-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D76k/2cUVSn3l9YjucokDEicEAI6hIWCl5i6Tot2zFunhDlKV19ME/jszVsY32mZ TzXzhdexcFmkDBkqtpQwSw== 0000950116-98-002269.txt : 19981123 0000950116-98-002269.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950116-98-002269 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: 4833 IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21389 FILM NUMBER: 98752944 BUSINESS ADDRESS: STREET 1: 5 RADNOR CORPORATE CTR STE 454 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6103411801 MAIL ADDRESS: STREET 1: 1345 CHESTNUT ST STREET 2: 1345 CHESTNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19107-3496 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS COMMUNICATIONS & MEDIA CORP DATE OF NAME CHANGE: 19960530 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 1998 ------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from__________ to __________ Commission File Number 0-21389 ------- PEGASUS COMMUNICATIONS CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0374669 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) c/o Pegasus Communications Management Company; 5 Radnor Corporate Center, Suite 454, Radnor, PA 19087 - - ------------------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (888) 438-7488 --------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Number of shares of each class of the registrant's common stock outstanding as of November 6, 1998: Class A, Common Stock, $0.01 par value 11,315,809 Class B, Common Stock, $0.01 par value 4,581,900 PEGASUS COMMUNICATIONS CORPORATION Form 10-Q Table of Contents For the Quarterly Period Ended September 30, 1998 Page ---- Part I. Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheets December 31, 1997 and September 30, 1998 3 Consolidated Statements of Operations Three months ended September 30, 1997 and 1998 4 Consolidated Statements of Operations Nine months ended September 30, 1997 and 1998 5 Consolidated Statements of Cash Flows Nine months ended September 30, 1997 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures About Market Risk 23 Part II. Other Information Item 2 Changes in Securities and Use of Proceeds 24 Item 5 Other Information 24 Item 6 Exhibits and Reports on Form 8-K 24 Signature 25 2 Pegasus Communications Corporation Consolidated Balance Sheets
December 31, September 30, 1997 1998 ------------- ------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 44,049,097 $ 39,073,970 Restricted cash 1,220,056 19,737,235 Accounts receivable, less allowance for doubtful accounts of $319,000 and $551,000, respectively 13,819,571 19,165,874 Program rights 2,059,346 3,767,113 Inventory 974,920 3,968,253 Deferred taxes 2,602,453 2,602,453 Prepaid expenses and other 788,669 1,493,975 ------------- ------------- Total current assets 65,514,112 89,808,873 Property and equipment, net 27,686,646 29,551,695 Intangible assets, net 284,774,027 709,319,035 Program rights 2,262,299 3,468,484 Deferred taxes -- 13,296,554 Deposits and other 624,629 719,565 ------------- ------------- Total assets $ 380,861,713 $ 846,164,206 ============= ============= LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt $ 6,357,320 $ 22,218,859 Accounts payable 4,151,226 4,684,795 Accrued interest 8,177,261 11,990,442 Accrued satellite programming and fees 6,089,389 15,824,268 Accrued expenses 6,973,297 8,436,061 Current portion of program rights payable 1,418,581 1,278,641 ------------- ------------- Total current liabilities 33,167,074 64,433,066 Long-term debt 201,997,811 482,414,676 Program rights payable 1,416,446 4,786,628 Deferred taxes 2,652,454 69,701,954 ------------- ------------- Total liabilities 239,233,785 621,336,324 ------------- ------------- Commitments and contingent liabilities -- -- Minority interest 3,000,000 3,000,000 ------------- ------------- Series A preferred stock 111,264,424 122,223,017 ------------- ------------- Common stockholders' equity: Class A common stock 57,399 113,158 Class B common stock 45,819 45,819 Additional paid-in capital 64,034,687 174,753,387 Accumulated deficit (36,774,401) (75,307,499) ------------- ------------- Total common stockholders' equity 27,363,504 99,604,865 ------------- ------------- Total liabilities and stockholders' equity $ 380,861,713 $ 846,164,206 ============= =============
See accompanying notes to consolidated financial statements 3 Pegasus Communications Corporation Consolidated Statements of Operations
Three Months Ended September 30, -------------------------------- 1997 1998 ------------ ------------ (unaudited) Revenues: Basic and satellite service $ 13,419,852 $ 39,161,134 Premium services 1,182,984 5,981,628 Broadcasting revenue, net of agency commissions 5,504,782 6,139,214 Barter programming revenue 1,453,300 1,615,200 Other 366,347 2,610,002 ------------ ------------ Total revenues 21,927,265 55,507,178 Operating expenses: Programming 6,760,400 21,825,933 Barter programming expense 1,453,300 1,615,200 Technical and operations 956,255 863,046 Marketing and selling 2,975,156 17,639,569 General and administrative 3,055,522 10,583,213 Incentive compensation 223,236 442,299 Corporate expenses 505,279 936,625 Depreciation and amortization 7,306,149 20,190,799 ------------ ------------ Loss from operations (1,308,032) (18,589,506) Interest expense (4,264,459) (13,534,677) Interest income 137,035 613,393 Other expenses, net (214,847) (288,066) Gain on sale of cable system -- 24,902,284 ------------ ------------ Loss before income taxes (5,650,303) (6,896,572) Provision for income taxes -- 50,000 ------------ ------------ Net loss (5,650,303) (6,946,572) Preferred stock dividends 3,365,000 3,804,887 ------------ ------------ Net loss applicable to common shares ($ 9,015,303) ($10,751,459) ============ ============ Basic and diluted earnings per common share: Net loss ($0.91) ($0.68) ============ ============ Weighted average shares outstanding 9,902,363 15,897,603 ============ ============
See accompanying notes to consolidated financial statements 4 Pegasus Communications Corporation Consolidated Statements of Operations Nine Months Ended September 30, -------------------------------- 1997 1998 ------------- ------------- (unaudited) Revenues: Basic and satellite service $ 32,008,696 $ 88,980,908 Premium services 3,116,253 13,053,641 Broadcasting revenue, net of agency commissions 16,950,204 18,290,873 Barter programming revenue 4,507,600 4,861,900 Other 954,076 5,842,905 ------------- ------------- Total revenues 57,536,829 131,030,227 Operating expenses: Programming 15,916,313 49,179,278 Barter programming expense 4,507,600 4,861,900 Technical and operations 2,814,922 2,927,287 Marketing and selling 7,429,814 33,688,708 General and administrative 8,341,570 23,463,195 Incentive compensation 744,242 1,471,876 Corporate expenses 1,408,954 2,418,067 Depreciation and amortization 18,160,442 46,789,028 ------------- ------------- Loss from operations (1,787,028) (33,769,112) Interest expense (10,288,211) (29,849,768) Interest income 828,388 1,333,683 Other expenses, net (454,612) (975,185) Gain on sale of cable system 4,451,320 24,902,284 ------------- ------------- Loss before income taxes (7,250,143) (38,358,098) Provision for income taxes 50,000 175,000 ------------- ------------- Net loss (7,300,143) (38,533,098) Preferred stock dividends 8,677,500 10,958,593 ------------- ------------- Net loss applicable to common shares ($ 15,977,643) ($ 49,491,691) ============= ============= Basic and diluted earnings per common share: Net loss ($1.64) ($3.66) ============= ============= Weighted average shares outstanding 9,755,882 13,533,756 ============= ============= 5 Pegasus Communications Corporation Consolidated Statements of Cash Flows
Nine Months Ended September 30, ---------------------------------- 1997 1998 ------------- ------------- (unaudited) Cash flows from operating activities: Net loss ($ 7,300,143) ($ 38,533,098) Adjustments to reconcile net loss to net cash provided used by operating activities: Depreciation and amortization 18,160,442 46,789,028 Program rights amortization 1,214,289 1,914,072 Accretion on discount of bonds and seller notes 295,486 931,808 Gain on sale of cable system (4,451,320) (24,902,284) Bad debt expense 812,308 1,773,094 Change in assets and liabilities: Accounts receivable (2,139,807) (3,657,763) Inventory 57,455 (1,647,165) Prepaid expenses and other (158,952) (530,481) Accounts payable and accrued expenses 461,099 3,598,937 Accrued interest (2,135,269) (1,103,101) Capitalized subscriber acquisition costs (4,514,874) -- Deposits and other (32,906) (94,936) ------------- ------------- Net cash provided (used) by operating activities 267,808 (15,461,889) ------------- ------------- Cash flows from investing activities: Acquisitions, net of cash acquired (99,305,168) (89,815,402) Cash acquired from acquisitions 164,221 3,284,382 Capital expenditures (8,375,393) (6,178,866) Purchase of intangible assets (2,068,864) (10,042,558) Payments of programming rights (1,792,580) (1,597,782) Proceeds from sale of cable system 6,945,270 30,132,826 ------------- ------------- Net cash used for investing activities (104,432,514) (74,217,400) ------------- ------------- Cash flows from financing activities: Repayments of long-term debt (241,764) (5,558,004) Borrowings on bank credit facilities 69,726,250 81,500,000 Repayments of bank credit facilities (30,126,250) (200,000) Restricted cash (1,181,306) 9,283,210 Debt issuance costs (3,961,383) -- Capital lease repayments (234,331) (321,044) Proceeds from issuance of Series A preferred stock 100,000,000 -- Underwriting and preferred offering costs (4,187,920) -- ------------- ------------- Net cash provided by financing activities 129,793,296 84,704,162 ------------- ------------- Net increase (decrease) in cash and cash equivalents 25,628,590 (4,975,127) Cash and cash equivalents, beginning of year 8,582,369 44,049,097 ------------- ------------- Cash and cash equivalents, end of period $ 34,210,959 $ 39,073,970 ============= =============
See accompanying notes to consolidated financial statements 6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries stated below, the "Company"), is a diversified media and communications company incorporated under the laws of the State of Delaware in May 1996, and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus' direct subsidiaries are Pegasus Media & Communications, Inc. ("PM&C"), Digital Television Services, Inc. ("DTS"), Pegasus Development Corporation ("PDC"), Pegasus Towers, Inc. ("Towers") and Pegasus Communications Management Company ("PCMC"). PM&C is a diversified media and communications company whose subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas of the United States, provide capital for various satellite initiatives such as subscriber acquisitions costs, own and operate a cable television ("Cable") system that provides service to individual and commercial subscribers in Puerto Rico, own and operate broadcast television ("TV") stations affiliated with the Fox Broadcasting Company ("Fox") and operate, pursuant to local marketing agreements, stations affiliated with United Paramount Network ("UPN") and The WB Television Network ("WB"). DTS, which was acquired by the Company on April 27, 1998 (see footnote 7 - Acquisitions and Disposition), provides DBS services to customers in certain rural areas of the United States. PDC provides capital for various satellite initiatives such as subscriber acquisitions costs. Towers owns and operates transmitting towers located in Pennsylvania and Tennessee. PCMC provides certain management and accounting services for the Company. 2. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include the accounts of Pegasus and all of its subsidiaries. All intercompany transactions and balances have been eliminated. The unaudited consolidated financial statements reflect all adjustments consisting of normal recurring items which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position of the Company and the results of its operations and its cash flows for the interim period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K/A for the year then ended. 7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 3. Common Stock: At December 31, 1997 common stock consists of the following:
Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 5,739,842 issued and outstanding ...................... $57,399 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ...................... 45,819 -------- Total common stock ................................................ $103,218 ======== At September 30, 1998 common stock consists of the following: Pegasus Class A common stock, $0.01 par value; 30.0 million shares authorized; 11,315,809 issued and outstanding ..................... $113,158 Pegasus Class B common stock, $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding ...................... 45,819 -------- Total common stock ................................................ $158,977 ========
The Company's ability to pay dividends on its Common Stock is subject to certain restrictions (see footnote 4 - Redeemable Preferred Stock and footnote 5 - Long-Term Debt). 4. Redeemable Preferred Stock: In January 1997, Pegasus completed a unit offering (the "Unit Offering") in which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock") and warrants to purchase 193,600 shares of Class A Common Stock at an exercise price of $15 per share to the public at a price of $1,000 per unit, resulting in net proceeds to the Company of $95.8 million. As a result of the Unit Offering and dividends subsequently declared on the Series A Preferred Stock, the Company had outstanding, at December 31, 1997 and September 30, 1998, 105,490 and 119,369 shares of Series A Preferred Stock, respectively, authorized, issued and outstanding. Each whole share of Series A Preferred Stock has a liquidation preference of $1,000 per share (the "Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are payable semi-annually on January 1 and July 1. Dividends may be paid, occurring on or prior to January 1, 2002, at the option of the Company, either in cash or by the issuance of additional shares of Series A Preferred Stock. Subject to certain conditions, the Series A Preferred Stock is exchangeable in whole, but not in part, at the option of the Company, for Pegasus' 12.75% Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes would contain substantially the same redemption provisions, restrictions and other terms as the Series A Preferred Stock. Pegasus is required to redeem all of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption price equal to the Liquidation Preference thereof, plus accrued dividends. The carrying amount of the Series A Preferred Stock is periodically increased by amounts representing dividends not currently declared or paid but which will be payable under the mandatory redemption features. The increase in carrying amount is effected by charges against retained earnings, or in the absence of retained earnings, by charges against paid-in capital. Under the terms of the Series A Preferred Stock, Pegasus' ability to pay dividends on its Common Stock is subject to certain restrictions. 8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Redeemable Preferred Stock (continued): Basic earnings per share amounts are based on net income after deducting preferred stock dividend requirements divided by the weighted average number of Class A and Class B Common shares outstanding during the period. 5. Long-Term Debt: Long-term debt consists of the following :
December 31, September 30, 1997 1998 ------------ ------------ Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable semi-annually in arrears on January 1 and July 1, net of unamortized discount of $3,018,003 and $2,721,088 as of December 31, 1997 and September 30, 1998, respectively ................................................... $ 81,981,997 $ 82,278,912 Series B Notes payable by DTS, due 2007, interest at 12.5%, payable semi-annually in arrears on February 1 and August 1, net of unamortized discount of $1,854,358 as of September 30, 1998 ............................................. -- 153,145,642 Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%, payable semi-annually in arrears on April 15 and October 15, commencing on April 15, 1998 ................... 115,000,000 115,000,000 Senior six-year $180.0 million revolving credit facility, payable by PM&C, interest at PM&C's option at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin ........................................... -- 81,500,000 Senior six-year $70.0 million revolving credit facility, payable by DTS, interest at DTS' option at either the bank's base rate or the Eurodollar Rate ........................ -- 9,500,000 Senior six-year $20.0 million term loan facility, payable by DTS, interest at DTS' option at either the bank's base rate or the Eurodollar Rate .................................... -- 19,800,000 Mortgage payable, due 2000, interest at 8.75% ...................... 477,664 460,827 Note payable, due 1998, interest at 10% ............................ 3,050,000 -- Sellers' notes, various maturities and interest rates .............. 7,171,621 42,327,380 Capital leases and other ........................................... 673,849 620,774 ------------ ------------ 208,355,131 504,633,535 Less current maturities ............................................ 6,357,320 22,218,859 ------------ ------------ Long-term debt ..................................................... $201,997,811 $482,414,676 ============ ============
9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Long-Term Debt (continued): In July 1997, DTS entered into an amended and restated $70.0 million six-year senior revolving credit facility and a $20.0 million six-year senior term facility (collectively, the "DTS Credit Facility"), which is collateralized by substantially all of the assets of DTS and its subsidiaries. Interest on the DTS Credit Facility is, at DTS' option, at either the bank's base rate or the Eurodollar Rate. The DTS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The DTS Credit Facility may be used to refinance certain existing indebtedness, finance future acquisitions and for working capital, capital expenditures and general corporate purposes. In July 1997, DTS completed a senior subordinated notes offering (the "DTS Notes Offering") in which it sold $155.0 million of its 12.5% Series A Senior Subordinated Notes due 2007 (the "DTS Series A Notes"), resulting in net proceeds to DTS of approximately $146.0 million. DTS used the net proceeds to fund an interest escrow account, which is included in restricted cash on the Company's consolidated balance sheets, for the first four semi-annual interest payments on the notes and to repay outstanding indebtedness under the DTS Credit Facility. In October 1997, Pegasus completed an offering of senior notes (the "Senior Notes Offering") in which it sold $115.0 million of its 9.625% Series A Senior Notes due 2005 (the "9.625% Series A Senior Notes"), resulting in net proceeds to the Company of approximately $111.0 million. A portion of the proceeds from the Senior Notes Offering were used to retire an existing $130.0 million credit facility. In December 1997, PM&C entered into a $180.0 million six-year senior revolving credit facility (the "New Credit Facility"), which is collateralized by substantially all of the assets of PM&C and its subsidiaries. Interest on the New Credit Facility is, at PM&C's option, at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin. The New Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. The New Credit Facility will be used to finance future acquisitions and for working capital, capital expenditures and general corporate purposes. In January 1998, DTS exchanged its DTS Series A Notes for its 12.5% Series B Senior Subordinated Notes due 2007 (the "DTS Series B Notes", and together with the DTS Series A Notes, the "DTS Notes"). The DTS Series B Notes have substantially the same terms and provisions as the DTS Series A Notes. The DTS Series B Notes are guaranteed on a full, unconditional, senior subordinated basis, jointly and severally by all direct and indirect subsidiaries of DTS, except DTS Capital, which is a co-issuer of the DTS Notes and currently has nominal assets and does not conduct any operations. In February 1998, pursuant to a registered exchange offer, Pegasus exchanged all $115.0 million of its 9.625% Series A Notes for $115.0 million of its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B Senior Notes", and together with the 9.625% Series A Senior Notes, the "Senior Notes"). The 9.625% Series B Senior Notes have substantially the same terms and provisions as the 9.625% Series A Senior Notes. No gain or loss was recorded in connection with the exchange of the notes. The Company's indebtedness contain certain financial and operating covenants, including restrictions on the Company's ability to incur additional indebtedness, create liens and pay dividends. 10 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 6. Net Loss Per Common Share: Calculation of Basic and Diluted Earnings Per Common Share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted earnings per common share:
Three Months Ended September 30, -------------------------------- 1997 1998 ------------ ------------ Net loss applicable to common shares ($ 9,015,303) ($10,751,459) ============ ============ Weighted average common shares outstanding 9,902,363 15,897,603 ============ ============ Nine Months Ended September 30, ------------------------------- 1997 1998 ------------ ------------ Net loss applicable to common shares ($15,977,643) ($49,491,691) ============ ============ Weighted average common shares outstanding 9,755,882 13,533,756 ============ ============
For the three and nine months ended September 30, 1997 and 1998, net loss per common share was determined by dividing net loss, as adjusted by the aggregate amount of dividends on the Company's Series A Preferred Stock, approximately $3.4 million, $8.7 million, $3.8 million and $11.0 million, respectively, by applicable shares outstanding. The total shares used for the calculation of diluted net loss per common share were not adjusted for securities that have not been issued as they are antidulitive. 7. Acquisitions and Disposition: As of January 7, 1998, the Company acquired, from an independent DIRECTV(R) ("DIRECTV") provider, the rights to provide DIRECTV programming in certain rural areas of Minnesota and the related assets in exchange for total consideration of approximately $1.9 million, which consisted of $1.8 million in cash and $32,000 in assumed liabilities. As of March 9, 1998, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Nebraska and Texas and the related assets in exchange for total consideration of approximately $15.6 million, which consisted of $5.9 million in cash, $105,000 in assumed liabilities, a $9.4 million note, payable over four years, and an aggregate of $225,000 for consultancy and non-compete agreements (consisting of $75,000 in cash and a $150,000 obligation, payable over two years). As of April 9, 1998, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of New Mexico and Texas and the related assets in exchange for total consideration of approximately $14.3 million, which consisted of $13.1 million in cash, $298,000 in assumed liabilities and 37,304 shares of the Company's Class A Common Stock (amounting to $900,000 at the time of issuance). 11 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Acquisitions and Disposition (continued): On April 27, 1998, the Company acquired DTS, which holds the rights to provide DIRECTV programming in certain rural areas of California, Colorado, Georgia, Indiana, Kansas, Kentucky, New Hampshire, New Mexico, New York, South Carolina and Vermont, in exchange for total consideration of approximately $345.2 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $119.4 million at a price of $21.71 per share), approximately $158.9 million of net liabilities and approximately $66.9 million of a deferred tax liability. As of May 11, 1998, the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Idaho and Oregon and the related assets in exchange for total consideration of approximately $9.3 million, which consisted of $9.2 million in cash and $140,000 in assumed liabilities. As of June 10, 1998, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Idaho, South Dakota and Texas and the related assets in exchange for total consideration of approximately $12.5 million, which consisted of $12.2 million in cash, $154,000 in assumed liabilities and a $120,000 obligation, payable over three years, for a non-compete agreement. Effective July 1, 1998, the Company sold substantially all the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30.1 million in cash. The Company recognized a nonrecurring gain of approximately $24.9 million in the third quarter of 1998 relating to this transaction. As of July 10, 1998, the Company acquired, from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Alabama, Nebraska and South Dakota and the related assets in exchange for total consideration of approximately $18.6 million, which consisted of $18.1 million in cash, $81,000 in assumed liabilities and an aggregate of $425,000 for consultancy and non-compete agreements (consisting of $62,000 in cash, a $63,000 obligation, payable over one year, and a $300,000 obligation, payable over three years). As of August 10, 1998, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of Oregon and the related assets in exchange for total consideration of approximately $3.0 million, which consisted of $2.8 million in cash, $34,000 in assumed liabilities and a $200,000 obligation, payable over two years, for consultancy and non-compete agreements. As of September 10, 1998, the Company acquired, from four independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Alabama, Illinois, Minnesota and Texas and the related assets in exchange for total consideration of approximately $37.1 million, which consisted of $26.5 million in cash, $464,000 in assumed liabilities, and $10.2 million in notes, payable over seven years. The following unaudited summary, prepared on a pro forma basis, combines the results of operations as if the above DBS territories and cable systems had been acquired/sold as of the beginning of the periods presented, after including the impact of certain adjustments, such as the Company's payments to related parties, amortization of intangibles, interest expense, preferred stock dividends and related income tax effects. The pro forma information does not purport to be indicative of what would have occurred had the acquisitions/disposition been made on those dates or of results which may occur in the future. This pro forma information does not include any acquisitions that occurred subsequent to September 30, 1998. 12 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Acquisitions and Disposition (continued):
Nine Months Ended September 30, (in thousands, except per share data) (unaudited) 1997 1998 ---- ---- Net revenues .......................................... $123,173 $165,281 -------------- -------------- Operating loss ........................................ ($58,442) ($50,828) -------------- -------------- Net loss .............................................. ($76,221) ($83,934) Less: Preferred stock dividends ....................... (10,959) (10,959) -------------- -------------- Net loss applicable to common shares .................. ($87,180) ($94,893) ============== ============== Net loss per common share ............................. ($5.54) ($5.98) ============== ==============
8. Supplemental Cash Flow Information: The Company incurred significant non-cash investing and financing activities in connection with the April 27, 1998 acquisition of DTS (see footnote 7 - Acquisitions and Disposition). The acquisition of DTS was accounted for using the purchase method of accounting. The purchase price of $345.2 million consisted of the issuance of approximately 5.5 million shares of Pegasus Class A Common Stock, valued at $21.71 per share ($119.4 million), to the shareholders of DTS and the assumption of net liabilities amounting to approximately $158.9 million (total assets of $216.4 million less intangibles of $161.0 million less total liabilities of $214.3 million). The Company also recorded a net deferred tax liability, primarily as a result of non-deductible amortization, of approximately $66.9 million of which $53.6 million was allocated to DBS rights and $13.3 million was recorded as a deferred tax asset. The Company incurred other significant non-cash investing and financing activities which include barter revenue and related expense of $4.9 million, capital contribution and related acquisition of intangibles of $854,000, notes payable and related acquisition of intangibles of $19.8 million and Series A Preferred Stock Dividends of $11.0 million in the nine months ended September 30, 1998. The Company incurred other significant non-cash investing and financing activities which include barter revenue and related expense of $4.5 million, capital contribution and related acquisitions of intangibles of $6.7 million, notes payable and related acquisitions of intangibles of $1.6 million and Series A Preferred Stock Dividends of $8.7 million in the nine months ended September 30, 1997. 9. Commitments and Contingent Liabilities: Legal Matters: From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. 10. Other Events: On July 23, 1998, the Company entered into an agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42 million in cash. The Aguadilla cable system serves approximately 21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the franchise area. The Aquadilla cable system is contiguous to the Company's existing Puerto Rico cable system and, upon completion of the purchase, the Company intends to consolidate the Aquadilla cable system with its existing cable system. The closing of this acquisition is subject to regulatory and other approvals, as well as customary conditions, and the Company expects this transaction to close by the end of the first quarter of 1999. In July 1998, Pegasus commenced operations of TV station WFXU, which simulcasts the signal of WTLH, a TV station owned by the Company which is affiliated with Fox. WFXU is in the Tallahassee, Florida Designated Market Area ("DMA") and is being operated under a local marketing agreement ("LMA"). 13 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 10. Other Events (continued): As of October 9, 1998, the Company acquired, from an independent DIRECTV provider, the rights to provide DIRECTV programming in certain rural areas of South Dakota and the related assets in exchange for total consideration of approximately $1.1 million, which consisted of $1.1 million in cash and $14,000 in assumed liabilities. As of November 9, 1998, the Company acquired from three independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Oklahoma, South Dakota and Texas and the related assets in exchange for total consideration of approximately $12.5 million in cash. 14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This Report contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of the management of the Company, as well as assumptions made by and information currently available to the Company's management. When used in this Report, the words "estimate," "project," "believe," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. For a discussion of such risks, see the information contained in the section captioned "Risk Factors" (pages 12-21) of Pegasus' Proxy Statement/Prospectus dated April 14, 1998, filed as part of Pegasus' Registration Statement in Form S-4, File No. 333-44929 (the "Proxy Statement/Prospectus"), which section is incorporated by reference herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as the date hereof. The Company does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Unless otherwise defined, all defined terms used herein have the same meaning as in the footnotes to the Consolidated Financial Statements included herein. General The Company is a diversified company operating in growing segments of the media and communications industries: multichannel television and broadcast television. Pegasus Multichannel Television includes DBS and cable businesses. As of September 30, 1998, the Company's DBS operations consisted of providing DIRECTV services to approximately 387,500 subscribers in certain rural areas of thirty-five states in which the Company holds the exclusive right to provide such services. Its cable operations consist of a system in Puerto Rico. The Company sold its New Hampshire cable system effective January 31, 1997. The Company sold its remaining New England cable systems (Connecticut and Massachusetts) effective July 1, 1998. Pegasus Broadcast Television owns and operates six TV stations affiliated with Fox and operates one affiliated with UPN and another affiliated with WB. It has entered into an agreement to operate two additional TV stations, which will be affiliated with WB. One station will commence operations in the fourth quarter of 1998 and the other in the first half of 1999. On April 27, 1998, the Company acquired (the "DTS Acquisition") Digital Television Services, Inc. (DTS). Upon completion of the DTS Acquisition, DTS became a wholly owned subsidiary of Pegasus. As of September 30, 1998, DTS' operations consisted of providing DIRECTV services to approximately 163,400 subscribers in certain rural areas of eleven states in which DTS holds the exclusive right to provide such services. Multichannel revenues are derived from monthly customer subscriptions, pay-per-view services, subscriber equipment rentals, home shopping commissions, advertising time sales and installation charges. Broadcast revenues are derived from the sale of broadcast airtime to local and national advertisers. The Company's location operating expenses consist of (i) programming expenses, (ii) marketing and selling costs, including advertising and promotion expenses, local sales commissions and ratings and research expenditures, (iii) technical and operations costs, (iv) general and administrative expenses, and (v) expensed subscriber acquisition costs. Multichannel programming expenses consist of amounts paid to program suppliers, digital satellite system or DSS(R) ("DSS") authorization charges and satellite control fees, each of which is paid on a per subscriber basis, and DIRECTV royalties which are equal to 5% of DBS program service revenues. Broadcast programming expenses include the amortization of long-term program rights purchases, music license costs and "barter" programming expenses which represent the value of broadcast air time provided to television program suppliers in lieu of cash. 15 The Company no longer requires new DBS customers to sign a one-year programming contract and, as a result, subscriber acquisition costs ("SAC"), which were being capitalized and amortized over a twelve-month period, are currently being charged to operations in the period incurred. This change became effective October 1, 1997. Subscriber acquisition costs charged to operations are excluded from pre-marketing location operating expenses. Results of Operations Three months ended September 30, 1998 compared to three months ended September 30, 1997 The Company's net revenues increased by approximately $33.6 million or 153% for the three months ended September 30, 1998 as compared to the same period in 1997. Multichannel Television net revenues increased approximately $32.7 million or 220% and Broadcast Television net revenues increased $855,000 or 12%. The net revenues increased as a result of (i) a $34.1 million or 322% increase in DBS revenues of which $2.4 million or 7% was due to the increased number of DBS subscribers in territories owned at the beginning of 1997 and $31.7 million or 93% resulted from acquisitions made in 1997 and 1998, (ii) a $1.4 million or 33% decrease in Cable revenues which was the net result of a $180,000 or 7% increase in Puerto Rico same system revenue, due primarily to rate increases and increased subscriber levels, and a $1.6 million reduction due to the sale of the Company's New England cable systems effective July 1, 1998, (iii) a $852,000 or 12% increase in TV revenues which was the result of a $470,000 or 7% increase in same station revenues due primarily to increases in local advertising sales and a $382,000 increase due to the three new stations launched in August 1997, October 1997 and July 1998, and (iv) a $3,000 increase in Tower rental income. The Company's total pre-marketing location operating expenses, as described above (before DBS subscriber acquisition costs), increased by approximately $24.0 million or 167% for the three months ended September 30, 1998 as compared to the same period in 1997. Multichannel Television pre-marketing location operating expenses increased approximately $23.5 million or 248% and Broadcast Television location operating expenses increased $545,000 or 11%. The pre-marketing location operating expenses increased as a result of (i) a $24.1 million or 333% increase in operating expenses of the Company's DBS operations due to a same territory increase in programming and other operating costs totaling $1.5 million (resulting from the increased number of DBS subscribers in territories owned at the beginning of 1997) and a $22.7 million increase attributable to territories acquired in 1997 and 1998, (ii) a $644,000 or 29% decrease in Cable operating expenses as the net result of a $162,000 or 11% increase in Puerto Rico same system operating expenses, due primarily to increases in programming costs, and a $806,000 reduction due to the sale of the Company's New England cable systems effective July 1, 1998, (iii) a $548,000 or 11% increase in TV operating expenses as the result of a $175,000 or 4% increase in same station operating expenses and a $373,000 increase attributable to the three new stations launched in August 1997, October 1997 and July 1998, and (iv) a $3,000 reduction in Tower administrative expenses. Average monthly programming revenue per DBS subscriber was approximately $41.50, with a contribution margin of approximately 34.7%, for the three months ended September 30, 1998 as compared to approximately $40.49, at a 36.0% margin, during the same period in 1997. The increase in average monthly programming revenue per DBS subscriber resulted primarily from an improved mix of premium package programming subscriptions. The contribution margin decline was primarily attributable to increases in customer service costs, in part due to increased call volume associated with the PrimeTime24 network issue, and other costs associated with the integration of DBS operations in territories acquired in 1998. DBS subscriber acquisition costs, which consist of regional sales costs, advertising and promotion, and commissions and subsidies, totaled approximately $14.1 million or $345 per gross subscriber addition for the three months ended September 30, 1998 as compared to approximately $2.3 million or $262 per gross subscriber addition for the same period in 1997. 16 Incentive compensation, which is calculated from increases in pro forma Location Cash Flow, increased by $219,000 or 98% for the three months ended September 30, 1998 as compared to the same period in 1997. Corporate expenses increased by $432,000 or 86% for the three months ended September 30, 1998 as compared to the same period in 1997 primarily due to increased staffing as a result of internal and acquisition related growth, enhanced public relations activities and additional public reporting requirements for the Company. Depreciation and amortization expense increased by approximately $12.9 million or 176% for the three months ended September 30, 1998 as compared to the same period in 1997 as the Company increased its fixed and intangible asset base as a result of twenty-five completed acquisitions during 1997 and twenty-one completed acquisitions in the first three quarters of 1998. As a result of these factors, the Company's loss from operations increased by approximately $17.3 million for the three months ended September 30, 1998 as compared to the same period in 1997. Interest expense increased by approximately $9.3 million or 217% for the three months ended September 30, 1998 as compared to the same period in 1997 as a result of an increase in debt associated with the Company's acquisitions. The Company reported a net loss of approximately $6.9 million for the three months ended September 30, 1998 as compared to a net loss of approximately $5.7 million for the same period in 1997. The $1.3 million change was the net result of an increase in the loss from operations of approximately $17.3 million, an increase in interest expense of approximately $9.3 million, an increase in the provision for income taxes of $50,000, a decrease in other expenses of $404,000 and a nonrecurring gain on the sale of the New England cable systems of approximately $24.9 million during the third quarter of 1998. The Company's preferred stock dividends, payable by issuing additional shares of Series A Preferred Stock, increased $440,000 for the three months ended September 30, 1998 as compared to the same period in 1997. Nine months ended September 30, 1998 compared to nine months ended September 30, 1997 The Company's net revenues increased by approximately $73.5 million or 128% for the nine months ended September 30, 1998 as compared to the same period in 1997. Multichannel Television net revenues increased approximately $71.7 million or 201% and Broadcast Television net revenues increased approximately $1.8 million or 8%. The net revenues increased as a result of (i) a $72.3 million or 309% increase in DBS revenues of which $6.5 million or 9% was due to the increased number of DBS subscribers in territories owned at the beginning of 1997 and $65.8 million or 91% resulted from acquisitions made in 1997 and 1998, (ii) a $580,000 or 5% decrease in Cable revenues which was the net result of a $865,000 or 11% increase in Puerto Rico same system revenues, due primarily to rate increases and increased subscriber levels, a $133,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997 and a $1.3 million reduction due to the sale of the Company's remaining New England cable systems effective July 1, 1998, (iii) a $1.8 million or 8% increase in TV revenues which was the result of a $649,000 or 3% increase in same station revenues due primarily to increases in local advertising sales and a $1.1 million increase due to the three new stations launched in August 1997, October 1997 and July 1998, and (iv) a $19,000 increase in Tower rental income. 17 The Company's total pre-marketing location operating expenses, as described above (before DBS subscriber acquisition costs), increased by approximately $51.9 million or 140% for the nine months ended September 30, 1998 as compared to the same period in 1997. Multichannel Television pre-marketing location operating expenses increased approximately $50.0 million or 222% and Broadcast Television location operating expenses increased approximately $1.9 million or 13%. The pre-marketing location operating expenses increased as a result of (i) a $50.3 million or 315% increase in operating expenses of the Company's DBS operations due to a same territory increase in programming and other operating costs totaling $3.9 million (resulting from the increased number of DBS subscribers in territories owned at the beginning of 1997) and a $46.4 million increase attributable to territories acquired in 1997 and 1998, (ii) a $282,000 or 4% decrease in Cable operating expenses as the net result of a $553,000 or 13% increase in Puerto Rico same system operating expenses due primarily to increases in programming costs, a $66,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997 and a $769,000 reduction due to the sale of the Company's remaining New England cable systems effective July 1, 1998, (iii) a $1.9 million or 13% increase in TV operating expenses as the result of a $465,000 or 3% increase in same station operating expenses and a $1.4 million increase attributable to the three new stations launched in August 1997, October 1997 and July 1998, and (iv) a $6,000 reduction in Tower administrative expenses. Average monthly programming revenue per DBS subscriber was approximately $41.75, with a contribution margin of approximately 35.5%, for the nine months ended September 30, 1998 as compared to approximately $40.75, at a 36.3% margin, during the same period in 1997. The increase in average monthly programming revenue per DBS subscriber resulted primarily from an improved mix of premium package programming subscriptions. The contribution margin decline was primarily attributable to increases in customer service costs, in part due to increased call volume associated with the PrimeTime24 network issue, and other costs associated with the integration of DBS operations in territories acquired in 1997 and 1998. DBS subscriber acquisition costs, which consist of regional sales costs, advertising and promotion, and commissions and subsidies, totaled approximately $25.0 million or $313 per gross subscriber addition for the nine months ended September 30, 1998 as compared to approximately $6.0 million or $304 per gross subscriber addition for the same period in 1997. Incentive compensation, which is calculated from increases in pro forma Location Cash Flow, increased by $728,000 or 98% for the nine months ended September 30, 1998 as compared to the same period in 1997. Corporate expenses increased by approximately $1.0 million or 72% for the nine months ended September 30, 1998 as compared to the same period in 1997 primarily due to increased staffing as a result of internal and acquisition related growth, enhanced public relations activities and additional public reporting requirements for the Company. Depreciation and amortization expense increased by approximately $28.6 million or 158% for the nine months ended September 30, 1998 as compared to the same period in 1997 as the Company increased its fixed and intangible asset base as a result of twenty-five completed acquisitions during 1997 and twenty-one completed acquisitions in the first three quarters of 1998. As a result of these factors, the Company's loss from operations increased by approximately $32.0 million for the nine months ended September 30, 1998 as compared to the same period in 1997. Interest expense increased by approximately $19.6 million or 190% for the nine months ended September 30, 1998 as compared to the same period in 1997 as a result of an increase in debt associated with the Company's acquisitions. 18 The Company reported a net loss of approximately $38.6 million for the nine months ended September 30, 1998 as compared to a net loss of approximately $7.3 million for the same period in 1997. The $31.2 million change was the net result of an increase in the loss from operations of approximately $32.0 million, an increase in interest expense of approximately $19.6 million, an increase in the provision for income taxes of $125,000, an increase in other expenses of $15,000, a nonrecurring gain on the sale of the New Hampshire cable system of approximately $4.5 million during the first quarter of 1997 and a nonrecurring gain on the sale of the Company's remaining New England cable systems of $24.9 million during the third quarter of 1998. The Company's preferred stock dividends, payable by issuing additional shares of Series A Preferred Stock, increased approximately $2.3 million for the nine months ended September 30, 1998 as compared to the same period in 1997. Liquidity and Capital Resources The Company's primary sources of liquidity have been the net cash provided by its TV and cable operations, credit available under its credit facilities and proceeds from public and private offerings. The Company's principal use of its cash has been to fund acquisitions, to meet debt service obligations, to fund investment in its TV and cable technical facilities and to fund DBS subscriber acquisition costs. Pre-Marketing Location Cash Flow increased by approximately $9.5 million or 126% for the three months ended September 30, 1998 as compared to the same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow increased approximately $9.2 million or 171% and Broadcast Television Location Cash Flow increased $310,000 or 14%. Pre-Marketing Location Cash Flow increased as a result of (i) a $10.0 million or 299% increase in DBS Pre-Marketing Location Cash Flow of which $947,000 or 9% was due to an increase in same territory Pre-Marketing Location Cash Flow and $9.1 million or 91% was attributable to territories acquired in 1997 and 1998, (ii) a $775,000 or 38% decrease in Cable Location Cash Flow which was the net result of a $18,000 or 1% increase in Puerto Rico same system Location Cash Flow and a $793,000 reduction due to the sale of the Company's New England cable systems effective July 1, 1998, (iii) a $304,000 or 14% increase in TV Location Cash Flow as a result of a $295,000 or 13% increase in same station Location Cash Flow and a $9,000 increase attributable to the three new stations launched in August 1997, October 1997 and July 1998, and (iv) a $6,000 increase in Tower Location Cash Flow. Pre-Marketing Location Cash Flow increased by approximately $21.6 million or 106% for the nine months ended September 30, 1998 as compared to the same period in 1997. Multichannel Television Pre-Marketing Location Cash Flow increased approximately $21.7 million or 165% and Broadcast Television Location Cash Flow decreased $94,000 or 1%. Pre-Marketing Location Cash Flow increased as a result of (i) a $22.0 million or 298% increase in DBS Pre-Marketing Location Cash Flow of which $2.6 million or 12% was due to an increase in same territory Pre-Marketing Location Cash Flow and $19.4 million or 88% was attributable to territories acquired in 1997 and 1998, (ii) a $298,000 or 5% decrease in Cable Location Cash Flow which was the net result of a $312,000 or 9% increase in Puerto Rico same system Location Cash Flow, a $67,000 reduction due to the sale of the Company's New Hampshire cable system effective January 31, 1997 and a $543,000 reduction due to the sale of the Company's remaining New England cable systems effective July 1, 1998, (iii) a $119,000 or 2% decrease in TV Location Cash Flow as the net result of a $184,000 or 3% increase in same station Location Cash Flow and a $303,000 decrease attributable to the three new stations launched in August 1997, October 1997 and July 1998, and (iv) a $25,000 increase in Tower Location Cash Flow. 19 During the nine months ended September 30, 1998, $44.0 million of cash on hand, together with $30.1 million of proceeds from the sale of the Company's remaining New England cable systems, $3.3 million of cash acquired from acquisitions and $84.7 million of net cash provided by the Company's financing activities, was used to fund operating activities of approximately $15.5 million and other investing activities of $107.6 million. Investing activities, net of cash acquired from acquisitions and proceeds from the sale of the New England cable systems, consisted of (i) the acquisition of DBS assets from three independent DIRECTV providers during the first quarter of 1998 for approximately $7.8 million, (ii) the acquisition of DBS assets from nine independent DIRECTV providers during the second quarter of 1998 for approximately $34.5 million, (iii) the acquisition of DBS assets from eight independent DIRECTV providers during the third quarter of 1998 for approximately $47.6 million, (iv) broadcast television transmitter, tower and facility upgrades totaling approximately $3.2 million, (v) payments of programming rights amounting to $1.6 million, (vi) capitalized costs relating to the DTS Acquisition of $4.3 million, and (vii) maintenance and other capital expenditures and intangibles totaling approximately $8.7 million. Financing activities consisted of (i) the repayment of approximately $5.9 million of long-term debt and capital leases, (ii) net borrowings on bank credit facilities totaling $81.3 million, and (iii) net restricted cash draws of approximately $9.3 million for interest payments. As of September 30, 1998, the Company's cash on hand approximated $39.1 million. As defined in the Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights thereof (the "Certificate of Designation") governing the Series A Preferred Stock and the indenture governing the Senior Notes (the "Senior Notes Indenture"), the Company is required to provide Adjusted Operating Cash Flow data for Pegasus and its Restricted Subsidiaries on a consolidated basis, where Adjusted Operating Cash Flow is defined as "for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries, less DBS Cash Flow (Satellite Segment Operating Cash Flow) for the most recent four-quarter period, plus DBS Cash Flow for the most recent quarterly period multiplied by four." Operating Cash Flow is income from operations before income taxes, depreciation and amortization, interest expense, extraordinary items and non-cash charges. Although Adjusted Operating Cash Flow is not a measure of performance under generally accepted accounting principles, the Company believes that Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Restricted Subsidiaries carries the same meaning as in the Certificate of Designation. Pro forma for the twenty completed DBS acquisitions occurring in the first three quarters of 1998 and the disposition of the New England cable systems, as if such acquisitions/disposition had occurred as of the beginning of the period, Adjusted Operating Cash Flow for Pegasus and its Restricted Subsidiaries would have been approximately $42.1 million, as follows:
Four Quarters Ended (in thousands) September 30, 1998 ------------------ Revenues $160,050 Direct operating expenses, excluding depreciation, amortization and other non-cash charges 114,703 ------------- Income from operations before incentive compensation, corporate expenses, depreciation, amortization and other non-cash charges 45,347 Corporate expenses 3,265 ------------- Adjusted operating cash flow $ 42,082 =============
20 The Company is restricted by the Senior Notes Indenture from paying dividends on the Series A Preferred Stock in cash prior to July 1, 2002. The indenture governing the PM&C Notes (the "PM&C Notes Indenture") and the New Credit Facility contain certain financial and operating covenants, including restrictions on PM&C's ability to incur additional indebtedness, create liens and pay dividends. The indenture governing the DTS Notes (the "DTS Notes Indenture") and the DTS Credit Facility contain certain financial and operating covenants, including restrictions on DTS' ability to incur additional indebtedness, create liens and pay dividends. Pre-Marketing Location Cash Flow is defined as net revenues less location operating expenses before subscriber acquisition costs. Location Cash Flow is defined as net revenues less location operating expenses. Although Pre-Marketing Location Cash Flow and Location Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Pre-Marketing Location Cash Flow and Location Cash Flow are accepted within the Company's business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measures for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. The Company believes that it has adequate resources to meet its working capital, maintenance capital expenditure and debt service obligations. The Company engages in discussions with respect to acquisition opportunities in media and communications businesses on a regular basis. The Company believes that cash on hand, together with available borrowings under the New Credit Facility and the DTS Credit Facility and future indebtedness which may be incurred by the Company and its subsidiaries will give the Company the ability to fund acquisitions and other capital requirements in the future. However, there can be no assurance that the future cash flows of the Company will be sufficient to meet all of the Company's obligations and commitments. The Company closely monitors conditions in the capital markets to identify opportunities for the effective and prudent use of financial leverage. In financing its future expansion and acquisition requirements, the Company would expect to avail itself of such opportunities and thereby increase its indebtedness, which could result in increased debt service requirements. There can be no assurance that such debt financing can be completed on terms satisfactory to the Company or at all. The Company may also issue additional equity to fund its future expansion and acquisition requirements. Capital Expenditures The Company's capital expenditures aggregated $9.9 million in 1997. The Company expects recurring renewal and refurbishment capital expenditures to total approximately $2.0 million per year. In addition to these maintenance capital expenditures, the Company's 1998 capital projects include (i) DBS facility upgrades of approximately $1.0 million and (ii) approximately $4.5 million of TV expenditures for broadcast television transmitter, tower and facility constructions and upgrades. The Company commenced the programming of three new TV stations, WPME in August 1997, WGFL in October 1997 and WFXU in July 1998 and its plans are to commence programming of two additional stations - one in the fourth quarter of 1998 and the other in the first half of 1999. There can be no assurance that the Company's capital expenditure plans will not change in the future. Effective October 1, 1997, the Company no longer requires new DBS customers to sign a one-year programming contract and, as a result, subscriber acquisition costs, which were being capitalized through September 30, 1997 and amortized over a twelve-month period, will be charged to operations in the period incurred. The Company's policy is to capitalize subscriber acquisition costs directly related to new subscribers who sign a programming contract, such as commissions and equipment subsidies. These costs are amortized over the life of the contract. The Company expenses its subscriber acquisition costs when no new contract is obtained. The Company currently does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. 21 Other The term "Year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other equipment as the Year 2000 approaches and is reached. These problems generally arise from the fact that most computer hardware and software have historically used only two digits to identify the year in a date, often resulting in the computer failing to distinguish dates in the "2000's" from dates in the "1900's." These problems may also arise from additional sources, such as the use of special codes and conventions in software utilizing the date field. The Company has reviewed all of its systems as to the Year 2000 issue. The Company's primary focus has been on its own internal systems. The Company has in the past three years replaced or upgraded, or is in the process of replacing or upgrading, all of its TV traffic systems, cable billing systems and corporate accounting systems. All of these new systems will be in place by the end of 1998. However, if any necessary changes are not made or completed in a timely fashion or unanticipated problems arise, the Year 2000 issue may take longer for the Company to address and may have a material impact on the Company's financial condition and its results of operations. The Company relies on outside vendors for the operation of its DBS satellite control and billing systems, including DIRECTV, the NRTC and their respective vendors. The Company has established a policy to ensure that these vendors are currently in compliance with the Year 2000 issue or have a plan in place to be in compliance with the Year 2000 issue by the first quarter of 1999. In addition, the Company has had initial communications with certain of its other significant suppliers, distributors, financial institutions, lessors and parties with which it conducts business to evaluate their Year 2000 compliance plans and state of readiness and to determine the extent to which the Company's systems may be affected by the failure of others to remediate their own Year 2000 issues. To date, however, the Company has received only preliminary feedback from such parties and has not independently confirmed any information received from other parties with respect to the Year 2000 issue. As such, there can be no assurance that such other parties will complete their Year 2000 conversion in a timely fashion or will not suffer a Year 2000 business disruption that may adversely affect the Company's financial condition and its results of operations. Because the Company's Year 2000 conversion is expected to be completed prior to any potential disruption to the Company's business, the Company has not yet completed the development of a comprehensive Year 2000-specific contingency plan. However, as part of its Year 2000 contingency planning effort, information received from external sources is examined for date integrity before being brought into the Company's internal systems. If the Company determines that its business or a segment thereof is at material risk of disruption due to the Year 2000 issue or anticipates that its Year 2000 conversion will not be completed in a timely fashion, the Company will work to enhance its contingency plan. Costs to date relating to the Year 2000 issue amounted to approximately $150,000.00. Costs to be incurred beyond September 30, 1998 relating to the Year 2000 issue are expected to be approximately $200,000. On April 27, 1998, the Company acquired DTS for total consideration of approximately $345.2 million, which consisted of approximately 5.5 million shares of the Company's Class A Common Stock (amounting to $119.4 million at a price of $21.71 per share), approximately $158.9 million of net liabilities and approximately $66.9 million of a deferred tax liability. Upon completion of the DTS Aquisition, DTS became a wholly owned subsidiary of Pegasus. As of September 30, 1998, DTS' operations consisted of providing DIRECTV services to approximately 163,400 subscribers in certain rural areas of eleven states in which DTS holds the exclusive right to provide such services. Effective July 1, 1998, the Company sold substantially all the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30.1 million in cash. The Company recognized a nonrecurring gain of approximately $24.9 million in the third quarter of 1998 relating to this transaction. 22 On July 23, 1998, the Company entered into an agreement to purchase a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42 million in cash. The Aguadilla cable system serves approximately 21,500 subscribers and passes approximately 81,000 of the 90,000 homes in the franchise area. The closing of the acquisition is subject to regulatory and other approvals, as well as customary conditions, and the Company expects this transaction to close by the end of the first quarter of 1999. On September 22, 1998, service to Pegasus' cable subscribers was interrupted by Hurricane Georges which struck the island of Puerto Rico. The Company suffered modest damage to its cable headend and approximately 3% of its 780 miles of cable plant. The Company estimates that it will incur approximately $300,000 in capital expenditures related to hurricane damage. Repairs will be substantially completed by December 1, 1998. Hurricane Georges had a negligible impact on Pegasus' third quarter 1998 operating results and the Company anticipates approximately a 2% reduction in pre-marketing cash flow for the quarter ending December 31, 1998, primarily as a result of lost subscribers. As a holding company, Pegasus' ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Under the terms of the New Credit Facility, PM&C is restricted from paying dividends. Under the terms of the DTS Notes Indenture and the DTS Credit Facility, DTS is restricted from paying dividends. In addition, Pegasus' ability to pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness are subject to certain restrictions contained in the Senior Notes Indenture and the Certificate of Designation governing the Series A Preferred Stock. PM&C's ability to incur additional indebtedness is limited under the terms of the PM&C Notes Indenture and the New Credit Facility. These limitations take the form of certain leverage ratios and are dependent upon certain measures of operating profitability. Under the terms of the New Credit Facility, capital expenditures and business acquisitions in excess of certain agreed upon levels will require lender consent. DTS' ability to incur additional indebtedness is limited under the terms of the DTS Notes Indenture and the DTS Credit Facility. These limitations take the form of certain leverage ratios and are dependent upon certain measures of operating profitability and not exceeding a certain "borrowing base" based on the number of paying subscribers and households in DTS' territories. The terms of the DTS Credit Facility contain a number of other significant covenants that, among other things, limit DTS' ability to make capital expenditures and business acquisitions. The Company's revenues vary throughout the year. As is typical in the broadcast television industry, the Company's first quarter generally produces the lowest revenues for the year and the fourth quarter generally produces the highest revenues for the year. The Company's operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues in the short-term until the impact of such advertising and promotion is realized in future periods. The Company believes that inflation has not been a material factor affecting the Company's business. In general, the Company's revenues and expenses are impacted to the same extent by inflation. A majority of the Company's indebtedness bears interest at a fixed rate. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement table that is displayed with the same prominence as other financial statements. SFAS 131 requires that all public business enterprises report information about operating segments, as well as specific revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. These new standards, which are effective for the fiscal year ending December 31, 1998, will not have a significant impact on the Company. In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits". In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Management has reviewed the provisions of SFAS No. 132 and SFAS No.133 and the implementation of these standards is not expected to have any significant impact on its consolidated financial statements. Item 3: Quantitative and Qualitative Disclosures About Market Risk Not Applicable 23 Part II. Other Information Item 2: Changes in Securities and Use of Proceeds As of August 10, 1998, Pegasus issued warrants to purchase 7,500 shares of its Class A Common Stock as partial consideration for the acquisition of DIRECTV rights and related assets from an independent provider of DIRECTV in certain rural areas of Oregon. The warrants are exercisable on or before August 20, 2002 at a price of $21.86042 per share, subject to certain adjustments. In issuing the warrants, Pegasus relied upon exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended. Item 5: Other Information New England Cable Sale. Effective July 1, 1998, Pegasus sold substantially all of the assets of its remaining New England cable systems to Avalon Cable of New England, LLC for approximately $30.1 million in cash. Pegasus recognized a nonrecurring gain of approximately $24.9 million in the third quarter of 1998 relating to this sale. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during the quarter ended September 30, 1998. 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pegasus Communications Corporation Date November 13, 1998 By /s/ Robert N. Verdecchio ------------------------------------- Robert N. Verdecchio Senior Vice President, Chief Financial Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer) 25 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheets of Pegasus Communication Corporation as of December 31, 1997 and September 30, 1998 (unaudited) and the related consolidated statements of operations and cash flows for the three and nine months ended September 30, 1997 (unaudited) and September 30, 1998 (unaudited). This information is qualified in its entirety by reference to such financial statements. 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 MAR-30-1998 SEP-30-1998 39,073,970 39,073,970 0 0 19,716,874 19,716,874 551,000 551,000 3,968,253 3,968,253 89,808,873 89,808,873 52,393,200 52,393,200 22,841,505 22,841,505 846,164,206 846,164,206 64,433,066 64,433,066 350,424,554 350,424,554 122,223,017 122,223,017 3,000,000 3,000,000 158,977 158,977 99,445,888 99,445,888 846,164,206 846,164,206 55,507,178 131,030,227 55,507,178 131,030,227 0 0 74,096,684 164,799,339 (25,227,611) (25,260,782) 0 0 13,534,677 29,849,768 (6,896,572) (38,358,098) 50,000 175,000 (6,946,572) (38,533,098) 0 0 0 0 0 0 (6,946,572) (38,533,098) (0.68) (3.66) (0.68) (3.66)
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