election, the following votes were cast for
each director:
Withheld
For Authority Abstain
Pagon 58,793,861 394,475 0
Lodge 59,062,051 126,285 0
Benbow 59,062,051 126,285 0
Collatos 59,062,051 126,285 0
Hopper 59,062,051 126,285 0
McEntee 59,062,051 126,285 0
Metzger 59,062,051 126,285 0
Phoenix 59,061,851 126,485 0
Smith 59,062,051 126,285 0
Verdecchio 59,062,051 126,285 0
In addition to the election of directors, stockholders voted to ratify
the appointment of PricewaterhouseCoopers LLP as independent accountants for
Pegasus for the current fiscal year. With respect to this proposal, 59,174,845
votes were cast in favor, 27 votes were cast against ratification and 13,464
votes were held in abstention.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
On May 19, 2000, Pegasus filed a Current Report on Form 8-K dated May
5, 2000 reporting under Item 5 the following events (i) the merger (the
"Merger") of Golden Sky Holdings, Inc. into a wholly-owned subsidiary of Pegasus
on May 5, 2000, which resulted in Golden Sky becoming a wholly-owned subsidiary
of Pegasus, (ii) the issuance of 12,180,290 shares of Pegasus' Class A Common
Stock to the former stockholders of Golden Sky, and (iii) the election of three
directors to Pegasus' Board of Directors as the designees of certain of Golden
Sky's former stockholders and Marshall W. Pagon pursuant to the terms of an
amended voting agreement, which was amended at the time of the Merger.
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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
August 10, 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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