-----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, KPtbHPCI/Xm5Egmm6c8ga+4vKXrBmpytADvQ+KqtfdETS3GNs/0ZTzaZVqeldOs8 AtsCst7GHEP5NfcYXQWFzQ== 0000950116-99-001017.txt : 19990517 0000950116-99-001017.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950116-99-001017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-71447 FILM NUMBER: 99623978 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 1999 -------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ____________ to _____________ Commission File Number 0-21389 ------- PEGASUS COMMUNICATIONS CORPORATION ----------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 51-0374669 ------------------------------ ---------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) c/o Pegasus Communications Management Company; 225 City Line Avenue, Suite 200, Bala Cynwyd, PA 19004 ------------------------------------------------ --------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (888) 438-7488 ------------- Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Number of shares of each class of the Registrant's common stock outstanding as of May 10, 1999: Class A, Common Stock, $0.01 par value 15,051,703 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 March 31, 1999 Page ---- Part I. Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheets December 31, 1998 and March 31, 1999 3 Consolidated Statements of Operations Three months ended March 31, 1998 and 1999 4 Consolidated Statements of Cash Flows Three months ended March 31, 1998 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk 18 Part II. Other Information Item 2 Changes in Securities and Use of Proceeds 19 Item 6 Exhibits and Reports on Form 8-K 19 Signature 20 2 Pegasus Communications Corporation Consolidated Balance Sheets
December 31, March 31, 1998 1999 ------------------- ------------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $54,505,473 $20,767,983 Restricted cash 21,479,305 10,955,768 Accounts receivable, less allowance for doubtful accounts of $567,000 and $674,000, respectively 20,882,260 22,668,512 Inventory 5,426,348 4,757,507 Program rights 3,156,715 2,868,071 Deferred taxes 2,602,453 2,073,248 Prepaid expenses and other 1,207,312 1,438,373 ------------------- ------------------- Total current assets 109,259,866 65,529,462 Property and equipment, net 34,066,502 37,407,298 Intangible assets, net 729,405,657 772,821,027 Program rights 3,428,382 3,103,382 Deferred taxes 9,277,280 7,156,946 Deposits and other 872,386 872,386 ------------------- ------------------- Total assets $886,310,073 $886,890,501 =================== =================== LIABILITIES AND TOTAL EQUITY Current liabilities: Current portion of long-term debt $14,399,046 $12,419,298 Accounts payable 4,794,809 2,336,721 Accrued interest 17,465,493 15,092,766 Accrued satellite programming and fees 19,352,780 22,042,341 Accrued expenses 12,926,864 14,271,766 Current portion of program rights payable 2,431,515 2,140,828 ------------------- ------------------- Total current liabilities 71,370,507 68,303,720 Long-term debt 544,629,706 518,627,987 Program rights payable 2,472,367 2,197,367 Deferred taxes 80,671,714 77,579,675 ------------------- ------------------- Total liabilities 699,144,294 666,708,749 ------------------- ------------------- Commitments and contingent liabilities - - Minority interest 3,000,000 3,000,000 Preferred Stock; $0.01 par value; 5.0 million shares authorized - - Series A Preferred Stock; $0.01 par value; 126,978 shares authorized; 119,369 and 126,978 issued and outstanding 126,027,871 130,075,309 Common stockholders' equity: Class A Common Stock; $0.01 par value; 30.0 million shares authorized; 11,315,809 and 14,933,681 issued and outstanding 113,158 149,336 Class B Common Stock; $0.01 par value; 15.0 million shares authorized; 4,581,900 issued and outstanding 45,819 45,819 Additional paid-in capital 173,870,633 244,680,079 Deficit (115,891,702) (157,768,791) ------------------- ------------------- Total common stockholders' equity 58,137,908 87,106,443 ------------------- ------------------- Total liabilities and stockholders' equity $886,310,073 $886,890,501 =================== ===================
See accompanying notes to consolidated financial statements 3 Pegasus Communications Corporation Consolidated Statements of Operations
Three Months Ended March 31, ---------------------------------------- 1998 1999 ------------------ ------------------ (unaudited) Net revenues: DBS $17,464,162 $58,335,773 Broadcast 6,925,019 7,949,530 Cable 4,394,511 3,070,984 ------------------ ------------------ Total net revenues 28,783,692 69,356,287 Operating expenses: DBS Programming, technical, general and administrative 12,194,387 40,519,557 Marketing and selling 4,199,406 21,146,272 Incentive compensation 360,000 390,000 Depreciation and amortization 6,644,127 21,451,553 Broadcast Programming, technical, general and administrative 3,877,798 4,942,549 Marketing and selling 1,384,801 1,466,609 Incentive compensation - 155,542 Depreciation and amortization 1,329,419 1,189,144 Cable Programming, technical, general and administrative 2,297,341 1,665,968 Marketing and selling 107,066 108,878 Incentive compensation 49,205 22,935 Depreciation and amortization 1,542,378 1,084,580 Corporate expenses 685,266 1,240,243 Corporate depreciation and amortization 414,660 710,590 ------------------ ------------------ Loss from operations (6,302,162) (26,738,133) Interest expense (5,975,738) (15,691,140) Interest income 345,747 460,565 Other expense, net (352,454) (350,881) ------------------ ------------------ Loss before income taxes (12,284,607) (42,319,589) Provision (benefit) for income taxes 75,000 (442,500) ------------------ ------------------ Net loss (12,359,607) (41,877,089) Preferred stock dividends 3,576,853 4,047,438 ------------------ ------------------ Net loss applicable to common shares ($15,936,460) ($45,924,527) ================== ================== Basic and diluted earnings per common share: Net loss ($1.54) ($2.81) ================== ================== Weighted average shares outstanding 10,332,436 16,352,307 ================== ==================
See accompanying notes to consolidated financial statements 4 Pegasus Communications Corporation Consolidated Statements of Cash Flows
Three Months Ended March 31, ---------------------------------------- 1998 1999 ----------------- ----------------- (unaudited) Cash flows from operating activities: Net loss ($12,359,607) ($41,877,089) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 9,930,584 24,435,867 Program rights amortization 601,129 783,158 Accretion on discount of bonds and seller notes 98,853 374,648 Stock incentive compensation 409,205 568,477 Gain on disposal of assets - (35,343) Bad debt expense 272,379 1,020,105 Change in assets and liabilities: Accounts receivable 1,697,397 (2,490,809) Inventory (159,490) 839,841 Prepaid expenses and other (140,082) (157,593) Accounts payable and accrued expenses (3,951,049) 50,404 Accrued interest (449,289) (2,372,727) Amounts due seller 2,261,790 - Deposits and other (2,000,000) - ----------------- ----------------- Net cash used for operating activities (3,788,180) (18,861,061) ----------------- ----------------- Cash flows from investing activities: Acquisitions (7,777,494) (65,776,010) Capital expenditures (1,502,066) (1,662,246) Purchase of intangible assets (1,063,812) (2,022,444) Payments for programming rights (626,308) (735,201) Proceeds from sale of assets - 508,988 ----------------- ----------------- Net cash used for investing activities (10,969,680) (69,686,913) ----------------- ----------------- Cash flows from financing activities: Repayments of long-term debt (5,353,852) (10,849,211) Borrowings on bank credit facilities - 30,500,000 Repayments of bank credit facilities - (50,200,000) Restricted cash (871,277) 10,523,537 Capital lease repayments (53,992) (56,904) Proceeds from issuance of common stock - 79,550,460 Underwriting and common stock offering costs - (4,657,398) ----------------- ----------------- Net cash provided (used) by financing activities (6,279,121) 54,810,484 ----------------- ----------------- Net decrease in cash and cash equivalents (21,036,981) (33,737,490) Cash and cash equivalents, beginning of year 44,049,097 54,505,473 ----------------- ----------------- Cash and cash equivalents, end of period $23,012,116 $20,767,983 ================= =================
See accompanying notes to consolidated financial statements 5 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company: Pegasus Communications Corporation ("Pegasus" or together with its subsidiaries, the "Company") operates in growing segments of the media industry and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus Media & Communications, Inc. ("PM&C") and Digital Television Services, Inc. ("DTS"). PM&C's subsidiaries provide direct broadcast satellite television ("DBS") services to customers in certain rural areas of the United States; own and/or program broadcast television ("Broadcast" or "TV") stations affiliated with the Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB Television Network ("WB"); and own and operate cable television ("Cable") systems that provide service to individual and commercial subscribers in Puerto Rico. DTS and its subsidiaries provide DBS services to customers in certain rural areas of the United States. 2. Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include the accounts of Pegasus and all of its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for 1998 have been reclassified for comparative purposes. The unaudited consolidated financial statements reflect all adjustments consisting of normal recurring items which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position of the Company and the results of its operations and its cash flows for the interim period. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K for the year then ended. 3. Common Stock: In March 1999, Pegasus completed a secondary public offering in which it sold approximately 3.6 million shares of its Class A Common Stock to the public at a price of $22 per share, resulting in net proceeds to the Company of $74.9 million. As of December 31, 1998 and March 31, 1999, the Company had two classes of Common Stock: Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock and Class B Common Stock are entitled to one vote per share and ten votes per share, respectively. The Company's ability to pay dividends on its Common Stock is subject to certain restrictions. 4. Preferred Stock: As of December 31, 1998 and March 31, 1999, the Company had 5.0 million shares of Preferred Stock authorized of which 126,978 shares have been designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock"). The Company had approximately 119,369 and 126,978 shares of Series A Preferred Stock issued and outstanding at December 31, 1998 and March 31, 1999, respectively. On January 1, 1999 the Company paid dividends on the Series A Preferred Stock in the aggregate of approximately 7,610 shares of Series A Preferred Stock, to shareholders of record on December 15, 1998. 6 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Preferred Stock: - (Continued) The carrying amount of the Series A Preferred Stock is periodically increased by amounts representing dividends not currently declared or paid but which will be payable under the mandatory redemption features. The increase in carrying amount is effected by charges against retained earnings, or in the absence of retained earnings, by charges against paid-in capital. Under the terms of the Series A Preferred Stock, Pegasus' ability to pay dividends on its Common Stock is subject to certain restrictions. 5. Long-Term Debt: Long-term debt consists of the following :
December 31, March 31, 1998 1999 ------------- --------- Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%, payable semi-annually in arrears on April 15 and October 15....................................... $115,000,000 $115,000,000 Series A Senior Notes payable by Pegasus, due 2006, interest at 9.75%, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 1999............. 100,000,000 100,000,000 Senior six-year $180.0 million revolving credit facility, payable by PM&C, interest at PM&C's option at either the bank's base rate plus an applicable margin or LIBOR plus an applicable margin............................... 27,500,000 4,000,000 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....................... 26,800,000 30,800,000 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....................... 19,600,000 19,400,000 Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable semi-annually in arrears on January 1 and July 1, net of unamortized discount of $2,621,878 and $2,522,548 as of December 31, 1998 and March 31, 1999, respectively.................................................. 82,378,122 82,477,452 Series B Notes payable by DTS, due 2007, interest at 12.5%, payable semi-annually in arrears on February 1 and August 1, net of unamortized discount of $1,784,844 and $1,716,377 as of December 31, 1998 and March 31, 1999, respectively...... 153,215,156 153,283,623 Mortgage payable, due 2000, interest at 8.75%..................... 454,965 448,989 Sellers' notes, due 1999 to 2005, interest at 3% to 8%............ 33,537,788 25,151,404 Capital leases and other.......................................... 542,721 485,817 --------------- ----------------- 559,028,752 531,047,285 Less current maturities........................................... 14,399,046 12,419,298 --------------- ----------------- Long-term debt.................................................... $544,629,706 $518,627,987 =============== =================
7 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Long-Term Debt: - (Continued) DTS maintains a $70.0 million senior revolving credit facility and a $20.0 million senior term credit facility (collectively, the "DTS Credit Facility") which expires in 2003 and is collateralized by substantially all of the assets of DTS and its subsidiaries. The DTS Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. As of March 31, 1999, $18.5 million of stand-by letters of credit were issued pursuant to the DTS Credit Facility, including $10.7 million collateralizing certain of the Company's outstanding sellers' notes. PM&C maintains a $180.0 million senior revolving credit facility (the "PM&C Credit Facility") which expires in 2003 and is collateralized by substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit Facility is subject to certain financial covenants as defined in the loan agreement, including a debt to adjusted cash flow covenant. As of March 31, 1999, $30.9 million of stand-by letters of credit were issued pursuant to the PM&C Credit Facility, including $16.8 million collateralizing certain of the Company's outstanding sellers' notes. Certain of the Company's notes may be redeemed, at the option of the Company, in whole or in part, at various points in time after July 1, 2000 at the redemption prices specified in the indentures governing the respective notes, plus accrued and unpaid interest thereon. The Company's indebtedness contain certain financial and operating covenants, including restrictions on the Company's ability to incur additional indebtedness, create liens and pay dividends. 6. Earnings Per Common Share: Calculation of basic and diluted earnings per common share: The following table sets forth the computation of the number of shares used in the computation of basic and diluted earnings per common share:
Three Months Ended March 31, --------------------------------------- 1998 1999 ---- ---- Net loss applicable to common shares ($15,936,460) ($45,924,527) ================== ================== Weighted average common shares outstanding 10,332,436 16,352,307 ================== ================== Total shares used for calculation of basic earnings per common share 10,332,436 16,352,307 Stock options and warrants - - ------------------ ----------------- Total shares used for calculation of diluted earnings per common share 10,332,436 16,352,307 ================== ==================
Basic earnings per common share amounts are based on net income, after deducting preferred stock dividend requirements, divided by the weighted average number of shares of Class A and Class B Common Stock outstanding during the year. The total shares used for the calculation of diluted earnings per common share were not adjusted for securities that have not been issued as they are antidilutive. For the three months ended March 31, 1998 and 1999, net loss per common share was determined by dividing net loss, as adjusted by the aggregate amount of dividends on the Company's Series A Preferred Stock, approximately $3.6 million and $4.0 million, respectively, by applicable shares outstanding. 8 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Acquisitions: In the first quarter of 1999, the Company acquired, from six independent DIRECTV(R) ("DIRECTV") providers, the rights to provide DIRECTV programming in certain rural areas of Colorado, Illinois, Indiana, Minnesota and Texas and the related assets in exchange for total consideration of approximately $26.1 million, which consisted of $23.7 million in cash, $2.3 million in promissory notes, payable over one year, and $198,000 in assumed liabilities. Effective March 31, 1999, the Company purchased a cable system serving Aguadilla, Puerto Rico and neighboring communities for a purchase price of approximately $42.1 million in cash. The Aguadilla cable system serves approximately 21,000 subscribers and passes approximately 81,000 of the 90,000 homes in the franchise area. The Aguadilla cable system is contiguous to the Company's other Puerto Rico cable system and the Company intends to consolidate the Aguadilla cable system with its existing cable system. 8. Supplemental Cash Flow Information: Significant noncash investing and financing activities are as follows:
Three Months Ended March 31, ------------------------------- 1998 1999 ---- ---- Barter revenue and related expense....................................... $1,459,500 $1,682,500 Acquisition of program rights and assumption of related program payables - 169,514 Acquisition of plant under capital leases................................ 36,500 - Notes payable and related acquisition of intangibles..................... 9,500,000 2,250,000 Series A Preferred Stock dividend and reduction of paid-in capital....... 3,576,853 4,047,438
For the three months ended March 31, 1998 and 1999, the Company paid cash for interest in the amount of $6.4 million and $18.1 million, respectively. The Company paid no federal income taxes for the three months ended March 31, 1998 and 1999. 9. Commitments and Contingent Liabilities: Legal Matters: In connection with the pending license renewal application of one of the Company's television stations, it has come to the attention of the Company that, at that station, there were violations of the FCC's rules establishing limits on the amount of commercial material in programs directed to children. The Company was notified that is has been sued in Indiana for allegedly charging DBS subscribers excessive fees for late payments. The plaintiffs, who purport to represent a class consisting of residential DIRECTV customers in Indiana, seek unspecified damages for the purported class and modification of the Company's late-fee policy. The Company is advised that similar suits have been brought against DIRECTV and various cable operators in other parts of the United States. From time to time the Company is involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to the aforementioned claims and matters will not have a material adverse effect on the consolidated operations, liquidity, cash flows or financial position of the Company. 9 PEGASUS COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 10. Industry Segments: The Company operates in growing segments of the media industry: DBS, Broadcast and Cable. DBS consists of providing direct broadcast satellite television services to customers in certain rural areas of 35 states. Broadcast consists of nine television stations affiliated with Fox, UPN and the WB and two transmitting towers, all located in the eastern United States. Cable consists of providing cable television services to individual and commercial subscribers in Puerto Rico. All of the Company's revenues are derived from external customers. Capital expenditures for the Company's DBS segment were $77,000 and $380,000 for the three months ended March 31, 1998 and 1999, respectively. Capital expenditures for the Company's Broadcast segment were $1.0 million and $251,000 for the three months ended March 31, 1998 and 1999, respectively. Capital expenditures for the Company's Cable segment were $280,000 and $892,000 for the three months ended March 31, 1998 and 1999, respectively. Identifiable total assets for the Company's DBS segment were $715.6 million and $697.3 million as of December 31, 1998 and March 31, 1999, respectively. Identifiable total assets for the Company's Broadcast segment were $67.1 million and $66.1 million as of December 31, 1998 and March 31, 1999, respectively. Identifiable total assets for the Company's Cable segment were $47.0 million and $86.3 million as of December 31, 1998 and March 31, 1999, respectively. 11. Other Events: In April 1999, the Company acquired, from two independent DIRECTV providers, the rights to provide DIRECTV programming in certain rural areas of Nebraska and Ohio and the related assets in exchange for $5.0 million in cash, warrants to purchase a total of 25,000 shares of the Company's Class A Common Stock and $2.0 million in promissory notes, payable over two years. On April 29, 1999, Pegasus exchanged its 9.75% Series A Senior Notes due 2006 (the "9.75% Series A Notes") for its 9.75% Series B Senior Notes due 2006 (the "9.75% Series B Notes"). The 9.75% Series B Notes have substantially the same terms and provisions as the 9.75% Series A Notes. 10 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; demographic changes; existing government regulations and changes in, or the failure to comply with government regulations; competition; the loss of any significant numbers of subscribers or viewers; changes in business strategy or development plans; technological developments and difficulties (including any associated with the Year 2000); the ability to attract and retain qualified personnel; our significant indebtedness; the availability and terms of capital to fund the expansion of our businesses; and other factors referenced in this Report. 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 3-10 herein. General Pegasus Communications Corporation is: o The largest independent provider of DIRECTV with 503,000 subscribers at April 30, 1999. We have the exclusive right to distribute DIRECTV digital broadcast satellite services to 4.8 million rural households in 35 states. We distribute DIRECTV through the Pegasus retail network, a network of approximately 2,000 independent retailers. o The owner or programmer of nine TV stations affiliated with either Fox, UPN or the WB and the owner of a large cable system in Puerto Rico serving approximately 50,000 subscribers. DBS revenues are principally derived from monthly customer subscriptions and pay-per-view services. Broadcast revenues are derived from the sale of broadcast airtime to local and national advertisers. Cable revenues are derived from monthly customer subscriptions, pay-per-view services, subscriber equipment rentals and installation charges. In this section we use the terms pre-marketing cash flow and location cash flow. Pre-marketing cash flow is calculated by taking our earnings and adding back the following expenses: o interest; o income taxes; o depreciation and amortization; o non-cash charges; o corporate overhead; and 11 o DBS subscriber acquisition costs, which are sales and marketing expenses incurred to acquire new DBS subscribers. Location cash flow is pre-marketing cash flow less DBS subscriber acquisition costs. Pre-marketing cash flow and location cash flow are not, and should not be considered, alternatives to income from operations, net income, net cash provided by operating activities or any other measure for determining our operating performance or liquidity, as determined under generally accepted accounting principles. Pre-marketing cash flow and location cash flow also do not necessarily indicate whether our cash flow will be sufficient to fund working capital, capital expenditures, or to react to changes in Pegasus' industry or the economy generally. We believe that pre-marketing cash flow and location cash flow are important, however, for the following reasons: o those who follow our industry frequently use them as measures of financial performance and ability to pay debt service; and o they are measures that our lenders, investors and we use to monitor our financial performance and debt leverage. Pegasus generally does not require new DBS customers to sign programming contracts and, as a result, subscriber acquisition costs are currently being charged to operations in the period incurred. Results of Operations Three months ended March 31, 1999 compared to three months ended March 31, 1998 Total net revenues for the three months ended March 31, 1999 were $69.4 million, an increase of $40.6 million, or 141%, compared to total net revenues of $28.8 million for the same period in 1998. The increase in total net revenues for the three months ended March 31, 1999 was primarily due to an increase in DBS revenues of $40.9 million attributable to acquisitions and to internal growth in Pegasus' DBS subscriber base. Total operating expenses for the three months ended March 31, 1999 were $96.1 million, an increase of $61.0 million, or 174%, compared to total operating expenses of $35.1 million for the same period in 1998. The increase was primarily due to an increase of $60.1 million in operating expenses attributable to the growth in Pegasus' DBS business. Total corporate expenses, including corporate depreciation and amortization, were $2.0 million for the three months ended March 31, 1999, an increase of $851,000, or 77%, compared to $1.1 million for the same period in 1998. The increase in corporate expenses is attributable to the growth in Pegasus' business. The increase in corporate depreciation and amortization is primarily due to amortization of deferred financing costs associated with the issuance of $100.0 million of senior notes in November 1998. Interest expense was $15.7 million for the three months ended March 31, 1999, an increase of $9.7 million, or 163%, compared to interest expense of $6.0 million for the same period in 1998. The increase in interest expense is primarily due to interest on Pegasus' $100.0 million senior notes issued in November 1998, Digital Television Service Inc.'s $155.0 million senior notes, which were assumed by Pegasus in April 1998, and an increase in bank borrowings and sellers' notes associated with Pegasus' DBS acquisitions. Interest income was $461,000 for the three months ended March 31, 1999, an increase of $115,000, or 33%, compared to interest income of $346,000 for the same period in 1998. The increase in interest income is due to greater average cash balances for the three months ended March 31, 1999 compared to the same period in 1998. Other expenses were $351,000 for the three months ended March 31, 1999, a decrease of $1,000 compared to other expenses of $352,000 for the same period in 1998. The provision for income taxes declined by approximately $518,000 primarily as a result of the amortization of the deferred tax liability that originated from the acquisition of Digital Television Services, Inc. 12 Preferred stock dividends were $4.0 million for the three months ended March 31, 1999, an increase of $471,000, or 13%, compared to $3.6 million in preferred stock dividends for the same period in 1998. The increase is attributable to a greater number of shares of Pegasus' preferred stock outstanding during the first quarter of 1999 compared to the first quarter of 1998 as the result of payment of dividends in preferred stock. DBS Pegasus' DBS business has experienced significant growth. During the last twelve months, Pegasus acquired approximately 218,000 subscribers and the exclusive DIRECTV distribution rights to approximately 2.5 million households in rural areas of the United States. At March 31, 1999, Pegasus had exclusive DIRECTV distribution rights to 4.8 million households and 481,000 subscribers as compared to 2.3 million households and 154,000 subscribers at March 31, 1998. Pegasus had 4.9 million households and 505,000 subscribers at March 31, 1999, including pending acquisitions. At March 31, 1998, subscribers would have been 384,000, including pending and completed acquisitions. Subscriber penetration increased from 7.8% at March 31, 1998 to 10.3% at March 31, 1999, including pending and completed acquisitions. Total DBS net revenues were $58.3 million for the three months ended March 31, 1999, an increase of $40.9 million, or 234%, compared to DBS net revenues of $17.5 million for the same period in 1998. The increase is primarily due to an increase in the average number of subscribers in the first quarter of 1999 compared to the first quarter of 1998. The average monthly revenue per subscriber was $43.12 for the three months ended March 31, 1999 compared to $41.91 for the same period in 1998. Pro forma DBS net revenues, including pending acquisitions at March 31, 1999, were $62.6 million, an increase of $16.3 million, or 35%, compared to pro forma DBS net revenues of $46.3 million for the same period in 1998. Programming, technical, and general and administrative expenses were $40.5 million for the three months ended March 31, 1999, an increase of $28.3 million, or 232%, compared to $12.2 million for the same period in 1998. The increase is attributable to significant growth in subscribers and territory during the last twelve months. As a percentage of revenue, programming, technical, and general and administrative expenses were 69.5% for the three months ended March 31, 1999 compared to 69.8% for the same period in 1998. Subscriber acquisition costs were $21.1 million for the three months ended March 31, 1999, an increase of $16.9 million compared to $4.2 million for the same period in 1998. The total subscriber acquisition costs per gross subscriber addition were $410 for the three months ended March 31, 1999 compared to $283 for the same period in 1998. The increase is principally due to an increase in promotional programming. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $390,000 for the three months ended March 31, 1999, an increase of $30,000, or 8%, compared to $360,000 for the same period in 1998. The increase resulted from a larger gain in pro forma location cash flow during the first quarter of 1999 as compared to the first quarter of 1998. Depreciation and amortization was $21.5 million for the three months ended March 31, 1999, an increase of $14.8 million, or 223%, compared to $6.6 million for the same period in 1998. The increase in depreciation and amortization is primarily due to an increase in the fixed and intangible asset base as the result of DBS acquisitions that occurred during the last two years. Broadcast During the three months ended March 31, 1999, Pegasus owned or programmed nine broadcast television stations in six markets. Two new stations were launched during the second half of 1998. Total net broadcast revenues for the three months ended March 31, 1999 were $7.9 million, an increase of $1.0 million, or 15%, compared to net broadcast revenues of $6.9 million for the same period in 1998. The increase was primarily attributable to an increase of $340,000 in net broadcast revenues from the four stations launched in 1997 and 1998, a $229,000 increase in barter revenue and an increase in local advertising sales. 13 Programming, technical, and general and administrative expenses were $4.9 million for the three months ended March 31, 1999, an increase of $1.1 million, or 28%, compared to $3.9 million for the same period in 1998. The increase is primarily due to an increase in expenses from the two new stations launched in 1998 and an increase in news related expenses associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets. Marketing and selling expenses were $1.5 million for the three months ended March 31, 1999, an increase of $82,000, or 6%, compared to $1.4 million for the same period in 1998. The increase in marketing and selling expenses was due to an increase in promotional costs associated with the launch of the new stations and news programs. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $156,000 for the three months ended March 31, 1999 compared to no incentive compensation for the same period in 1998. The incentive compensation resulted from a gain in pro forma location cash flow during the first quarter of 1999 as compared to a loss in the first quarter of 1998. Depreciation and amortization was $1.2 million for the three months ended March 31, 1999, a decrease of $140,000, or 11%, compared to $1.3 million for the same period in 1998. Cable Total net cable revenues were $3.1 million for the three months ended March 31, 1999, a decrease of $1.3 million, or 30%, compared to net cable revenues of $4.4 million for the same period in 1998. The decrease is primarily due to the sale of Pegasus' New England cable systems effective July 1, 1998. Net cable revenues from the New England Cable systems were $1.6 million for the three months ended March 31, 1998. The net revenues derived from Pegasus' Puerto Rico cable system were $3.1 million for the three months ended March 31, 1999, an increase of $275,000, or 10%, compared to net cable revenues of $2.8 million for the same period in 1998. The average monthly revenue per subscriber was $35.15 for the three months ended March 31, 1999 compared to $33.71 for the same period in 1998. On a pro forma basis, including the completed acquisition of the Aguadilla, Puerto Rico cable system and the disposition of the New England cable systems, there were 50,200 subscribers as of March 31, 1999 compared to 49,300 subscribers as of March 31, 1998. Programming, technical, and general and administrative expenses were $1.7 million for the three months ended March 31, 1999, a decrease of $631,000, or 28%, compared to $2.3 million for the same period in 1998. The decrease is primarily attributable to the sale of Pegasus' New England cable systems. Marketing and selling expenses were $109,000 for the three months ended March 31, 1999, an increase of $2,000, or 2%, compared to $107,000 for the same period in 1998. Incentive compensation, which is calculated based on increases in pro forma location cash flow, was $23,000 for the three months ended March 31, 1999, a decrease of $26,000, or 53%, compared to $49,000 for the same period in 1998. The decrease resulted from a lower gain in pro forma location cash flow during the first quarter of 1999 as compared to the first quarter of 1998. Depreciation and amortization was $1.1 million for the three months ended March 31, 1999, a decrease of $458,000, or 30%, compared to $1.5 million for the same period in 1998. The decrease in depreciation and amortization is primarily due to the sale of Pegasus' New England cable systems. 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 use of its cash has been to fund acquisitions, to meet debt service obligations, to fund DBS subscriber acquisition costs and to fund investments in its broadcast and cable technical facilities. 14 Pre-marketing cash flow increased by approximately $11.7 million, or 131%, for the three months ended March 31, 1999 as compared to the same period in 1998. Pre-marketing cash flow increased as a result of: o a $12.5 million, or 238%, increase in DBS pre-marketing cash flow of which $2.2 million, or 17%, was due to an increase in same territory pre-marketing cash flow and $10.4 million, or 83%, was attributable to territories acquired in 1998 and 1999; o a $122,000, or 7%, decrease in broadcast location cash flow as the result of a $59,000, or 4%, increase in same station location cash flow and a $181,000 decrease attributable to the two new stations launched in July 1998 and November 1998; and o a $694,000, or 35%, decrease in cable location cash flow. This decrease was the net result of a $76,000, or 6%, increase in Puerto Rico same system location cash flow and a $770,000 reduction due to the sale of Pegasus' New England cable systems effective July 1, 1998. During the three months ended March 31, 1999, $54.5 million of cash on hand at the beginning of the year, together with $54.8 million of net cash provided by Pegasus' financing activities, was used to fund operating activities of approximately $18.9 million and investing activities of $69.7 million. Investing activities consisted of: o the purchase of a cable system serving Aguadilla, Puerto Rico and neighboring communities for approximately $42.1 million; o the acquisition of DBS assets from six independent DIRECTV providers during the first quarter of 1999 for approximately $23.7 million; o broadcast expenditures associated with the launch of self-produced news in our Portland, Maine and Chattanooga, Tennessee markets totaling $428,000; o DBS facility upgrades of $376,000; o the expansion and enhancements of the Puerto Rico cable system amounting to $600,000, including $213,000 related to hurricane damage; o payments of programming rights amounting to $735,000; o capitalized costs relating to Pegasus' financing of approximately $1.5 million; o proceeds from the sale of DBS assets to an independent DIRECTV provider for $509,000; and o maintenance and other capital expenditures and intangibles totaling $792,000. Financing activities consisted of: o the issuance of approximately 3.6 million shares of Class A common stock resulting in net proceeds to Pegasus of approximately $74.9 million; o net repayments of bank credit facilities totaling $19.7 million; o the repayment of approximately $10.9 million of long-term debt, primarily sellers' notes and capital leases; and o net restricted cash draws of approximately $9.5 million for interest payments and $1.0 million in connection with the acquisition of the Aguadilla, Puerto Rico cable system. 15 As of March 31, 1999, cash on hand amounted to $20.8 million plus restricted cash of $11.0 million. Pegasus Media & Communications maintains a $180.0 million senior, reducing revolving credit facility. Borrowings under the credit facility are available for acquisitions, subject to the approval of the lenders in certain circumstances, working capital, capital expenditures and for general corporate purposes. As of March 31, 1999, $4.0 million was outstanding and stand-by letters of credit amounting to $30.9 million were issued under its $180.0 million credit facility. The credit facility expires in December 2003. Digital Television Services maintains a $70.0 million senior, reducing revolving credit facility and a $20.0 million senior term credit facility. Borrowings under the credit facilities are available to refinance certain indebtedness and for acquisitions, subject to the approval of the lenders in certain circumstances, working capital, capital expenditures and for general corporate purposes. As of March 31, 1999, $50.2 million was outstanding and stand-by letters of credit amounting to $18.5 million were issued under its $90.0 million credit facilities. The credit facilities expire in July 2003. In March 1999, Pegasus completed its secondary public offering in which it sold approximately 3.6 million shares of its Class A Common Stock to the public at a price of $22.00 per share, resulting in net proceeds to Pegasus of approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds to pay down indebtedness under the Pegasus Media & Communications credit facility and $25.0 million towards the acquisition of the cable system serving Aguadilla, Puerto Rico and neighboring communities. As defined in the Certificate of Designation governing Pegasus' Series A Preferred Stock and the indentures governing Pegasus' senior notes, Pegasus is required to provide Adjusted Operating Cash Flow data for Pegasus and its Restricted Subsidiaries on a consolidated basis where Adjusted Operating Cash Flow is defined as "for the four most recent fiscal quarters for which internal financial statements are available, Operating Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the most recent four-quarter period plus DBS Cash Flow for the most recent quarterly period, multiplied by four." Operating Cash Flow is income from operations before income taxes, depreciation and amortization, interest expense, extraordinary items and non-cash charges. Although Adjusted Operating Cash Flow is not a measure of performance under generally accepted accounting principles, we believe that Location Cash Flow, Operating Cash Flow and Adjusted Operating Cash Flow are accepted within our business segments as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such segments. Restricted Subsidiaries carries the same meaning as in the Certificate of Designation. Digital Television Services, Inc., among certain other Pegasus' subsidiaries, are not included in the definition of Restricted Subsidiaries and, accordingly, their operating results are not included in the Adjusted Operating Cash Flow data provided below. Pro forma for the acquisition of the Aguadilla, Puerto Rico cable system, the six completed DBS acquisitions occurring in the first quarter of 1999 and the sale of our New England cable systems, as if such acquisitions/disposition occurred on April 1, 1998, Adjusted Operating Cash Flow would have been approximately $56.7 million as follows:
Four Quarters Ended (in thousands) March 31,1999 -------------------- Revenues........................................................................ $189,543 Direct operating expenses, excluding depreciation, amortization and other non-cash charges.............................................................. 128,929 -------- Income from operations before incentive compensation corporate expenses, depreciation and amortization and other non-cash charges............ 60,614 Corporate expenses.............................................................. 3,870 -------- Adjusted operating cash flow ................................................... $ 56,744 ========
16 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: o restrict our ability to pay dividends and make certain other payments and investments; o borrow additional funds; o create liens; and o to sell our assets. Failure to make debt payments or comply with our covenants could result in an event of default which if not cured or waived could have a material adverse effect on us. Pegasus closely monitors conditions in the capital markets to identify opportunities for the effective use of financial leverage. In financing its future expansion and acquisition requirements, Pegasus would expect to avail itself of such opportunities and thereby increase its indebtedness. This could result in increased debt service requirements. We cannot assure you that such debt financing can be completed on terms satisfactory to Pegasus or at all. Pegasus may also issue additional equity to fund its future expansion and acquisition requirements. Year 2000 The year 2000 issue is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other equipment as the year 2000 approaches and is reached. These problems generally arise from the fact that most computer hardware and software have historically used only two digits to identify the year in a date, often resulting in the computer failing to distinguish dates in the 2000s from dates in the 1900s. These problems may also arise from additional sources, such as the use of special codes and conventions in software utilizing the date field. Pegasus has reviewed all of its systems as to the year 2000 issue. Pegasus' primary focus has been on its own internal systems. Pegasus has in the past three years replaced or upgraded, 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 are expected to be in place by May 31, 1999. 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 Pegasus to address and may have a material adverse impact on Pegasus' financial condition and its results of operations. Pegasus relies on outside vendors for the operation of its DBS satellite control and billing systems, including DIRECTV, the National Rural Telecommunications Cooperative and their respective vendors. Pegasus has established a policy to ensure that these vendors are currently in compliance with the year 2000 issue or have a plan in place to be in compliance with the year 2000 issue by the first quarter of 1999. In addition, Pegasus 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 Pegasus' systems may be affected by the failure of others to remediate their own year 2000 issues. To date, however, Pegasus has received only preliminary feedback from such parties and has not independently confirmed any information received from other parties with respect to the year 2000 issue. As such, we cannot assure you that these other parties will complete their year 2000 conversion in a timely fashion or will not suffer a year 2000 business disruption that may adversely affect Pegasus' financial condition and its results of operations. 17 Because Pegasus' year 2000 conversion is expected to be completed prior to any potential disruption to Pegasus' business, Pegasus has not yet completed the development of a comprehensive year 2000-specific contingency plan. However, as part of its year 2000 contingency planning effort, Pegasus examines information received from external sources for date integrity before bringing it into its internal systems. If Pegasus determines that its business or a segment thereof is at material risk of disruption due to the year 2000 issue or anticipates that its year 2000 conversion will not be completed in a timely fashion, it will work to enhance its contingency plan. Costs to date relating to the year 2000 issue amounted to approximately $200,000. Costs to be incurred beyond March 31, 1999, relating to the year 2000 issue are expected to be approximately $150,000. Dividend Policy As a holding company, Pegasus' ability to pay dividends is dependent upon the receipt of dividends from its direct and indirect subsidiaries. Credit facilities and publicly held debt securities of Pegasus' principal subsidiaries restrict them from paying dividends to Pegasus. In addition, Pegasus' ability to pay dividends and Pegasus' and its subsidiaries' ability to incur indebtedness are subject to certain restrictions contained in Pegasus' and its subsidiaries' credit facilities and publicly held debt securities and in the terms of Pegasus' Series A preferred stock. Seasonality Pegasus' revenues vary throughout the year. As is typical in the broadcast television industry, Pegasus' first quarter generally produces the lowest revenues for the year and the fourth quarter generally produces the highest revenues for the year. Pegasus' operating results in any period may be affected by the incurrence of advertising and promotion expenses that do not necessarily produce commensurate revenues in the short-term until the impact of such advertising and promotion is realized in future periods. Inflation Pegasus believes that inflation has not been a material factor affecting its business. In general, Pegasus' revenues and expenses are impacted to the same extent by inflation. A majority of Pegasus' indebtedness bears interest at a fixed rate. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable. 18 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On April 13, 1999, Pegasus issued warrants to purchase 25,000 shares of its Class A Common Stock as partial consideration for the acquisition of DIRECTV rights and related assets from an independent provider of DIRECTV in certain rural portions of Nebraska. The warrants are exercisable on or before April 13, 2004 at a price of $24.1771 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during the quarter ended March 31, 1999. 19 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 Date May 12, 1999 By /s/ Robert N. Verdecchio ------------ ------------------------------------- Robert N. Verdecchio Senior Vice President, Chief Financial Officer, Assistant Secretary and Director (Principal Financial and Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet of Pegasus Communication Corporation as of March 31, 1999 (unaudited) and the related consolidated statements of operations and cash flows for the three months ended March 31, 1999 (unaudited). This information is qualifed in its entirety by reference to such financial statements. 1 $U.S. Dollars 3-MOS DEC-31-1999 MAR-31-1999 1.1 20,767,983 0 23,342,512 674,000 4,757,507 65,529,462 63,696,050 26,288,752 886,890,501 68,303,720 450,761,075 130,075,309 3,000,000 195,155 86,911,288 886,890,501 69,356,287 69,356,287 0 96,094,420 (109,684) 0 15,691,140 (42,319,589) (442,500) (41,877,089) 0 0 0 (41,877,089) (2.81) (2.81)
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