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, 2002
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 0-32383
PEGASUS COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 23-3070336
(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 November 8, 2002:
Class A, Common Stock, $0.01 par value 50,383,405
Class B, Common Stock, $0.01 par value 9,163,800
Non-Voting, Common Stock, $0.01 par value -
PEGASUS COMMUNICATIONS CORPORATION
Form 10-Q
Table of Contents
For the Quarterly Period Ended September 30, 2002
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 4
Consolidated Statements of Operations and Comprehensive Loss
Three months ended September 30, 2002 and 2001 5
Consolidated Statements of Operations and Comprehensive Loss
Nine months ended September 30, 2002 and 2001 6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 3. Defaults Upon Senior Securities 32
Signature 33
Certifications
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
Pegasus Communications Corporation
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2002 2001
------------ ------------
(unaudited)
Currents assets:
Cash and cash equivalents $ 48,417 $ 144,673
Restricted cash 8,343 9,987
Accounts receivable, net
Trade 20,297 34,744
Other 8,446 12,915
Deferred subscriber acquisition costs, net 17,152 15,194
Prepaid expenses 14,879 14,218
Other current assets 7,880 17,912
----------- ------------
Total current assets 125,414 249,643
Property and equipment, net 94,616 91,811
Intangible assets, net 1,750,184 1,868,809
Investment in others 117,361 102,397
Other noncurrent assets 59,496 63,171
----------- ------------
Total $ 2,147,071 $ 2,375,831
=========== ============
Current liabilities:
Current portion of long term debt $ 5,899 $ 8,728
Accounts payable 13,141 10,872
Accrued interest 22,995 27,979
Accrued programming fees 57,316 67,225
Accrued commissions and subsidies 42,831 45,746
Other accrued expenses 32,850 32,863
Other current liabilities 4,031 4,755
----------- ------------
Total current liabilities 179,063 198,168
Long term debt 1,281,128 1,329,923
Other noncurrent liabilities 46,257 78,375
----------- ------------
Total liabilities 1,506,448 1,606,466
----------- ------------
Commitments and contingent liabilities (see Note 16)
Minority interest 2,007 1,315
Redeemable preferred stock 298,704 472,048
Common stockholders' equity:
Common stock 608 592
Other common stockholders' equity 339,304 295,410
----------- ------------
Total common stockholders' equity 339,912 296,002
----------- ------------
Total $ 2,147,071 $ 2,375,831
=========== ============
See accompanying notes to consolidated financial statements
4
Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
Three Months Ended September 30,
2002 2001
---------- ----------
(unaudited)
Net revenues:
DBS $ 216,363 $ 206,795
Other businesses 9,557 8,118
---------- ----------
Total net revenues 225,920 214,913
---------- ----------
Operating expenses:
DBS
Programming 94,584 89,660
Other subscriber related expenses 51,547 50,344
---------- ----------
Direct operating expenses (excluding depreciation and
amortization shown below) 146,131 140,004
Promotions and incentives 5,933 7,601
Advertising and selling 7,877 24,281
General and administrative 6,216 8,683
Depreciation and amortization 42,968 63,671
---------- ----------
Total DBS 209,125 244,240
---------- ----------
Other businesses
Programming 3,703 3,374
Other direct operating expenses 1,579 2,021
---------- ----------
Direct operating expenses (excluding depreciation and
amortization shown below) 5,282 5,395
Advertising and selling 1,801 1,694
General and administrative 1,083 1,217
Depreciation and amortization 1,003 1,286
---------- ----------
Total other businesses 9,169 9,592
---------- ----------
Corporate and development expenses 4,040 5,580
Corporate depreciation and amortization 7,985 437
Other operating expenses, net 8,690 6,110
---------- ----------
Loss from operations (13,089) (51,046)
Interest expense (36,531) (32,589)
Interest income 227 470
Loss on impairment of marketable securities - (34,205)
Other nonoperating income (expense), net 940 (2,604)
---------- ----------
Loss before equity in affiliates, income taxes, discontinued
operations, and extraordinary item (48,453) (119,974)
Equity in earnings of affiliates 200 160
Benefit for income taxes - (37,959)
---------- ----------
Loss before discontinued operations and extraordinary item (48,253) (81,855)
Discontinued operations:
Income (loss) on operations, net of income tax (expense) benefit of
$(356) and $1,982 582 (3,233)
---------- ----------
Loss before extraordinary item (47,671) (85,088)
Extraordinary net gain from extinguishments of debt, net of income tax
expense of $5,967 9,736 -
---------- ----------
Net loss (37,935) (85,088)
---------- ----------
Other comprehensive (loss) income:
Unrealized loss on marketable securities, net of income tax benefit of
$57 and $2,521, respectively (94) (4,113)
Reclassification adjustment for accumulated unrealized loss on
marketable securities included in net loss, net of income tax
benefit of $12,998 - 21,207
---------- ----------
Net other comprehensive (loss) income (94) 17,094
---------- ----------
Comprehensive loss $ (38,029) $ (67,994)
========== ==========
Basic and diluted per common share amounts:
Loss from continuing operations, including $7,992 and $10,751,
respectively, representing accrued and deemed preferred stock
dividends and accretion $ (0.94) $ (1.65)
Discontinued operations 0.01 (0.06)
-------- ---------
Loss before extraordinary item, including accrued and deemed preferred
stock dividends and accretion (0.93) (1.71)
Extraordinary item 0.16 -
-------- ---------
Net loss applicable to common shares $ (0.77) $ (1.71)
======== =========
Weighted average number of common shares outstanding 59,976 56,104
======== =========
See accompanying notes to consolidated financial statements
5
Pegasus Communications Corporation
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
Nine Months Ended September 30,
2002 2001
------------- -------------
(unaudited)
Net revenues:
DBS $ 647,534 $ 618,648
Other businesses 26,429 25,584
---------- ----------
Total net revenues 673,963 644,232
---------- ----------
Operating expenses:
DBS
Programming 286,918 265,594
Other subscriber related expenses 152,374 151,087
--------- ----------
Direct operating expenses (excluding depreciation and
amortization shown below) 439,292 416,681
Promotions and incentives 9,703 36,909
Advertising and selling 23,998 93,715
General and administrative 20,998 26,937
Depreciation and amortization 123,905 189,675
--------- ----------
Total DBS 617,896 763,917
--------- ----------
Other businesses
Programming 9,996 9,569
Other direct operating expenses 5,304 5,637
--------- ----------
Direct operating expenses (excluding depreciation and
amortization shown below) 15,300 15,206
Advertising and selling 5,375 5,721
General and administrative 3,139 3,493
Depreciation and amortization 3,090 3,872
--------- ----------
Total other businesses 26,904 28,292
--------- ----------
Corporate and development expenses 14,560 15,279
Corporate depreciation and amortization 23,900 1,164
Other operating expenses, net 24,611 20,584
--------- ----------
Loss from operations (33,908) (185,004)
Interest expense (108,893) (101,796)
Interest income 663 4,523
Loss on impairment of marketable securities (3,063) (34,205)
Other nonoperating income (expense), net 2,179 (6,290)
--------- ----------
Loss before equity in affiliates, income taxes, discontinued
operations, and extraordinary item (143,022) (322,772)
Equity in earnings of affiliates 549 14,261
Benefit for income taxes (35,661) (103,953)
--------- ----------
Loss before discontinued operations and extraordinary item (106,812) (204,558)
Discontinued operations:
Loss on operations, net of income tax benefit of $1,514 and
$5,266, respectively (2,467) (8,591)
--------- ----------
Loss before extraordinary item (109,279) (213,149)
Extraordinary net gain (loss) from extinguishments of debt, net of
income tax (expense) benefit of $(5,967) and $604, respectively 9,736 (986)
--------- ----------
Net loss (99,543) (214,135)
--------- ----------
Other comprehensive (loss) income:
Unrealized loss on marketable securities, net of income tax benefit
of $1,837 and $5,658, respectively (2,998) (9,231)
Reclassification adjustment for accumulated unrealized loss on
marketable securities included in net loss, net of income tax
benefit of $1,164 and $12,998, respectively 1,899 21,207
--------- ----------
Net other comprehensive (loss) income (1,099) 11,976
---------- ----------
Comprehensive loss $ (100,642) $ (202,159)
========== ==========
Basic and diluted per common share amounts:
Loss from continuing operations, including $24,935 and $31,592,
respectively, representing accrued and deemed preferred stock
dividends and accretion $ (2.19) $ (4.24)
Discontinued operations (0.04) (0.15)
-------- ----------
Loss before extraordinary item, including accrued and deemed preferred
stock dividends and accretion (2.23) (4.39)
Extraordinary item 0.16 (0.02)
-------- ----------
Net loss applicable to common shares $ (2.07) $ (4.41)
======== ==========
Weighted average number of common shares outstanding 59,995 55,705
======== ==========
See accompanying notes to consolidated financial statements
6
Pegasus Communications Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended September 30,
2002 2001
-------------- --------------
(unaudited)
Net cash provided by (used for) operating activities $ 9,349 $ (117,108)
------------ -------------
Cash flows from investing activities:
DBS equipment capitalized (20,149) (9,620)
Other capital expenditures (4,160) (20,717)
Purchases of intangible assets (346) (13,068)
Other - (889)
------------ -------------
Net cash used for investing activities (24,655) (44,294)
------------ -------------
Cash flows from financing activities:
Borrowings on term loan facility 63,156 -
Repayments of term loan facility (2,220) (37,062)
Proceeds from short term debt - 61,000
Net repayments of revolving credit facilities (80,000) -
Repayments of other long term debt (5,934) (7,077)
Purchases of outstanding notes (24,974) -
Purchases of preferred stock (23,192) -
Redemption of preferred stock (5,717) -
Restricted cash, net of cash acquired 1,644 (14,900)
Other (645) (4,304)
------------ -------------
Net cash used for financing activities (80,950) (1,910)
------------ -------------
Net decrease in cash and cash equivalents (96,256) (163,312)
Cash and cash equivalents, beginning of year 144,673 214,361
------------ -------------
Cash and cash equivalents, end of period $ 48,417 $ 51,049
============ =============
See accompanying notes to consolidated financial statements
7
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
"We," "us," and "our" refer to Pegasus Communications Corporation together
with its subsidiaries. "PCC" refers to Pegasus Communications Corporation
individually as a separate entity. "PSC" refers to Pegasus Satellite
Communications, Inc., a subsidiary of PCC. "PM&C" refers to Pegasus Media &
Communications, Inc., a subsidiary of PSC. "DBS" refers to direct broadcast
satellite. Other terms used are defined as needed where they first appear.
Significant Risks and Uncertainties
We are highly leveraged. At September 30, 2002, we had a combined carrying
amount of debt and redeemable preferred stocks outstanding of $1.6 billion.
Because we are highly leveraged, we are more vulnerable to adverse economic and
industry conditions. We dedicate a substantial portion of cash to pay amounts
associated with debt. In the first nine months of 2002, we paid interest of
$93.9 million. We were scheduled to begin paying cash dividends on PSC's 12-3/4%
series preferred stock in July 2002. However, we did not declare the scheduled
semiannual dividend payable July 1, 2002 for this series (see note 7). Further,
we did not declare the scheduled quarterly dividends payable April 30, 2002,
July 31, 2002, and October 31, 2002 for our Series C preferred stock (see note
7). In the past, we paid the dividends payable on Series C with shares of our
Class A common stock, as permitted under the certificate of designation. We
redeemed $5.7 million of Series B preferred stock in cash in March 2002. We have
received notice of redemption from holders for $5.0 million of Series E
preferred stock. However, we are not permitted nor obligated to redeem the
related shares while dividends on preferred stock senior to the series are in
arrears. Under these circumstances, our inability to redeem the Series E shares
is not an event of default. We have also used cash to redeem and purchase
preferred stock, and to purchase our common stock, and debt. See notes 5, 7, and
8, respectively, for a discussion of these transactions.
Using cash for the above noted payments reduces the availability of funds
to us for working capital, capital expenditures, and other activities, and
limits our flexibility in planning for, or reacting to, changes in our business
and the industries in which we operate, although we have reduced the amount of
cash paid and payable to nonaffiliates in connection with our repurchased debt
and preferred stock. Our ability to make payments on and to refinance
indebtedness and redeemable preferred stocks outstanding and to fund operations,
planned capital expenditures, and other activities depends on our ability to
generate cash in the future. Our ability to generate cash depends on the success
of our business strategy, prevailing economic conditions, regulatory risks,
competitive activities by other parties, equipment strategies, technological
developments, level of programming costs, levels of interest rates, and
financial, business, and other factors that are beyond our control. We cannot
assure that our business will generate sufficient cash flow from operations or
that alternative financing will be available to us in amounts sufficient to fund
the needs previously specified. Our indebtedness and preferred stocks contain
numerous covenants that, among other things, generally limit the ability to
incur additional indebtedness and liens, issue other securities, make certain
payments and investments, pay dividends, transfer cash, dispose of assets, and
enter into other transactions, and impose limitations on the activities of our
subsidiaries. Failure to make debt payments or comply with covenants could
result in an event of default that, if not cured or waived, could have a
material adverse effect on us.
We are involved in significant litigation. See note 16 for further
information.
2. Basis of Presentation
The unaudited financial statements herein include the accounts of PCC and
all of its subsidiaries on a consolidated basis. All intercompany transactions
and balances have been eliminated. The balance sheets and statements of cash
flows are presented on a condensed basis. These financial statements are
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The financial statements reflect all adjustments
consisting of normal recurring items that, in our opinion, are necessary for a
fair presentation, in all material respects, of our financial position and the
results of our operations and comprehensive loss and our cash flows for the
interim period. The interim results of operations contained herein
8
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
may not necessarily be indicative of the results of operations for the full
fiscal year. Prior year amounts have been reclassified where appropriate to
conform to the current year classification for comparative purposes.
3. Adoption of FAS 141
On January 1, 2002, we adopted in its entirety Statement of Financial
Accounting Standards No. 141 "Business Combinations." FAS 141, as well as FAS
142 discussed below, makes a distinction between intangible assets that are
goodwill and intangible assets that are other than goodwill. When we use the
term "intangible asset or assets," we mean it to be an intangible asset or
assets other than goodwill, and when we use the term "goodwill," we mean it to
be separate from intangible assets. The principal impact to us of adopting FAS
141 was the requirement to reassess at January 1, 2002 the classification on our
balance sheet of the carrying amounts of our goodwill and intangible assets
recorded in acquisitions we made before July 1, 2001. The adoption of FAS 141
did not have a significant impact on our financial position.
4. Adoption of FAS 142
In the first quarter 2002, effective on January 1, 2002, we adopted in its
entirety Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets." A principal provision of the standard is that goodwill and
intangible assets that have indefinite lives are not subject to amortization,
but are subject to an impairment test at least annually. The principal impacts
to us of adopting FAS 142 were: 1) reassessing on January 1, 2002 the useful
lives of intangible assets existing on that date that we had recorded in
acquisitions we made before July 1, 2001 and adjusting remaining amortization
periods as appropriate; 2) ceasing amortization of goodwill and intangible
assets with indefinite lives effective January 1, 2002; 3) establishing
reporting units as needed for the purpose of testing goodwill for impairment; 4)
testing on January 1, 2002 goodwill and intangible assets with indefinite lives
existing on that date for impairment; and 5) separating goodwill from intangible
assets. The provisions of this standard were not permitted to be retroactively
applied to periods before the date we adopted FAS 142.
We believe that the estimated remaining useful lives of our DBS rights
assets should be based on the estimated useful lives of the satellites at the
1010 west longitude orbital location available to provide DirecTV services under
the NRTC-DirecTV contract. The contract sets forth the terms and conditions
under which the lives of those satellites are deemed to expire, based on fuel
levels and transponder functionality. We estimate that the useful life of the
DirecTV satellite resources provided under the contract (without regard to
renewal rights) expires in November 2016. Because the cash flows for all of our
DBS rights assets emanate from the same source, we believe that it is
appropriate for all of the estimated useful lives of our DBS rights assets to
end at the same time. Prior to the adoption of FAS 142, our DBS rights assets
had estimated useful lives of 10 years from the date we obtained the rights.
Linking the lives of our DBS rights assets in such fashion extended the
amortization period for the unamortized carrying amount of the assets to
remaining lives of approximately 15 years from January 1, 2002. The lives of our
DBS rights are subject to litigation. See note 16 for information regarding this
litigation.
We determined that our broadcast licenses had indefinite lives because
under past and existing Federal Communications Commission's regulations the
licenses can be routinely renewed indefinitely with little cost. Ceasing
amortization on goodwill and broadcast licenses had no material effect on our
results of operations. The adoption of FAS 142 did not have a significant effect
on our other intangible assets other than those discussed above. Our industry
segments already established equate to the reporting units required under the
standard. We determined that there were no impairments to be recorded upon the
adoption of FAS 142.
9
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At September 30, 2002 and December 31, 2001, intangible assets, net
consisted of the following (in thousands):
September 30, December 31,
2002 2001
-------------- -------------
Assets subject to amortization:
Cost:
DBS rights assets $ 2,289,068 $ 2,259,231
Other 223,954 286,430
------------ ------------
2,513,022 2,545,661
------------ ------------
Accumulated amortization:
DBS rights assets 724,787 624,115
Other 53,526 52,737
------------ ------------
778,313 676,852
------------ ------------
Net assets subject to amortization 1,734,709 1,868,809
Assets not subject to amortization:
Broadcast licenses 15,475 -
------------ ------------
Intangible assets, net $ 1,750,184 $ 1,868,809
============ ============
At September 30, 2002 and December 31, 2001, total goodwill had a carrying
amount of $15.8 million and was entirely associated with our broadcast
operations. Because the carrying amount of goodwill is not significant, it is
included in other noncurrent assets on the balance sheet.
Loss before extraordinary items and net loss, each as adjusted for the
effects of applying FAS 142, for the three and nine months ended September 30,
2001 were as follows (in thousands, except per share amounts):
Per share
For the three months ended: ------------
Net loss, as adjusted $ (67,408) $ (1.40)
For the nine months ended:
Loss before extraordinary items, as adjusted (161,628) (3.46)
Net loss, as adjusted (162,614) (3.48)
A reconciliation of net loss, as reported to net loss, as adjusted for the
three and nine months ended September 30, 2001 is as follows (in thousands,
except per share amounts):
Per share
For the three months ended: ------------
Net loss, as reported $ (85,088) $ (1.71)
Add back goodwill amortization 106 -
Add back amortization on broadcast licenses 79 -
Adjust amortization for a change in the useful
life of DBS rights assets 17,495 .31
----------- -----------
Net loss, as adjusted $ (67,408) $ (1.40)
=========== ===========
For the nine months ended:
Net loss, as reported $ (214,135) $ (4.41)
Add back goodwill amortization 309 .01
Add back amortization on broadcast licenses 283 .01
Adjust amortization for a change in the useful
life of DBS rights assets 50,929 .91
----------- -----------
Net loss, as adjusted $ (162,614) $ (3.48)
=========== ===========
10
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Aggregate amortization expense for the nine months ended September 30, 2002
and 2001 was $111.0 million and $183.6 million, respectively. Aggregate
amortization expense for 2001 was $245.4 million. The estimated aggregate amount
of amortization expense for the remainder of 2002 and for each of the next five
years thereafter is $36.6 million, $128.0 million, $128.0 million, $126.0
million, $123.4 million, and $122.7 million, respectively.
5. Common Stock
The number of shares of PCC's Class A common stock at September 30, 2002
was 51,588,777 issued and 50,383,405 outstanding, and at December 31, 2001 was
49,995,099 issued and 49,991,463 outstanding. Class A shares issued during the
nine months ended September 30, 2002 were as follows:
Payment for dividends on preferred stocks 576,394
Conversion of Series C preferred stock (see note 7) 570,410
Employee benefit and award plans, net 446,874
Commencing in July 2002 and through September 30, 2002, PSC purchased an
aggregate of 1,125,200 shares of PCC's Class A common stock for approximately
$1.0 million. For PCC's consolidated financial statements, these shares
purchased by PSC are reported as treasury shares. Since September 30, 2002, PSC
has purchased an additional 251,700 shares in the aggregate for $353 thousand.
PSC's current plans are to hold onto all of the shares purchased.
No dividends were declared or paid for common stocks during the nine months
ended September 30, 2002. In October 2002, PCC issued 116,164 shares of Class A
in connection with employee benefit plans.
At our annual stockholders' meeting held in May 2002, stockholders
authorized the board of directors to effect a reverse stock split of PCC's
issued and outstanding Class A and B common stocks at any time prior to the next
annual stockholders' meeting. The reverse split would be based upon a
determination by the board of directors that the reverse stock split and reverse
stock split ratio are in our and the stockholders' best interests. The ratio of
the reverse split would be not less than 1 for 2 and not more than 1 for 10.
Also at the annual stockholders' meeting, stockholders approved amendments to
certain of our employee benefit plans. The 1996 stock option plan was amended to
increase the number of shares of Class A that may be issued under the plan to
10.0 million from 6.0 million and to increase the maximum number of shares of
Class A that may be issued under options granted to any employee under the plan
to 2.0 million from 1.5 million. The restricted stock plan was amended to
increase the number of shares of Class A that may be issued under the plan to
2.0 million from 1.5 million.
11
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Changes in Other Stockholders' Equity
The change in other stockholders' equity from December 31, 2001 to
September 30, 2002 consisted of (in thousands):
Net loss $ (99,543)
Increase (decrease) to additional paid in capital for:
Repurchases of preferred stock at amounts less than
carrying value (see note 7) 161,579
Common stock issued in the conversion of Series C
preferred stock (see note 7) 7,723
Common stock issued as payment for preferred stock
dividends 5,201
Common stock issued for employee plans and awards 1,746
Deemed dividends (see note 7), dividends accrued, and
accretion associated with preferred stocks (24,935)
Beneficial conversion feature recovered with preferred
stock redeemed (see note 7) (2,441)
Preferred stock original issue costs written off for
preferred stock purchased and converted (2,690)
Net change in accumulated other comprehensive loss (1,099)
Common stock repurchased and held in treasury (1,647)
7. Redeemable Preferred Stocks
The aggregate carrying amount of redeemable preferred stocks at September
30, 2002 of $298.7 million consisted of $92.7 million in 12-3/4% series of PSC
and $206.0 million in preferred stocks of PCC. The aggregate carrying amount at
September 30, 2002 decreased by $173.3 million from that at December 31, 2001.
This decrease consisted of:
Par value of shares repurchased or converted $ (183,259)
Shares redeemed (5,707)
Preferred stock original issue costs written off for
preferred stock purchased and converted 2,690
Dividends paid with common stock (5,207)
Dividends accrued on shares held by nonaffiliates and
accretion 26,507
Dividends paid with cash (10)
Dividends eliminated in association with shares repurchased
and converted (8,358)
Additionally, we paid dividends of $11.0 million for the 12-3/4% series in like
kind shares of the same amount.
The number of shares of preferred stock issued and outstanding at September
30, 2002 and December 31, 2001, respectively, was: 84,938 and 172,952 of 12-3/4%
Series of PSC; 1,808,114 and 2,650,300 of Series C; 12,500 of Series D at each
date; and 10,000 of Series E at each date. The net decrease in the number of
shares for the 12-3/4% series resulted from purchases by PCC of 99,041 shares
offset in part by the issuance of 11,027 shares in payment of the semiannual
dividend of $11.0 million declared and paid in January 2002. The decrease in
Series C was due to the conversion in May 2002 of 67,504 shares into shares of
Class A common stock and purchases by PCC in July 2002 of 774,682 shares. Annual
dividends on Series D and E of $500 thousand and $400 thousand, respectively,
were paid in January 2002 with an aggregate of 87,138 shares of PCC's Class A
common stock. In January 2002, the regularly scheduled quarterly dividend for
Series C of $4.3 million was paid with 489,256 shares of PCC's Class A common
stock.
12
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All 5,707 outstanding shares of Series B were redeemed in March 2002 at a
redemption price of $1,000 per share, plus accrued and unpaid dividends to the
date of redemption of $10 thousand. The redemption price and accrued dividends
were paid in cash. As a result of the redemption, $2.4 million of the beneficial
conversion feature previously recognized for this series when it was issued was
recovered as a negative deemed dividend. This deemed dividend was included in
determining the net loss applicable to common shares in 2002.
In May 2002, 67,504 shares of Series C with a carrying amount of $6.9
million, including accrued dividends of $110 thousand, were converted into
570,410 shares of Class A common stock. The conversion rate used exceeded the
conversion rate specified in the series' certificate of designation. As a
result, $869 thousand of the consideration paid in the conversion was determined
to be an inducement to the holder of the Series C shares to convert and was
treated as a deemed dividend. This deemed dividend was included in determining
the net loss applicable to common shares for 2002. The original issue costs
associated with the shares converted of $216 thousand were also charged to
additional paid in capital.
From May 2002 through August 2002, PCC purchased in a series of negotiated
transactions with unaffiliated holders an aggregate 99,041 shares of the 12-3/4%
series with a carrying amount of $105.2 million, including accrued dividends of
$6.2 million, for $17.1 million. For our consolidated financial reporting
purposes, the shares purchased are considered to be constructively retired. The
differential between the carrying amount and the purchase price of $88.1 million
was recorded as an adjustment to additional paid in capital within stockholders'
equity. PCC's current plans are to hold onto all of the shares purchased.
In July 2002, in a series of negotiated transactions with unaffiliated
holders, PCC purchased 774,682 shares of Series C with a carrying amount of
$79.6 million, including accrued dividends of $2.1 million, for $6.1 million in
cash. The differential between the carrying amount and the purchase price of
$73.5 million was recorded as an adjustment to additional paid in capital within
stockholders' equity. The original issue costs associated with the shares
converted of $2.5 million were also charged to additional paid in capital.
At the discretion of our board of directors as permitted by the certificate
of designation for the Series C, we did not declare the scheduled quarterly
dividends payable April 30, 2002, July 31, 2002, and October 31, 2002 for this
series. The total amount of dividends in arrears on Series C through the most
recent dividend payable date was $8.8 million, at a rate of 6.5% per $100
liquidation preference value for each share outstanding. Dividends not declared
accumulate in arrears until later declared and paid. Dividends in arrears on
Series C accrue without interest. Unless full cumulative dividends in arrears
have been paid or set aside for payment, PCC, but not its subsidiaries, may not,
with certain exceptions, 1) declare, pay, or set aside amounts for payment of
future cash dividends or distributions, or 2) purchase, redeem, or otherwise
acquire for value any shares of its capital stock junior or on a parity with
Series C. Series D and E preferred stock are junior securities with respect to
Series C. As permitted in the certificate of designation, PCC has the option of
paying dividends declared on Series C in cash, shares of PCC's Class A common
stock, or a combination of both. Dividends declared on Series C in the past have
been paid with shares of the Class A common stock.
At the discretion of our board of directors as permitted by the certificate
of designation for the 12-3/4% series, we did not declare the scheduled
semiannual dividend payable July 1, 2002 for this series. Dividends declared on
and after July 1, 2002 are payable in cash. The amount of the dividends in
arrears that were payable to nonaffiliates was $5.4 million. Dividends not
declared or paid accumulate in arrears and incur interest at a rate of 14.75%
per year until later declared and paid. Unless full cumulative dividends in
arrears on the 12-3/4% series have been paid or set aside for payment, PSC may
not, with certain exceptions, 1) declare, pay, or set aside amounts for payment
of future cash dividends or distributions, or 2) purchase, redeem, or otherwise
acquire for value any shares of its capital stock junior to the 12-3/4% series.
The amount of interest accrued and unpaid through September 30, 2002 on
dividends in arrears that was payable to nonaffiliates was $199 thousand.
Despite the restrictions placed on PSC regarding cash dividend payments
discussed in the preceding paragraph, permissible means are available to
transfer funds to PCC while dividends on PSC's preferred stock are in arrears.
13
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long Term Debt
During the three months ended September 30, 2002, amounts borrowed by PM&C
under its revolving credit facility during the period were repaid during the
period. No principal amount was outstanding under the revolving credit facility
at September 30, 2002, compared to $80.0 million outstanding at December 31,
2001. Letters of credit outstanding under the revolving credit facility, which
reduce the availability thereunder, were $60.1 million at September 30, 2002 and
$63.2 million at December 31, 2001. At September 30, 2002, the commitment for
the revolving credit facility was permanently reduced by $8.4 million to $177.2
million as scheduled. The commitment for the revolving credit facility is
scheduled to be permanently reduced by another $8.4 million in December 2002.
Availability under the revolving credit facility at September 30, 2002 was
$116.9 million.
PM&C repaid $688 thousand of principal under PM&C's term loan facility
during the third quarter 2002, as scheduled, thereby reducing the total
principal amount outstanding thereunder to $270.2 million. The weighted average
variable rate of interest including applicable margins on principal amounts
outstanding under the term facility was 5.3% and 5.4% at September 30, 2002 and
December 31, 2001, respectively.
In June 2002, PM&C borrowed $63.2 million in incremental term loans under
its credit agreement. Principal amounts outstanding under the incremental term
loan facility are payable quarterly in increasing increments over the remaining
term of the facility that began September 30, 2002. All unpaid principal and
interest outstanding under the incremental term loans are due July 31, 2005.
Amounts repaid under the incremental term loan facility may not be reborrowed.
Margins on incremental term loans are 2.5% for base rates and 3.5% for LIBOR
rates. Interest on outstanding principal borrowed under base rates is due and
payable quarterly and interest on outstanding principal borrowed under LIBOR
rates is due and payable the earlier of the end of the contracted interest rate
period or three months. We repaid $158 thousand of principal during the third
quarter as scheduled, thereby reducing the total principal amount outstanding
thereunder to $63.0 million. We are scheduled to pay another $158 thousand of
principal in December 2002. Total annual repayments of principal scheduled over
the remaining term of the facility are $632 thousand in 2003, $16.3 million in
2004, and $45.9 million in 2005. The weighted average rate of interest including
applicable margins on principal amounts outstanding under the incremental loan
term facility at September 30, 2002 was 5.3%. There is no availability under the
incremental term loan facility.
In connection with the incremental term loan borrowed in June 2002, PM&C
entered into two additional interest rate cap agreements with the same financial
institution in August 2002. Each cap has a notional amount of $15.8 million. The
cap rate under one agreement is 9.00% and the cap rate under the other is 4.00%.
Both caps terminate September 2005. Payment under each cap is determined
quarterly based on the three month LIBOR rate in effect at the beginning of each
three month resetting period. Under these caps, we receive interest from the
contracting institution when the applicable market LIBOR rate exceeds the
applicable cap rate at each resetting date. The premium we paid to enter into
these agreements was not significant.
In July 2002, PSC purchased $17.1 million in maturity value of PM&C's
12-1/2% senior subordinated notes due July 2005 for $17.1 million in a
negotiated transaction with an unaffiliated holder. The carrying amount of the
notes at the date of purchase was $16.7 million, net of associated unamortized
discount and deferred financing fees. The notes were not cancelled but were
considered to be constructively retired for PSC's consolidated financial
statements. As a result, a loss of $262 thousand, net of income taxes of $160
thousand, was recognized and included in extraordinary net gain from
extinguishments of debt on the statement of operations and comprehensive loss.
In August 2002, PSC purchased $30.1 million in maturity value of its
13-1/2% senior subordinated discount notes due March 2007 for $7.9 million in
negotiated transactions with unaffiliated holders. The aggregate carrying amount
of the notes at their dates of purchase was $24.0 million, net of associated
unamortized discount and deferred financing fees. As a result, a gain of $10.0
million, net of income taxes of $6.1 million, was recognized and included in
extraordinary net gain from extinguishments of debt on the statement of
operations and comprehensive loss.
14
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Per Common Share Amounts
Within each respective period presented on the statements of operations and
comprehensive loss, basic and diluted per common share amounts were the same
because all potential common stock items were antidilutive and excluded from the
computation. The number of shares of potential common stock derived from
convertible preferred stocks, warrants, and stock options at September 30, 2002
and December 31, 2001 was 12.5 million at each date. Dividends and accretion on
preferred stock and deemed dividends associated with preferred stock issuances,
conversions, and redemptions adjust, as appropriate, net income or loss and
results from continuing operations to arrive at the amount applicable to common
shares. Such amounts for the periods presented were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------- ---------- --------- ----------
Accrued dividends on preferred stock $ 7,969 $ 10,728 $ 26,436 $ 31,521
Deemed dividends associated with preferred stock - - (1,572) -
Accretion on preferred stock 23 23 71 71
-------- --------- --------- ---------
$ 7,992 $ 10,751 $ 24,935 $ 31,592
======== ========= ========= =========
The amounts in the table exclude dividends associated with preferred stock held
by entities within the PCC consolidated group.
10. Supplemental Cash Flow Information
Significant noncash investing and financing activities were as follows (in
thousands):
Nine Months
Ended September 30,
2002 2001
----------- ----------
Preferred stock dividends, accrued and deemed, and accretion on preferred
stock $ 24,935 $ 31,592
Payment of 12-3/4% series preferred stock dividends in like kind shares 11,026 20,109
Payment of other preferred stock dividends with common stock 5,207 15,821
Common stock issued for employee benefit and award plans 1,750 4,101
NRTC patronage capital investment accrued 13,780 14,434
Net change in other comprehensive loss 1,099 11,976
Proceeds of debt borrowing withheld as collateral - 14,000
Beneficial conversion feature recovered in additional paid in capital in
association with preferred stock redeemed with common stock 2,441 -
Conversion of preferred stock into common stock 7,723 -
Preferred stock original issue costs written off for preferred stock
purchased and converted 2,690 -
Differential between cash purchase price and carrying amount of preferred
stock repurchased 161,579 -
11. Loss on Impairment of Marketable Securities
Based on the significance and duration of the loss in fair value, at June
30, 2002, we determined that our sole investment in marketable securities held
had incurred an other than temporary decline in fair market value. Accordingly,
we wrote down the cost basis in the marketable securities to their fair market
value at June 30, 2002 and charged earnings in the amount of $3.1 million. The
income tax benefit recorded in income taxes for continuing operations associated
with this charge was $1.2 million. Concurrently, we made a reclassification
adjustment to other comprehensive loss and other stockholder's equity at June
30, 2002 amounting to $1.9 million, net of income tax benefit of $1.2 million,
to remove all of the net unrealized losses on the marketable securities
15
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accumulated at that date that had been charged to earnings. The remaining
balance of this investment is not significant at September 30, 2002.
12. Income Taxes
At September 30, 2002, we recorded a valuation allowance of $20.0 million
against the net deferred income tax asset balance existing at September 30, 2002
because we believe at the present time that it is more likely than not that the
benefits of this net tax asset balance will not be realized. We charged income
taxes on the loss from continuing operations in the third quarter 2002 in the
amount of the valuation allowance. As a result of the valuation allowance
recorded, we had no income tax expense or benefit on the loss from continuing
operations for the three months ended September 30, 2002, and the effective
income tax rate on continuing operations for the nine months ended September 30,
2002 was lowered to 25.0%.
13. Discontinued Operations
We have entered into a definitive agreement to sell our Mobile, Alabama
broadcast television station to an unaffiliated party for $11.5 million in cash.
The sale is contingent upon conditions typical of sales of this nature,
including final approval by the Federal Communications Commission of the
transfer of the station's broadcast license to the buyer. It is anticipated that
the sale will occur in the first quarter of 2003. We have classified the
operations of this station as discontinued for all periods presented.
In August 2002, we completed the transfer of the subscribers and equipment
inventory for our Pegasus Express two way satellite internet access business
that were sold to an unaffiliated party. We anticipate that the cash proceeds
from the sale of the subscribers will be about $1.5 million. The ultimate
proceeds will be based on the number of the transferred subscribers that
ultimately are authorized into the buyer's service no later than February 2003.
Our estimate of the ultimate proceeds factor in an estimate for subscribers that
may not be authorized into the buyer's service. We sold the equipment for $2.6
million cash. With the sale of the subscribers and equipment, we no longer
operate the Pegasus Express business and, accordingly, have classified this
business as discontinued for all periods presented.
Aggregate revenues and pretax loss of discontinued operations were as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- --------- ----------- -----------
Revenues $ 755 $ 641 $ 3,419 $ 808
Pretax income (loss) 938 (5,226) (3,981) (13,868)
Included in the pretax amount for the three and nine months ended 2002 is a
gain of $1.5 million for the Pegasus Express subscribers sold and within the
nine months 2002 a loss of $837 thousand on the Pegasus Express equipment
inventory sold. Also included in discontinued operations for the nine months
2002 is an aggregate loss of $847 thousand for other assets associated with the
Pegasus Express business that were written off because they had no use outside
of the business. Assets and liabilities associated with the broadcast station
are not significant to our financial position and are not shown separately on
the balance sheet, and there were no assets held subject to sale or related
liabilities for the Pegasus Express business at September 30, 2002.
14. Impairment of Programming Rights
In the third quarter 2002, we recognized an impairment loss of $1.4 million
associated with programming rights of our broadcast operations. This loss is
contained within other operating expenses on the statements of operations. The
fair value of the affected programming rights and the impairment and amount of
the loss were based upon the present value of the expected cash flows associated
with the related programming agreements that provide the rights.
16
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Industry Segments
Our only reportable segment at September 30, 2002 was the DBS business.
Information on DBS' revenue and measure of profit/loss and how these contribute
to our consolidated loss from continuing operations before income taxes for each
period reported is as presented on the statements of operations and
comprehensive loss. DBS derived all of its revenues from external customers for
each period presented. Identifiable total assets for DBS were approximately $1.8
billion at September 30, 2002, which did not change significantly from the total
DBS assets at December 31, 2001.
16. Commitments and Contingent Liabilities
Legal Matters
DIRECTV Litigation:
National Rural Telecommunications Cooperative
Our subsidiaries, Pegasus Satellite Television ("PST") and Golden Sky
Systems ("GSS"), are affiliates of the National Rural Telecommunications
Cooperative ("NRTC") that participate through agreements in the NRTC's direct
broadcast satellite program. "DIRECTV" refers to the programming services
provided by DirecTV, Inc. ("DirecTV").
On June 3, 1999, the NRTC filed a lawsuit in United States District Court,
Central District of California against DirecTV seeking a court order to enforce
the NRTC's contractual rights to obtain from DirecTV certain premium programming
formerly distributed by United States Satellite Broadcasting Company, Inc. for
exclusive distribution by the NRTC's members and affiliates in their rural
markets. On July 22, 1999, DirecTV filed a counterclaim seeking judicial
clarification of certain provisions of DirecTV's contract with the NRTC. As part
of the counterclaim, DirecTV is seeking a declaratory judgment that the term of
the NRTC's agreement with DirecTV is measured only by the orbital life of DBS-1,
the first DIRECTV satellite launched, and not by the orbital lives of the other
DIRECTV satellites at the 101(degree)W orbital location. While the NRTC has a
right of first refusal to receive certain services from any successor DIRECTV
satellite, the scope and terms of this right of first refusal are also being
disputed in the litigation, as discussed below. If DirecTV were to prevail on
its counterclaim, any failure of DBS-1 could have a material adverse effect on
our DIRECTV rights. On August 26, 1999, the NRTC filed a separate lawsuit in
federal court against DirecTV claiming that DirecTV had failed to provide to the
NRTC its share of launch fees and other benefits that DirecTV and its affiliates
have received relating to programming and other services. On November 15, 1999,
the court granted a motion by DirecTV and dismissed the portion of this lawsuit
asserting tort claims, but left in place the remaining claims asserted by the
NRTC. The NRTC and DirecTV have also filed indemnity claims against one another
that pertain to the alleged obligation, if any, of the NRTC to indemnify DirecTV
for costs incurred in various lawsuits described herein. These claims have been
severed from the other claims in the case and will be tried separately. On July
3, 2002, the court granted a motion for summary judgment filed by DirecTV,
holding that NRTC is liable to indemnify DirecTV for the costs of defense and
liabilities that DirecTV incurs in a patent case filed by Pegasus Development
Corporation and Personalized Media Communications, L.L.C., which is more fully
described below.
17
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exclusive license include services distributed to consumers using certain Ku
band BSS frequencies and Ka band frequencies, including frequencies licensed to
affiliates of Hughes Electronics and used by DirecTV to provide services to its
subscribers.
Pegasus Satellite Television and Golden Sky Systems
On January 10, 2000, PST and GSS filed a class action lawsuit in federal
court in Los Angeles against DirecTV as representatives of a proposed class that
would include all members and affiliates of the NRTC that are distributors of
DIRECTV. The complaint contained causes of action for various torts, common
counts and declaratory relief based on DirecTV's failure to provide the NRTC
with certain premium programming, and on DirecTV's position with respect to
launch fees and other benefits, term and right of first refusal. The complaint
sought monetary damages and a court order regarding the rights of the NRTC and
its members and affiliates. On February 10, 2000, PST and GSS filed an amended
complaint which added new tort claims against DirecTV for interference with
PST's and GSS' relationships with manufacturers, distributors and dealers of
direct broadcast satellite equipment. The class action allegations PST and GSS
previously filed were withdrawn to allow a new class action to be filed on
behalf of the members and affiliates of the NRTC. The new class action was filed
on February 29, 2000. The court certified the plaintiff's class on December 28,
2000. On March 9, 2001, DirecTV filed a counterclaim against PST and GSS, as
well as the class members. In the counterclaim, DirecTV seeks two claims for
relief: (i) a declaratory judgment that PST and GSS have no right of first
refusal in their agreements with the NRTC to have DirecTV provide any services
after the expiration of the term of these agreements, and (ii) an order that
DBS-1 is the satellite (and the only satellite) that measures the term of PST's
and GSS' agreements with the NRTC.
On June 22, 2001, DirecTV brought suit against PST and GSS in Los Angeles
County Superior Court for breach of contract and common counts. The lawsuit
pertains to the seamless marketing agreement dated August 9, 2000, as amended,
between DirecTV and PST and GSS. On July 13, 2001, PST and GSS terminated the
seamless marketing agreement. On July 16, 2001, PST and GSS filed a cross
complaint against DirecTV alleging, among other things, that (i) DirecTV has
breached the seamless marketing agreement, and (ii) DirecTV has engaged in
unlawful and/or unfair business practices, as defined in Section 17200, et seq.
of California Business and Professions Code. This suit has since been moved to
the United States District Court, Central District of California. On September
16, 2002, PST and GSS filed first amended counterclaims against DirecTV. Among
other things, the first amended counterclaims added claims for (i) rescission of
the seamless marketing agreement on the ground of fraudulent inducement, (ii)
specific performance of audit rights, and (iii) punitive damages on the breach
of the implied covenant of good faith claim. In addition, the first amended
counterclaims deleted the business and professions code claim and the claims for
tortuous interference that were alleged in the initial cross complaint. On
November 5, 2002 the court granted DirecTV's motion to dismiss (i) the specific
performance claim, and (ii) the punitive damages allegations on the breach of
the implied covenant of good faith claim. The court denied DirecTV's motion to
dismiss the implied covenant of good faith claim in its entirety.
DirecTV filed four summary judgment motions on September 11, 2002 against
NRTC, the class members, and PST and GSS on a variety of issues in the case. The
motions cover a broad range of claims in the case, including (i) the term of the
agreement between NRTC and DirecTV, (ii) the right of first refusal as it
relates to PST and GSS, (iii) the right to distribute the premiums, and (iv)
damages relating to the premiums, launch fees and advanced services claims. The
court has set a hearing date of December 16, 2002 for the summary judgment
motions.
Both of the NRTC's lawsuits against DirecTV have been consolidated for
discovery and pretrial purposes. All five lawsuits discussed above, including
both lawsuits brought by the NRTC, the class action, and PST's and GSS' lawsuit,
are pending before the same judge. The court has set a trial date of April 1,
2003, although, as noted above, it is not clear whether all the lawsuits will be
tried together.
18
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Patent Infringement Litigation:
On December 4, 2000, one of our subsidiaries, Pegasus Development
Corporation ("Pegasus Development"), and Personalized Media Communications,
L.L.C.("Personalized Media"), a company in which Pegasus Development has an
investment in and licensing arrangement with, filed a patent infringement
lawsuit in the United States District Court, District of Delaware against
DirecTV, Hughes Electronics Corporation, Thomson Consumer Electronics
("Thomson") and Philips Electronics North America Corporation. Pegasus
Development and Personalized Media are seeking injunctive relief and monetary
damages for the defendants' alleged patent infringement and unauthorized
manufacture, use, sale, offer to sell and importation of products, services, and
systems that fall within the scope of Personalized Media's portfolio of patented
media and communications technologies, of which Pegasus Development is an
exclusive licensee within a field of use. The technologies covered by Pegasus
Development's exclusive license include services distributed to consumers using
certain Ku band BSS frequencies and Ka band frequencies, including frequencies
licensed to affiliates of Hughes Electronics and used by DirecTV to provide
services to its subscribers. We are unable to predict the possible effects of
this litigation on our relationship with DirecTV.
DirecTV has also filed a counterclaim against Pegasus Development alleging
unfair competition under the federal Lanham Act. In a separate counterclaim,
DirecTV has alleged that both Pegasus Development's and Personalized Media's
patent infringement lawsuit constitutes "abuse of process." Those counterclaims
have since been dismissed by the court or voluntarily by DirecTV. Separately,
Thomson has filed counterclaims against Pegasus Development, Personalized Media,
Gemstar-TV Guide, Inc. (and two Gemstar-TV Guide affiliated companies, TVG-PMC,
Inc. and Starsight Telecast, Inc.), alleging violations of the federal Sherman
Act and California unfair competition law as a result of alleged licensing
practices.
In December 2001, one of our subsidiaries (along with DirectTV, Inc.,
Hughes Electronics Corporation, EchoStar Communications Corporation, and others)
was served with a complaint in patent infringement lawsuit by Broadcast
Innovations, L.L.C. ("Broadcast Innovations"). The precise nature of the
plaintiff's claims is not clear from the complaint. However, the plaintiff
claims in response to interrogatories that the satellite broadcast systems and
equipment of defendants, including those used for DIRECTV programming services,
infringe its patent. The defendants named in the complaint have denied the
allegation and have raised defenses of patent invalidity and noninfringement. In
October 2002, we entered into a settlement agreement with Broadcast Innovations
pursuant to which all claims and counterclaims between us and Broadcast
Innovations were dismissed with prejudice.
Other Legal Matters:
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability, if any, with respect to these claims will not
have a material adverse effect on our operations, cash flows, or financial
position.
Commitments
We negotiated a new agreement with our provider of communication services
commencing in the first quarter 2002. Under this new agreement, our annual
minimum commitment was reduced to $6.0 million over the three year term of the
agreement, from $7.0 million under the prior agreement.
In July 2002, we gave notice to terminate a contract for call center
services provided to us that will terminate at the end of 12 months from the
date of notice. We will pay a termination fee of $4.5 million at the agreement
termination date. We accrued a liability for this fee in the third quarter 2002
and charged DBS' other subscriber related expenses on the statement of
operations and comprehensive loss for this amount.
19
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" addresses financial accounting and reporting for
obligations associated with the retirement of tangible long lived assets and the
associated asset retirement costs. FAS 143 becomes effective for us on January
1, 2003. Entities are required to recognize the fair values of liabilities for
asset retirement obligations in the period in which the liabilities are
incurred. Liabilities recognized are to be added to the cost of the asset to
which they relate. Legal liabilities that exist on the date of adoption of FAS
143 are to be recognized on that date. We continue to study our long lived
assets to determine if any legal liabilities are connected with them that need
to be recognized upon the adoption of this statement.
Statement of Financial Accounting Standards No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" becomes effective for us on January 1, 2003. A principal provision
of FAS 145 is the reporting in the statement of operations of gains and losses
associated with extinguishments of debt. FAS 145 rescinds the present required
classification of extinguishments of debt as extraordinary. Instead, FAS 145
states that extinguishments of debt be considered for extraordinary treatment in
light of already established criteria used to determine whether events are
extraordinary. For an event to be extraordinary, the established criteria are
that it must be both unusual and infrequent. Once FAS 145 becomes effective, all
debt extinguishments classified as extraordinary in the statement of operations
issued prior to the effective date of FAS 145 that do not satisfy the criteria
for extraordinary treatment may not be reported as extraordinary in statements
of operations issued after that date. We have extinguished debt a number of
times in the past, and may do so in the future. Regarding our debt
extinguishments occurring prior to January 1, 2003 that are properly reported as
extraordinary under accounting standards in effect until that time, we expect
that they will not be events that qualify for extraordinary treatment after that
date. As a result, we believe that our extinguishments of debt reported as
extraordinary prior to January 1, 2003 will not be reported as extraordinary
after that date. Rather, these extinguishments will be reported as a component
of nonoperating gains and losses within continuing operations in the statement
of operations. We believe that extinguishments of debt occurring after that date
will be classified similarly. We do not expect such a change in classification
to have any effect on our operations, cash flows, financial position, or
covenants related to our existing credit agreement and note indentures.
Statement of Financial Accounting Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" becomes effective for us on January
1, 2003. FAS 146 requires companies to recognize costs associated with exit or
disposal activities, costs to terminate contracts that are not capital leases,
and costs to consolidate facilities or relocate employees when they are incurred
rather than at the date of a commitment to engage in these activities as
permitted under existing accounting standards. FAS 146 is to be applied
prospectively to the activities covered by the statement that are initiated
after December 31, 2002. We will apply the requirements of FAS 146 after its
effective date when we engage in any of the covered activities.
18. Related Party Transactions
PSC has an arrangement with W.W. Keen Butcher, certain entities controlled
by Mr. Butcher (the "KB Companies"), and the owner of a minority interest in the
KB Companies under which PSC agrees to provide and maintain cash collateral for
certain of the principal amount of bank loans loaned to these individuals and
entities. Mr. Butcher, the KB Companies, and the minority owner are required to
lend or contribute the proceeds of those bank loans to one or more of the KB
Companies in connection with the acquisition of television broadcast licenses
and the operation of television broadcast stations to be programmed by us
pursuant to local marketing and similar agreements. The maximum amount of
collateral to be provided and maintained under the arrangement was increased
from $8.0 million to $9.5 million in June 2002 in anticipation of the KB
Companies acquiring a 50% ownership interest from a third party with respect to
an entity which holds a television license and which the KB Companies already
held the other 50% ownership interest. W.W. Keen Butcher is the stepfather of
Marshall W. Pagon, chairman of the board of directors and chief executive
officer of PSC and PCC.
20
PEGASUS COMMUNICATIONS CORPORATION
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 our beliefs, as well as assumptions made by and
information currently available to us. When used in this report, the words
"estimate," "project," "believe," "anticipate," "hope," "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; catastrophic events, including acts of terrorism;
relationships with and events affecting other parties like DirecTV, Inc. and the
National Rural Telecommunications Cooperative; litigation with DirecTV; the
proposed merger of Hughes Electronics Corporation with EchoStar Communications
Corporation or the acquisition by a third party of the DirecTV business and the
related confusion in the marketplace; demographic changes; existing government
regulations and changes in, or the failure to comply with government
regulations; competition, including the provision of local channels by a
competing direct broadcast satellite provider in markets where DirecTV does not
offer local channels and deceptive sales practices by agents of the competing
direct broadcast satellite provider; the loss of any significant numbers of
subscribers or viewers; changes in business strategy or development plans; the
cost of pursuing new business initiatives; an expansion of land based
communications systems; technological developments and difficulties; the ability
to obtain intellectual property licenses and to avoid committing intellectual
property infringement; the ability to attract and retain qualified personnel;
our significant indebtedness; the availability and terms of capital to fund the
expansion of our businesses; and other factors referenced in this report and in
reports and registration statements filed from time to time with the Securities
and Exchange Commission, including our Annual Report on Form 10-K for the fiscal
year ended December 31, 2001. Readers are cautioned not to place undue reliance
on these forward looking statements, which speak only as of the date of this
report. We do not undertake any obligation to publicly release any revisions to
these forward looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The following discussion of our financial condition, results of operations,
and liquidity and capital resources should be read in conjunction with the
consolidated financial statements and related notes herein.
General
"We," "us," and "our" refer to Pegasus Communications Corporation together
with its subsidiaries. "PCC" refers to Pegasus Communications Corporation
individually as a separate entity. "PSC" refers to Pegasus Satellite
Communications, Inc., a subsidiary of PCC. "PM&C" refers to Pegasus Media &
Communications, Inc., a subsidiary of PSC. "DBS" refers to direct broadcast
satellite. Other terms used are defined as needed where they first appear.
Approximately 96% of our consolidated revenues and 87% of the expenses
within consolidated loss from operations for the nine months ended September 30,
2002, and 83% of our assets at September 30, 2002 were associated with our DBS
business that provides multichannel DIRECTV(R) audio and video services as an
independent DIRECTV provider. DIRECTV is a service of DirectTV, Inc.
("DirecTV"). We may be adversely affected by any material adverse changes in the
assets, financial condition, programming, technological capabilities, or
services of DirecTV. Separately, we are involved in litigation with DirecTV. An
outcome in this litigation that is unfavorable to us could have a material
adverse effect on our DBS business. See Note 16 of the Notes to Consolidated
Financial Statements for information on the litigation.
Hughes Electronics Corporation, which is the parent company of DirecTV, and
EchoStar Communications Corporation, which owns the only other nationally
branded DBS programming service in the United States, have agreed to merge,
subject to regulatory approval. However, recently the Federal Communications
Commission declined to approve the merger and the Department of Justice along
with 23 states filed a lawsuit to block the merger. At this time, we are unable
to predict the effect of our litigation with DirecTV on our financial position,
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PEGASUS COMMUNICATIONS CORPORATION
results of operations, cash flows, and future operations. We also do not know at
this time whether EchoStar and Hughes will continue to seek regulatory approval
for their proposed merger or not, and the resulting impact thereof.
Results of Operations
In this section, amounts and changes specified are for the three and nine
months ended September 30, 2002 compared to the corresponding periods of 2001,
unless indicated otherwise. With respect to our income or loss from operations,
we focus on our DBS business, as this is our only significant business.
DBS Business
Revenues:
Revenues increased $9.6 million to $216.4 million and $28.9 million to
$647.5 million for the three and nine months, respectively, primarily due to the
rate increase for our core packages that we instituted in the fourth quarter
2001 and, effective July 1, 2002, a royalty fee that passes on to subscribers a
portion of the royalty costs charged to us in providing DIRECTV service. Revenue
increases were partially offset by revenue decreases from a reduction in the
number of subscribers, a reduction in on demand viewing, and subscribers
downgrading to a less expensive mix of programming offered by us primarily, we
believe, as the result of the effect of general economic conditions on our
subscribers.
Direct Operating Expenses:
Programming expense increased $4.9 million to $94.6 million and $21.3
million to $286.9 million for the three and nine months, respectively, primarily
due to a broad rate increase commencing January 2002 and a targeted increase to
certain programming rates commencing August 2002 charged to us by the National
Rural Telecommunications Cooperative ("NRTC"), through which we receive our
DIRECTV programming. Also contributing to the increases was our lowered
expectations of the amount of patronage that we are to receive from the NRTC for
2002 compared to that received in 2001. Patronage from the NRTC reduces the
programming expense we incur. Increased costs incurred by the NRTC in 2002
combined with our loss of subscribers in 2002 (discussed below) have factored
into our lowered patronage expectations. The increases in programming expense
were offset in part by the loss of subscribers in 2002.
Other subscriber related expenses increased $1.2 million to $51.5 million
and $1.3 million to $152.4 million for the three and nine months, respectively,
primarily due to a one time contract termination fee of $4.5 million, offset in
part by a decrease in bad debt expense. We accrued a liability in the third
quarter 2002 for the termination fee connected with a contract for call center
services for which we gave notice of termination during the quarter. The
decrease in bad debt expense was mainly due to our focus in 2002 on improving
the quality of the subscriber base that we obtain and retain over the quality of
the subscriber base that existed prior to 2002.
Operating Margins:
Our operating margin is the difference between net revenues and direct
operating expenses (excluding depreciation and amortization). Operating margins
for the three and nine months ended September 30, 2002 and 2001 were $70.2
million and $66.8 million, and $208.2 million and $202.0 million, respectively.
The operating margin ratio percent for the respective periods ended September
30, 2002 and 2001 was 32.5% and 32.3% for the three months and 32.2% and 32.6%
for the nine months. Excluding the one time contract termination fee of $4.5
million referred to above, the operating margin for the three and nine months
ended September 30, 2002 was $74.7 million and $212.7 million, respectively, and
the operating margin ratio for the three and nine months ended September 30,
2002 were 34.5% and 32.9%, respectively. The increase in the current quarter
operating margin ratio, as adjusted to exclude the contract termination fee,
reflects the revenue rate increase and royalty fee pass through discussed under
revenues above, and the decrease in bad debt expense discussed under direct
operating expenses above. The increase in the current quarter adjusted ratio had
an incremental effect in increasing the current nine month ratio, as adjusted to
exclude the contract termination fee.
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PEGASUS COMMUNICATIONS CORPORATION
Other Operating Expenses:
Promotion and incentives and advertising and selling costs constitute our
expensed subscriber acquisition costs ("SAC"). Equipment and installation
subsidies and commissions form a substantial portion of promotions and
incentives and advertising and selling, respectively. Subsidies and commissions
are direct and incremental costs incurred with respect to our DIRECTV
subscription plans. We incur subsidies and commissions only when subscribers are
added. We are able to defer subsidies and commissions for plans that have
minimum service commitment periods and early termination fees, with amounts
deferred not to exceed the amount of the termination fees. Subsidies and
commissions deferred are amortized over the 12 month commitment period to which
the termination fees apply and charged to amortization expense. Also, we are
able to capitalize equipment subsidies as fixed assets under our subscription
plans in which we retain or take title to the equipment delivered to
subscribers. Equipment subsidies capitalized are depreciated over their
estimated useful lives of three years and charged to depreciation expense.
Subsidies and commissions that are not deferred or capitalized are expensed as
promotion and incentives expense and advertising and selling expense,
respectively.
Gross SAC costs decreased by $14.5 million to $27.5 million and $70.6
million to $78.1 million for the three and nine months, respectively, primarily
due to reduced gross subscriber additions this year compared to last year.
Additionally, commissions for the nine months ended September 30, 2001 were
higher due to amounts incurred under the seamless marketing agreement with
DirecTV that was in effect during 2001. That agreement was terminated in July
2001, and is the subject of litigation. See Note 16 of the Notes to Consolidated
Financial Statements for information on the litigation.
SAC costs deferred increased $297 thousand to $7.0 million and $15.8
million to $24.3 million for the three and nine months, respectively. The
increase for the nine months was primarily due to substantially all of the
subscription plans sold through our controlled channels in 2002 containing
provisions, as described above, that enabled us to defer costs, whereas for
2001, plans with such provisions principally commenced in the third quarter
2001. Our controlled channels consist of our independent dealer and distributor
network and direct sales channels, which are our predominant sales channels. SAC
costs capitalized increased $3.3 million to $6.7 million and $10.5 million to
$20.1 million for the three and nine months, respectively, primarily due to a
greater number of plans in place in 2002 than 2001 under which equipment was
eligible to be capitalized.
Primarily as a result of the reduced subscriber additions and increased
amounts deferred and capitalized noted above, aggregate promotions and
incentives and advertising and selling expenses decreased $18.1 million to $13.8
million and $96.9 million to $33.7 million for the three and nine months,
respectively. Also contributing to a decrease in advertising and selling
expenses was a reduction in advertising expenses of $8.2 million primarily due
to a focused cost reduction initiative. Amounts we expend for advertising are
discretionary on our part.
General and administrative expenses decreased $2.5 million to $6.2 million
and $5.9 million to $21.0 million for the three and nine months, respectively,
due to a broad based cost reduction effort that we have undertaken in 2002.
Depreciation and amortization decreased $20.7 million to $43.0 million and
$65.8 million to $123.9 million for the three and nine months, respectively,
primarily due to our adoption in first quarter 2002 of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" in its
entirety on January 1, 2002. In accordance with FAS 142, we reassessed the
estimated lives of our intangible assets. We believe that the estimated
remaining useful life of our DBS rights assets should be based on the estimated
useful lives of the satellites at the 101(Degree) west longitude orbital
location available to provide DirecTV services under the NRTC-DirecTV contract.
The contract sets forth the terms and conditions under which the lives of those
satellites are deemed to expire, based on fuel levels and transponder
functionality. We estimate that the useful life of the DirecTV satellite
resources provided under the contract (without regard to renewal rights) expires
in November 2016. Because the cash flows for all of our DBS rights assets
emanate from the same source, we believe that it is appropriate for all of the
estimated useful lives of our DBS rights assets to end at the same time. Prior
to the adoption of FAS 142, our DBS rights assets had estimated useful lives of
10 years from the date we obtained the rights. Linking the lives of our DBS
rights assets in such fashion extended the amortization period for the
unamortized carrying amount of the assets to remaining lives of approximately 15
years from January 1, 2002. The
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PEGASUS COMMUNICATIONS CORPORATION
lives of our DBS rights are subject to litigation. See Note 16 of the Notes to
Consolidated Financial Statements for information on the litigation.
Included in depreciation and amortization for the nine months ended
September 30, 2002 and 2001 was aggregate depreciation and amortization of
promotions and incentives costs capitalized or deferred and advertising and
selling costs deferred of $32.2 million and $3.6 million, respectively. The
difference is due to the increased amount of costs deferred and capitalized in
the current year, as discussed above.
Subscribers:
Our number of subscribers at September 30, 2002 was 1,341,000. We have
experienced a net reduction in the number of subscribers in the nine months
ended September 30, 2002 as the number of subscribers that have churned exceeded
the number of subscribers that we have added by approximately 40,000. This net
decrease excludes the one time adjustment to decrease our subscriber count that
was made and reported in the first quarter 2002 of 138,000. We believe that the
reasons for the net 40,000 decrease are: 1) our focus on enrolling more
creditworthy subscribers; 2) competition from digital cable providers and a
competing direct broadcast satellite provider in the territories we serve,
including the provision of local channels by this competing direct broadcast
satellite provider in several markets where DirecTV does not offer local
channels; 3) our service becoming less affordable as a result of our royalty
cost pass through to subscribers; 4) the effect of general economic conditions
on our subscribers and potential subscribers; 5) deceptive sales practices by
agents of the competing direct broadcast satellite provider; 6) the departure of
subscribers due to the effect that the replacement of DIRECTV system access
cards had on subscribers that had been pirating a portion of their services; and
7) a reduction in the number of new subscribers we obtain from DirecTV's
national retail chains.
We will continue to face intensive competition from other providers for the
foreseeable future, most notably as a result of the local into local programming
provided by the competing direct broadcast satellite provider in certain markets
where DirecTV does not offer such programming. We believe that the deceptive
sales practices by agents of the competing direct broadcast satellite provider
may subside as a result of the aforementioned regulatory rulings surrounding the
proposed EchoStar and Hughes merger, although the practices have continued into
the fourth quarter. For the foreseeable future, we expect to continue to see a
decrease in subscribers obtained from DirecTV's national retail chains.
Reduction in the number of subscribers from national retail chains under
arrangements directly with DirecTV results from efforts by DirecTV to minimize
certain subscriber acquisition costs that they have paid to national retail
chains for their enrollment of subscribers who reside in our exclusive
territories.
We will continue to focus on adding high quality, creditworthy subscribers.
Our subscriber acquisition efforts in 2002 and beyond now include: 1) the
diversification of our sales and distribution channels; 2) the alignment of
channel economics more closely to expected quality and longevity of subscribers;
and 3) the refinement and expansion of our offers and promotions to consumers.
Our subscriber screening policies may generate a lesser number of subscriber
additions, but we expect that the subscribers added will be of a higher quality.
We expect that this will have an immediate favorable impact on our cash flows
due to a reduction in SAC costs. We also believe that this will have a longer
term favorable impact on our cash flows due to an overall extension of
subscriber lives, thereby leading to a more favorable churn experience. We
manage our subscriber base to maximize cash flow generation. To the extent that
net subscriber reductions resulting from our recent churn experience continue
and unfavorably impact our cash flow generation, our subscriber retention
efforts and investments will be increased accordingly. We believe that net
reductions in our number of subscribers will not have a significant effect on
our operating margins for 2002.
Other Statement of Operations and Comprehensive Loss Items
For the three and nine months ended September 30, 2002 and 2001, our other
businesses primarily consisted of our continuing broadcast operations. Our
Pegasus Express business had been included with our other businesses until the
second quarter 2002 when we first reported the business as discontinued for all
periods presented in our statements of operations and comprehensive loss. The
discontinued Pegasus Express business is discussed below. The continuing
broadcast operations had revenues for the respective periods ended September 30,
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PEGASUS COMMUNICATIONS CORPORATION
2002 and 2001 of $9.4 million and $7.8 million for the three months and $25.7
million and $24.6 million for the nine months. Results from continuing
operations for the respective periods ended September 30, 2002 and 2001 were
income of $409 thousand and loss of $1.6 million for the three months and losses
of $555 thousand and $3.1 million for the nine months. We provide this
information with respect to the broadcast operations for context purposes only,
for we believe that these operations are not significant relative to the overall
scope and understanding of our operations.
Corporate depreciation and amortization increased $7.5 million to $8.0
million and $22.7 million to $23.9 million for the three and nine months ended,
respectively, due to amortization that commenced in 2002 associated with certain
licenses held by our subsidiary Pegasus Development Corporation.
Other operating expenses, net primarily consisted of amounts incurred in
our litigation with DirecTV for the respective periods ended September 30, 2002
and 2001 of $3.4 million and $4.6 million for the three months and $10.1 million
and $14.7 million for the nine months.
Interest expense increased $3.9 million to $36.5 million and $7.1 million
to $108.9 million for the three and nine months, respectively. The increase for
the three months was primarily due to: 1) $4.9 million for PSC's 11-1/4% notes
issued in December 2001 and 2) $867 thousand for increased interest incurred
with respect to our swap instruments. The increase for the three months was
offset in part by $2.2 million for lower average amounts outstanding at lower
average variable rates of interest under PM&C's term and revolving credit
facilities in 2002 versus 2001. The increase for the nine months was primarily
for the same reasons as for the three months, amounting to $14.7 million and
$2.2 million for 1) and 2) above, respectively, plus $1.3 million for
incremental accretion of the discount on our 13-1/2% senior discount notes and
$1.5 million in increased amortization of deferred financing fees resulting from
additional fees associated with debt added since September 30, 2001. The
increase for the nine months was offset in part by $3.5 million for repayment of
all principal amounts outstanding under Golden Sky Systems' credit facility in
June 2001 with the concurrent termination of the facility and $8.9 million for
lower average amounts outstanding at lower average variable rates of interest
under PM&C's term and revolving credit facilities in 2002 versus 2001.
Borrowings under our credit facilities are generally subject to short term LIBOR
rates that vary with market conditions. The interest we have incurred in 2002 on
these borrowings has benefited from relatively low market LIBOR rates available
throughout 2002. We have swap instruments that exchange the market LIBOR rates
incurred on our credit facilities based on an aggregate notional amount of $72.1
million for fixed rates of interest specified in the swap contracts. The purpose
of the swaps is to protect us from an increase in market LIBOR rates above the
contracted fixed rates. Since our swaps are a hedge against rising interest
rates, we pay additional interest when the applicable market LIBOR rates are
less than the fixed rates. The applicable LIBOR rates have been less than the
related fixed swap rates for all of 2002. As a result, we incurred additional
cash interest expense of $2.6 million in the nine months ended September 30,
2002 for the difference between the market rates and the fixed rates.
The decrease in interest income for the nine months of $3.9 million to $663
thousand was primarily due to reduced cash amounts available for earning
interest income and much lower interest rates available during 2002 compared to
2001.
Based on the significance and duration of the loss in fair value, at June
30, 2002, we determined that our sole investment in marketable securities held
had incurred an other than temporary decline in fair market value. Accordingly,
we wrote down the cost basis in the marketable securities to their fair market
value at June 30, 2002 and charged earnings in the amount of $3.1 million for
the impairment loss realized. We had incurred an other than temporary decline in
fair market value in this investment in the third quarter 2001 for which we
realized an impairment loss of $34.2 million.
For other nonoperating income/expense, net, for the three months ended
September 2002 and 2001 we had income of $940 thousand and an expense of $2.6
million, respectively, and for the nine months ended September 30, 2002 and 2001
we had income of $2.2 million and an expense of $6.3 million, respectively. The
differences in the comparable periods year over year were primarily due to the
increase in the fair value of our interest rate instruments for the three and
nine months 2002 of $1.1 million and $2.3 million, respectively, compared to a
decrease in the fair value of these instruments for the three and nine months
2001 of $1.7 million and $4.5 million,
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PEGASUS COMMUNICATIONS CORPORATION
respectively. The fair values of our interest rate instruments are based on the
amounts that the related contracts could be settled at on any designated day, as
computed by the institutions that are party to the contracts. No cash is
exchanged on these assumed settlement dates, but we record gains for increases
and losses for decreases in fair values between assumed settlement dates, which
occur on each calendar quarter end month.
Equity in earnings of affiliates decreased $13.7 million to $549 thousand
for the nine months because the prior year included gain on sales of licenses
made by one of our investees.
We had no income tax expense or benefit on the loss from continuing
operations for the three months ended September 2002 compared to an income tax
benefit of $38.0 million in the corresponding prior year period. We had an
income tax benefit of $35.7 million on the loss from continuing operations for
the nine months ended September 30, 2002 compared to a benefit of $104.0 million
in the corresponding prior year period. The decreases in the current year
periods were due to lower pretax losses in the current year periods and a
valuation allowance of $20.0 million recorded in the third quarter 2002 against
the net deferred income tax asset balance existing at September 30, 2002. We
recorded the valuation allowance and charged income taxes on the loss from
continuing operations in the same amount because we believe at the present time
that it is more likely than not that the benefits of this net tax asset balance
will not be realized. The effect of the valuation allowance lowered our
effective income tax rate on continuing operations to 25.0% for the nine months
ended September 30, 2002.
We have entered into a definitive agreement to sell our Mobile, Alabama
broadcast television station to an unaffiliated party for $11.5 million in cash.
The sale is contingent upon conditions typical of sales of this nature,
including final approval by the Federal Communications Commission of the
transfer of the station's broadcast license to the buyer. It is anticipated that
the sale will occur in the first quarter of 2003. We have classified the
operations of this station as discontinued for all periods presented. In August
2002, we completed the transfer of the subscribers and equipment inventory for
our Pegasus Express two way satellite internet access business that were sold to
an unaffiliated party. We anticipate that the cash proceeds from the sale of the
subscribers will be about $1.5 million. The ultimate proceeds will be based on
the number of the transferred subscribers that ultimately are authorized into
the buyer's service no later than February 2003. Our estimate of the ultimate
proceeds factor in an estimate for subscribers that may not be authorized into
the buyer's service. We sold the equipment for $2.6 million cash. With the sale
of the subscribers and equipment, we no longer operate the Pegasus Express
business and, accordingly, have classified this business as discontinued for all
periods presented. Aggregate revenues and pretax loss of discontinued operations
were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- --------- ----------- ----------
Revenues $ 755 $ 641 $ 3,419 $ 808
Pretax income (loss) 938 (5,226) (3,981) (13,868)
Included in the pretax amount for the three and nine months ended 2002 is a
gain of $1.5 million for the Pegasus Express subscribers sold and within the
nine months 2002 a loss of $837 thousand on the Pegasus Express equipment
inventory sold. Also included in discontinued operations for the nine months
2002 is an aggregate loss of $847 thousand for other assets associated with the
Pegasus Express business that were written off because they had no use outside
of the business.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 143 "Accounting for Asset
Retirement Obligations" addresses financial accounting and reporting for
obligations associated with the retirement of tangible long lived assets and the
associated asset retirement costs. FAS 143 becomes effective for us on January
1, 2003. Entities are required to recognize the fair values of liabilities for
asset retirement obligations in the period in which the liabilities are
incurred. Liabilities recognized are to be added to the cost of the asset to
which they relate. Legal liabilities that exist on the date of adoption of FAS
143 are to be recognized on that date. We continue to study our long lived
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PEGASUS COMMUNICATIONS CORPORATION
assets to determine if any legal liabilities are connected with them that need
to be recognized upon the adoption of this statement.
Statement of Financial Accounting Standards No. 145 "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" becomes effective for us on January 1, 2003. A principal provision
of FAS 145 is the reporting in the statement of operations of gains and losses
associated with extinguishments of debt. FAS 145 rescinds the present required
classification of extinguishments of debt as extraordinary. Instead, FAS 145
states that extinguishments of debt be considered for extraordinary treatment in
light of already established criteria used to determine whether events are
extraordinary. For an event to be extraordinary, the established criteria are
that it must be both unusual and infrequent. Once FAS 145 becomes effective, all
debt extinguishments classified as extraordinary in the statement of operations
issued prior to the effective date of FAS 145 that do not satisfy the criteria
for extraordinary treatment may not be reported as extraordinary in statements
of operations issued after that date. We have extinguished debt a number of
times in the past, and may do so in the future. Regarding our debt
extinguishments occurring prior to January 1, 2003 that are properly reported as
extraordinary under accounting standards in effect until that time, we expect
that they will not be events that qualify for extraordinary treatment after that
date. As a result, we believe that our extinguishments of debt reported as
extraordinary prior to January 1, 2003 will not be reported as extraordinary
after that date. Rather, these extinguishments will be reported as a component
of nonoperating gains and losses within continuing operations in the statement
of operations. We believe that extinguishments of debt occurring after that date
will be classified similarly. We do not expect such a change in classification
to have any effect on our operations, cash flows, financial position, or
covenants related to our existing credit agreement and note indentures.
Statement of Financial Accounting Standards No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" becomes effective for us on January
1, 2003. FAS 146 requires companies to recognize costs associated with exit or
disposal activities, costs to terminate contracts that are not capital leases,
and costs to consolidate facilities or relocate employees when they are incurred
rather than at the date of a commitment to engage in these activities as
permitted under existing accounting standards. FAS 146 is to be applied
prospectively to the activities covered by the statement that are initiated
after December 31, 2002. We will apply the requirements of FAS 146 after its
effective date when we engage in any of the covered activities.
Liquidity and Capital Resources
We are highly leveraged. At September 30, 2002, we had a combined carrying
amount of debt and redeemable preferred stocks outstanding of $1.6 billion.
Because we are highly leveraged, we are more vulnerable to adverse economic and
industry conditions. We dedicate a substantial portion of cash to pay amounts
associated with debt. In the first nine months of 2002, we paid interest of
$93.9 million.
We were scheduled to begin paying cash dividends on PSC's 12-3/4% series
preferred stock in July 2002. However, we did not declare the scheduled
semiannual dividend payable July 1, 2002 for this series. See the discussion
below concerning the nondeclaration of dividends on this series. Further, we did
not declare the scheduled quarterly dividends payable April 30, 2002, July 31,
2002, and October 31, 2002 for our Series C preferred stock. This is discussed
further below as well. In the past, we paid the dividends payable on Series C
with shares of our Class A common stock, as permitted under the certificate of
designation. We have received notice of redemption from holders for $5.0 million
of Series E preferred stock. However, we are not permitted nor obligated to
redeem the related shares while dividends on preferred stock senior to the
series are in arrears. Under these circumstances, our inability to redeem the
Series E shares is not an event of default.
All outstanding shares of Series B junior convertible participating
preferred stock were redeemed in March 2002 for $5.7 million cash plus accrued
and unpaid dividends on the series to the date of redemption of $10 thousand.
From May 2002 through August 2002, PCC purchased in a series of negotiated
transactions with unaffiliated holders an aggregate 99,041 shares of PSC's
12-3/4% series preferred stock with a carrying amount of $105.2 million,
including accrued dividends of $6.2 million, for $17.1 million. In July 2002, in
a series of negotiated transactions with unaffiliated holders, PCC purchased
774,682 shares of Series C with a carrying amount of $79.6 million, including
accrued dividends of $2.1 million, for $6.1 million in cash. In July 2002, PSC
purchased $17.1 million in maturity value of PM&C's 12-1/2% senior subordinated
notes due July 2005 with a
27
PEGASUS COMMUNICATIONS CORPORATION
carrying amount of $16.7 million for $17.1 million in a negotiated
transaction with an unaffiliated holder. Commencing in July 2002 and through
September 30, 2002, PSC purchased an aggregate of 1,125,200 shares of PCC's
Class A common stock for approximately $1.0 million. Since September 30, 2002,
PSC has purchased an additional 251,700 shares in the aggregate for $353
thousand. In August 2002, PSC purchased $30.1 million in maturity value of its
13-1/2% senior subordinated discount notes due March 2007 for $7.9 million in
negotiated transactions with unaffiliated holders. The aggregate carrying amount
of the notes at their dates of purchase was $24.0 million.
We may engage in further transactions from time to time in which we acquire
through purchases and/or exchanges of our securities and the securities of our
subsidiaries. Such transactions may be made in the open market or in privately
negotiated transactions and may involve cash or the issuance of securities,
including shares of our Class A common stock and securities received upon
purchase or exchange. The amount and timing of such transactions, if any, will
depend on market conditions and other considerations.
In July 2002, we gave notice to terminate a contract for call center
services provided to us that will terminate at the end of 12 months from the
date of notice. We will pay a termination fee of $4.5 million at the agreement
termination date.
Using cash for the above noted payments or potential payments reduces the
availability of funds for working capital, capital expenditures, and other
activities, and limits our flexibility in planning for, or reacting to, changes
in our business and the industries in which we operate, although we have reduced
the amount of cash paid and payable to nonaffiliates in connection with our
repurchased debt and preferred stock. Our ability to make payments on and to
refinance indebtedness and redeemable preferred stock outstanding and to fund
operations, planned capital expenditures and other activities depends on our
ability to generate cash in the future. Our ability to generate cash depends on
the success of our business strategy, prevailing economic conditions, regulatory
risks, competitive activities by other parties, equipment strategies,
technological developments, level of programming costs, levels of interest
rates, and financial, business, and other factors that are beyond our control.
We cannot assure that our business will generate sufficient cash flow from
operations or that alternative financing will be available to us in amounts
sufficient to service needs previously specified. Our indebtedness and preferred
stock contain numerous covenants that, among other things, generally limit the
ability to incur additional indebtedness and liens, issue other securities, make
certain payments and investments, pay dividends, transfer cash, dispose of
assets, and enter into other transactions, and impose limitations on the
activities of our subsidiaries. Failure to make debt payments or comply with
covenants could result in an event of default that, if not cured or waived,
could have a material adverse effect on us.
At the discretion of our board of directors as permitted by the certificate
of designation for the Series C, we did not declare the scheduled quarterly
dividends payable April 30, 2002, July 31, 2002, and October 31, 2002 for this
series. The total amount of dividends in arrears on Series C through the most
recent dividend payable date was $8.8 million, at a rate of 6.5% per $100
liquidation preference value for each share outstanding. Dividends not declared
accumulate in arrears until later declared and paid. Dividends on the Series C
accrue without interest. Unless full cumulative dividends in arrears have been
paid or set aside for payment, PCC, but not its subsidiaries, may not, with
certain exceptions, 1) declare, pay, or set aside amounts for payment of future
cash dividends or distributions, or 2) purchase, redeem, or otherwise acquire
for value any shares of its capital stock junior or on a parity with Series C.
Series D and E preferred stock are junior securities with respect to Series C.
As permitted in the certificate of designation, PCC has the option of paying
dividends declared on Series C in cash, shares of PCC's Class A common stock, or
a combination of both.
At the discretion of our board of directors as permitted by the certificate
of designation for the 12-3/4% series, we did not declare the scheduled
semiannual dividend payable July 1, 2002 for this series. Dividends declared on
and after July 1, 2002 are payable in cash. The amount of the dividends in
arrears that were payable to nonaffiliates was $5.4 million. Dividends not
declared or paid accumulate in arrears and incur interest at a rate of 14.75%
per year until later declared and paid. Unless full cumulative dividends in
arrears on the 12-3/4% series have been paid or set aside for payment, PSC may
not, with certain exceptions, 1) declare, pay, or set aside amounts for payment
of future cash dividends or distributions, or 2) purchase, redeem, or otherwise
acquire for value any shares
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PEGASUS COMMUNICATIONS CORPORATION
of its capital stock junior to the 12-3/4% series. The amount of interest
accrued and unpaid through September 30, 2002 on dividends in arrears that was
payable to nonaffiliates was $199 thousand.
Foregoing paying dividends on the 12-3/4% series increases the current
availability of funds for working capital, capital expenditures, and other
activities. Dividends declared on Series C in the past have been paid with
shares of the Class A common stock. Because of the very low market price for our
common stock in 2002, paying dividends on Series C with Class A common stock
would have a much greater dilution effect on holdings in the common stock than
was experienced in the past when the market price of the common stock was
higher. Despite the restrictions placed on PSC regarding cash dividend payments
discussed in the preceding paragraph, permissible means are available to
transfer funds within the PCC consolidated group while dividends on PSC's
preferred stock are in arrears. We do not believe that we will experience any
adverse effects on liquidity while dividends are in arrears.
In August 2002, a major rating agency reduced the ratings on all of our
subsidiaries' notes, bank debt, preferred stock, and senior implied and
unsecured issuer ratings to a lower grade. We believe that these downgradings
will not have much of an impact on our liquidity and capital resources because:
1) capital markets in general have tightened, given general economic conditions,
and in particular for the cable and satellite sector, in which we operate, given
uncertainties and developments within the sector, and 2) our ratings before the
downgrade were generally considered speculative grade securities.
We had cash and cash equivalents on hand at September 30, 2002 of $48.4
million compared to $144.7 million at December 31, 2001. The change in cash is
discussed below in terms of the amounts shown in our cash flow statement. At
September 30, 2002, the commitment for PM&C's revolving credit facility was
permanently reduced by $8.4 million to $177.2 million as scheduled under the
terms of the credit agreement. The commitment for the revolving credit facility
is scheduled to be permanently reduced by another $8.4 million in December 2002.
Availability under the revolving credit facility at September 30, 2002 was
$116.9 million, after reduction for letter of credits of $60.1 million
associated with the facility. We believe that these cash resources combined with
cash projected to be provided by operations in the next 12 months are sufficient
to meet our liquidity and capital resource needs for the next 12 months.
However, we cannot provide any assurance as to the amount or sufficiency of cash
that will be provided by our operations within the next 12 months.
In June 2002, PM&C borrowed $63.2 million in incremental term loans under
its credit agreement. There is no further availability under this facility.
Principal amounts outstanding under the incremental term loan facility are
payable quarterly in increasing increments over the remaining term of the
facility that began September 30, 2002. All unpaid principal and interest
outstanding under the incremental term loans are due July 31, 2005. Amounts
repaid under the incremental term loan facility may not be reborrowed. Margins
on incremental term loans are 2.5% for base rates and 3.5% for LIBOR rates.
Interest on outstanding principal borrowed under base rates is due and payable
quarterly and interest on outstanding principal borrowed under LIBOR rates is
due and payable the earlier of the end of the contracted interest rate period or
three months. We repaid $158 thousand of principal on the loan in the third
quarter 2002, and are scheduled to repay principal of $158 thousand in December
2002. Total annual repayments of principal on the loan scheduled after 2002 are
$632 thousand in 2003, $16.3 million in 2004, and $45.9 million in 2005.
Net cash was provided by operating activities for the nine months ended
September 30, 2002 of $9.3 million compared to net cash used by operating
activities of $117.1 million for the nine months ended September 30, 2001. The
principal reasons for the change were: 1) much less subscriber acquisition costs
paid in the current year period compared to the prior year period primarily as a
result of reduced gross subscriber additions in the current year; 2) taxes paid
in 2001 for the sale of our cable operations in 2000; and 3) increased operating
margins in the current year period compared to the prior year period that
provided greater net cash inflows.
For the nine months ended September 30, 2002 and 2001, net cash used for
investing activities was $24.7 million and $44.3 million, respectively. The
primary investing activity for 2002 was for costs incurred with DBS equipment
capitalized of $20.1 million. In 2001, the primary investing activities were
for: 1) DBS equipment capitalized of $9.6 million; 2) other capital expenditures
of $20.7 million primarily for a new call center and capital
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PEGASUS COMMUNICATIONS CORPORATION
improvements to existing buildings; and 3) purchases of intangible assets of
$13.1 million, consisting of additional guardband licenses and costs incurred to
acquire subscribers of a cable system going out of business.
For the nine months ended September 30, 2002 and 2001, net cash used for
financing activities was $81.0 million and $1.9 million, respectively. The
primary financing activities for 2002 were: 1) $60.9 million borrowed under term
loans, net of principal repaid of $2.2 million; 2) $80.0 million repayments of
amounts outstanding under our revolving credit facility; 3) repurchases of our
outstanding notes of $25.0 million; 4) repurchases of our outstanding preferred
stock of $23.2 million; 5) redemption of preferred stock of $5.7 million, and 6)
repayments of other long term debt of $5.9 million. In 2002, we also purchased
PCC's Class A common stock at various times for an aggregate $1.0 million. The
primary financing activities for 2001 were: 1) proceeds from short term debt
borrowed of $61.0 million; 2) $37.1 million net repayments of amounts
outstanding under our revolving credit facilities in place in 2001; 3) $14.9
million in restricted cash that was used as collateral for letters of credit
connected with the short term debt incurred; and 4) repayments of other long
term debt of $7.1 million.
Premarketing cash flow of our DBS business was $191.7 million and $175.0
million for the nine months ended September 30, 2002 and 2001, respectively.
EBITDA for our DBS business was $158.0 million and $44.4 million for the nine
months ended September 30, 2002 and 2001, respectively. DBS premarketing cash
flow is calculated by subtracting DBS direct operating expenses (excluding
depreciation and amortization), as adjusted to exclude the one time contract
termination fee therein of $4.5 million, and general and administrative expenses
from DBS revenues. DBS EBITDA is DBS premarketing cash flow less DBS promotions
and incentives and advertising and selling expenses. We present DBS premarketing
cash flow and DBS EBITDA because the DBS business is our only significant
segment and this business forms the principal portion of our results of
operations and cash flows.
DBS premarketing cash flow and DBS EBITDA 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. DBS premarketing cash flow and DBS EBITDA also do not
necessarily indicate whether our cash flow will be sufficient to fund working
capital, capital expenditures, or to react to changes in our industry or the
economy generally. We believe that DBS premarketing cash flow and DBS EBITDA are
important because people who follow our industry frequently use them as measures
of financial performance and ability to pay debt service, and they are measures
that we, our lenders, and investors use to monitor our financial performance and
debt leverage. Although EBITDA is a common measure used by other companies, our
calculation of EBITDA may not be comparable with that of others.
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PEGASUS COMMUNICATIONS CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal market risk continues to be exposure to variable market rates
of interest associated with borrowings under our credit facilities. Borrowings
under our credit facilities are generally subject to short term LIBOR rates that
vary with market conditions. The amount of interest we incur also depends upon
the amount of borrowings outstanding. The interest we have incurred in 2002 on
these borrowings has benefited from relatively low market LIBOR rates available
throughout 2002. The way we manage our interest rate risks did not change during
the nine months ended September 30, 2002.
We have swap instruments that exchange the market LIBOR rates incurred on
our credit facilities based on an aggregate notional amount of $72.1 million for
fixed rates of interest specified in the swap contracts. The purpose of the
swaps is to protect us from an increase in market LIBOR rates above the
contracted fixed rates. Since our swaps are a hedge against rising interest
rates, we pay additional interest when the applicable market LIBOR rates are
less than the fixed rates. The applicable LIBOR rates have been less than the
related fixed swap rates for all of 2002. As a result, we incurred additional
cash interest expense of $2.6 million in the nine months ended September 30,
2002 for the difference between the market rates and the fixed rates. The
additional interest had the effect of adding 116 basis points in arriving at our
aggregate combined weighted average variable interest rate associated with
amounts outstanding under our credit agreement for the nine months ended
September 30, 2002 of 6.63%, including applicable margins.
The fair values of our swaps are based on the amounts that the swap
contracts could be settled at on any designated day, as computed by the
institutions that are party to the swaps. No cash is exchanged on these assumed
settlement dates, but we record gains for increases and losses for decreases in
fair values between assumed settlement dates, which occur on each calendar
quarter end month. The fair values of our swaps at September 30, 2002 were
higher than those at December 31, 2001 by $2.3 million, and as a result, we
recorded a gain in this amount for the nine months ended September 30, 2002.
In connection with the incremental term loan borrowed in June 2002, PM&C
entered into two additional interest rate cap agreements with the same financial
institution in August 2002. Each cap has a notional amount of $15.8 million. The
cap rate under one agreement is 9.00% and the cap rate under the other is 4.00%.
Both caps terminate September 2005. Payment under each cap is determined
quarterly based on the three month LIBOR rate in effect at the beginning of each
three month resetting period. Under these caps, we receive interest from the
contracting institution when the applicable market LIBOR rate exceeds the
applicable cap rate at each resetting date. The premium we paid to enter into
these agreements was not significant.
Including the two new agreements, we have four interest rate cap agreements
in place at September 30, 2002. These caps have not had any effect on our
effective interest rates or the amount of interest incurred, and only nominal
effect in the amount of gains and losses recorded for the changes in the fair
values of these agreements during 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report on Form 10-Q, we
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and Vice President -
Finance and Controller (the principal financial officer), to determine the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and the Vice President - Finance and
Controller concluded that these controls and procedures are effective in their
design to ensure that information required to be disclosed by the registrant in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information has been accumulated and communicated to the management of the
registrant, including the above indicated officers, as appropriate to allow
timely decisions regarding the required disclosures. There have not been any
significant changes in the registrant's internal controls or in other factors
that could significantly affect these controls subsequent to the date of this
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PEGASUS COMMUNICATIONS CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information relating to litigation with DirecTV, Inc. and others, we
incorporate by reference herein the disclosure reported under Note 16 to the
Notes to Consolidated Financial Statements. The Notes to Consolidated Financial
Statements can be found under Part I, Item 1 of this Quarterly Report on Form
10-Q. We have previously filed reports during the fiscal year disclosing some or
all of the legal proceedings referenced above. In particular, we have reported
on such proceedings in our Annual Report on Form 10-K for the year ended
December 31, 2001 and in our Quarterly Report on Form 10-Q for the quarterly
periods ended March 31, 2002 and June 30, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At the discretion of our board of directors as permitted by the certificate
of designation for the 6-1/2% Series C convertible preferred stock of Pegasus
Communications Corporation, we did not declare the scheduled quarterly dividends
payable April 30, 2002, July 31, 2002, and October 31, 2002 for this series. The
total amount of dividends in arrears on Series C through the most recent
dividend payable date was $8.8 million, at a rate of 6.5% per $100 liquidation
preference value for each share outstanding. Dividends not declared accumulate
in arrears until later declared and paid. Dividends in arrears on Series C
accrue without interest.
At the discretion of our board of directors as permitted by the certificate
of designation for the 12-3/4% cumulative exchangeable preferred stock of
Pegasus Satellite Communications, Inc., we did not declare the scheduled
semiannual dividend payable July 1, 2002 for this series. The amount of the
dividends in arrears that were payable to nonaffiliates was $5.4 million.
Dividends not declared or paid accumulate in arrears and incur interest at a
rate of 14.75% per year until later declared and paid. The amount of interest
accrued and unpaid through September 30, 2002 on dividends in arrears that was
payable to nonaffiliates was $199 thousand.
32
PEGASUS COMMUNICATIONS CORPORATION
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Pegasus Communications Corporation has duly caused this Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Pegasus Communications Corporation
November 14, 2002 By: /s/ Joseph W. Pooler, Jr.
Date Joseph W. Pooler, Jr.
Vice President - Finance and Controller
(Principal Financial and Accounting Officer)
33
CERTIFICATION
I, Marshall W. Pagon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
By: /s/ Marshall W. Pagon
Marshall W. Pagon
Chief Executive Officer
CERTIFICATION
I, Joseph W. Pooler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pegasus
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 14, 2002
By: /s/ Joseph W. Pooler
Joseph W. Pooler
Vice President - Finance and Controller